Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-1

1976-1 C.B. 57

Section 170

IRS Headnote

Charitable contribution; annuity contract of split insurance program. Under a split life insurance program, the owner of an annuity contract who exercised an option under it to purchase term life insurance at discount rates and then transferred all ownership rights to the annuity, including term life renewal, to an exempt charitable organization and made annual cash contributions equal to the annuity premium in exchange for permission to renew the term life policy does not have an allowable deduction under section 170 of the Code.

Full Text

Rev. Rul. 76-1

Advice has been requested whether a gift of an annuity contract, under the circumstances described below, is deductible as a charitable contribution under section 170 of the Internal Revenue Code of 1954.

In 1973 an individual taxpayer purchased, under a split life insurance program, an annuity contract including a right contained therein to purchase a convertible term life insurance policy at favorable rates. The annuity contract provided that the owner of the annuity contract could assign the right to purchase the term insurance policy to any person. This right may be exercised up to age 70 of the person to be insured, and if exercised before age 70, renewed up to age 99 of the insured, on each policy anniversary date, so long as the companion annuity contract is in force on a premium paying basis with no premium unpaid, or, after maturity, annuity payments are being made by the insurer. However, at any such anniversary the owner of the annuity contract may advise the insurer that the right to purchase the term life insurance is no longer extended to the current insured and is to be extended to another person.

If the annual premiums are paid on the annuity until maturity, the contract provides for the payment of a specified monthly amount to the owner for ten years certain and thereafter, if the annuitant survives the ten year period, for the life of the annuitant. If the annuitant does not survive until the maturity date, a death benefit is payable equal to the greater of the annual premiums paid or the cash surrender value of the policy.

The term life insurance that is issued upon exercise of the right is subject to the usual evidence of insurability for anyone to be insured. The annual premium for the term life insurance is at lower rates than if the policy were issued without the companion annuity contract.

The taxpayer exercised the right to purchase the term insurance, and took out policies on the taxpayer's own life. The taxpayer then contributed the annuity contract to a charitable organization described in section 170(c) of the Code, contributions to which are deductible. The gift was in the form of a complete transfer of ownership under an absolute assignment form. The charitable organization became the absolute owner of the annuity contract having all ownership rights including, but not limited to, the right to assign, revoke an assignment, pledge for a loan, surrender or cancel, change beneficiary, name itself beneficiary, receive all amounts payable to the annuitant or to the beneficiary of the annuity, and, on the anniversary date, name the persons who may be the insured of any annual term life insurance policy purchased or in effect because of the continuation of the annuity.

The taxpayer subsequently made annual cash contributions to the charitable organization equal to the annual premium payments necessary to keep the annuity contract in force, and the charitable organization applied an amount equal to the contributions received from the taxpayer toward the annual premium requirements of the annuity contract. The charitable organization annually provided the taxpayer with the right to renew his annual term life insurance policy.

Section 170 of the Code provides, in pertinent part and subject to certain limitations, a deduction for contributions to or for the use of organizations described in section 170(c), payment of which is made within the taxable year.

Section 170(f)(3)(A) of the Code provides for the denial of a deduction in the case of certain contributions (not made by a transfer in trust) of an interest in property which consists of less than the taxpayer's entire interest in such property.

In the instant case, the taxpayer has transferred an annuity policy to a charitable organization but has retained a substantial right which is a part of that policy. Before the transfer, the taxpayer exercised the right under the annuity policy and elected to purchase the annual term life insurance policy at the special discount rates. Thus, the taxpayer retained the benefit of the initial exercise of the insurance option. Moreover, the subsequent pattern of contributions in exchange for the charitable organization's continuing election to allow the taxpayer to renew his term life policy means that the taxpayer effectively remained in possession of the option to annually renew the insurance policy at the discount rates so long as the taxpayer continued to make annual contributions sufficient to pay for the annuity premiums.

Accordingly, since the taxpayer has transferred less than an entire interest in the annuity contract, no deduction will be allowed under section 170 of the Code.