WASHINGTON - After an Internal Revenue Service hearing last week, bankers remain hopeful the Retirement CD will survive.
The IRS in April issued a proposed regulation that would strip the annuity-like product of an important tax break.
"The questions did indicate that they are looking hard at whether insurance companies should be the only ones to offer tax-deferred annuities," said James E. O'Connor, referring to queries from the IRS panel. Mr. O'Connor is tax counsel for America's Community Bankers.
"They seemed to understand that Congress did not intend to create a monopoly for these companies ... and they may be more inclined to rethink the regulation," he said.
Jonathan Allen, senior vice president at Wachovia Bank of North Carolina, agreed. He testified for the American Bankers Association.
"I feel they are really wrestling with the policy decision," he said. "I was pleased by the policy questions raised, and I don't think it is a certainty that the IRS will keep the regulation" that has been proposed.
The thrift and banking trade groups were joined by the product's founder - American Deposit Corp. - in opposing the proposed rule at the Aug. 8 hearing. The Committee of Annuity Insurers and the American Council of Life Insurance spoke in support of the IRS rule.
At the heart of the debate is the IRS' interpretation of 1984 laws allowing the government to tax the interest from debt instruments, such as bonds and certificates of deposit, as it accrues. Congress wrote exceptions into the law for annuity contracts, but the IRS proposal would classify the Retirement CD as a debt instrument, not an annuity.
Dennis M. Gingold, general counsel for American Deposit, which began licensing the Retirement CD in 1994, said he believes the IRS is being driven not by tax law but by the insurance industry's strong lobby.
"It is just a way to keep banks from profiting on a product dominated by insurance companies," Mr. Gingold said.
Only 11 banks were issuing the Retirement CD when the IRS rule was proposed April 7. Bankers had hoped to use the product to attract long-term investors.
Mr. Gingold said he doesn't expect the IRS to change its proposed rule. But he plans to use testimony presented at the hearing in his lawsuit against the IRS. The Pine, Colo.-based company has sued the Treasury Department, charging the IRS with changing tax law, which only Congress can do.
"The record is improved because the comments from the bankers and the government helped reinforce the fact that there is no basis for the IRS decision," Mr. Gingold said.
A spokesman for the IRS said he expects the agency to publish a final version of the proposal this fall.
Mr. Lumetta writes for Medill News Service.
