Exempt Organizations Advisory - Life Insurance Abuses Involving Tax-Exempt Organizations Targeted by Grassley and Baucus

On May 3, Senator Chuck Grassley, Senate Finance Committee Chairman, and Senator Max Baucus, ranking minority member, announced legislation to crack down on abuses in certain life insurance contracts held by tax-exempt organizations. Their stated goal is to eliminate life insurance contracts that inappropriately afford benefits to private investors that would not otherwise be available without a charity’s involvement.

The legislation is effective for contracts issued after May 3, with a reporting requirement for existing contracts that will enable the IRS to examine existing arrangements to determine whether they comply with current law. The Senators plan to introduce their legislation early the week of May 9 when the Senate reconvenes.

The bill applies to life, annuity and endowment contracts in which an exempt organization and another person directly or indirectly hold an interest. Exceptions include contracts in which all persons have an insurable interest in the insured independent of any interest of the exempt organization, and the sole interest of the non-exempt party is as a named beneficiary, beneficiary of a trust with an interest in the contract or trustee who holds an interest in a fiduciary capacity. The bill imposes an excise tax equal to 100% of the acquisition cost on any person (including an exempt organization) who acquires a direct or indirect interest in a covered contract.

This bill is part of a series of legislative reforms introduced by Grassley and Baucus in an effort to end abuses in the non-profit sector. The Senators have convened two hearings on charitable abuses and plan to introduce more anti-abuse legislation in the near future.

For more information on this topic, please contact Catherine W. Wilkinson or Suzanne Ross McDowell.

The Exempt Organization Advisory is a general summary of the law and is not intended as specific legal advice for any organization.

Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

For more information on this topic, please contact the authors or the attorneys with whom you usually work at Steptoe.

Questions and comments about the Exempt Organizations Advisory are always welcome and should be sent to bstone@steptoe.com.