President Obama's Fiscal Year 2010 Revenue Proposals increase the taxes on insurance companies and products by $4.9 billion for the five-year period 2010-2014 and $12.729 billion for the ten-year period 2010-1019. Specifically, the proposals would:
- Modify the rules that apply to sales or assignments of life insurance contracts;
- Modify the dividends-received deduction for life insurance company separate accounts; and
- Expand the pro-rata interest expense disallowance for corporate-owned life insurance contracts.
Sales of Life Insurance Contracts
The proposal increases the reporting requirements in connection with the sale of life insurance contracts. The purchaser of an interest in an existing life insurance contract with a death benefit equal to or exceeding $1 million would have to report the purchase price, the buyer's and seller's taxpayer identification numbers and the issuer and policy number to the IRS, to the insurance company that issued the policy and to the seller. In addition, the proposal would modify the transfer-for-value rule to ensure that buyers could not take advantage of the current exceptions to that rule. Finally, the insurer would be required to report any policy benefits paid to the buyer and an estimate of the buyer's basis in the policy, to the IRS. The proposal would be effective for sales or assignments and payments of death benefits for taxable years beginning after December 31, 2010 and is expected to raise $812 million over the period 2010-2019.
Dividends-Received Deduction for Life Insurance Company Separate Accounts
The proposal would modify the regime for computing the company's share and policyholder's share of net investment income (the "proration" rule) to require a more direct relationship between the company's share and the company's actual economic interest in the separate account. For a separate account, the new proposed formula would generally produce a company's share that approximates the ratio of the mean of the separate account's surplus to the mean of the separate account's assets. The effect of the new rule would reduce the tax benefit a company receives in connection with dividends received by separate account assets. The proposal would be effective for taxable years beginning after December 31, 2010 and is expected to raise $3.444 billion over the period 2010-2019.
Expand Pro-Rata Interest Expense Disallowance for COLI
The proposal would repeal the current exception from the pro-rata interest expense disallowance rule for COLI contracts covering employees, officers or directors. Under the proposal, the exception would apply only to policies covering 20-percent owners of the business. The effect of this proposal would be to reduce the otherwise allowable interest deduction of a business that owns a COLI policy. The proposal would apply to contracts entered into after the date of enactment of the provision and is expected to raise $8.473 billion over the period 2010-2019.