New Internal Revenue Service regulations have delivered a coup de grace to a bank annuity product called the Retirement CD.

The certificate of deposit has been the subject of intense debate between banks and insurance companies since it was created in 1994 by Washington attorney Dennis Gingold and Richard Fasold, president of American Deposit Corp. of Pine, Colo.

The certificate of deposit, a bank-issued annuity product insured by the Federal Deposit Insurance Corp., quickly came under attack by insurance companies that claimed banks received an unfair advantage because the FDIC serves as underwriter for the tax-deferred product. Insurance companies underwrite their own annuities.

The IRS said its regulations, issued Jan. 8 and scheduled to take effect in February, are not written to single out a particular product. But observers agreed the new rules will chiefly affect the Retirement CD.

While some of the rules are good for the product-the CD is no longer required to make distributions within one year-others prevent CD holders from receiving a lump sum distribution and borrowing against the account.

"Does this mean that the Retirement CD is no longer a viable product?" asked Mark R. Baran, senior tax counsel for the American Bankers Association in Washington. "Yes."

Inventors of the annuity product promised a fight.

"They are dancing on a fence" and trying "to do as much damage as possible to the Retirement CD," Mr. Fasold said. "Their regulations are not justified, and we'll see what some court has to say about this."

Annuity sales have meant big business for both banks and insurance companies in the last couple of years. Lipper Analytical Services, Summit, N.J., said banks and insurance companies increased assets in variable annuities 40%, to $463.6 billion, for the 12 months ended Nov. 30.

American Deposit Corp. licensed the CD in 1994, and 11 banks signed up to issue the product. Blackfeet National Bank of Browning, Mont., was one of the first to issue the CD, intending to distribute the product nationally. But the CD soon came under attack by the insurance industry in Florida and Ohio, the bank said. In 1996, the Illinois Supreme Court banned it.

Eventually Blackfeet National, seeing no end to the legal entanglements, returned investors' money and stopped selling the product.

"We're a small, remote bank in Montana on an Indian reservation, and the bank is 94%-owned by the Blackfeet tribe," said Jack Kelly, president and chief executive officer. "We thought it was a way for us to increase our deposits in order to serve our community."

"I think it would have attracted core deposits for banks," he added. "And the attractive part is that is was insured by the FDIC."

Not all banks in the insurance business are sad to see the product go. The Financial Institution Insurance Association, a trade group whose membership is equally divided between banks and insurers, said many of its bank members did not want to mount an underwriting challenge to insurance companies.

Furthermore, the trade association has been working toward a more "level playing field" between banks and insurance companies. It feared the Retirement CD, underwritten by the FDIC, gave banks an unfair advantage.

"The Financial Institution Insurance Association has had the position that the CD represented a bad set of facts that would turn into bad law," said Kathleen W. Collins, a partner at Morgan, Lewis & Bockius in Washington and counsel for the trade group. "So to the extent it negatively impacts the Retirement CD, so be it and R.I.P."

James O'Connor, tax counsel for America's Community Bankers, said he was disappointed by the ruling.

"I thought the Retirement CD had tremendous potential," he said. "But the IRS moved so swiftly to eliminate the potential from this product."

Mr. Gingold "had a product here that would have worked," Mr. O'Connor added. "You would have had the peace of mind represented by FDIC insurance and an insured, tax-deferred product."

Other observers were more circumspect about the Retirement CD.

"Banks had pushed for this product because it would help create a level playing field with insurance companies," said Kenneth Kehrer, principal of Kehrer & Associates, Princeton, N.J. "But it looks like the IRS does not agree."

"The whole question of FDIC insurance, whether it is an advantage or disadvantage, (is) how much does it cost banks to have this insurance?" he said. "Banks pay for this through their insurance premiums, and it really hinges on whether the consumer benefit of wanting to have FDIC insurance is worth more to banks than it costs them."

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