Three recent decisions by an Administrative Law Judge address the sometimes confusing rules on how New York State taxes insurance companies that have nexus with the State but that nonetheless do not conduct an insurance business in the State. Matter of Bayerische Beamtenkrankenkasse AG, DTA No. 824762 (N.Y.S. Div. of Tax App., Mar. 3, 2016); Matter of Landschaftliche Brandkasse Hanover, DTA No. 825517 (N.Y.S. Div. of Tax App., Mar. 3, 2016); and Matter of AXA Versicherung AG, DTA No. 825518 (N.Y.S. Div. of Tax App., Mar. 3, 2016). In Matter of Bayerische and Matter of Landschaftliche, the ALJ held that foreign non-life insurance companies whose sole connection with New York State was ownership of interests in real estate partnerships that conducted business in the State were subject to the Article 33 tax under Tax Law § 1501 (which is imposed on the highest of four alternative bases, including on allocated net income) and that the Department’s application of an alternative apportionment formula was reasonable. In Matter of AXA Versicherung, the ALJ concluded that the petitioner, the significant majority of the receipts of which were from providing non-life insurance, nonetheless constituted a life insurance corporation, which meant that it was entitled to the limitation on tax under Tax Law § 1505(a)(2).
Facts. The facts in Matter of Bayerische and Matter of Landschaftliche were straightforward. The cases both involved German non-life insurance companies that did not conduct an insurance business in the United States. As such, they were not authorized by the New York Superintendent of Insurance (now known as the Superintendent of Financial Services) to transact an insurance business in New York and were considered “unauthorized insurance corporations” under the Tax Law. The insurance companies’ activities in the United States and New York were limited to holding two interests in partnerships which owned and managed real property, some of which were located in New York State.
Both insurance companies filed New York State nonlife insurance corporation tax returns and paid the minimum tax for the years 2006 and 2007. Following an examination of the New York State partnership tax returns of the partnerships in which they were partners, the Department assessed additional tax against the insurance companies, first by subjecting them to tax under Tax Law § 1501 (which is imposed on the highest of four alternative bases, in this case the highest being on allocated net income) and then by exercising the Department’s discretionary authority to disregard the prescribed allocation formula (which is based on weighted premiums and wages factors), and substituting a single receipts factor based on their distributive share of receipts from the partnerships.
Statutory Argument. The insurance companies made two alternative arguments. First, they maintained that the statute should be interpreted so that Tax Law § 1502-a – which limits the tax for authorized non-life insurance corporations to the tax that would be due on direct premiums – applied to them, even though they were unauthorized insurance corporations. The insurance corporations had no direct premiums in the State, so they took the position that only the minimum tax should apply.
The ALJ rejected this argument, holding that he could not ignore the express terms of § 1502-a, which clearly only applied to authorized non-life insurers. Therefore, the ALJ held that the insurance corporations were subject to the § 1501 tax based on their allocated entire net income and were not covered by the § 1502-a “in lieu of” premiums tax limitations.
Alternative Apportionment Argument. In the alternative, the insurers argued that even if they were properly subject to tax under § 1501, the statutory allocation method (based on premiums and wages) should apply, not, as the Department asserted, an alternative single factor method based on receipts from the partnerships.
Tax Law § 1504(a) provides that an insurance corporation’s entire net income is apportioned based on a two-factor allocation percentage, the first factor being the ratio of New York State premiums to total premiums, and the second factor being the ratio of New York State employee wages to total wages, with the premiums factor more heavily weighted at 90%. The Department declined to apply this formula and invoked Tax Law § 1504(d), which permits the Department to adjust the statutory formula in order to properly reflect income. Thus, rather than applying the zero allocation percentage as reported, the Department applied an alternative apportionment based on the ratio of the insurers’ distributive share of New York receipts from the partnerships to their distributive share of total receipts from the partnerships, which was approximately 69%.
The ALJ acknowledged that, as the party seeking to deviate from the statutory formula, the Department must not only show that the statutory formula did not properly reflect the taxpayer’s New York income and activity, but also that the Department’s proposed alternative formula did. Since none of the income subject to apportionment – specifically, the partnership income – was from premiums, and since the statutory formula was heavily weighted based on premiums, the ALJ found the Department had a “substantial basis” for rejecting it under these facts. According to the ALJ, “since unauthorized insurance corporations . . . may . . . have no premium-based income, application of a premium-based allocation formula to non-premiumbased entire net income would be, at best, inconsistent.”
The ALJ also found the Department’s application of a single factor receipts-based apportionment formula was reasonable under the facts. The ALJ noted that while this resulted in more than 2/3 of the insurers’ entire net income being apportioned to New York, as non-U.S. corporations their entire net income did not include their worldwide income, and the majority of their income subject to apportionment arose from the partnerships’ New York real estate activity and income. Apportioning that income by a single factor receiptsbased formula attributable to those partnerships was, according to the ALJ, clearly reasonable under the facts.
Life Insurance Corporation Decision. In Matter of AXA Versicherung AG, the same ALJ addressed a different threshold question for the tax years 2006 and 2007 – whether a different German insurer constituted a life insurance corporation for New York insurance tax purposes where the substantial majority of the insurer’s premiums were from the furnishing of nonlife insurance, although it did receive some reinsurance premiums relating to life insurance. The ALJ held that the insurer should be classified as a life insurance corporation because it engaged in a life insurance business, albeit outside the State, through reinsurance. Therefore, under the Department’s pre-2012 policy regarding unauthorized life insurance corporations, the ALJ held that the deficiency should be cancelled and that the Department should refund the minimum taxes previously paid by the insurer.
The ALJ’s affirmance of the Department’s rejection of the statutory apportionment formula was based principally on the fact that the formula is almost entirely based on premiums and the insurers were not being taxed on premiums. However, the alternative method used gave no weight to the fact that the premiums earned by the insurers outside the State were undoubtedly the source for their ability to invest in the partnerships that generated most of the insurers’ income subject to apportionment, and therefore it could reasonably be argued that those premiums should have been reflected in the apportionment formula. Moreover, if the unauthorized insurers were instead U.S. corporations so that their apportionable income did include premiums earned outside the State, the ALJ’s rationale for disregarding the statutory formula would not seem to apply, resulting in potentially divergent treatment of U.S. and foreign insurers. In any event, if the Department believes that the statutory formula should not apply to unauthorized non-life insurers, the more appropriate remedy would be through legislation to change the formula to more accurately reflect income and activity in the State.