A bill passed Monday by the Senate contains a provision that suspends for 2 years a tax imposed on policyholder surplus accounts held by stock life insurers.[@@]

The bill, H.R. 4520, the foreign sales corporation and extraterritorial income exclusions bill, also contains a provision codifying for the first time so-called rabbi trusts, thereby giving the life industry the opportunity to fund these tax-deferred accounts through sales of corporate-owned life insurance.

The first provision suspends for 2 years payment of taxes on policyholder surplus accounts as mandated in a 1984 and codified as Section 815 of the Internal Revenue Code. The Joint Tax Committee estimates that the stock life companies holding these accounts will save at least $132 million in taxes owed on these accounts during that period. But some tax accountants and lobbyists in the industry project that the industry will use that period to “release” all the funds held in those accounts, saving an estimated $533 million in taxes.

That’s because the tax, enacted in 1984, is only a bookkeeping entry and is triggered only when insurers go through changes in control. Industry officials believe a 2-year suspension of the tax could lead to a wave of mergers and acquisitions involving life insurers with stock company charters.

The Senate passed the bill 69-17 after objections to provisions sought by Senate Democrats were left out of the bill during conference negotiations at the demand of House negotiators. The sections cut include a provision mandating oversight of the tobacco industry by the Food and Drug Administration and another requiring immediate drought relief for farmers to be paid for by reducing funding for another agriculture program.

The White House already has indicated that President Bush will sign the bill.