In a rather
surprising move, the Service, in Ltr. Rul.
9147040 , revoked an earlier letter ruling ( Ltr.
Rul. 9110016 ) in which it denied a
charitable contribution deduction for the gift of a life insurance policy
by a New York state taxpayer. Its revocation was based on the fact that
facts of the original ruling, A, a resident of
A requested a number of rulings from the Service regarding this planned gift:
(1.) That A would be entitled to an income tax charitable deduction under Section 170(a)(1) for the amount of any premiums she paid.
(2.) That A would be entitled to a gift tax charitable deduction under Section 2522(a)(2) for any premiums she paid.
(3.) That, if A died within three years of making, the gift and the proceeds were included in her gross estate under Section 2035(a) , A's estate would be entitled to an estate tax charitable deduction under Section 2055(a)(2) .
(4.) That, if A lived more than three years after making the gift, the policy proceeds would not be included in A's estate.
in its original ruling, began by examining the
The Service then addressed the specific rulings requested by A. Since A's estate could have a claim against the policy proceeds, and A had the right to name the heirs of her estate (who would make such a claim), the Service determined that A would be transferring only a partial interest in the insurance policy to the Charity, and not her whole interest in the policy. Because A was not transferring her entire interest in the policy, and the partial interest did not satisfy the exceptions in Section 170(f)(3)(A) , the Service concluded that A was not entitled to a charitable deduction under Section 170 for her contribution to the Charity, and, therefore, she could not take an income tax deduction for any premiums paid. For the same reason, A was not entitled to a gift tax deduction for the premiums paid.
Addressing the estate tax issues, the Service agreed that the policy proceeds would be included in A's estate under Section 2035(a) if she died within three years of the transfer. The Service also determined that the proceeds would be included in her estate even if she died after three years had passed, if her estate could recover the proceeds. In neither case could the estate claim a charitable deduction. The proceeds either would pass directly to the estate or they would pass to the Charity because of the estate's inaction (lack of attempt to recover proceeds). They would not pass to the Charity directly from A.
9110016 caused an uproar in the estate planning
community as practitioners, lawmakers, and charities around the country
scrambled to examine their state's laws. On 7/15/91, the state of
The Service responded by issuing Ltr. Rul. 9147040 in which it explained that the Insurance Code had been amended to allow transfers such as A wished to make, and that the amendment was retroactive. It also stated that it understood that A no longer intended to proceed with the transaction. The Service then revoked Ltr. Rul. 9110016 .
this new ruling is welcome news for potential charitable donors and estate
interesting that the Service coupled in a separate paragraph the statement that
“A no longer intends to proceed with this transaction” with the Service's
declaration that the previous letter ruling was revoked. The amendment to the
For a discussion of the earlier letter ruling, see Schlenger, Madden, and Hayes, Current Tax Developments, Charitable deduction disallowed for gift of life insurance, 18 EP 239 (Jul/Aug 1991) .
Assembly Bill 8586, 1991-92 Reg. Sess., 1991 N.Y. Laws.
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