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The difficulty with existing District law, as interpreted by the Finance and Revenue Division, is the fact that the exemption for intercorporate dividends is said to apply only where the corporation paying the dividend is subject to the corporate income tax.

Thus, even though the net premiums tax is imposed in lieu of the corporate income tax, the fact that Peoples pays the net premiums tax, rather than the corporate income tax, has been construed as barring application of the exemption provision to, for example, the dividends which Peoples pays to Capital.

If Peoples' earnings are to be taxed twice at the corporate level (that is, in Peoples' hands and again in Capital's hands), the tax burden on those earnings, assuming Peoples pays the same dividends it paid in 1972, will be increased each year by over $100,000. This is a tax burden which Capital cannot afford to bear, and one which no other jurisdiction imposes on life insurance company operations. This is the reason Peoples has ceased to pay dividends and why consideration has been given to removing Peoples from the District of Columbia.

My testimony this morning will confirm that Capital's management has no wish to take Peoples outside Washington, D.C. We believe its location here is an asset. Recently Peoples expanded its operations by acquiring licenses to do business in three additional states. Capital's management has faith in Peoples and intends to keep it in the District and use it as a vehicle for building a more substantial business enterprise-assuming the existence of an equitable tax structure in the District, a tax structure which places the District on a par with competing jurisdictions and does not penalize life insurance company operations conducted within a holding company structure.

Enactment of H.R. 6186 will eliminate the difference in treatment of dividends paid by corporations paying the regular corporate income tax and life insurance companies paying the net premiums tax and will conform the District's law for taxing life insurance company operations with the laws applicable to such operations in other jurisdictions.

In conclusion, we respectfully urge the subcommittee to act favorably with respect to this bill.

Thank you very much for giving me the opportunity to testify this morning. I will be glad to try to answer any questions you may have.

ATTACHMENT TO STATEMENT OF HOMER D. PARKER

PARTIAL LIST OF LIFE INSURANCE COMPANY HOLDING COMPANIES OPERATING IN THE

UNITED STATES

Aetna Life and Casualty
All American Life and Financial Corporation
American General Insurance Company
CNA Financial Corporation
Chubb Corporation
Connecticut General Insurance Corporation
Gulf Life Holding Company
INA Corporation
Integon Corporation
Liberty Corporation
Lincoln National Corporation
Monumental Corporation
NLT Corporation
Nationwide Corporation
Richmond Corporation
Southland Financial Corporation
Transamerica Corporation
The Travelers Corporation
USLIFE Corporation
Washington National Corporation

Mr. STUCKEY. If you would like to summarize, it would be helpful, now that we have pretty much agreement on section 2.

Mr. PARKER. That is our position.
Mr. STUCKEY. Thank you.
Our next witness is Mr. Hogan, President of Peoples Life Insur-

ance Co.

STATEMENT OF ERNEST L. HOGAN, PRESIDENT, PEOPLES LIFE

INSURANCE CO.

Mr. Hogan. Mr. Chairman and members of the subcommittee, I am delighted to have the opportunity to be here. Each of you has a copy of my statement with reference to the bill.

I would like for it to be filed with the committee.
Mr. STUCKEY. With no objection.

[The complete prepared statement of Mr. Hogan, above referred to, follows:]

PREPARED STATEMENT BY ERNEST L, HOGAN, PRESIDENT, PEOPLES LIFE

INSURANCE Co.

Mr. Chairman and members of the subcommittee my name is Ernest L. Hogan. I am President of Peoples Life Insurance Company, a corporation which was organized in the District of Columbia in 1903 and which has always had its home office in the District. Peoples stock, other than a few shares, is now owned by Capital Holding Corporation, a Kentucky corporation which engages in no business in the District of Columbia.

I am here today to urge this subcommittee to recommend the passage of H.R. 6186. H.R. 6186 is a bill

--that will eliminate unintended discrimination against companies which receive dividends from District of Columbia life insurance companies;

--that will bring District of Columbia law (as it applies to the tax treatment of the receipt of such dividends) into conformity with federal law and the laws of the various states; and

--that will create a climate of equitable taxation which will encourage life insurance companies to remain in the District of Columbia and to

expand their operations here. Peoples has always had its home office in the Nation's Capital and has represented to its policyholders that it is a District of Columbia corporation. To change its domicile now would require considerable explanations to be made to policyholders.

The management of both Capital Holding Corporation and Peoples Life want Peoples to remain in the District of Columbia. Our relationship with the District Government has been a long and mutually satisfactory one. In addition, our relations with the Congress, and particularly with the House District Committee, have been most satisfactory. Some of the members of this subcommittee may recall the assistance we received from this body in the mid-1950's, when our new home office was constructed near the present location of the Kennedy Center.

At present, Peoples employs over 300 persons in the District of Columbia. Peoples pays to the District each year real property taxes in excess of $100,000, and it also pays to the District each year premiums taxes on business sold in the District (as do other insurance companies), and withholding, sales, and unemployment compensation taxes.

