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Financial Planning > Tax Planning > Tax Reform

More Tax Details Surface (with Health Reform Reserve Fund description)

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WASHINGTON — The Obama administration has come out with more details about tax proposals that could affect many sectors of the financial services industry.

An early look at the full proposal, included in Fiscal Year 2010 budget documents, shows that it would require settlement companies and investors that buy in-force life policies to report transactions involving policies with $1 million or more in face value to the Internal Revenue Service, and to the seller.

The goal of the provision is to ensure compliance with the tax code by improving the reporting of tax-related information, according to officials at the American Council of Life Insurers, Washington.

“The reporting requirement imposes no new taxes on either the sellers of insurance policies or the buyers,” the ACLI officials say. “The provision is simply a new reporting requirement.”

Another Obama administration provision would repeal the exception from the pro-rata interest expense disallowance rule for contracts covering a business’s employees, officers or directors.

The one exception would apply to an individual who owns 20% or more of a business that is the contract owner or the contract beneficiary.

The provision would keep the affected entities from deducting otherwise deductible interest expense by using a formula based on the ratio of the value of the life insurance contracts to the business’s total assets.

If, for example, an entity had 10% of its assets in life insurance, 10% of otherwise deductible interest would be disallowed, according to officials at the Association for Advanced Life Underwriting, Falls Church, Va.

The proposal would apply to policies issued after the date of enactment, and officials are estimating it could raise about $8.4 billion from 2010 to 2019.

An AALU official has called that provision an “attack on life insurance owned by businesses.”

The Obama administration proposal also would change the dividends-received deduction for “certain life insurance company separate accounts.”

The dividends-received deduction involves provisions in the tax code designed to prevent double taxation of corporate earnings, according to officials at the ACLI. Life insurance companies have been taking the deduction for many years.

Analysts at Keefe, Bruyette & Woods Inc., Hartford, say the dividends-received-deduction provision could cut the earnings of some large life insurers by 5% to 10%.

“While that may seem small relative to recent share price volatility, we would argue that a permanent 5% to 10% change in earnings power would be an unusual and non-trivial event,” the analysts write in a comment

But other stock life insurance companies “have limited separate account exposure and thus have limited DRD downside,” the analysts write.
The following are excerpts from the Health Reform Reserve Fund section of the Obama administration’s Analytical Perspectives report, which outlines administration tax proposals and other budget proposals:

Health Reform Reserve Fund

The Administration proposes to set aside a reserve fund of more than $630 billion over 10 years dedicated to financing reforms to the American health care system. The Administration recognizes that this is not sufficient to fully fund comprehensive reform, but it is a crucial first step in the effort. The proposed reserve fund would be financed by a combination of specific health care savings and a rebalancing of the tax code as described below: …

Reduce the tax gap/improve compliance.–The tax gap generally is the difference between the amount owed under the tax law and the amount actually paid on time. The Administration proposes to help reduce the tax gap through proposals that would expand information reporting, improve compliance by businesses, strengthen tax administration, and expand penalties.

Information reporting proposals would apply to certain life insurance contracts, to payments to corporations, and to payments from Government entities. Additional proposals would require a certified Taxpayer Identification Number (TIN) from contractors and would increase penalties with respect to information returns.

Proposals to improve compliance by businesses would require electronic filing by certain large organizations and implement standards clarifying when employee leasing companies can be held liable for their clients’ Federal employment taxes.

Tax administration proposals would: (1) expand IRS access to information in the National Directory of New Hires for tax administration purposes; (2) make repeated willful failure to file a tax return a felony; (3) facilitate tax compliance with local jurisdictions; (4) extend statutes of limitations where State tax adjustments affect Federal tax liability; (5) improve the investigative disclosure statute; (6) expand electronic filing requirements for tax return preparers; (7) repeal the requirement of a partial payment with an application for an offer-in-compromise; and (8) allow assessment of criminal restitution as tax. …

Make reforms to close tax loopholes.–The Administration also proposes to make certain reforms in domestic tax laws to close loopholes in the following areas: (1) financial institutions and products; (2) insurance companies and products; (3) tax accounting methods; and (4) estate and gift taxation. The first category of proposals would require accrual of income on forward sale of corporate stock, require ordinary treatment of income from day-to-day dealer activities, and modify the definition of “control” for purposes of the limit on deductions related to a repurchase of debt. The second category would modify rules that apply to sales of life insurance contracts, modify the dividends-received deduction for life insurance company separate accounts, and expand the pro rata interest expense disallowance. Proposals in the third category would repeal the lower of cost or market inventory accounting method and deny the deduction for punitive damages. The fourth category of proposals would require consistent valuation for transfer and income tax purposes, modify rules on valuation discounts, and require a minimum term for grantor retained annuity trusts.


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