In Prudential Insurance Co. of America v. Wrynn, 2013 NY Slip Op. 02343 (1st Dep’t, Apr. 9, 2013), the Appellate Division, First Department, upheld a lower court’s determination that Prudential was not entitled to a refund or credit against retaliatory tax paid in prior years as the result of an additional payment of the Article 33 franchise tax on insurance companies.

As discussed in the June 2012 issue of New York Tax Insights, the taxpayer, Prudential, a non-New York insurer, sought a refund or credit of retaliatory tax as the result of an Internal Revenue Service adjustment to a net operating loss (“NOL”), which Prudential had carried back to 1995. The federal NOL adjustment increased Prudential’s Article 33 franchise tax liability for 1995. In 2006, Prudential paid the additional franchise tax liability for the 1995 year. Thereafter, Prudential applied for a refund or credit of retaliatory tax paid in 2003, and cancellation of an assessment of retaliatory tax for 2007.

In a relatively short opinion, the Appellate Division set out four reasons for its denial of Prudential’s claims. First, the Appellate Division reasoned that Prudential had an underpayment, rather than an overpayment, of franchise tax in 1995 and, therefore, cannot recover any refund of its additional franchise tax payment under Insurance Law § 9109.

Second, Prudential’s underpayment did not result from any erroneous interpretation of a New York statute or statute of another state, as required for a refund under Insurance Law § 9109. Rather, Prudential’s underpayment resulted from a misinterpretation of the NOL provisions of the Internal Revenue Code.

Third, Tax Law § 1511(b) does not permit franchise taxes to be offset against retaliatory taxes in any year. As explained by the lower court, while Tax Law § 1511(b) allows a credit against retaliatory tax for “any taxes paid under this article,” the word “any” refers to the type of taxes paid under the article, not the period of time for which a credit is permitted.

Finally, Prudential was not permitted to rely upon a 2007 opinion of the Insurance Department’s Office of General Counsel, which the Insurance Department declined to follow, because the court found Prudential had failed to preserve its argument that the Insurance Department’s change of opinion should be applied only prospectively. In any case, according to the Appellate Division, even if it were to consider Prudential’s new argument, it would not find the Insurance Department’s change of opinion so palpably unjust as to warrant prospective-only application.

Additional Insights

There is an the apparent conflict between the denial of Prudential’s claims and the decision in Matter of Phoenix Home Life Mutual Ins. Co. v. Curiale, 162 Misc.2d 142 (N.Y. Sup. Ct. 1994), in which a New York County Supreme Court judge rejected the argument that Tax Law § 1511(b) requires a yearto- year matching of the credit at issue. Under the reasoning of Phoenix Home, Prudential’s payment of franchise tax in 2006 created an overpayment of retaliatory tax in 2003, for which Prudential was entitled to a credit or refund. The Appellate Division decision does not discuss Phoenix Home.

An interesting development on appeal is the Appellate Division’s conclusion that Prudential failed to preserve its argument with respect to the retroactive application of the Insurance Department’s change in position. While the opinion does not provide very much in the way of an explanation, the Appellate Division relied on Recovery Consultants v. Shih-Hsieh, 141 A.D.2d 272, 276 (1st Dep’t, 1988), in which it had held that an issue that was never raised in the motion court could not be considered by an appellate court.

Prudential clearly raised and relied on the Insurance Department’s 2007 opinion itself before the lower court, where Prudential argued that the Insurance Department had failed to give deference to its own counsel’s legal opinion, yet the Appellate Division concluded that Prudential had not raised the argument about improper retroactive application until the appeal. It is important to remember that not only must a taxpayer develop a complete factual record for appeal, but must raise all legal arguments in the court of original jurisdiction, or run the risk that it is precluded from arguing a theory on appeal not presented to the court of original jurisdiction.