Exempt Organizations Advisory - IRS Invites Public Comments on Structured Insurance Contracts Involving Exempt Organizations

Today the IRS issued Notice 2007-24, inviting public comments on draft IRS forms to implement a new information reporting requirement for charities and certain other entities with respect to certain structured insurance contracts.  The Notice also invites public comments with respect to a Congressionally mandated study being conducted by Treasury and the IRS.

The reporting requirements and the study reflect Congress' concern regarding a perceived increase in transactions involving the acquisition of life insurance, annuity or endowment contracts under arrangements in which both a tax-exempt organization and private investors have an interest in a contract.  Under such arrangements, private investors often provide capital used to fund the purchase of the insurance contracts. Both the private investors and the tax-exempt organization have an interest, directly or indirectly, in the contracts and receive cash, either while the contracts are in force or upon the death of the insured.

The new reporting requirements are required by IRC § 6050V, which was added by the Pension Protection Act of 2006 ("PPA").  IRC § 6050V imposes a new information reporting requirement on organizations (including certain government entities) to which contributions are deductible for federal income, estate or gift tax purposes and which acquire an applicable insurance contract in a reportable acquisition after August 17, 2006, but on or before August 17, 2008. 

To enable organizations to satisfy the requirements of IRC § 6050V, Treasury and the IRS designed Form 8921, "Transactions Involving a Pool of Applicable Insurance Contracts," and Form 8922, "Applicable Insurance Contract Information Return (for Tax-Exempt Organizations and Government Entities under Section 6050V)."  Copies of the draft forms, and their instructions, are here.

 The PPA also requires Treasury and the IRS to undertake a study on the use by exempt organizations of insurance contracts for the purpose of sharing with investors the benefits of the exempt organization’s insurable interest in individuals insured under such contracts.  It also requires Treasury and the IRS to address in the study whether these activities are consistent with the tax-exempt status of certain exempt organizations. Additionally, the study may address whether such arrangements are or may be used to improperly shelter income from tax. 

A report on the study must be submitted to Congress in 2009.  The study will be based, in part, on information received from applicable exempt organizations on Forms 8921 and 8922 and the public comments.

Comments regarding the draft forms must be submitted to the IRS by March 16, 2007. Written comments on the study mandated by the PPA should be submitted by August 22, 2007.

The complete text of Notice 2007-24 is available on the IRS website, at http://www.irs.gov/pub/irs-drop/n-07-24.pdf.