Banks are chafing under 23 proposed tax increases contained in President Clinton’s budget for the year 2010, including a much despised provision that eliminates certain deductions for corporate-owned life insurance.

So far the top item worrying banks is the proposed repeal of the exception under the corporate-owned life insurance (COLI) pro-ration rules for contracts covering employees, officers, and directors. This would prevent businesses from funding deductible interest expenses with tax-exempt or taxdeferred inside buildup on life insurance and annuity contracts. The plan would raise $1.9 billion over five years.

A similar $2.2 billion provision was offered last year, but heavy lobbying kept the provision out of any legislation. However, experts predicted that the tax would resurface this year.

Banks are also worried about the Treasury’s plan to repeal the taxfree conversions of companies when they switch from C-Corp status to S-Corp status under Section 1374. Under the Taxpayer Relief Act of 1997, banks are eligible to switch to S-Corp status if they meet all the requirements. However the tax might make it less likely for small community banks to convert. "This would put a real damper on conversions," said Donna Fisher of the American Bankers Association. "The window ought to be open a little longer before they close it."

The tax is expected to raise $212 million over the next five years and would go into effect on Jan.1, 2010 instead of the traditional chairman’s mark. The proposal would also apply to mergers between C-corporations and S- corporations after Dec. 31, 2009.

A further tax would also require that banks that use the cash method of accounting must accrue all interest, original interest discount and acquisition discount on short-term obligations, including loans made in the course of the banks business.

Fisher says the proposal attempts to get around a 1993 decision by the Court of Appeals for the Eighth Circuit that says banks do not have to accrue stated interest and original issue discount on short-terms loans. However the Clinton administration, according to Fisher, has ignored the ruling. The Treasury, in its explanation of the new taxes, said "it is inappropriate to treat short-term obligations originated by a bank differently than short-term obligations purchased by a bank. That tax is expected to raise $72 million next year with a total of $85 million over the next five years.

Banks also saw the return of a proposal designed to close what the Treasury sees as a loophole involving closely held real estate investment trusts (REITs). The proposal would impose an additional requirement for REIT qualification that no person can own stock of a REIT if they own 50% or more of the total combined voting power of all classes of voting stock or 50% and above of the total value of all shares of all classes of stock. The change is expected to raise $75 million over five years