Paul L. Caron

Monday, August 24, 2009

Charitable Life Insurance Gift Program Blows Up on University, Donors

Joe Kristan (Roth & Co.) blogs a tax fiasco reported in the Des Moines Sunday Register:

Nearly 1,700 contributors to a University of Northern Iowa athletic scholarship fund lost an estimated $6.8 million in accumulated insurance this year when school officials determined the benefit violated federal tax law, according to documents obtained by the Des Moines Sunday Register.

The donors and the university may owe the federal government three years of back taxes because it took so long for them to recognize that the program should have been discontinued 10 years ago, when tax law was changed, school officials acknowledged last week. ...

The "Return of Contribution" program provided boosters with an accumulating death benefit if they continued to make annual contributions to the scholarship fund. Under the terms of the program, when a donor contributed from $100 to $3,000 to UNI, a matching amount would be credited as a death benefit in his or her name under a contract with Fidelity Security.

Here's how it worked: A $1,000 contributor would receive a $1,000 credit on a term life insurance policy in that year. If the contributor donated between $100 to $3,000 annually, the amount of the insurance benefit would increase in the same amount.

If the donor died, survivors would be paid the accumulated amount, and the insurance company would pay the scholarship fund 10 percent of the amount as a final contribution in the donor's name.

The UNI athletics department paid an annual premium to Fidelity Security equal to 6.12 percent of the total amount donated annually by contributors within the program. School officials say the premiums ranged annually from $50,000 to $55,000 during the final years of the program. ...

In 1999, Congress had approved two changes in the tax laws governing charities. Under one change, a donor's contribution would not be tax-deductible if the charity paid an insurance premium on behalf of the donor and the beneficiary was the donor or a member of the donor's family. The second change imposed a 100 percent excise tax on the charitable organization for any amount of money spent on an insurance policy premium for the donors - estimated by UNI officials at $50,000 annually. ...

Asked why it took the university 10 years to discover two changes in the federal tax laws governing charitable organizations like the Panther Scholarship Club, [Associate Athletics Director Steve] Gearhart said that he did not have an answer.

"I am not a tax attorney or a tax expert," Gearhart said. "We were made aware of it when we began a thorough review with outside sources to look at this program, and that is what was brought to our attention."

Gearhart also pointed a finger at officials at the insurance company. "We felt like Fidelity Security Life had an obligation to make us aware of that IRS tax code change and they did not," he said.

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