ACE PROPERTY & CASUALTY INSURANCE COMPANY v. Commissioner of Revenue

• Decision Date: 28 June 2002
• Citation: 437 Mass. 241,770 NE 2d 980
• Parties: ACE PROPERTY & CASUALTY INSURANCE COMPANY v. COMMISSIONER OF REVENUE.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

437 Mass. 241

770 NE 2d 980

ACE PROPERTY & CASUALTY INSURANCE COMPANY v. COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts, Suffolk.

December 3, 2001.

June 28, 2002.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

John S. Brown for the taxpayer.

Thomas A. Barnico, Assistant Attorney General, for Commissioner of Revenue.

SOSMAN, J.

The plaintiff, ACE Property & Casualty Insurance Company (ACE), brought the present action seeking a declaration that the Federal Crop Insurance Act, 7 U.S.C. §§ 1501 et seq. (2000) (Act), preempts G. L. c. 63, § 23, with respect to any tax imposed on premiums for crop insurance policies that are reinsured by the Federal Crop Insurance Corporation (FCIC). ACE's complaint for declaratory relief against the Commissioner of Revenue (commissioner) was filed in the county court, where a single justice reserved and reported the case to the full court on a statement of agreed facts. We conclude that the tax imposed by G. L. c. 63, § 23, on premiums for policies reinsured by the FCIC is preempted by the Act, and therefore remand the case to the county court for entry of a judgment in favor of ACE.

1. Facts. ACE is a Pennsylvania corporation with its principal place of business in Philadelphia. As a foreign insurance company, ACE is subject to the tax imposed by G. L. c. 63, § 23, on premiums for policies insuring property or interests located in the Commonwealth.¹ ACE's customers include various cranberry growers located in Massachusetts, to whom ACE has issued multiple peril crop insurance policies. Those crop insurance policies are reinsured by the FCIC.

Believing that premiums on FCIC-reinsured policies are exempt from State taxation under the Act, see 7 U.S.C. § 1511, ACE did not include those premiums on its premium excise return for 1995. The commissioner audited ACE's 1995 excise return and issued an assessment based on the crop insurance premiums that ACE had excluded from its return. ACE filed an application for abatement and, after the commissioner denied such application, ACE appealed to the Appellate Tax Board (board). While that appeal was pending, ACE commenced the present action for declaratory relief in the county court.²

2. Exhaustion of administrative remedies. Although the commissioner has not raised the issue (see note 2, supra), we first address whether this action for declaratory relief may be pursued prior to resolution of the pending appeal before the board. Ordinarily, parties must first exhaust all administrative remedies before seeking judicial relief. See New England Legal Found. v. Boston, 423 Mass. 602, 607 (1996); Space Bldg. Corp. v. Commissioner of Revenue, 413 Mass. 445, 448 (1992), and cases cited. "Nevertheless, `we have held repeatedly, in the tax field, that a declaratory action is not ousted merely by the fact that the taxpayer has an administrative path to relief. Rather we have taken the view that the judge in such a case may still exercise a discretion as to whether the action should be entertained.'" Id., quoting Sydney v. Commissioner of Corps. & Taxation, 371 Mass. 289, 293 (1976). While there is no "comprehensive formula ... governing the exercise of discretion," Sydney v. Commissioner of Corps. & Taxation, supra at 294, "exceptions to the exhaustion rule occur most often when important, novel, or recurrent issues are at stake, when the decision has public significance, or when the case reduces to a question of law." Space Bldg. Corp. v. Commissioner of Revenue, supra. See S.J. Groves & Sons v. State Tax Comm'n, 372 Mass. 140, 142-143 (1977) (because declaratory action "reduces to an issue of law without dispute as to the facts," and "raises an issue of first impression which may well affect the interests of others than the taxpayer here," there was no abuse of discretion in entertaining action).

Here, the commissioner agrees that the preemption question raised by this case affects other taxpayers, who are asserting the identical preemption argument in applications for abatement and appeals to the board. Absent a judicial determination that the tax is preempted, the commissioner intends to enforce the tax against all insurers whose crop insurance policies are reinsured by the FCIC. The facts are not in dispute, and the issue is purely a matter of law. As such, we conclude that this case comes within that "narrow set of circumstances" that makes a declaratory judgment action appropriate despite the failure to exhaust administrative remedies, New England Legal Found. v. Boston, supra at 607 n.5, and we exercise our discretion to entertain this action and resolve the underlying legal issue on the merits.

