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TAXABILITY OF INSURANCE COMPANY DIVIDEND

MONDAY, JULY 16, 1973

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON BUSINESS,

COMMERCE, AND TAXATION OF THE
COMMITTEE ON THE DISTRICT OF COLUMBIA,

Washington, D.C. The subcommittee met, pursuant to notice, at 10:25 a.m. in room 1310, Longworth House Office Building, Hon. W. S. Stuckey, Jr. [chairman of the subcommittee] presiding.

Present: Representatives Stuckey (presiding) and Broyhill.

Also present : Robert B. Washington, Jr., chief counsel; Dale MacIver, counsel; James T. Clark, legal consultant; John E. Hogan, minority counsel; Jacques DePuy and Leonard 0. Hilder, professional staff members.

Mr. STUCKEY. Mr. Lombard, we will have you and Mr. Wallach come back again. Mr. Robinson, we are delighted to have you join us also.

[The bill, H.R. 6186, before the subcommittee and staff memorandum will be included at this point.]

(H.R. 6186, 93d Cong., 1st sess. by Mr. Stuckey on Mar. 27, 1973] Å BILL To amend the District of Columbia Revenue Act of 1947 regarding taxability of

dividends received by a corporation from insurance companies Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the first proviso of section 1 of title X of the District of Columbia Revenue Act of 1947 (D.C. Code, sec. 47–1580) is amended to read as follows: ": Provided, however, That, in the case of any corporation, the amount received as dividends from a corporation which is subject to taxation under this subchapter or under title II of the Act entitled "An Act to provide additional revenue for the District of Columbia, and for other purposes", approved August 17, 1937 (D.C. Code, secs. 47–1801—1808), and, in the case of a corporation not engaged in carrying on any trade or business within the District, interest received by it from a corporation which is subject to taxation under this subchapter or under such title II of such Act shall not be considered as income from sources within the District for purposes of this subchapter"

SEC. 2. The amendment made by the first section of this Act shall apply with respect to all taxable years ending after December 31, 1969. Memorandum in re: H.R. 6186 (Stuckey), to amend the District of Columbia

Revenue Act of 1947 regarding taxability of dividends received by a corporation from insurance companies

PURPOSE To eliminate an apparent unintended discrimination under D.C. Code sec. 47– 1580 (1967 Supplement V-1972) against holding companies receiving dividends from District of Columbia life insurance companies. Such holding companies are subject to double taxation by the District even though they are located outside the District and engage in no trade or business within the District.

PROVISIONS 1. The amount received as dividends from a corporation which is subject to taxation under D.C. law and, in the case of a corporation not engaged in carrying on any trade or business within the District, interest received by it from a corporation which is subject to taxation under D.C. law shall not be considered as income from sources within the District.

2. Above amendment shall apply with respect to all taxable years ending after December 31, 1969.

BACKGROUND D.C. Code sec. 47–1571 (a) (1967 Supplement V-1972) imposes an income tax upon every corporation "for the privilege of carrying on or engaging in any trade or business within the District and of receiving income from sources within the District.” Although D.C. Code sec. 47–1580 provides that dividends paid by a corporation which is subject to the income tax shall not constitute, in the hands of a receiving corporate stockholder, income from sources within the District, this provision has been construed to be inapplicable to a corporation receiving dividends from a District of Columbia life insurance company on the ground that the exemption for intercorporate dividends is stated to be applicable only when the distributing corporation "is subject to the income tax." Insurance companies, because of difficulties encountered in determining their net income, are not subject to the normal District of Columbia corporate income tax, but instead are subject to a net premiums tax imposed "in lieu of” other taxes, D.C. Code sec. 47–1806 (1967 ed.).

Since the net premiums tax on life insurance companies is designed to be a complete substitute for the corporate income tax, there appears to be no reason for treating the dividends a holding company receives from a District of Columbia insurance company differently from the dividends it receives from other corporations, particularly when the holding company conducts no business in the District and the greater part of the insurance company's receipts are from nonDistrict sources.

The purpose of D.C. Code sec. 47–1580 is to insure that at the corporate level income is taxed only once and not a second time when distributed as dividends to a corporate shareholder. This treatment is generally consistent with the federal income tax law. Dividend income is taxed a second time when eventually distributed to individual shareholders.

Enactment of these provisions of the D. C. Code, which impose a double tax on the earnings of certain life insurance companies, appears to have been inadvertent and to have occurred when there were no D. C. life insurance companies operating as a part of a holding company structure and before the current trend began toward the use of such organizations.

PRECEDENTS There is no other jurisdiction which construes its income tax laws in such a manner as to penalize the use of life insurance holding companies as presently is the case in the District of Columbia.

COST Peoples Life, the principal company affected by the adverse taxation, was acquired by Capital Holding Company, Louisville, Kentucky, in 1969. No diridends were paid in 1969 by Peoples, the first year the second tax became applicable. In 1970, $69,071 and in 1971, $84,308 were paid to the District as taxes on dividends the holding company received from the D.C. insurance company. No dividends were paid in 1972 to avoid the second tax.

HISTORY
A public hearing on H.R. 6186 was held by the Subcommittee on Business,
Commerce and Taxation on July 16, 1973. Witnesses providing testimony in
support of the legislation included : Edward P. Lombard, Superintendent of
Insurance and Maximillian Wallach, Deputy Superintendent of Insurance,
District of Columbia Government; Homer D. Parker, Chairman of the
Board, Capital Holding Corporation; Ernest L. Hogan, President, Peoples Life

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Insurance Company and Herbert Martin, Vice President, Acacia Mutual Life Insurance Company on behalf of Acacia as well as Equitable, Government Employees, Peoples and United Services Life Insurance Companies. There was no testimony opposing the legislation, as amended, and no expression of opposition has been received by your Committee.

