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Congressman Gene Green

Representing the 29th District of Texas

Green Joins Congressional Effort to Stop Corporations from Using COLI Premiums as Tax Shelter

May 15, 2003
Press Release
Washington, DC - U.S. Representatives Gene Green (D-TX), Rahm Emanuel (D-IL), Trent Franks (R-AZ) and 12 other Members of Congress today introduced the Taxpayer Savings and Employee Notification Act of 2003, a bipartisan bill that would end the tax shelters enjoyed by businesses who purchase corporate-owned life insurance (COLI) policies on their rank-and-file employees without the employees' knowledge or consent.
These policies are often referred to as janitors insurance because they are taken out on workers such as janitors, secretaries and clerks.  Companies buying these policies receive tax breaks each year.  In addition, companies receive the entire death benefit when the employee dies, even if the employee doesnt know about the policy or work at the company anymore. 
If companies want to purchase these policies, they are free to do so, Rep. Emanuel said.  However, there is no reason for this practice to be subsidized by American taxpayers, especially in these difficult economic times.  Our bipartisan bill stops these subsidies, and addresses the way many corporations are using the tax code to distort the free market.
Tax incentives for business should seek to enhance the productivity of business, Rep. Franks said.  This policy of subsidized corporate owned life insurance on unknowing rank and file employees does not enhance the productivity of the corporation or benefit the employee.
According to the Wall Street Journal, and based on President Bushs FY 2004 budget, corporate-owned life insurance as a whole, including the money accrued from the purchase of janitors insurance--called inside buildup--will cost taxpayers $1.9 billion a year, and $9.3 billion over the next five years, in lost revenue.
When employers purchase janitors insurance, the premiums they pay for these policies grow tax-free, and the company receives the tax exemption on life insurance investment gains, or inside buildup.  Any annual gains flow directly to the company's income statement, similar to pension income.  Then, once the insured dies, the company receives the tax-free death benefit, and the family receives nothing.
Most of these companies are using the death of current and former employees to make huge profits, not put it back into workers benefits, said Rep. Gene Green.  Profiting from the death of these employees is offensive, unethical and represents free enterprise gone astray.
By amending the Internal Revenue Code of 1986, the legislation:

Eliminates Tax Shelters.  The legislation eliminates the tax exemption on COLI investment gains known as inside buildup, and the tax-free death benefit.
  • Allows for a Grandfather Clause.  This legislation includes a "grandfather clause" so that non-leveraged COLI policies purchased before a certain date (probably the date of introduction) will not be affected, provided that certain employee retirement benefits are maintained. 
  • Includes a Savings Clause.  The bill states that nothing should be interpreted to affect any
    pending investigations by the Treasury Department against any employer regarding the purchase of COLI.
  • Provides a Notice and Opt-Out Provision.  The provision requires written notice to employees before policies are purchased.  Employees may then choose to opt-out and prevent the company from purchasing the policy.  Failure to comply with the notice requirements will make the company subject to the Federal Trade Commission's Unfair Trade Practice regulations.
  • Exempts key-man policies.  These policies cover corporate executives.
  • Routes Inside Buildup Tax Savings to U.S. Treasury for Deficit Reduction.

The Wall Street Journal exposed the unsavory nature of janitors insurance in a series of articles over the past several months.  One story that illustrated the true nature of janitors insurance involved a 20-year-old man, William Smith.  Mr. Smith was working extra hours as a clerk at a Stop-N-Go convenience store in Pasadena, TX, for extra Christmas money when he was shot and killed by a robber.  The store's owner didn't participate in the state's workers comp system, which provides death benefits to families of workers killed on the job.  But the company had purchased a life insurance policy on Mr. Smith in the amount of $250,000.  After Mr. Smith's death, the company offered his eighteen-year-old wife and one-year-old son a payment of $60,000 to avoid a wrongful death lawsuit.  Mrs. Smith thought that the company was just being generous, but when she later discovered that the company had received $250,000, she sued the company in state court.  She later settled with the company for $390,000. 
This case is an unfortunate but common occurrence.  Cutting corporate welfare is not a partisan issue, Rep. Emanuel said.  In 1984, President Reagans Treasury Department proposed getting rid of the tax deferral on the inside buildup on ALL life insurance policies.  Here, were looking at tax policy for one specific type of life insurance, which is a smaller subset of what President Reagan had targeted as a tax shelter. 
According to the Citizens for Tax Justice, for the first time since the early 1980s, corporate tax loopholes will actually cost more than companies pay in income taxes in 2003 and 2004.  In addition to Reps. Emanuel, Franks and Green, the bills original cosponsors include:  U.S. Representatives Maurice Hinchey (D-NY), Donald Payne (D-NJ), Tim Ryan (D-OH), Raul Grijalva (D-AZ), Edward Markey (D-MA), Rosa DeLauro (D-CT), Martin Frost (D-TX), Tom Lantos (D-CA), Carolyn Kilpatrick (D-MI), Peter DeFazio (D-OR), Barbara Lee (D-CA), and Adam Smith (D-WA).