Financial Institutions/Products

Financial Crisis Responsibility Fee

The president’s FY 2011 budget includes his controversial “financial crisis responsibility fee” on the liabilities of financial institutions with at least $50 billion in consolidated assets. The rate of the fee applied to covered liabilities would be approximately 15 basis points. The president proposes to make the fee effective as of July 1, 2010.

IMPACT: The fee would be applied to banks, thrifts, bank and thrift holding companies, brokers, and securities dealers. U.S. firms owning or controlling these types of entities as of January 14, 2010 would also be subject to the fee. Financial firms not based in the U.S. would be subject to the fee based on the liabilities of their U.S. subsidiaries.

Forward corporate stock sales

Generally, corporations do not recognize gain or loss on the issuance or repurchase of their own stock. The president proposes to require a corporation that enters into a forward contract to sell its own stock to treat a portion of the payment received when the stock is issued as a payment of interest. The proposal would be effective for forward contracts entered into after December 31, 2011.

COMMENT: Income tax is currently imposed on a portion of the payment when corporations declare a future stock issue, but receive immediate payment from the investor.

Commodities, Securities and Other Dealers

Generally, certain dealers in commodities, securities, commodities derivatives, and equity options must treat the income from Code Sec. 1256 contracts entered into in their capacity as a dealer as generating 60 percent long-term capital gain or loss and 40 percent short-term capital gain or loss. The president proposes to end this treatment effective for tax years beginning after the date of enactment.  Affected dealers in commodities, securities, commodities derivatives, and equity options would be required to treat the income from their day-to-day dealer activities in Code Sec. 1256 contracts as ordinary in character and not as capital in character.

Repurchases of Convertible Debt

Code Sec. 249 may operate to limit or disallow a corporation’s deduction of amounts used to repurchase convertible debt if the debt instrument is convertible into its stock or stock of a corporation in control of, or controlled by, the corporation. “Control” is determined by reference to Code Sec. 368(c). The president proposes to amend the definition of control in Code Sec. 249 to incorporate indirect control relationships of the nature described in Code Sec. 1563(a)(1).

Insurance Companies/Products

Sales of Life Insurance Contracts

The FY 2011 budget would require the purchaser of an interest in an existing life insurance policy with a death benefit of at least $500,000 to report the purchase price and other information to the IRS. The insurance company would also have to report the payment of benefits to the buyer. In addition, the proposal would modify the transfer-for-value rules to ensure that exceptions do not apply to buyers of policies.

Dividends-Received Deduction

The president proposes to modify the dividends-received deduction for life insurance company separate accounts. Under current law, the deduction may exceed the company’s economic interest in its net investment income.

Corporate-Owned Life Insurance

The president proposes to expand the disallowance of interest expense deductions for funds borrowed to purchase corporate-owned life insurance (COLI) contracts on employees, officers and directors. The proposal would apply to contracts issued after December 31, 2010.

IMPACT: The change, the administration predicted, would deter companies from investing in investment-oriented insurance policies by borrowing from sources other than the contracts themselves.

Annuities

The president proposes to permit partial annuitization of a nonqualified, deferred annuity contract in an exchange of annuity contracts. The proposal would provide for consistent treatment of these transactions and be effective for partial annuitizations that are effected after December 31, 2010.

Source: CCH, a Wolters Kluwer business