CONCLUSION

It would appear in the light of the foregoing that in general the present revenue statutes recognize fairly the principles involved and reach all income of insurance companies which should be taxed. In fact in the case of mutual companies the tax burden on their taxable income is greater than for other taxpayers because of the minimum tax provided. An appropriate amendment to prevent unreasonable accumulation of surpluses by mutuals and reciprocals should complete the picture of fair distribution to the insurance industry of their share of the Federal tax burden.

TAXATION OF MUTUAL LIFE INSURANCE COMPANIES

H. Ladd Plumley1

1

In a mutual company, premium deposits and the income from the investment of these deposits are held for the exclusive benefit of the policyholders and their beneficiaries. Consequently any tax levied on my company must be borne by the policyholders or their dependents and by no one else.

The tremendous increase in Federal taxation by reason of the 1959 law was and continues to be a matter of deep concern to my company and its policyholders, but it is the inequities that are inherent in some provisions that presently are paramount.

My own company, as an illustration, is an underwriter both of individual and group insurance in the generally accepted, traditional manner. We are a medium size company-26th in assets among U.S. companies with more than $660 million in assets and 25th in volume of life insurance in force with more than $2,700 million in force. Our comments are based on our situation which is typical of a conservative, sound, mutual life insurance company continuing successfully to fulfill its contracts and to be alert to the growing insurance needs of the American people.

We are not pleading the case of the new, the special, the reorganized, the acquired, or the unsuccessful company. We are not speaking for ourselves at the expense of any other competitor or any other company in a special situation. We are presenting our case with the objectives of parity and equity only.

Most of what I say has been said before, but I submit here certain recommendations upon which we sincerely hope you will hold an open mind and accept and adopt them as an act of perfecting that which already has been partially accomplished.

The 1959 law was far-reaching in nature and complex in structure. In many respects the committees of the Congress which conceived and brought forth this law have reason to be gratified by their product. It is my hope that you will not consider me lacking in appreciation of the difficulties surrounding such a task if I express my conviction that there are areas of refinement, of extension of presently accepted philosophies, and in some few instances substantive changes which should be made in the interests of all concerned. I use this phrase "the interests of all concerned" for the processes and benefits of the institution of life insurance are a part of the basic economic fabric of our economy and a strengthening of those threads is of vital consequence to all Americans. The benefits paid to beneficiaries in many cases constitute the sole financial bulwark of families, the only guarantor of educational funds, or the cash requisite to carry on a business. The reserves of life insurance companies form a pool of long-term in

1 President, State Mutual Life Assurance Co. of America. Worcester, Mass.

vestment which is the largest in the world. The focus of our financial thinking today is on the reality of inflation and its ominous future shadow. It is of prime import that the institutions of thrift be encouraged so that the moneys necessary to finance continuation of the machinery which creates employment be accumulated-lacking this continuous accretion we are faced with either contraction of our economic activity or inflation of the monetary supply.

So I make an appeal that, for the long term, the Congress keep an open mind on the problem of the taxation of life insurance companies. The application of this law may produce unlooked for and unwanted results.

In the meantime, there are specific areas which appeal for action. I hope that despite the devotion to the enactment of the present bill. which engaged some Members of Congress over a period of months, there remains a desire to take care of particular needs which were evidently sacrificed during the enactment period.

I will deal with only five of them but I assure you that in these areas action soon is requisite. Since it has been stated that we are here concerned with tax philosophy and not specific legislation this statement will omit substantiating data although if the committee so wishes, it will be furnished gladly.

First, in phase 2 there is a provision for the deduction of 2 percent of the premiums for group life and accident and health insurance. It was said that this deduction was included to build up reserves in an area where the spread of risk might be less than in individual policies. This was a prudent provision. In this area there is no difference in basic premium structures between stock and mutual companies so the objectives of safety which this 2 percent reserving was to accomplish should by all means be retained and apply equally to stock and mutual companies. Yet we find the direct opposite can be true. Because of the limitations of section 809 (f) in computing the phase 2 tax base, that which we were given permission to reserve in one subsection of section 809 we are denied by another subsection of section 809, except to the extent of $250,000. It is absolutely necessary to provide that this special and prudent reserve be subtracted from any tax base otherwise calculated if it is to have full force and effect.

