IRS Tax Claim Threatens Payouts by Executive Life
In a surprise move that could jeopardize life insurance and annuity payments to thousands of individuals, the Internal Revenue Service has demanded $643 million in back taxes from Executive Life Insurance Co. of California, insurance regulators said Monday.
State Insurance Commissioner John Garamendi said he would fight the IRS claim with every legal means available, but if the IRS succeeds, it would force liquidation of the company’s $10 billion in assets. That could spell financial ruin for hundreds of thousands of holders of insurance policies and annuities, he said.
“This would wipe out whatever capital the company has,” Garamendi said. “If this company is liquidated, the pain will be enormous for policyholders, annuitants and the whole life insurance industry.”
Executive Life insures about 300,000 individuals. It is also the parent of Executive Life Insurance Co. of New York, which has $3.2 billion in assets and 103,000 policyholders.
Whether the New York subsidiary would be affected by the IRS action was unclear. Regulators in New York noted that the company is a separate entity, but its assets could be considered to be owned by Executive Life of California.
Claims by the IRS would take precedence over claims of policyholders and all other creditors of the company, industry experts said.
If the IRS is successful in laying claim to the bulk of Executive Life’s cash, Garamendi said policyholders would need to look to state guarantee funds to pay their claims. Each guarantee fund has separate limits on coverage.
California’s fund covers up to 80% of the policy amount to a maximum of $100,000 on annuities and $250,000 on death benefits. Less traditional products, such as guaranteed investment contracts, are not covered.
In another development, insurance regulators won a court order Monday that allows them to resume payments to retirees and to individuals who expect death and medical benefits from Executive Life. Death and medical benefits will be paid 100%, but annuitants will get only 70% of their normal monthly stipends, Garamendi said.
Those with individual guaranteed investment contracts also will be paid at a 70% rate, regulators said. However, those holding such contracts purchased through company plans will not be paid, at least for now, Garamendi said.
The policyholder payment schedule is temporary and set for revision in 90 days, according to Garamendi. If the IRS is successful in forcing its claims, all payments may stop, he said.
Garamendi also noted that a previously announced rehabilitation plan, which anticipated that the French firm Altus Financial would buy Executive Life, is now in question because of the IRS claim.
“Altus’ proposal, and the proposals we have received from other companies, do not include anything for this tax liability,” Garamendi said.
The IRS claim is based on audits of Executive Life’s 1981, 1982 and 1983 tax years, according to regulators. Although state Insurance Department officials knew the IRS was reviewing Executive Life’s books regarding these years, the IRS had refused until late Friday to reveal the scope of its claim.
But in a letter faxed Friday afternoon to Executive Life, the federal agency said it is owed $643 million--approximately $249 million in tax and $394 million in interest and penalties. It wants to be paid immediately.
“We have not had time to evaluate the merit of the IRS claim, but I cannot understand why they would wait so long to take action on liabilities alleged to have been incurred as long as a decade ago,” Garamendi said. “Wealthy investors and traders earned hundreds of millions of dollars on Executive Life transactions, and not a peep was heard from the tax police. Now that we have conserved the company to salvage the life savings of smaller investors, the IRS has moved with lightning speed to cannibalize the vulnerable carcass of this company.”
State regulators said they did not know the full basis for the IRS claim but were told it related to a recent court decision concerning an insurance company named Colonial. Industry experts speculated that the IRS claim was based on a recent Supreme Court decision concerning how insurers are taxed when they buy and sell large numbers of policies from each other. State regulators could not provide further details.
Insurance Department officials said they fear the IRS will assess further taxes and penalties against Executive Life for years after 1983, eliminating any chance of policyholders getting payments.
Garamendi said he would ask Congress and the Bush Administration to help him fight the IRS. A White House spokeswoman said she knew of the issue, but would not comment about possible White House intervention.
Garamendi pledged that he would attempt to delay any payments to the IRS for as long as possible.
“We do not intend to make payment to the IRS until we have a court order requiring us to do so,” Garamendi said. “I made a decision to pay policyholders first, and the IRS later.”
BACKGROUND
Struggling with a souring portfolio of junk bonds and a crisis of confidence that caused thousands of policyholders to withdraw their funds, Executive Life Insurance Co. was seized by state insurance regulators April 11. Regulators in New York seized Executive’s sister firm, Executive Life Insurance Co. of New York, a week later, citing a run on the insurer’s assets as the primary reason. These insurers are the largest subsidiaries of Los Angeles-based First Executive Corp., which has reported net losses of $1.1 billion over the past two years.
