DRA Introduces New Concepts in Altering Taxation of Life Insurance Companies

In enacting the life insurance provisions of the Deficit Reduction Act of 1984 (the 1984 Act), Congress' greatest concern was to establish a taxing scheme that would reflect the fundamental difference between mutual and stock life insurance companies and provide a "level playing field" between them. The basic problem is that distributions by mutuals to their policyholders contain two components: a return on equity similar to a dividend to shareholders and a distribution to the policyholders in their capacity as customers. 

The 1984 Act reflects a policy decision that all distributions to policyholders in their capacity as customers should be fully deductible by both stocks and mutuals. Because a shareholder dividend is taxable to shareholders and is not deductible by a stock company, however, Congress determined that mutuals should not be allowed to use the deduction for policyholder dividends, etc., to reduce their tax base below an amount representing an imputed return on the mutuals' equity.