Second, the testimony of the originators of the legislation and the commentary thereon is replete with the recognition that the unfair discrimination against insured pension plans and in favor of trusteed plans should be removed. Part of this discrimination has been removed insofar as taxing the income from the body of the fund but no provision was made to treat capital gains with similar equity.

In this same field the funds of the individual annuitant or the person who receives his insurance benefits in installments (so-called supplemental contracts with life contingencies) was given no recognition at all. Individual annuities, including supplementary contracts with life contingencies, should be given similar treatment to that accorded qualified pension plans. Treatment of capital gains on these reserves should also be treated equitably and be excluded from taxation. These changes would also remove the double application of taxes on investment income earned for annuitants. Individual thrift is in the American tradition and to fail to give the same

fair consideration to the individual as a single purchaser which he would receive in a group is a fault which I hope you will correct. Third, is the matter of the discriminatory treatment against dividends contained in the computations of the phase 2 tax base. Now that the heat of the struggle has passed a rereading of the testimony offers convincing evidence that justice demands that this situation. be corrected. Dividends are adjustments in price. This was apparently reestablished in the testimony at the hearings as it has been previously in the courts. They are a return of a person's own money. There appeared but one reservation which was repeatedly examined: Is any of this money a profit from investment income and not a price. adjustment? Mr. Lindsay of the Treasury said perhaps 10 percent was, although he conceded that to identify it was difficult. Others contended none was still other said it could at the most be the incremental investment income for 1 year on the excess premium that could be allocated to investment. In order to progress the legislation and to rid the industry of the gross inequities of the 1942 law, my "mutual" colleagues at that time agreed to a compromise that was liberal in the extreme. As you know, the law disallows that portion of dividends disbursed that reduces phase 2 net gain below phase 1 taxable investment income (except to the extent that the $250,000 may apply) and thereby creates the so-called negative. Even though the net effect of this disallowance is a 52-percent tax on the return of a policyholder's own money, many mutual companies, in order to eliminate any possible vestige of freeing investment profit from tax agreed to the deduction of only 50 percent of the negatives. I subscribe to that theory but immediate steps should be taken to progress toward this goal. This is not a matter which pertains only to large mutual companies or small mutual companies, but to all them. It is a gross inequity. As an example, may I include the statement which Mr. Albert L. Hall, vice president and general counsel of the Berkshire Life Insurance Co., made before the Senate Finance Committee on March 19, 1959.

Mr. HALL. My name is Albert L. Hall. I am vice president and general counsel of the Berkshire Life Insurance Co., of Pittsfield, Mass., a mutual life insurance company chartered in 1851. At the end of 1957, the Berkshire ranked 62d in assets and 101st in insurance in force.

My remarks do not deal primarily to the problems occasioned by H.R. 4245 in its impact upon the mutual life insurance business as a whole, but will relate with particular pertinency to the operations of Berkshire Life Insurance Co. As one small mutual life insurance company, we concur with previous witnesses that the bill, with suitable amendments, will be acceptable. I will discuss briefly the impact of two amendments already proposed because they have marked relevancy to Berkshire Life.

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A second amendment has particular significance to the Berkshire Life. Here is where our special problem lies. Under the bill as drawn, while our gain from operations for 1958 amounted to a bit more than $1,250,000, we are required to use the larger taxable investment income of $1,600,000 as the tax base, for the reason that the bill does not permit a reduction in the gain from operations by the full amount of dividends paid to policyholders, but only down to the level of the taxable investment income where it is pegged. This has the effect of arbitrarily forcing us to a taxable level which is $350,000 in excess of the Berkshire's actual gain from operations. At a 52-percent rate this affects my company by an additional tax of $180,000. Simply expressed, this makes the rate of tax on gain from operations 66 percent, not 52 percent. We feel amendment is in order.