New Law Revamps Life Insurance Company Computation of Reserves and Income

The Deficit Reduction Act of 1984 (the "Act"), P.L. 98-369, amends the Life Insurance Company Income Tax Act of 1959, P.L. 96-69, for tax years beginning after 1983 and replaces it with a completely revised system of income taxation for life insurance companies. The 1984 Act follows the enactment, in TEFRA in 1982, of stop-gap provisions that covered the 1982 and 1983 tax years. The new law attempts to provide a "level playing field" between segments of the life insurance industry and with other financial intermediaries by fixing a 55/45% allocation between mutual and stock life insurance companies of the approximate $3 billion industry tax burden and by allowing a special 20% deduction for all life insurance companies. It also establishes mandatory rules for computing life insurance reserves, and imposes an "add-on" tax on a mutual company's adjusted surplus in recognition of the participating policyholders' ownership interest. Further, it attempts simplification by eliminating the complex three-phase tax system that resulted in differing effective tax rates depending on the company's tax phase, and it provides Congress a simple mechanism to modify future tax revenue by reducing or eliminating the new 20% special deduction.