                        T.C. Memo. 2004-271



                      UNITED STATES TAX COURT



      DAVID C. ROARK and ESTATE OF IRENE ROARK, DECEASED,
            DAVID C. ROARK, EXECUTOR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 9231-02, 5105-03.   Filed November 29, 2004.


     Earl S. Howell and Timothy R. Simonds, for petitioners.

     Edsel Ford Holman, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HOLMES, Judge:   In 1998, David Roark gave $160,000 to a

charity, the National Community Foundation (“NCF”).    NCF sent him

letters in return saying that “no goods or services have been

provided in connection with this gift,” and he took his

contributions as a deduction.   But NCF used the money to pay the

premiums on a $2.2 million insurance policy on Roark’s life that
                               - 2 -

was owned by a trust benefiting the Roark family.    Both the trust

and NCF were entitled to portions of the policy’s death benefit,

the trust entitled to by far the larger share.

     In Addis v. Commissioner, 118 T.C. 528 (2002), and then

again in Weiner v. Commissioner, T.C. Memo. 2002-153, we ruled

that the deductions in such arrangements--known as “charitable

split-dollar life insurance agreements”--foundered on section

170(f)(8).1   This section requires substantiation of a charitable

contribution with a written acknowledgment by the charity stating

whether the donor received “any goods or services in

consideration, in whole or in part,” for his donation.    Sec.

170(f)(8)(B)(ii).   In both Addis and Weiner, we held that letters

from a charity stating that no consideration was received were

inadequate substantiation if the charity was paying premiums for

life insurance benefiting the donor or his family.    Both Addis

and Weiner have now been affirmed on appeal.     Addis, 374 F.3d 881

(9th Cir. 2004); Weiner, 102 Fed. Appx. 631 (9th Cir. 2004).     In

this case, we follow those rulings and again uphold the

Commissioner’s disallowance of the claimed deduction.

                         FINDINGS OF FACT

     This case features three characters: (1) petitioner David




     1
       Section references are to the Internal Revenue Code of
1986, as amended.
                               - 3 -

Roark;2 (2) American Express, and (3) NCF, the recipient of the

disputed contributions.

     David Roark is a lifelong Tennessean (including when he

filed the petition in this case).   His life has been marked by

success in business and a consistent devotion to charity.     After

graduating from college, he worked for 25 years at United Hosiery

Mill in East Chattanooga, Tennessee.   He came to recognize an

untapped demand for fabric dyeing, and in 1982 set out with a few

colleagues to start a business to contract with manufacturers to

dye their fabric.   The business, later known as Skyland

International, flourished.   Mr. Roark and his wife, who had

tithed their gross income every year for decades, used their

prosperity to increase their already generous donations to both

their local church and other Christian charities.   Mr. Roark

became especially generous with both time and money to the North

Chattanooga Camp of the Gideons.

     American Express is a well-known financial services company.

One of its subsidiaries is IDS Life Insurance Company.     Robert

Pippenger is a Senior Financial Adviser at American Express and

has long served as the Roarks’ personal financial adviser.     He

also managed the Roarks’ investments, and knew their financial

goals and inclination toward charitable giving.


     2
       Mr. Roark and his wife filed joint returns. Mrs. Roark
died in 1999, and he filed the petition both for himself and in
his capacity as executor of her estate.
                               - 4 -

     NCF, the third major player in this case, is a section

501(c)(3) charitable organization based in Brentwood, Tennessee.

It receives money from both its own investments and donations.

One of the ways it receives donations is through “donor-advised

accounts,” also known as “individual foundations.”   Donors to

these foundations contribute money or other property to a special

individual account, and they can direct NCF to contribute up to

75 percent of the principal and interest from that account to

other charities of their own choosing.   The remaining 25 percent

of each account goes to the charitable programs of NCF, which

focus on Christian evangelical and humanitarian services.

