[Congressional Record Volume 146, Number 27 (Monday, March 13, 2000)]
[Extensions of Remarks]
[Pages E287-E288]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




  A BILL TO REPEAL SECTION 809, WHICH TAXES POLICYHOLDER DIVIDENDS OF 
   MUTUAL LIFE INSURANCE COMPANIES, AND TO REPEAL SECTION 815, WHICH 
               APPLIES TO POLICYHOLDERS SURPLUS ACCOUNTS

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                           HON. AMO HOUGHTON

                              of new york

                    in the house of representatives

                         Monday, March 13, 2000

  Mr. HOUGHTON. Mr. Speaker, I am pleased to join my colleague from 
Massachusetts, Mr. Neal, together with a number of other colleagues, in 
introducing our bill, ``The Life Insurance Tax Simplification Act of 
2000.'' The bill repeals two sections of the Internal Revenue Code 
which no longer serve valid tax policies goals.
  This Congress has taken a major step forward in rewriting the 
regulatory structure of the financial services industry in the United 
States. This realignment is already having a positive impact on the way 
life insurance companies serve their customers, conduct their 
operations and merge their businesses to achieve greater market 
efficiencies. Unfortunately, the tax code contains several provisions 
which no longer represent valid tax policy goals, and in fact are 
carry-overs from the old tax and regulatory regimes that separated the 
life insurance industry from the rest of the financial world and 
differentiated between the stock and mutual segments of the life 
insurance industry. Today, the lines of competition are not between the 
stock and mutual segments of the life insurance industry. Rather, life 
insurers must compete in an aggressive, fast moving global financial 
services marketplace contrary to the premises underlying these old, 
outmoded tax rules.
  In 1984 Congress enacted Section 809, which imposed an additional tax 
on mutual life insurers to guarantee that stock life insurers would not 
be competitively disadvantaged by what was then thought to be the 
dominant segment of the industry. Section 809 operates by taxing some 
of the dividends that mutual life insurers pay to their policyholders. 
When Section 809 was enacted, mutual life insurers held more than half 
the assets of U.S. life insurance companies. It is estimated that 
within a few years, life insurers operating as mutual companies are 
expected to constitute less than ten percent of the industry.
  Section 809 has not been a significant component of the substantial 
taxes paid by the life

[[Page E288]]

insurance industry, including mutual companies. But it has been 
extremely burdensome because of its unpredictable nature and 
complexity. The tax is based on a bizarre formula under which the tax 
of each mutual life insurer increases if the earnings of its large 
stock company competitors rise--even when a mutual company's earnings 
fall. The provision has been critized by the Treasury Department and 
others as fundamentally flawed in concept. The original rationale 
behind the enactment of Section 809 no longer exists, and mutual life 
insurers should not pay taxes based on the earnings of their 
competitors or solely because they exist in the mutual form. 
Accordingly, the bill would repeal Section 809.
  Section 815 was added to the Code as part of the 1959 changes to the 
life insurance companies tax structure. Before 1959, life insurance 
companies were taxed only on their investment income. Underwriting 
(premium) income was not taxed, and underwriting expenses were not 
deductible. The change in 1959 provided that all life insurance 
companies paid tax on investment income not set aside for policyholders 
and on one-half of their underwriting income. The other half of 
underwriting income for stock companies was not taxed unless it was 
distributed to shareholders. The amount of that income was called a 
``policyholders surplus account'' or ``PSA''. No money was set aside; a 
PSA was and is just a bookkeeping entry. Mutual companies were not 
required to establish PSAs. The 1959 tax structure sought to tax the 
proper amount of income of stock and mutual companies alike and the PSA 
mechanism helped implement that goal.
  In 1984, Congress rewrote the rules again. Both stock and mutual 
companies were subjected to tax on all their investment and 
underwriting income. In this context, dividend deductions for mutuals 
were limited under Section 809, and the tax exclusion for a portion of 
stock company's underwriting income was discontinued. Congress made a 
decision not to tax the amount excluded between 1959 and 1984. Rather 
the amounts are only taxed if one of the specific events described in 
the current Section 815 occurs (principally dissolution of the 
company).
  The bill would repeal the obsolete Section 815 provision. Since 1984, 
the Government has collected relative small amounts of revenue with 
respect to PSAs as companies avoid the specific events which trigger 
PSAs taxation. There is not a ``fund,'' ``reserve,'' ``provision'' or 
``allocation'' on a life insurance company's books to pay PSA taxes 
because, under generally accepted accounting principles, neither the 
government nor taxpayers have ever believed that significant amounts of 
tax would be triggered. Nevertheless, the continued existence of the 
PSAs does result in a burden on the companies in today's changing 
financial services would--a burden based on bookkeeping entries made 
from fifteen to forty years ago to comply with Congress' then vision of 
how segments of the life insurance industry should be taxed. In 
addition, the Administration has made recent proposals to require that 
PSA balances be taxed, even though no triggering event has taken 
place--thus another cloud of uncertainty.
  The repeal of these two provisions, Sections 809 and 815, would 
provide certainty, less complexity, and remove two provisions from the 
Internal Revenue Code, which no longer serve a valid tax policy goal in 
the life insurance tax structure of the Internal Revenue Code. We urge 
our colleagues to join us in cosponsoring this legislation

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