[Congressional Record (Bound Edition), Volume 147 (2001), Part 2]
[Extensions of Remarks]
[Pages 3130-3131]
[From the U.S. Government Publishing Office, www.gpo.gov]



 INTRODUCTION OF A BILL TO PERMIT THE CONSOLIDATION OF LIFE INSURANCE 
                               COMPANIES

                                 ______
                                 

                          HON. PHILIP M. CRANE

                              of illinois

                    in the house of representatives

                        Wednesday, March 7, 2001

  Mr. CRANE. Mr. Speaker, today I am introducing, along with 
Representatives Matsui, English, Lewis, Becerra, Rangel, Weller, Sam 
Johnson, Collins, Ramstad, McNulty,

[[Page 3131]]

Hulshof, Shaw, and Nussle legislation that would repeal a number of 
limitations contained in the consolidated return provisions of the 
Internal Revenue Code. These limitations, originally enacted in 1976, 
are a relic from a time when the financial markets were highly 
regulated and financial institutions were taxed very differently than 
they are today. The limitations serve no good purpose and yet they 
complicate the tax code for both the taxpayer and the Internal Revenue 
Service and they place affiliated corporations that include life 
insurance companies at a competitive disadvantage relative to other 
corporate groups.
  I had hoped we could have addressed this problem long ago, and 
indeed, much of the bill I am introducing today was included in the 
1999 tax bill vetoed by President Clinton. It is my hope that we can 
focus our attention on this problem again this year, either in the 
context of a tax simplification effort, an income tax system 
maintenance effort, or as part of tax relief for business.


                               Background

  The consolidated return provisions in the tax laws were enacted so 
that the members of an affiliated group of corporations could file a 
single tax return. The right to file a ``consolidated'' return is 
available regardless of the nature or variety of the businesses 
conducted by the affiliated corporations. The purpose behind 
consolidated returns is simply to tax a complete business entity and 
not its component parts individually. It should not matter whether an 
enterprise's businesses are operated as divisions within one 
corporation or as subsidiary corporations with a common parent company. 
If the group is one economic entity, it should be taxed as a single 
entity and file its return accordingly.
  Corporate groups that include life insurance companies, however, are 
denied the ability to file a single consolidated return until they have 
been affiliated for at least five years. Even after groups with life 
insurance companies are permitted to file on a consolidated basis, they 
are subject to two additional limitations that do not apply to any 
other type of group. First, non-life insurance companies must be 
members of an affiliated group for five years before their losses may 
be used to offset life insurance company income. Second, non-life 
insurance affiliate losses (including current year losses and any 
carryover losses) that may offset life insurance company taxable income 
are limited to the lesser of 35 percent of life insurance company 
taxable income or 35 percent of the non-life insurance company's 
losses.
  The historical argument against allowing life insurance companies to 
file consolidated returns with other, non-life companies was that life 
insurance companies were not taxed on the same tax base as non-life 
companies. This argument is unfounded today. Prior to 1958, life 
insurance companies were taxed under special formulas that did not take 
their underwriting income or loss into account. Legislation enacted in 
1959 took a major step toward taxing life insurance companies on both 
their investment and underwriting income. In fact, at the same time the 
present rules were under consideration in 1976, the Treasury Department 
took the position that full consolidation was consistent with sound tax 
policy.
  In 1984 and 1986, Congress reviewed the taxation of life insurance 
companies and made a number of substantial changes that have resulted 
in these companies paying tax at regular income tax rates on their 
total income. Today, life insurance companies are fully taxed on their 
income just like other corporations. There is no reason to treat them 
differently today, especially with respect to consolidation.


                              The Problem

  The current restrictions place affiliated groups of corporations that 
include life insurance companies at a competitive disadvantage compared 
with other corporate groups and also create substantial administrative 
complexities for taxpayers and for the Internal Revenue Service. The 
five-year limitations, in particular, create irrational disparities 
between groups containing life insurance companies and other 
consolidated groups. For example: First, when a consolidated group 
acquires another consolidated group that includes a life insurance 
company member, the acquired group is deconsolidated. This means that, 
unlike other groups, intercompany gains in the acquired group would be 
recognized as current income while losses would continue to be 
deferred.
  Second, for the five year period following a consolidated group's 
acquisition of a life insurance company, gains on any intercompany 
transactions are subject to current tax and cannot be deferred. 
However, gains of other groups that are allowed to file a consolidated 
return are allowed to be deferred.
  Third, section 355 spin-off transactions raise questions concerning 
the five year ineligibility period for the spun-off company even if the 
group had existed and been filing a consolidated return for many years.
  The ability to file consolidated returns is particularly important 
for affiliated groups containing life insurance companies. Many 
corporations in other industries can, in effect, consolidate the 
returns of affiliates by establishing divisions within one corporation, 
rather than operating as separate corporations. Unfortunately, state 
law and other, non-tax business considerations generally require a life 
insurance company to conduct its non-life business through 
subsidiaries. The inability to file consolidated returns thus operates 
as an economic barrier inhibiting the expansion of life insurance 
companies into related areas.


                                Solution

  There are no sound reasons to deny affiliated groups of corporations 
including life insurance companies the same unrestricted ability to 
file consolidated returns that is available to other financial 
intermediaries (and corporations in general). Allowing the members of 
an affiliated group of corporations to file a consolidated return 
prevents the business enterprise's structure, i.e., multiple legal 
entities, from obscuring the fact that the true gain or loss of the 
business enterprise is the aggregate of each of the members of the 
affiliated group. The limitations contained in present law are so 
clearly without policy justification that they should be repealed.
  The legislation we are introducing today will repeal the two five-
year limitations for taxable years beginning after this year. For 
revenue reasons, the legislation will phase out the 35 percent 
limitation over seven years. This bill should be part of any 
simplification or tax relief legislation that may be enacted.

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