     Pippenger first became aware of charitable split-dollar life

insurance plans in 1997.   A conscientious investment adviser, he

studied the arrangement by attending, at his own expense,

seminars put on by American Express; he also performed his own

due diligence independently.   He came to see these plans as an

opportunity to benefit his clients who were interested in estate

planning: since proceeds of a life insurance contract that are

paid by reason of the insured’s death are excluded from income,

sec. 101(a)(1), sharing the cost of the premiums with a charity

in a way that created current tax deductions would obviously be

attractive.   Sometime in early 1998 Pippenger met with the Roarks

to discuss the value of Mr. Roark’s business, and the potential

taxes that his estate would face upon his death.   Pippenger told
                               - 5 -

the Roarks that this charitable split-dollar arrangement would be

a good fit for them since it would further their philanthropic

goals, as well as helping to provide for Mr. Roark’s family after

he died.   The Roarks agreed, and Pippenger began putting the deal

in place in April 1998.

     On April 13, 1998, Mr. Roark took the first step by opening

a donor-advised account with NCF, to be called the David C. Roark

Foundation.   In keeping with NCF’s practice, Mr. Roark was

allowed to choose which charity would get 75 percent of the

distribution from his Foundation, and he picked the North

Chattanooga Gideons Camp.   The Roarks then created the David

Roark Revocable Life Insurance Trust on April 16, 1998.     Mr.

Roark, and Mrs. Roark in her capacity as trustee, applied to IDS

Life for a $2.2 million insurance policy on Mr. Roark’s life,

naming the Trust as beneficiary.   Mr. Roark was both the grantor

of the Trust and its beneficiary during his lifetime.     Mrs. Roark

was the Trust’s beneficiary if she survived her husband; the

remainder beneficiaries were the Roarks’ children.

     Mrs. Roark, as trustee of the Trust, sent a letter to Curtis

Calihan, NCF’s Executive Director.     The letter offered NCF an

option to buy a term insurance death benefit in the insurance

policy through the Roark Foundation.     NCF’s chief counsel, Mark

Absher, testified that NCF applied stringent criteria to the life

insurance investments it was offered--NCF insisted on a
                                 - 6 -

guaranteed right to a fixed permanent and primary portion of the

death benefit, for instance.    The proposed rate of return on the

investment also had to be “acceptable”.    The Roarks’ proposal

apparently met NCF’s criteria, and so NCF and Mrs. Roark signed a

Charitable Legacy Plan Agreement shortly thereafter.

     The Plan Agreement called for Mr. Roark to donate large sums

of money to the Roark Foundation at NCF.    NCF could then choose

from among three options:

     1.   If NCF paid no premiums.    The Plan Agreement carefully

gave NCF this option, but made clear that NCF’s death benefit

would then “be null and void.”

     2.   If NCF chose to pay the premiums.    The Plan Agreement

contemplated that NCF would pay the premiums on an accelerated

timetable, with all of them paid within five years.3    If NCF

chose to make all the payments, it would be entitled to $489,000

of the $2.2 million death benefit, and the “unearned premium




     3
       The Plan Agreement called for Roark to donate the
following sums to NCF:

           1998:     $240,000
           1999:      165,000
           2000:       25,000
           2001:       25,000
           2002:       25,000

Each year, NCF had the option of paying sums equal to Roark’s
donations as premiums on the insurance policy.
                               - 7 -

amount value.”4   The $489,000 death benefit, plus the unearned

premium account value, would be paid to the Roark Foundation,

with 75 percent ultimately going to the Gideons, but NCF would be

able to use the remaining 25 percent for its own programs.     The

Roark Trust would receive at least the remaining $1.711 million

of the death benefit.5

     3.   If NCF made some of the payments but then stopped.

Under this option, NCF’s portion of the death benefit would be

fixed at $489,000 until the accrued premiums earned were equal to

NCF’s payments.   NCF’s interest in the policy would then end, but

if the Trust and NCF agreed to terminate the policy while some of

the premiums remained unearned, NCF would at least get those

premiums back.

