Stock Insurers Would Gain Long-Sought Tax Relief In Bill
Stock life insurers would gain a major legislative victory and substantive tax savings through a provision added to business tax legislation that Congress was seen as passing before it recessed.
Sources say the provisions passage is expected to lead to a major merger and acquisition activity in the stock life industry as companies seek to take advantage of the 2-year window to escape a tax triggered only by a change in control.
The bill was approved by a conference committee last Wednesday and the House last Thursday. Anger by some senators, mostly Democrats, because a provision mandating regulation of the tobacco industry by the Food and Drug Administration was not attached to a title of a bill giving a huge buyout to tobacco farmers was expected to delay, but not kill, action on the bill in that body. Congress was planning to leave last Friday, but the battle over the FDA provision is expected to keep the Senate in session partly through the weekend.
Ultimately, however, the Senate Republican leadership is expected to have the votes to pass the bill.
Moreover, the White House, after voicing some concerns earlier, is now signaling that it will accept the measure as reported out of the conference committee, removing another huge obstacle.
The provision would suspend for 2 years, 2005 and 2006, a tax on policyholder surplus accounts imposed by legislation enacted in 1984 and codified in Sec. 815 of the tax code. The tax is usually only a bookkeeping entry of surplus accrued before 1984, and is only triggered through a change in control.
“The real key about the suspension provision is that Congress is finally taking care of a 20-year-old provision that never raised much revenue and is clearly outdated,” said Laurie Lewis, chief tax counsel at the American Council of Life Insurers. It was added to the tax code in 1984 as a means of balancing the competitive interests of mutual and stock life insurance companies. But, at the time, mutuals controlled 55% of the industry; currently that has dropped to 10%.
The legislation also contains a provision sought by the life insurance industry that would codify establishment of nonqualified deferred compensation plans, so-called rabbi trusts. They are so named because the private letter ruling issued by the IRS to sanction them involved a retirement plan for a rabbi.