May 11,2005

Grassley, Baucus Introduce Bill Cracking Down on Insurance Deals Using Charities

WASHINGTON -- As they announced last week, Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, last night introduced their bill to block insurance contracts in which tax-exempt organizations hold an interest. Following are a description of the bill and the senators’ news release from last week.

 

EXCISE TAX ON CERTAIN ACQUISITIONS OF INTERESTS IN INSURANCE CONTRACTS IN WHICH CERTAIN EXEMPT ORGANIZATIONS HOLD AN INTEREST

 The bill imposes an excise tax, equal to 100 percent of the acquisition costs, on the taxableacquisition of any interest in an applicable insurance contract. An applicable insurance contract isany life insurance, annuity or endowment contract in which both an applicable exempt organizationand any person that is not an applicable exempt organization have, directly or indirectly, held aninterest in the contract (whether or not the interests are held at the same time). An applicable exemptorganization generally includes an organization that is exempt from Federal income tax by reasonof being described in section 501(c)(3) (including one organized outside the United States), agovernment or political subdivision of a government, and an Indian tribal government.

The bill provides that an interest in an applicable insurance contract includes any right with respect to the contract, whether as an owner, beneficiary, or otherwise. An indirect interest in a contract includes an interest in an entity that, directly or indirectly, holds an interest in the contract.

Exceptions apply under the bill. An exception is provided if each person (other than the exemptorganization) with an interest in the contract has an insurable interest in the insured personindependent of any interest of the exempt organization. Another exception is provided if each person(other than the exempt organization) has an interest solely as a named beneficiary.

An exception is also provided for a person (other than the exempt organization) with an interest asa trust beneficiary, if the beneficiary designation is purely gratuitous, or with an interest as a trusteewho holds in a fiduciary capacity for an applicable exempt organization or another permittedbeneficiary.

The bill provides reporting rules requiring an applicable exempt organization or other person thatmakes a taxable acquisition of an applicable insurance contract to file a return showing requiredinformation. A statement is required to be furnished to each person whose taxpayer identificationinformation is required to be reported on the return. Penalties apply for failure to file the return orfurnish the statement, including, in the case of intentional disregard of the return filing requirement,a penalty equal to the amount of the excise tax that has not been paid with respect to the itemsrequired to be included on the return.

The bill is effective for contracts issued after May 3, 2005. The bill requires reporting of existing lifeinsurance, endowment and annuity contracts issued on or before that date, in which an applicableexempt organization holds and interest and which would be treated as an applicable insurancecontract under the bill. This reporting is required within one year after the date of enactment.

For Immediate Release
Tuesday, May 3, 2005

Grassley, Baucus Announce Bill Cracking Down on Life Insurance Deals Via Charities

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen.Max Baucus, ranking member, today announced legislation to crack down on abuses in certain lifeinsurance contracts involving tax-exempt organizations. The effective date for the legislation istoday, with a reporting requirement to allow the Internal Revenue Service to examine previous dealsto determine their compliance with even current law.

The legislation builds on the Bush administration’s proposal in its budget that also soughtto deal with life insurance contracts that inappropriately afforded benefits to private investors thatwould not otherwise be available without the charity’s involvement.

“I’m very concerned about snake oil salesmen taking advantage of tax-exempt organizationsto line their own pockets with life insurance schemes,” Grassley said. “Many states are nowconsidering legislation that would allow this kind of exploitation. The bill we’re announcing todaywill toll the bell on this scam.”

Baucus said, “Charities should be in the business of feeding the hungry, keeping theenvironment clean, and building opportunities for the disadvantaged – charities should not be in thebusiness of tax shelters. I will work with Senator Grassley to make sure that these insurance scamsare shut down quickly.”

Grassley and Baucus said they plan to introduce their legislation early next week when theSenate comes back into session. They continue to work on other legislative reforms to shut downabuses in the non-profit sector while preserving charities’ abilities to perform their good works. Thesenators have been soliciting input from charities about reforms. They plan to introduce more antiabuselegislation in the near future.

Grassley and Baucus have convened two hearings on charitable abuses. Most recently, onApril 5, IRS Commissioner Mark Everson described the scope of the charitable sector andenforcement challenges for his agency in a letter to Grassley and Baucus. Three relevant excerpts:

“Approximately three million entities make up this sector of the economy. They controlapproximately $8 trillion in assets and pay over $300 billion in employment tax and employeeincome tax withholding.”

“... We must recognize that we are now at an important juncture. We can see that tax abuseis increasingly present in the sector, and we intend to address it. We will act vigorously, for to dootherwise is to risk the loss of the faith and support that the public has always given to this sector.”

“Almost half of the 31 transactions we have identified to date as listed transactions under thetax shelter disclosure regulations involve the use of a tax-indifferent party. In one listed transaction,Notice 2003-81, involving tax-avoidance using offsetting foreign currency option contracts, we havefound both otherwise-legitimate and suspect charities to have been involved.”

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