Tax Policy:

Allocation of Taxes Within the Life Insurance Industry

GGD-90-19: Published: Oct 19, 1989. Publicly Released: Oct 19, 1989.

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Pursuant to a congressional request, GAO reviewed: (1) how section 809 of the Internal Revenue Code affected the income tax split between stock and mutual life insurance companies and within the mutual segment itself; and (2) alternative methods of taxing mutual life insurance companies.

GAO found that section 809 imposed taxes that: (1) were higher for the mutual companies as a whole in years when their earnings were low, and vice versa; (2) were regressive on the basis of company income because segmentwide averages dictated each firm's taxes; and (3) depended disproportionately on the behavior and performance of the larger mutual companies. GAO also found that, through 1987, the mutual-stock split in taxes produced by the section 809 approach was consistent with the mutual-stock split in income. GAO examined such alternatives to section 809 as: (1) including all policyholder dividends in taxable income; (2) excluding all dividends from taxable income; (3) excluding all policyholder dividends from taxable income; (4) imputing under alternative methods; and (5) designating a part of policyholder dividends as distributed earnings. GAO believes that the most equitable alternative would be to delete section 809 and allow mutual life insurance companies to deduct all policyholder dividends in determining corporate taxable income.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress has, at least for the time being, decided to let section 809 stand.

    Matter: Congress should delete section 809 from the tax code, accept the prepayment approach at the company level, and legislate a tax on the earnings part of dividends attributed to the individual policyholder. Congress should impose the tax on these earnings at the company level as a proxy for the tax on individual policyholders.

  2. Status: Closed - Not Implemented

    Comments: Congress has, at least for the time being, decided to let section 809 stand.

    Matter: To calculate the earnings part of policyholder dividends, Congress should specify a proportion of policyholder dividends to be included in the taxable income of mutual and stock life insurance companies. This proportion should be based on the dividend payout behavior of stockholder-owned corporations but could be adjusted upward to allow for capital gains. The proportion should be reexamined periodically.


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