25 April 2016 New York ALJ holds unauthorized non-life and life insurance companies are subject to Article 33 franchise tax based on the higher of entire net income or capital base A New York State (NYS) Administrative Law Judge (ALJ) issued three determinations1 holding that two unauthorized non-life insurance companies (Bayerische and Landschaftliche, collectively, "Non-Life Companies") and an unauthorized life insurance company (AXA Versicherung (Life Company)), each of which held property in New York, were subject to the state's insurance franchise tax imposed under NY Tax Law Article 33 on the higher of the entire net income (ENI) or capital base (although the Life Company was not subject to any additional tax liability) . The evolution of NYS's taxation of insurance companies from the 1970s to the present is set forth in considerable detail in these ALJ determinations. Highlights of this evolution include the following: — Between 1977 and 2003, NYS subjected all types of insurance companies, without distinction between authorized and unauthorized insurers, to an insurance franchise tax based on the higher2 of net income or capital plus a premium tax based on authorized NYS insurance premiums (Life Company Tax). Embedded within the Life Company Tax was a "cap" computed as a 2% premium tax that is the maximum amount of tax that a life insurance company could pay on all bases of tax. — In 2003, the Legislature amended this tax regime by enacting NY Tax Law Section 1502-a, which explicitly subjected authorized non-life insurance companies to a traditional insurance company tax based on premiums alone in lieu of the Life Company Tax. Conversely, life companies continued to be subject to the Life Company Tax. In enacting this legislation, however, the Legislature did not specifically address whether the new Section 1502-a regime applied to unauthorized non-life insurance companies. — The NYS Department of Taxation (Department) issued several advisory opinions from 2003 to 2012 pertaining to the computation of tax for authorized and unauthorized life insurance companies. Initially, the Department's position was that unauthorized life insurance companies were nominally subject to the insurance franchise tax, but would not owe tax because, as an unauthorized life company, the premium tax cap is zero. See, Pacific Life Insurance Company, Adv Op Comm T&F, November 10, 1999, TSB-A-99(28)C. — Thereafter, the Department issued two additional advisory opinions, TSB-A-08(3)C and TSB-A-09(2)C (respectively, "Service Life" and "Service Lloyds"). In Service Life, the Department held that an unauthorized life insurance company that held property through a partnership in New York was subject to the Life Company Tax, but, because it was unauthorized, its tax cap is zero. Alternatively, it held in Service Lloyds that an unauthorized non-life insurance company was subject to the Life Company Tax but its tax was not limited by the cap because the cap did not apply to nonlife companies. — Finally, in 2012, the Department issued TSB-M-12(4)C, in which it held that both unauthorized life insurance companies and unauthorized non-life insurance companies could be subject to and owe the Life Company Tax because the "cap" had been inapplicable since 2003. The Department did recognize, however, that this was a significant shift in policy and accordingly would apply this new interpretation to unauthorized life insurance corporations prospectively beginning January 1, 2012. During the years at issue (2006 and 2007), the Non-Life Companies were in the business of providing accident and health and property and casualty insurance throughout Europe. The Non-Life Companies were not and were never authorized by the NY Department of Financial Services to transact an insurance business in New York. Further, the Non-Life Companies were never actually transacting insurance business in New York or any other US state. The Non-Life Companies did, however, own interests in limited partnerships that owned real estate located in New York, with such partnerships allocating income effectively connected to a US trade or business to the Non-Life Companies. The Non-Life Companies stipulated that the ownership of these partnership interests subjected them to the Life Company Tax. As discussed, New York's premium tax on non-life insurance companies was made explicitly applicable to authorized non-life insurance companies but the statute was silent regarding its applicability to unauthorized non-life insurance companies. The Non-Life Companies argued that this statutory silence, coupled with the Department's earlier position treating authorized and unauthorized life insurance companies similarly under the Tax Law, should be interpreted to mean that authorized and unauthorized non-life insurance companies should also be taxed consistently. The ALJ disagreed and instead held the plain language of the statute meant that it only applied to authorized non-life insurance corporations. As such, the taxpayers were not subject to the tax on premiums but were subject to the Life Company Tax. The question then addressed by the ALJ was how to allocate3 the taxpayers' ENI or capital to New York. The default rule under the insurance franchise tax utilizes a two-factor formula, 90% based on premiums and 10% based on wages allocated to New York. Under this formula, because the Non-Life Companies did not have any NY wages or premiums, their allocation factor to New York is zero. This conclusion made the dispute about whether the premium tax applied to the Non-Life Companies meaningless. The Life Company Tax, however, also affords the Department discretion to apply an alternative apportionment to "properly reflect" the taxpayers' NY income. The Department applied the standard corporate allocation factors separately to each stream of partnership income using a separate accounting or separate allocation approach, which the ALJ agreed was appropriate. During the years at issue (2006 and 2007), the Life Company provided health, property and casualty insurance in Europe. The Life Company did not directly provide any life insurance and only accepted life insurance risk as a reinsurer. It did have one reinsurance contract with a California-based life insurer during the relevant period. The Life Company was never authorized by the NY Department of Financial Services to transact insurance business in New York nor did it conduct an insurance business in New York. Further, the Life Company was never authorized by the NY Secretary of State to conduct business in New York nor did it conduct any business in the state other than through its ownership interests in limited partnerships that owned real estate located in New York. The Life Company did not dispute that the ownership of these partnership interests subjected it to NY insurance franchise tax. The ALJ agreed with the Life Company's admission that it was a life insurance company for NY purposes due to the Life Company's admittedly limited conduct of a life reinsurance business in the US and Europe. Further, the ALJ reasoned that, according to NY law, a company having the power to engage in either a life or annuity insurance business is a life insurance company, even if it also engages in non-life insurance business. The ALJ held that, "since the years at issue here (2006 and 2007) are before January 1, 2012, AXA Versicherung is entitled to the benefit of the Division's interpretation and application of" the relevant NY insurance tax law prior to that date. In other words, the cap would operate to calculate zero tax liability under the Life Company Tax. While the ALJ's decisions are not precedential and can be appealed to NY State Tax Appeals Tribunal, they do shed some light on the often-contrasting interpretations taken by the Department regarding the tax treatment of unauthorized insurance companies, especially between 2003 and 2012. Nevertheless, a number of unanswered questions remain, for example, should "alternative allocation" apply to unauthorized insurers? Does the discretion to claim an alternative allocation method belong solely to the Department or can a taxpayer make such a claim on an originally filed return without first obtaining the Department's approval?
1 In the Matter of the Petition of Bayerische Beamtenkrankenkasse AG, DTA No. 824762 (N.Y. Div. Tax App. Mar. 3, 2016); In the Matter of the Petition of Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y. Div. Tax App. Mar. 3, 2016); and In re , DTA No. 825518 (N.Y. Div. Tax App. Mar. 3, 2016). 2 The tax imposed under Article 33 for life companies is actually the highest of four bases: tax on ENI, tax on capital, alternative tax based on ENI + salaries paid to officers and stockholders, or a fixed dollar tax, but for sake of brevity, the ENI and capital taxes are only referenced herein. Document ID: 2016-0749 | |||||||||