3. Statutory and regulatory background. The Act, which dates back to 1938, seeks "to promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for the research and experience helpful in devising and establishing such insurance." 7 U.S.C. § 1502(a). The FCIC, a Federal corporation comprising an agency within the Department of Agriculture, is charged with implementing the Federal crop insurance program. See 7 U.S.C. § 1503. The FCIC provides some crop insurance directly, entering into insurance contracts with agricultural producers. See 7 U.S.C. § 1508(a). More commonly, however, it provides reinsurance for crop insurance policies issued to producers by private insurance companies. See 7 U.S.C. § 1508(k)(1) (FCIC "shall, to the maximum extent practicable, provide reinsurance to insurers approved by the FCIC that insure producers of any agricultural commodity"). Pursuant to its reinsurance agreements, the FCIC reimburses the private insurance companies for operating and administrative costs incurred in connection with the reinsured policies. See 7 U.S.C. § 1508(h)(5)(A)(ii) and (k)(4).

From the inception of the crop insurance program, Congress exempted the FCIC from all taxation "imposed by the United States or by any Territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority." 7 U.S.C. § 1511, as appearing in c. 30, Title V, § 511, 52 Stat. 75 (1938). The Act also contains a general preemption provision, expressly conferring on the FCIC the power to preempt State law: "State and local laws or rules shall not apply to contracts, agreements, or regulations of the FCIC or the parties thereto to the extent that such contracts, agreements, or regulations provide that such laws or rules shall not apply, or to the extent that such laws or rules are inconsistent with such contracts, agreements, or regulations" (emphasis added). 7 U.S.C. § 1506(l). The FCIC is also authorized to issue regulations "as are necessary to carry out the Act." 7 U.S.C. § 1506(p).

Despite the express tax preemption in 7 U.S.C. § 1511, the FCIC found that, as of 1990, "many States have been asserting the right to tax premiums on the reinsured policies under various State taxing statutes." 55 Fed. Reg. 23,066 (1990). The FCIC noted that, through its reimbursement of private insurance companies' expenses, it had effectively paid over $15 million in State premium taxes in the previous year alone. Id. Because the FCIC was exempt from taxation under 7 U.S.C. § 1511, the agency concluded that those State taxes "should not have been assessed." Id. To remedy what it perceived to be inappropriate taxation on the policies that it reinsured (along with other provisions of State law that had impeded the crop insurance program in other respects), the FCIC promulgated regulations specifying the preemption of a variety of State laws, including tax laws. See 7 C.F.R. §§ 400.351 - 400.352 (2002).

The regulations, issued in 1990, first set forth a broad statement of preemption: "No State or local governmental body or non-governmental body shall have the authority to promulgate rules or regulations, pass laws, or issue policies or decisions that directly or indirectly affect or govern agreements, contracts, or actions authorized by this part unless such authority is specifically authorized by this part or by the FCIC." 7 C.F.R. § 400.352(a).³ Next, the regulations provide "a non-inclusive list" of State actions that are expressly prohibited. 7 C.F.R. § 400.352(b). One of the things a State may not do is "tax premiums associated with policies issued under the Act." 7 C.F.R. § 400.352(b)(2).⁴

Shortly after the 1990 regulations became effective, the State of Kansas challenged their validity, claiming that the FCIC had exceeded its statutory authority. See State ex rel. Todd v. United States, 791 F. Supp. 1491, 1496 (D. Kan. 1992), aff'd, 995 F.2d 1505 (10th Cir. 1993). Kansas conceded that it could not tax policies issued directly by the FCIC, but argued that the FCIC could not validly preempt taxation of premiums on private policies that were only reinsured by the FCIC. See id. at 1497 n.7. Summary judgment was granted in favor of the defendants, holding that the FCIC had the authority to promulgate the preemption regulations, and the United States Court of Appeals for the Tenth Circuit affirmed that judgment. See State ex rel. Todd v. United States, 995 F.2d 1505, 1509 (10th Cir. 1993) (Todd). The Todd court found "no rational explanation, based on the statutory scheme, for a distinction between FCIC reinsured policies and FCIC direct insurance policies permitting the state taxing and regulation of one while preempting the other." Id. at 1510. The court concluded that the FCIC was authorized to preempt State law with respect to reinsured contracts under former § 1506(k) (current § 1506l),⁵ or, assuming in the alternative that Congress had not expressly authorized such preemption, that the FCIC's preemption regulations were "eminently reasonable" in light of the terms and purpose of the Act. Id. at 1510-1511.

The following year, Congress amended the Act, adding the following clause to the general...