In executive session, November 2, 1973, section 2, allowing repeal of the tax to be retroactive to 1969, was deleted, as requested by the District Government.

STATEMENT OF EDWARD P. LOMBARD, SUPERINTENDENT OF IN

SURANCE, D.C. GOVERNMENT, ACCOMPANIED BY MAXIMILLIAN WALLACH, DEPUTY SUPERINTENDENT OF INSURANCE; AND WILLIAM A. ROBINSON, ASSISTANT CORPORATION COUNSEL

Mr. LOMBARD. Mr. Chairman, I believe there is a statement from Mayor Washington, which Mr. Robinson may have here.

Mr. STUCKEY. We will make the statement from the Commissioner of the District part of the record.

[The statement from Mayor Washington, above-referred to, follows:]

THE DISTRICT OF COLUMBIA,

Washington, D.C., July 16, 1973. Hon. CHARLES C. DIGGS, Jr., Chairman, Committee on the District of Columbia, U.S. House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: The Government of the District of Columbia has for report H.R. 6186, a bill "To amend the District of Columbia Revenue Act of 1947 regarding taxability of dividends received by a corporation from insurance companies."

Section 1 of the bill would amend existing law to provide that dividends and interest declared by an insurance company whose net premium receipts are subject to the 2 per cent premium tax imposed by section 6 of title II of the District of Columbia Revenue Act of 1937 (D.C. Code, sec. 47–1806), shall not, when paid to a parent corporation, be considered as income from sources within the District and thus subject to the District's franchise tax. Section 2 of the bill would make this amendment retroactive to all taxable years ending after December 31, 1969, thus enabling corporations which have paid franchise taxes on such dividends during those years to refunds thereof.

Present District of Columbia tax laws impose an income or franchise tax upon corporations for the privilege of carrying on or engaging in trade or business within the District and of receiving other income derived from sources within the District. An exception to this general requirement (D.C., Code, sec. 47–1580) provides that the amount received as dividends by any corporation from a corporation subject to payment of such income or franchise tax shall not be treated as income from sources within the District. Domestic insurance companies, however, are not taxed under the District's income tax laws, but rather pay a net premium tax in lieu of the franchise tax. Accordingly, this exception to the franchise tax law has been construed as inapplicable to certain dividend and interest payments made to corporate stockholders by local insurance companies.

The contention that under existing law dividend income, depending upon its source, receives unequal treatment in that parent corporations or holding companies need not pay taxes on such dividends when the subsidiary or paying corporation is subject to the District's franchise tax is understandable and not unreasonable from an equity standpoint. It must be pointed out, however, that enactment of H.R. 6186 would result in immediate revenue loss to the District Government and a potential greater loss in future years. The precise amount of such revenue loss is difficult to estimate since it appears that the existence of this tax liability has in some cases inhibited local insurance companies from declaring dividends which would become subject to taxation as income from sources within the District. However, under the retroactive provisions of section 2 of the bill, one corporation alone would be eligible for a refund of approximately $165,000 for taxes paid in 1970 and 1971.

Because of the inequities which, under certain circumstances, may result in the double taxation of dividends and interest distributed by insurance companies to corporate stockholders, the District Government is not opposed to the enactment of section 1 of H.R. 6186. We are, however, constrained to object to the passage of section 2 of the bill in view of its impact upon District revenues. The financial loss to the District which would result from the refund of those portions of the franchise tax attributable to dividends and interest paid to corporations by local insurance companies in 1970, 1971, and 1972 is considerable and may seriously affect the District's ability to fund public services in the fiscal year beginning July 1, 1973, if the full amount of such tax reimbursements is required to be made in that year.

We recommend, therefore, that section 2 of H.R. 6186 be deleted.

Subject to this recommendation, the District Government offers no objection to the enactment of H.R. 6186.

The Office of Management and Budget has advised that, from the standpoint of the Administration's program, there is no objection to the submission of this report to the Congress. Sincerely yours,

WALTER E. WASHINGTON,

Mayor-Commissioner.

Mr. LOMBARD. We have a short statement which might be read into the record. Of course, the Department in turn follows the statement from Mayor Washington and are in agreement with his position, and he is in favor of this bill.

The elimination of this tax would seem to be a very fair thing and one of the statements indicates that it was almost inadvertent that the tax situation ended up as it has. It appears to be unfair in its present status and it would appear that it would be extremely reasonable to eliminate it.

I will ask Mr. Wallach if he would read the short statement from the Department.

STATEMENT OF MAXIMILLIAN WALLACH, DEPUTY SUPERIN

TENDENT OF INSURANCE

TAXES UNDER PRESENT LAW Mr. WALLACII. The premiums received by authorized insurance companies on risks in the District of Columbia are subject to a 2percent tax. Insurers are also subject to real estate taxes. These taxes are in lieu of all other taxes, as provided in the D.C. Code, section 47–1806, and are payable whether the insurer is experiencing gains or losses.

Insurers domiciled in the District of Columbia are also subject to these types of taxes in every State in which they operate with regard to the risks located or the real estate they own in these States.

The imposition of double taxation by D.C. Code, section 47–1580, whether intentionally or unintentionally, on dividends or interests paid by insurers to a corporate noninsurer parent was a moot question prior to corporate reorganizations. Even now the provision does not create tax revenues in the case of a "down-stream" holding company type corporate structure, since by definition such parent is an insurer and

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