Ready…Aim…Fire! FY 2012 Budget Proposals (Once Again) Target Insurance Companies

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On February 14, 2011, the Administration released its fiscal year 2012 budget (FY 2012 Budget). Of note, the FY 2012 Budget includes a number of tax proposals that target insurance companies or that otherwise would have a direct effect on them. Those proposals include:

-Modifying the dividends-received deduction for life insurance company separate accounts. This proposal is a modified version of a proposal that was included in the fiscal year 2010 budget (FY 2010 Budget) and the fiscal year 2011 budget (FY 2011 Budget) and is estimated to raise $2.368 billion over 5 years and $5.146 billion over 10 years.

-Disallowing the deduction for “non-taxed reinsurance premiums paid to affiliates.” This proposal is a modified version of a proposal that was included in the FY 2011 Budget and is estimated to raise $1.103 billion over 5 years and $2.614 billion over 10 years.

-Extending the Subpart F “active financing” exception and “look-through” treatment for payments made between related controlled foreign corporations through December 31, 2012.

-Imposing a “financial crisis responsibility fee” on “financial institutions.” This proposal is a modified version of a proposal that was included in the FY 2011 Budget and is estimated to raise $10 billion over 5 years and $30 billion over 10 years. The Administration first proposed such a fee on January 14, 2010.

-Modifying the rules that apply to sales of life insurance contracts. This proposal is a carryover from the FY 2010 Budget and the FY 2011 Budget and is estimated to raise $344 million over 5 years and $1.243 billion over 10 years.

-Requiring information reporting for “private separate accounts” of life insurance companies. This proposal is a carryover from the FY 2010 Budget and the FY 2011 Budget and is estimated to raise $9 million over 5 years and $39 million over 10 years.

-Repealing section 847 effective for taxable years beginning after December 31, 2011. This proposal is new and is expected to be revenue neutral.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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