[Congressional Record Volume 140, Number 148 (Wednesday, November 30, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: November 30, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
              FAIR TREATMENT OF CERTAIN REAL ESTATE SALES

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                         HON. NANCY L. JOHNSON

                             of connecticut

                    in the house of representatives

                       Tuesday, November 29, 1994

  Mrs. JOHNSON of Connecticut. Mr. Speaker, I rise today on a tax issue 
that is of considerable importance to me and my constituents. That 
issue concerns the tax treatment under section 818(b) of the Internal 
Revenue Code of distressed real estate sales by life insurance 
companies.
  Section 818(b) is a remnant of the Life Insurance Company Income Tax 
Act of 1959 that unfortunately was left in the code when most of the 
provisions of the 1959 act were repealed in 1986. The main impact of 
section 818(b) today is on life insurance companies that are 
undertaking programs to sell distressed real estate assets they own as 
a result of loan defaults by borrowers. Section 818(b) causes life 
insurance companies to undertake considerable tax planning steps when 
deciding whether to sell assets they hold, if the assets only can be 
sold at a loss. Moreover, section 818(b) often results in life 
insurance companies making decisions based strictly on tax 
consequences, rather than on economic factors. Section 818(b), whose 
purpose disappeared when the other provisions of the 1959 act were 
repealed, needs to be amended.
  Specifically, because of section 818(b), a life insurance company 
must treat as a capital loss any loss on the sale of depreciable 
property or real estate which is used in any trade or business other 
than its life insurance business. In contrast, other taxpayers who 
dispose of the identical kind of properties at a loss are allowed an 
ordinary loss for tax purposes. It is generally more advantageous from 
a tax standpoint to have an ordinary tax loss rather than a capital 
loss, because capital losses of a corporation are deductible only to 
the extent the corporation has realized capital gains, and capital loss 
carryforwards expire after 5 years. On the other hand, ordinary losses 
can be used by a corporation to offset either capital gain income or 
ordinary income.
  Therefore, because of section 818(b), a life insurance company 
planning to sell distressed real estate must monitor and manage its 
overall capital gain and capital loss position throughout its entire 
asset portfolio, for the purpose of ensuring that it will realize 
capital gain each year in an amount at least equivalent to its capital 
losses on distressed real estate for the year. Otherwise, the company 
will not receive the immediate tax benefit of the capital loss it 
realizes. Thus the current tax law encourages life insurance companies 
either to slow down the pace of sales of distressed real estate, or to 
speed up sales of assets with capital gains, such as assets in the 
companies' bond portfolios, solely for tax purposes.
  Because section 818(b) leads to inefficient economic decisions based 
solely on tax consequences, it needs to be changed. For the past 2 
years I have worked closely with the Joint Committee on Taxation's 
revenue estimators to develop a legislative solution that is both 
revenue neutral and that substantially eliminates the negative impact 
of section 818(b) on life insurance companies trying to dispose of 
troubled real estate holdings. The result of that effort is a proposal 
that would amend section 818(b) in a way that would allow for modified 
ordinary loss treatment for losses from the sale of real property 
acquired by a life insurance company as a result of a foreclosure. My 
proposal was the subject of hearings held in June 1993, before the 
Subcommittee on Select Revenue Measures of the Committee on Ways and 
Means. The legislative proposal provides for an appropriate 
simplification of the tax law, reaches the right policy results, and is 
revenue natural. Due to a lack of action on Member tax bills in the 
past 2 years, it was not possible to have the proposal enacted during 
the 103d Congress. I believe we should address the issue early in the 
104th Congress.
  Because life insurance companies should receive the same tax 
treatment as other businesses when they sell assets at a loss, I plan 
to press my proposal to allow for modificated ordinary loss treatment 
under section 818(b) in the 104th Congress. Enactment of my proposal 
will ensure that section 818(b) achieves the right policy result, when 
life insurance companies sell distressed real estate at a loss.
  Because the correct tax policy result will be achieved in a revenue-
neutral manner, I plan to provide that the proposal be effective for 
tax years beginning after December 31, 1993. I believe that modified 
ordinary loss treatment for losses from the sale of real estate 
acquired by life insurance companies in a foreclosure is necessary in 
order to remove inefficient tax considerations from the decisionmaking 
process, when life insurance companies consider how, and when, to 
dispose of their distressed real estate assets. I will ask for the 
support of my colleagues to have this important change enacted into 
law.

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