[Congressional Record (Bound Edition), Volume 147 (2001), Part 2]
[Extensions of Remarks]
[Pages 2074-2075]
[From the U.S. 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 POLICYHOLDER SURPLUS ACCOUNTS

                                 ______
                                 

                           HON. AMO HOUGHTON

                              of new york

                    in the house of representatives

                      Wednesday, February 14, 2001

  Mr. HOUGHTON. Mr. Speaker, I am pleased to join my colleague from 
Massachusetts, Mr. Neal, together with a number of our colleagues in 
introducing our bill, ``The Life Insurance Tax Simplification Act of 
2001.'' The bill repeals two sections of the Internal Revenue Code 
which no longer serve valid tax policy goals. Except for the effective 
date, the bill is identical to the one we introduced in the 106th 
Congress.
  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Unfortunately, the tax code contains several provisions which no longer 
represent valid tax policy goals, and in fact are carry-overs from the 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.
  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 criticized by the Treasury Department and others 
as fundamentally flawed in concept. The original rationale behind the 
enactment of Section 809 no longer exists. Accordingly, the bill would 
repeal Section 809.

[[Page 2075]]

  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 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 (so-called ``policyholders surplus account or PSA''). 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 Federal government has collected relatively 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 world--a burden based 
on bookkeeping entries made from sixteen to forty-one years ago to 
comply with Congress' then vision of how segments of the life insurance 
industry should be taxed. In addition, the prior Administration made 
proposals to require that PSA balances be taxed, even though no 
triggering event has taken place--thus creating additional 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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