STATEMENT MUTUAL INSURANCE COMMITTEE ON FEDERAL TAXATION BY JOHN J. WICKER, JR. Presented Tuesday, May 23, 1961 WAYS AND MEANS COMMITTEE HOUSE OF REPRESENTATIVES of the UNITED STATES OF AMERICA IDENTIFICATION: I am John J. Wicker, Jr., a former State Senator of Virginia, senior partner in the law firm of Wicker, Baker & Goddin in Richmond, Virginia, and General Counsel of Mutual Insurance Committee on Federal Taxation. MUTUAL COMMITTEE IS REPRESENTATIVE OF "REGULAR MUTUALS": This latter organization (which I shall hereinafter call the "Mutual Committee") is composed of 692 mutual fire and casualty companies (which the Treasury refers to as "regular mutuals") with more than 27 million policyholders. As you can see from the tabulation of its member companies (filed herewith), this Committee is thoroughly representative of the mutual insurance industry in the fire and casualty field including mutual companies of all sizes, located in all sections of our country. FACTORY MUTUALS AND RECIPROCALS HAVE THEIR OWN SPOKESMEN: The Mutual Committee does not include the companies generally referred to as "Factory Mutuals" nor the inter-insurance exchanges, generally called "Reciprocals" who have somewhat different structures and problems from the other mutuals and who are, con sequently, represented by separate spokesmen. To save the time of the Committee, I will not undertake to read the various tabulations and exhibits included in this statement but we would like to have them included and printed with our complete statement in the official record, please. PROPOSED LEGISLATION WOULD BE UNFAIR TO MUTUALS: As General Counsel of the Mutual Committee, I am appearing here today in opposition to the Treasury proposal which endorsed certain proposed legislation (H.R. 6659 - 6660, generaly called the "Boggs-Baker Bills"). This Treasury proposal would: 1. 2. More than double the tax burden of the mutual fire and casualty insurance companies and their Be injurious to the public interest by seriously 3. Unfairly penalize an essential nationwide non-profit 4. industry; and Violate fundamental principles of income taxation And in spite of all this inequity and unfairness, this legislation 18 being urged in the name of so-called "tax equality." NO CRITICISM OF PATRONS OF THE LEGISLATION: We are not criticizing the two distinguished Congressmen who are the patrons of this proposed legislation. We know that they are gentlemen of outstanding ability and unquestionable integrity. And we freely acknowledge to them the same honesty of purpose and sincerity of conviction with which we are actuated. However, even the most intelligent, respectable and conscientious sponsorship cannot offset or lessen the inconsistency and inequity of the proposed legislation and the evil effects which its enactment would cause. PROPOSED LEGISLATION INCONSISTENT WITH PRESIDENTIAL RECOMMENDATION: The recent Presidential tax message recommended that the existing system of mutual fire and casualty insurance taxation should be: "Reviewed in the light of current conditions" and that "consideration should be given to taxing mutual... companies on a basis similar to stock companies, following the pattern of similar treatment of stock and mutual enterprise in the life field. (Underlining supplied.) The Treasury Department has now gone far afield and, at the beginning of these hearings, flatly endorsed the pending legislation which, as we shall point out, in many vital features, does NOT "follow the pattern of similar treatment of stock and mutual enterprise in the life field." This inconsistent action of the Treasury was in marked contrast with the comprehensive report the Treasury made to this Committee less than two years ago on very similar legislation (H.R. 7671 and H.R. 7672 in the 86th Congress.) EXISTING TAX PLANS IN EFFECT SINCE 1942: For the record, may I remind you that mutual fire and casualty companies are taxed under sections 821, 822, and 823 of the Internal Revenue Code. Under these sections mutuals pay taxes each and every year at regular corporate rates on taxable investment income (including realized net capital gains), provided that the tax cannot be less than 1 percent of the sum of taxable investment income and premiums, after deducting dividends to policyholders. The tax exemption found in section 501 (15) of the code, applies only to the very small companies whose total annual income from all sources (premiums, investment income, etc.) does not exceed $75,000. These very small companies, comparable to the aggregate approximately exempt small-income individual citizens, 80 percent of the total number of mutuals, but they account for less than 3 percent of the mutual premium volume. Stock companies are taxed under sections 831 and 832 of the same code. Stock company taxes are computed on taxable profits by first combining investment income or losses, and capital gains or losses, and underwriting gains or losses (with deductions for any dividends to policyholders), and then applying regular corporate rates on the combinations, thus resulting in a tax on net profits or a tax credit carryback or carryover on net losses. 4 FUNDAMENTAL DIFFERENCES BETWEEN STOCK AND MUTUAL COMPANIES: The existing law was designed to recognize the fundamental differences between stock companies and mutual companies. Among these differences the following are typical: A stock company has three entities: By contrast, a mutual company has only two entities: 1. The company 2. The policyholders The surplus of a mutual company is available only for the policyholders and their protection and can never be used for any other purpose. By contrast, the surplus of a stock company is available not only for the policyholders and their protection, but also for third party stockholders. This is entirely proper. FACTS DEVELOPED IN 1951 AND 1958 HEARINGS ARE EQUALLY APPLICABLE NOW: In 1951, and again in 1958, full hearings on the Federal income tax status of the mutuals were held by the Ways and Means Committee, and in 1951 by the Senate Finance Committee. Careful and detailed studies were made by the staff of the Joint Committee on Internal Revenue and by your own staff. After full consideration it became obvious that there was, in fact, no real tax inequality between the mutuals and the stocks. The facts and principles developed in the 1951 and 1958 hearings are just as logical and applicable today as they were then. |