The net premiums tax which Peoples pays to the Distrct is a tax imposed, as provided in the District of Columbia Code, “in lieu of” the District's corporate income tax. It is imposed on the premiums which Peoples receives from District of Columbia residents. Peoples also pays to other jurisdictions substantial net premiums taxes on the premiums which it receives from policyholders in those states. In 1972, Peoples paid $939,664 of premiums taxes and accrued income taxes of $1,832,000.

If an additional tax is imposed when Peoples pays dividends to Capital Holding Corporation, then there is double taxation at the corporate level. In such event, the tax burden becomes intolerable.

We believe this conclusion is confirmed by the fact that no state imposes such a tax burden on life insurance companies. Further, this Congress itself has provided, in effect, in the Internal Revenue Code, that for federal income tax purposes, there will be only one tax at the corporate level. Dividends paid by a subsidiary corporation to its parent corporation are not tared again, including dividends paid by a life insurance company to a parent company. Corporate earnings are, of course, taxed again when distributed as dividends to individual shareholders.

The District Finance and Revenue Division has taken the position that when a holding company structure is involved it intends to tax life insurance company earnings twice at the corporate level. Thus, the District of Columbia Code provides that when dividends are paid by a corporation subject to the D.C. corporate income tax to another corporation, the dividends are not taxed. The D.C. authorities say, however, that this provision does not apply in the case of a life insurance company paying dividends to a corporate parent company because the life insurance company is not subject to the .C. corporate income tax. They take this position even though the D.C. net premiums tax is imposed expressly "in lieu of” the D.C. corporate income tax. Because of this position, Peoples has avoided imposition of the second tax by paying no dividends to Capital Holding Corporation in 1973. Our Board of Directors has indicated that it will continue this policy and, if it becomes necessary, I am afraid that we will, with great reluctance, be forced to move outside the District of Columbia.

I am here today to ask this subcommitte and to ask the full committee to act favorably with respect to this legislation so that Peoples is no longer subject to this unfair double tax burden.

H.R. 6186 is a bill which will help establish a fair and equitable structure for taxing life insurance companies domiciled within the District of Columba. It will enable our company to remain here and to expand our operations here. It will complement the District's effective and reasonable regulatory system for life insurance companies and thus will make it attractive for such companies to locate here. It will, in the long run almost certainly produce additional revenue for the District and strengthen the economy here.

I will be glad to answer any questions which you may have regarding the effect of this bill on our company or regarding our operations.

Thank you very much for permitting me to testify before this subcommittee today.

Mr. Hogan. I will also support Mr. Parker in the statement with reference to section 2, as far as the president of the company is concerned.

Mr. STUCKEY. Thank you, Mr. Hogan.

The only thing, Mr. Parker as chairman of the board and you as president of your corporation, what are you going to say if some shareholder comes up and says it was an illegal payment that was paid in and as a shareholder I would like to see our company get the money back? What would be your response to that?

Mr. HOGAN. Mr. Chairman, I think that question that you ask possibly will be asked by some minority stockholder. However, we are planning on testing this in the court to see, but we would rather the court decide.

Mr. STUCKEY. Rather than legislation ?
Mr. Hogan. Yes, sir.
Mr. STUCKEY. I agree with you on that.

Mr. BROYHILL. Maybe the stockholders will ask why they didn't fight harder to keep section 2 in the bill when they were testifying before the committee.

Mr. STUCKEY. I think the answer was given to that earlier, they would rather look ahead than look back and correct inequities.

Our next withness is Mr. Martin, vice president of the Acacia Mutual Life Insurance Co.

STATEMENT OF HERBERT E. MARTIN, JR., VICE PRESIDENT,

ACACIA MUTUAL LIFE INSURANCE CO.

Mr. Martin. Gentlemen, I believe you have a copy of my statement, also. I am representing the five major life insurance companies in the District and this statement is on behalf of those five companies.

This statement supports the enactment of this bill for the reasons that have already been presented. We think it is extremely important

from the standpoint of the business atmosphere in the District to eliminate this very inequitable tax which results in double taxation. So we are in support and would urge its

passage. [The complete prepared statement of Mr. Martin, above referred to, follows:

PREPARED STATEMENT OF HERBERT E. MARTIN, JR. I am Herbert E. Martin, Jr., Vice President and General Counsel of Acacia Mutual Life Insurance Company, a Company chartered by Special Act of Congress in 1869. Acacia is a domestic District of Columbia life insurance company. I am chairman of the Legislative Committee formed by the major life insurance companies of the District of Columbia. This consolidated statement on H.R. 6186 is made on behalf of the following domestic District of Columbia life insurance companies :

Acacia Mutual Life Insurance Company
Equitable Life Insurance Company of D.C.
Government Employees Life Insurance Company
Peoples Life Insurance Company

United Services Life Insurance Company Peoples Life Insurance Company is also presenting an individual statement to the Subcommittee today.

