Summary: By entering into modified coinsurance agreements under section 820 of the Internal Revenue Code, some insurance companies, especially large companies, convert investment income on which they pay taxes into underwriting gains on which they pay little or no tax. Section 820 was intended to eliminate possible double taxation when coinsurance agreements are used; it was not intended to be a tax loophole for insurance companies. Findings to date indicate that: (1) the amount of modified coinsurance reported increased more than 20 times over from 1979 to 1980; (2) sample companies reduced their tax burdens in 1980 by over $6 million from the previous year, with the 10 largest mutual insurance companies accounting for most of the reduction; and (3) an estimated $1.5 billion tax dollars was lost in 1980, and an estimated $3.4 billion was lost in 1981 due to the use of modified coinsurance agreements. Elimination of section 820 would eventually correct the reduction of enormous amounts of Federal income taxes, but would reintroduce the problem of double taxation. Problems with section 820 should be viewed in light of the substantially changed economic conditions today as compared to the economic conditions in the late 1950's when major life insurance company income tax legislation was passed.
