Call for Action

TO ALL AGENTS:

UFAA, along with the other CEAA members, is glad to announce that the Capital Gains Contract Value bill has been re-introduced in congress. Congressman Sam Johnson of Texas, a highly respected member of the Ways and Means Committee, filed HR2509.

I want to quickly clarify what this legislation will do and what it means for retiring captive agents. As it now stands, agents are claiming contract value payments as Capital Gains based on SECA tax legislation passed in 1997. CEAA was the main force behind that bill. However, the SECA tax legislation never really defined what contract value or termination pay represents. In fact, three federal courts have defined Termination Pay or Contract Value as unearned income while another court decision found the contract value payments to be earned income subject of self-employment tax. This legislation, if passed, will codify contract value payments as a capital gains tax transaction. In terms of money, it will mean about 20% to 25% tax savings when you retire.

But it is not going to happen on its own. We need broad based support starting now. First of all, contact your Congress member and ask that he/she co-sign on HR2509 as a sponsor. I'm sure they will want to research it first. If not, they can call Kathleen Black at Congressman Johnson's office for more information. Secondly, fax a short thank you to Congressman Johnson, at 202-225-1485, thanking him for supporting all captive agents. He needs to hear from us, as I am sure this legislation will have its opponents.

Our UFAA Board Members, as part of the CEAA Board, that were active in promoting this legislation with Congressman Johnson were Ralph Buchanan, Don Green and Mark Martin. We can best show our appreciation to them by now doing our part.

To read the bill, access the talking points and find your Congress member, go to the UFAA Home Page (www.ufaa.com) and click on the “Capital Gains and You.”

Thanks, Ed Cuellar
Governmental Affairs Director

Contact Congress: U.S. Senate U.S. House of Representatives

To amend the Internal Revenue Code of 1986 to provide for capital gains treatment for certain termination payments received by former insurance salesmen.

June 18, 2003

Mr. SAM JOHNSON of Texas introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to provide for capital gains treatment for certain termination payments received by former insurance salesmen.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Fair Tax Treatment for Insurance Agents' Termination Payments Act of 2003.

SECTION 2. CAPITAL GAINS TREATMENT OF QUALIFIED TERMINATION PAYMENTS RECEIVED BY FORMER INSURANCE SALESMEN.

(a) IN GENERAL- Part IV of subchapter P of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

SECTION 1261. QUALIFIED TERMINATION PAYMENTS RECEIVED BY FORMER INSURANCE SALESMEN.

(a) GENERAL- A qualified termination payment received during the taxable year from an insurance company by an individual in the capacity of a former insurance salesman for such company shall be considered a sale or exchange of a capital asset held for more than 12 months.

(b) QUALIFIED TERMINATION PAYMENT- For purposes of this section, the term `qualified termination payment' means any amount received by a former insurance salesman if--

(1) such amount is received after termination of such individual's agreement to perform services as an insurance salesman for such company,

(2) such individual performs no services for such company after such termination and before the close of such taxable year,

(3) such individual enters into a covenant not to compete against such company which applies to at least the 1-year period beginning on the date of such termination, and

(4) the amount of such payment depends primarily on policies sold by or credited to the account of such individual or the extent to which such policies remain in force for some period after such termination, or both.'.

(b) CLERICAL AMENDMENT- The table of sections for such part IV is amended by adding at the end the following new item:

Sec. 1261. Qualified termination payments received by former insurance salesmen.'

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.

[Editorial note from UFAA: Section 1261, (b) Qualified Terminations, (4) says OR right in the middle, between the two qualifying factors.]

For years, retired agents have filed their tax returns using the capital gains provision. The IRS has accepted most of them as filed. However, some unknowing IRS agents have rejected the tax returns. HR 2509 would clarify the issue and provide a uniform filing procedure for all retired captive insurance agents.

It is imperative that Congress take the necessary action that would allow all captive insurance agents to plan their retirement years.

Agents should be able to file their tax returns using capital gains since the agent is selling back to the company their entire book of business. The insurance companies in turn pay the agent a monthly benefit in return for the agent’s book of business.

It is important to note that in the event an agent does not turn over all records and accounts and decides to compete with the insurance company, no termination benefits are paid. Thus, the arrangement is a “sale” to the companies by the agents.

The agent also gives up the “goodwill” earned over many years in the business as an insurance agent. The payments to the retired agent truly become a capital gain upon termination of the agent’s business with the insurance company.

Congressman Sam Johnson (R-TX) has filed legislation (HR 2509) in order to clarify this problem with the IRS.

Congressman Johnson’s tax aid, Kathleen Black, is able to answer any technical questions. Members of Congress should contact her for more information if needed.