     Pippenger was also involved in the arrangement.   Whenever

Mr. Roark sent in money to NCF, Pippenger would fill out and send


     4
       As is common with insurance companies, IDS Life earns its
premiums by accepting risk for a given time. It thus “earns”
accelerated premiums only over that time. The “unearned premium
account value” was the excess of the premiums NCF had paid over
the amount IDS Life had earned.
     5
       The Roark Trust would actually receive the larger of the
death benefit or a percentage of the “policy value.” In the
early years of the policy, the death benefit would almost
certainly be larger than the policy value. However, as with most
universal life policies, the longer the Roarks’ policy was in
effect, the more likely it would be that the accounts into which
the accelerated premiums were invested would grow in value and
eventually exceed the death benefit. Under the Plan Agreement,
this buildup in value would accrue entirely to the Trust’s
benefit, not NCF’s.
                                - 8 -

in an NCF form identifying himself as “charitable emissary,” and

reminding NCF of the details of the insurance policy’s deadlines

and mailing address for payment.

     By late April 1998, then, all the parts of a charitable

split-dollar life insurance arrangement were assembled and in

place.   The policy was purchased, the Trust formed, the

Foundation created, the Plan Agreement signed, and even an

emissary appointed.   Roark began sending in his contributions.

     Everything went smoothly at first.    By November 1998, Roark

had contributed a total of $160,000.    After each payment, NCF

sent a letter to him acknowledging his contribution.    Each was

signed by either NCF’s chief financial officer or one of its vice

presidents.   Each contained this language:

     I further acknowledge that, New Life Corporation of
     America [NCF’s legal name] is a charitable organization
     with the meaning of Section [170(c)] of the Internal
     Revenue Code, and is listed as such in the current
     revision of IRS Publication 78. In accordance with IRS
     regulations, no goods or services have been provided in
     connection with this gift.

     NCF used the money to pay $158,000 to IDS Life for premiums

on the policy in 1998 (keeping $2,000 in administrative fees),

with the first $48,000 on May 15, and the remaining $110,000 on

December 2.   Roark then made one additional contribution of

$20,000 on December 23, 1998.   He again received a letter from

NCF acknowledging the contribution, and the letter again stated

that “no goods or services had been provided in connection with
                                - 9 -

the gift.”    On January 29, 1999, Mrs. Roark passed away.   The

Roarks’ daughter, Connie R. Perrin, became the successor trustee

of the Roark Trust, and the arrangement continued.

     The only problem was that the Roarks were far from alone;

split-dollar agreements had become so widespread that Congress

stepped in.   In February 1999, bills were introduced in both the

Senate and the House to force charities to pay a 100-percent

excise tax on any amounts they had paid on life insurance

policies covering their donors.    Because of the possibility that

the legislation would be made retroactive to the date it was

introduced,6 NCF stopped making payments on all the split-dollar

agreements it had.   As a result, NCF never made a premium payment

corresponding to Roark’s last $20,000 contribution.

     Once NCF stopped paying premiums, its death benefit in the

Roark policy was fixed under the Plan Agreement at $489,000.       As

IDS Life was continuously earning the accelerated payments,

however, the amount of money that NCF stood to get if the policy

were terminated began to shrink.    And once IDS Life earned all of

the accelerated payments, NCF’s $489,000 interest would

disappear.

     NCF faced similar problems with the other split-dollar


     6
       The legislation passed, and can now be found in section
170(f)(10). Tax Relief Extension Act of 1999, Pub. L. 106-170,
sec. 537, 113 Stat. 1936. Parts of it were indeed made
retroactive to Feb. 8, 1999, the date of introduction.
                                - 10 -

agreements it had made, so it began sending letters to all its

contributors encouraging them to terminate their policies.    If a

contributor agreed, NCF would be able to recover the unearned

premiums.    But without a contributor’s agreement to terminate,

NCF’s investment was at risk.    If the contributor died quickly,

NCF would receive a great deal of money; but if he outlived the

time it took for the life insurance company to earn its premiums

on NCF’s accelerated payments, NCF would get nothing.

     Roark got such a letter, but he never agreed to terminate

the policy.    He also never contributed any more money to NCF once

the legislation was introduced.    But he did make another payment

to IDS Life in December 2001 to prevent the insurance policy from

lapsing.    Then, in March 2003, he reduced the policy’s death

benefit from $2.2 million to $1.1 million.    This guaranteed that

the Trust would receive at least some death benefit even if he

never paid another premium.

