Banks Will Take a Final Shot At Saving the Retirement CD

WASHINGTON - At a public hearing Tuesday, Retirement CD proponents will take one last swipe at the Internal Revenue Service's plan to yank the investment vehicle's tax break.

"The whole purpose of the public hearing process is to learn others' views, but there is no way of telling how the IRS will respond," said Donna J. Fisher, director of tax and accounting for the American Bankers Association.

"We think the IRS is overstepping its bounds here by changing the law, and it has no justification for the proposal."

In April, the IRS proposed rules that would strip the Retirement CD of its tax-deferred status by classifying it a debt instrument rather than an annuity.

At the time, the banking industry was just warming up to the product, hoping to use it to attract long-term deposits.

The ABA, along with America's Community Bankers and the Independent Bankers Association, plans to tell the IRS Tuesday that requiring holders of Retirement CDs to report the income as it accrues, rather than when it matures, is a misinterpretation of the tax code.

However, the American Council of Life Insurance, which represents 606 life insurance companies, plans to support the IRS decision. The group is expected to testify that the tax deferral applies only to annuities issued by insurance companies.

The tax code was "not intended to apply to a broad category of annuity contracts issued by noninsurance companies," the group wrote in its comments to the IRS.

There is no reason why insurance companies should get special treatment in the tax laws, argued James E. O'Connor, tax counsel at America's Community Bankers.

"There is nothing to support the view that only insurance companies are allowed to issue deferred annuities," he said.

But the IRS appears to disagree. In the proposed rule, the IRS states that "if a contract is both a debt instrument and an annuity contract not issued by an insurance company, it is subject to taxation as a debt instrument."

The Retirement CD has an advantage over annuities because it is covered by federal deposit insurance. Like annuities, the CD allows consumers to deposit a lump sum in a tax-deferred account in exchange for periodic payments at retirement for the rest of their lives.

But the product was given little exposure to the public before the IRS rule proposal killed it. American Deposit Corp. began licensing the use of the Retirement CD in 1994 and only 11 banks were issuing them when the IRS rule was proposed April 7.

Dennis M. Gingold, American Deposit's general counsel, said that banks such as First National Bank of Santa Fe found a great deal of consumer interest in the CD.

Insurers are simply trying to control the annuities market, he said.

"The insurance industry has launched a massive campaign to take deposits away from banks, and this is one example of that," Mr. Gingold said in an interview Friday.

Mr. Gingold said he does not expect the IRS to change its position. But American Deposit has one last hope. The Pine, Colo.-based company has a lawsuit pending against the Treasury Department that charges the IRS with overstepping its authority. Only Congress can make such changes to tax law, Mr. Gingold said.

Mr. Lumetta writes for Medill News Service.

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