Although taxpayers often complain that complying with the tax laws imposed by the numerous state and local taxing jurisdictions that exist in the United States is a burdensome process, many of these tax statutes also provide benefits to taxpayers in the form of exemptions, deductions and credits. Taxpayers who structure their affairs according to the plain language of these favorable tax laws can be frustrated when state revenue departments attempt to deny them the benefits of the statute. A recent opinion from the Maryland Tax Court supports the argument commonly advanced by taxpayers in these situations – that when the language of a statute is clear, there is no room for the revenue department to interpret the statute in a contrary manner. See National Indemnity Co. v. Comptroller of the Treasury, Dkt. No. 14-IN-OO-0433 (Md. Tax Ct. April 24, 2015).
Maryland, like many states, exempts “insurance companies” from the payment of corporate income taxes because these entities are generally subject to tax under some other section of the tax law, insurance law or both. Also as in many states, insurance companies are defined for purposes of Maryland’s corporate income tax statutes by reference to the state’s insurance law. The taxpayer in National Indemnity Co. plainly fit within the definition of an insurance company under the Maryland insurance statutes because it was “in the business of writing insurance contracts.” See Md. Code Insurance § 6-101(a). While the facts of the case do not disclose whether the company did in fact pay taxes under a different statute, insurance companies in Maryland are subject to tax on all new and renewal gross direct premiums that are allocable to the state and written during the preceding calendar year. See Md. Code Insurance § 6-102. Nevertheless, the Maryland Comptroller’s office contended that when an insurance company invests money similar to a commercial bank, it should not be afforded the statutory exemption from corporate income tax. The Tax Court rejected the Comptroller’s argument, noting that under the plain language of the statute (as well as under the Comptroller’s regulations and other published guidance), insurance companies similar to the taxpayer were not subject to Maryland corporate income tax.
In National Indemnity, Maryland’s corporate income tax statute clearly exempted insurance companies from the payment of corporate income taxes, and clearly defined insurance companies by reference to the Maryland insurance law. The Comptroller’s argument appeared to be that, despite the fact that the taxpayer at issue fit within the statutory definition of an insurance company, it wasn’t “acting like” an insurance company and therefore shouldn’t be taxed like an insurance company. While the National Indemnity opinion is short, its import is clear—where the legislature has plainly spoken on a subject, the revenue department is obligated to follow the plain language of the statute, whether that statute is favorable to the revenue department or not. Companies should also be aware that Maryland (like a number of other states) does allow the prevailing party in a civil action to recover the costs of the action plus reasonable expenses (including reasonable attorneys’ fees) if the court finds that the conduct of any party in maintaining or defending any proceeding was in bad faith or without substantial justification. See Md. Gen. Rule 1-341. Thus, taxpayers facing a revenue agency that is attempting to contravene the plain language of a statute without substantial justification should consider whether litigation costs are potentially recoverable from the agency.