     If the payments to NCF are counted, the Roarks contributed a

total of $220,966 to charity during 1998.    Due to rules that set

an annual ceiling on charitable contribution deductions, sec.

170(d)(1), the Roarks deducted only $166,031 in 1998 and carried

over the remainder to 1999.    The IRS issued a notice of

deficiency for the 1998 and 1999 tax years that disallowed the

$180,000 in contributions to NCF.    The Commissioner later reduced

the disputed amount because NCF never made a payment on the
                              - 11 -

insurance policy with the last $20,000 that Roark sent it.    The

$160,000 that is still in dispute is the total of $158,000 that

NCF made toward the insurance policy, and the $2,000 Roark sent

to NCF for administrative fees.

                              OPINION

     The Commissioner argues that the $160,000 in dispute should

be disallowed entirely because it was not properly substantiated

by NCF under section 170(f)(8) and section 1.170A-13(f), Income

Tax Regs., and because (applying the step-transaction doctrine)

the series of interrelated transactions was in substance an

attempted gift of a partial interest in a life insurance policy,

and so not deductible under section 170(f)(3).   He also claims

that the deduction must at the very least be limited to the

excess of Roark’s contributions over the economic benefit he

received.

     As we noted at the outset, we have already decided two very

similar cases on the first ground that the Commissioner suggests,

and our decisions were in both cases affirmed.   Addis v.

Commissioner, 118 T.C. 528 (2002), and Weiner v. Commissioner,

T.C. Memo. 2002-153.   Unless these cases can be distinguished,

they govern.7

     7
       Roark argues in his brief that Addis was not binding on
this Court while it was pending an appeal. This is wrong. We
are bound by the reviewed decisions of this Court. Groetzinger
v. Commissioner, 82 T.C. 793, 797 n.11 (1984), affd. 771 F.2d 269
                                                   (continued...)
                                - 12 -

     In Addis, as here, the taxpayer negotiated a charitable

split-dollar life insurance contract.    The insurance policy there

also was owned by a trust, whose beneficiaries were also the

taxpayer’s family.   The taxpayer in Addis also set up a

foundation with a charity.    She also donated money to the

charity, and the charity also issued an acknowledgment letter

with language designed to meet section 170(f)(8)'s substantiation

requirements; i.e., that the charity “did not provide any goods

or services to the donor in return for the contribution.”     That

charity also used the donated funds to pay the premiums on a life

insurance contract, entitling it to a percentage of the proceeds

upon the taxpayer’s death.

     Our analysis in Addis centered on the substantiation

requirement.   Taxpayers may deduct cash contributions that are

made to a qualified donee organization.    Sec. 170(a).   If a

taxpayer contributes $250 or more at one time, the donee

organization must substantiate the donation in writing for the

deduction to be allowed.     Sec. 170(f)(8).

     This writing must specify whether the donor received or

expected to receive any goods or services from the charity in


     7
      (...continued)
(7th Cir. 1985). There are exceptions, Golsen v. Commissioner,
54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971), but
they do not apply here. Now that our previous opinions in Addis
(and Weiner) have been affirmed, we of course have no reason not
to follow them.
                                - 13 -

consideration for the donation, as well as an estimate of their

fair market value.    Sec. 170(f)(8)(B); sec. 1.170A-13(f)(2), (6),

Income Tax Regs.   According to the Commissioner, the letters NCF

sent Roark fail to meet the terms of the statute and regulation

because Roark did expect that NCF would pay the premiums, and the

payment of those premiums was valuable to him--in other words, it

was not true, as NCF wrote in its letter, that “no goods or

services have been provided in connection with this gift.”

     In countering the Commissioner, Roark first argues that NCF

was not legally obliged to pay the premiums.     Whether NCF was

under a legal obligation might be relevant here under the step-

transaction doctrine.    (Though perhaps not even then.   See Blake

v. Commissioner, 697 F.2d 473, 480 (2d Cir. 1982), affg. T.C.