The bill under consideration, H.R. 6186, would correct the present unequal District of Columbia tax treatment of the recipients of intercorporate dividends paid (a) by a general business corporation, and (b) by an insurance company.

The District of Columbia, like most jurisdictions, taxes general business corporations based on their net income (Chapter 15 of Title 47, District of Columbia Code), and taxes insurance companies based on their premium receipts (Chapter 18 of Title 47, D.C. Code). As in most jurisdictions, the premium tax levied on insurance companies is in lieu of certain other taxes, including the income tax.

Also, like most jurisdictions, the District of Columbia exempts dividends paid by a general business corporation from taxation as income when these dividends are paid to and received by a corporate shareholder. This exemption (Section 47–1580 of the Code) is based on the fact that the corporation paying the dividend has already been taxed. The clear purpose is to prevent double taxation of intercorporate dividends. In this respect, the District of Columbia tax treatment of dividends paid by a general business corporation conforms to the treatment of intercorporate dividends under the U.S. Internal Revenue Code

It would be reasonable to expect that when an insurance company (taxable under Chapter 18 instead of under Chapter 15) pays dividends to a corporate shareholder the same exemption should apply in order to prevent double taxation. Such an exemption does apply to insurance company dividends in other jurisdictions, as well as under the provisions of the U.S. Internal Revenue Code.

Possibly because of an oversight, specific language to provide such as exemption was not included in Section 47–1580. As a consequence, the District of Columbia has taken the position that intercorporate dividends paid by a District of Columbia insurance company to a corporate shareholder are taxable. This position means that such dividends would be taxable unequally as compared with dividends paid by a general busines corporation--and would be subject to a double tax burden that is not imposed in other jurisdictions.

In my opinion, a vigorous and growing insurance industry is important to the District of Columbia. Passage of this bill would correct an inequitable and discriminatory situation that presents serious current problems for two domestic companies. Further, it would place the District of Columbia at least on an equal footing with other jurisdictions as a desirable location for operating insurance companies. It is the position of the companies I represent today that H.R. 6186 is a highly desirable remedial bill. On behalf of the domestic insurance industry, I recommend its passage.

Mr. Chairman, I appreciate having the opportunity to present this statement.
MrSuka: Phank you, Mr. Martin.
Mr. BroyhiTI?
Mr. Broymill. No questions.

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Mr. STUCKEY. That winds us up on the witnesses for H.R. 6186. Do we have any people present that would like to testify or make any comments regarding H.R. 6186?

[No response.]

Mr. STUCKEY. That concludes the hearings on H.R. 7128 and H.R. 6186.

Mr. BROYHILL. Mr. Chairman, since both of these bills are noncontroversial, is it possible that a motion be in order to recommend to report these to the full committee? I recognize that a quorum is not present, but I don't think a quorum has to be present for you, as a chairman, to recommend these to the full committee.

Mr. STUCKEY. The gentleman is quite correct. If there is no objection raised before the full committee if a quorum is not present. In view of the fact that both bills are noncontroversial, there is a strong possibility the objection will not be raised.

So the Chair is in agreement with the gentleman from Virginia ; we will report out H.R. 7218 and H.R. 6186 to the full committee, with H.R. 6186 amended to remove section 2 of the bill.

Mr. BROYHILL. What about the amendment offered by Mr. Phillips?

Mr. STUCKEY. And H.R. 7128 will be reported to the Full Committee with the amendment that was presented in written testimony.

Mr. BROYHILL. Mr. Chairman, I am hopeful you can get these bills up to the full committee before the Home Rule bill is acted upon, because that might be next February.

Mr. STUCKEY. The gentleman is being very optimistic in placing a heavy burden on the chairman there. We will do our best to see it is reported out.

I think there is a possibility of it being reported out because it is noncontroversial at this point. The Chair will assure those present and the gentleman from Virginia, we will do our best to see if we can bring it up before the Home Rule hearings start.

Mr. BROYHILL. Mr. Chairman, one more question. As you know, I offered an amendment to another bill that was reported out of the subcommittee, having to do with the Capital Yacht Club, I believe, and the usery laws. The bill I have pending before the committee would exempt large commercial loans in excess of $1 million from the D.C. usery law. The chairman did promise me we would have a hearing on that. I hope that will not be controversial, but again I would like to call it to the attention of the chairman and see if we couldn't have early hearings on it.

Mr. STUCKEY. Actually, the bill we are hearing this morning, I think it will be a matter of bringing the bill back up to the subcommittee and the chairman introducing his amendment and the subcommittee reporting the bill.

Does the gentleman from Virginia have any comments? Mr. BROYHILL. No, sir. Mr. STUCKEY. The committee will report out the two bills H.R. 7218 and H.R. 6186 and will bring them up as soon as it is possible. I think there is a good chance because of the noncontroversial nature of the bills.

The subcommittee will stand adjourned. DEPOSIT

[Whereupon, at 10:50 a.m., the subcommittee adjourned, vene subject to the call of the Chair.]

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