[Congressional Record (Bound Edition), Volume 149 (2003), Part 3]
[Extensions of Remarks]
[Page 4144]
[From the U.S. Government Publishing Office, www.gpo.gov]




           THE LIFE INSURANCE TAX SIMPLIFICATION ACT OF 2003

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                           HON. AMO HOUGHTON

                              of new york

                    in the house of representatives

                      Thursday, February 13, 2003

  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 
2003.'' 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 107th 
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 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the tax code contains several provisions which no longer represent 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.
  The bill would repeal section 809 that imposes a tax on the 
policyholder dividends of mutual life insurance companies, and section 
815 that applies to policyholder surplus accounts of stock-owned life 
insurance companies. Both of these provisions are vestiges of an 
outdated tax scheme developed in 1984 when the lines of competitive 
balance existed between stock and mutual life insurance companies.
  Section 809 was added to the Code in 1984, in part, to address a 
perceived imbalance between the tax treatment of stock and mutual 
companies. In 1984, there were over 100 mutual life insurers, including 
many large mutual companies, accounting for about one-half of industry 
activity. Today, about 40 mutual life companies remain, including only 
a few large companies, and mutual insurers account for only about 10 to 
15 percent of the industry. Stocks as well as mutuals agree that 
section 809 is not now needed to provide competitive balance.
  Both mutual and stock life insurers believe that their policies 
provide superior value to consumers. Repeal of section 809 would result 
in more nearly neutral taxation of stock and mutual companies and allow 
consumers to focus more on nontax considerations in selecting their 
insurance provider. As a result, repeal of section 809 is one of the 
few corporate tax relief measures endorsed by the Consumer Federation 
of America and the National Cooperative Business Association.
  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 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 the 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 nineteen to forty-three years ago to 
comply with Congress' then vision of how segments of the life insurance 
industry should be taxed.
  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 Code. We urge our colleagues to 
join us in cosponsoring this legislation.

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