Memo. 1981-579.)     The regulation that applies here, however,

makes clear that the key question is whether a donor expected to

receive consideration, not whether he was entitled to receive it:

“A donee organization provides goods or services in consideration

for a taxpayer’s payment if, at the time the taxpayer makes the

payment to the donee organization, the taxpayer receives or

expects to receive goods or services in exchange for that

payment.   Sec. 1.170A-13(f)(6), Income Tax Regs. (emphasis

added).    We look for a quid pro quo, not a possible cause of

action.
                               - 14 -



     Perhaps anticipating this, Roark tries to distinguish his

case from Addis’s by stating--correctly--that Addis admitted that

she expected the charity in her case to pay the premiums.    Addis

118 T.C. at 535.   Roark, in contrast, testified that he had no

idea what was going on with NCF and the charitable split-dollar

life insurance plan, and that every time he got information about

it, he simply turned it all over to Pippenger.

     We do not find this disavowal credible.   The idea for this

deal, after all, came from Pippenger--his financial, not his

charitable, adviser.   Roark had to have realized that the

intricacy of the plan, plus the fact that it was being marketed

so extensively by American Express, suggested that as a practical

matter NCF would of course use money it got under such plans to

pay for insurance and not just add to its endowment.    Failure to

do so would have been a massive denial of its donors’

expectations, as NCF itself recognized when it let loose with its

letterwriting surge after Congress began considering the excise

tax on premiums.

     We also find that NCF’s payment of the premiums was

something of value to Roark.   Of the policy’s $2.2 million death

benefit, a maximum of only $489,000 would go to NCF.    The Trust,

which was set up by Roark and whose beneficiaries were his wife

and children, would receive the other $1.711 million.   The Trust

would thus take 78 percent of the total death benefit, while NCF
                               - 15 -

would only get 22 percent.   Even if the Trust had agreed to

terminate the policy early, NCF would merely get back the

unearned premiums that it prepaid.      In Addis, we reasoned that if

the charity’s premium payments were big enough to keep the policy

viable, and the family trust itself would receive a significant

portion of the death benefit, the value of those payments to the

trust had to be greater than zero.

     The facts of this case show that Roark was getting an even

better deal than the taxpayers in the other split-dollar cases

that we’ve decided.    In both Addis and Weiner, the charity would

have received a greater proportion of the insurance proceeds than

the families’ trusts.   Here, the proportions were reversed: the

Roark family, through the Trust, would actually receive more

money than NCF, and so we easily find that Mr. Roark would

receive value as a result of NCF paying the premiums.     And while

it is true that, after Mrs. Roark’s death, it was the Roark’s

daughter who was trustee, we reasoned in Weiner, that this change

in which relative would collect on the policy did not change our

conclusion that the donor “expected that he would benefit from

his payments * * *.”

     Roark does of course have the letter that NCF sent him,

stating that he received nothing of value in exchange for his

contributions.   And it is true that a taxpayer ordinarily may

rely on a charity’s estimate of fair market value.     Sec. 1.170A-
                               - 16 -

1(h)(4)(i), Income Tax Regs.    But if a taxpayer knew or should

have known that a charity’s estimate of the fair market value of

the consideration it provided was not reasonable, he cannot take

the deduction.   Sec. 1.170A-1(h)(4)(ii), Income Tax Regs.     And

that’s the situation here. Even if Roark did not have actual

knowledge that NCF would pay the policy premiums, he should have

known.   He was a sophisticated businessman, and all the paperwork

was available to him.    He signed much of it.    All the letters

were sent to him.   It would have been simply unreasonable for him

to conclude that this split-dollar agreement did not benefit him

and his family at all.

     In the end, then, this case is indistinguishable from Addis.

Though NCF wrote that “no goods or services have been provided in

connection with this gift” each time Roark sent in money, he knew

or should have known that he would receive some value in return.

Since the donation was not properly substantiated under section

170(f)(8), and the Roarks unreasonably relied on it contrary to

the provisions of section 1.170A-1(h)(4), Income Tax Regs., we

hold that they may not deduct the $160,000 he contributed to NCF.

We need not reach any other arguments, but because the

Commissioner conceded a $20,000 increase to the Roarks’

charitable deduction,

                                     Decisions will be entered

                                under Rule 155.
