Grant Farmers Mut. Fire and Lightning Ins. Co. v. State By and Through Conrad

• Decision Date: 29 March 1984
• Docket Number: No. 10527,10527
• Citation: 347 N.W.2d 324
• Parties: GRANT FARMERS MUTUAL FIRE AND LIGHTNING INSURANCE COMPANY, Complainant and Appellant, v. STATE of North Dakota, By and Through the State Tax Commissioner, Kent CONRAD, Respondent and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 324

347 N.W.2d 324

GRANT FARMERS MUTUAL FIRE AND LIGHTNING INSURANCE COMPANY, Complainant and Appellant, v. STATE of North Dakota, By and Through the State Tax

Commissioner, Kent CONRAD, Respondent and Appellee.

Civ. No. 10527.

Supreme Court of North Dakota.

March 29, 1984.

Zuger & Bucklin, Bismarck, for complainant and appellant; argued by Thomas O. Smith, Bismarck.

Carla J. Smith and Albert R. Hausauer, Asst. Attys. Gen., State Tax Dept., State

Capitol, Bismarck, for respondent and appellee; argued by Carla J. Smith. Appearance by Kathryn Heitkamp, Bismarck.

GIERKE, Justice.

The question in this case is whether or not Grant Farmers Mutual Fire and Lightning Insurance Company [Grant Farmers] is exempt under Section 57-38-09(12) of the North Dakota Century Code from paying State income and business and corporation privilege taxes for the taxable years 1974 through 1979. ¹ Grant Farmers appeals from a judgment of the District Court of Burleigh County affirming an order of the State Tax Commissioner finding the company not exempt. We affirm.

Grant Farmers is a county mutual insurance company which was incorporated on July 1, 1905, pursuant to the provisions of Chapter 14, Article 8, Sec. 3134 of Revised Codes of North Dakota (1895), to engage in the business of selling fire and lightning insurance. Although Grant Farmers commenced its operation as a township mutual insurance company in five adjoining townships in Ward County, its present territory of operation encompasses a ten-county area. In 1962, Grant Farmers amended its articles of incorporation to expand the types of insurance it may issue, ² and during the years involved in this case it was engaged in the business of insurance as authorized by the provisions of Chapter 26-15, N.D.C.C. ³

Grant Farmers voluntarily filed tax returns in 1980 and paid income taxes due for taxable years 1977, 1978 and 1979. At the request of the Tax Commissioner, Grant Farmers also filed returns and paid the taxes due for taxable years 1974, 1975 and 1976. Following an audit of the company's returns, the Tax Commissioner served a notice of determination and assessment for business and corporation privilege taxes for the years 1974 through 1979, which were thereafter paid by Grant Farmers.

In 1981, Grant Farmers requested a refund of all taxes, interest, and penalties paid to the Tax Commissioner asserting that it was a tax-exempt organization pursuant to Sec. 57-38-09(12), N.D.C.C. The request for a refund, which totaled $17,039 exclusive of interest and penalties, was denied on February 4, 1982.

On October 21, 1982, Grant Farmers filed an administrative complaint against the Tax Commissioner. The matter was submitted by stipulation to a hearing officer, and on March 29, 1983, the Tax Commissioner entered his findings of fact, conclusions of law and decision denying Grant Farmers' request for a refund. Grant Farmers appealed to the district court, which affirmed the Tax Commissioner's decision in a judgment entered on July 20, 1983. Grant Farmers has appealed from that judgment.

Our review of an administrative agency decision involves a three-step process whereby we determine whether or not the findings of fact are supported by a preponderance of the evidence, the conclusions of law are sustained by the findings of fact, and the decision is supported by the conclusions of law. Section 28-32-19, N.D.C.C.; Satrom v. N.D. Workmen's Compensation Bureau, 328 N.W.2d 824, 829 (N.D.1982). We do not make independent findings of fact or substitute our judgment for that of the agency, but determine only whether or not a reasoning mind reasonably could have determined that the factual conclusions reached were proved by the weight of the evidence from the entire record. Power Fuels, Inc. v. Elkin, 283 N.W.2d 214, 220 (N.D.1979). In reaching this determination, we look to the record compiled before the administrative agency rather than to the findings of the district court. Asbridge v. North Dakota State Highway Com'r, 291 N.W.2d 739, 743 (N.D.1980). Decisions of administrative agencies on questions of law are fully reviewable by our court. State Hospital v. N.D. Employment Security Bureau, 239 N.W.2d 819, 822 (N.D.1976); In Re Sales & Use Tax Determination By State Tax Commissioner, 225 N.W.2d 571, 576 (N.D.1974).

The claimant of a tax exemption has the burden of establishing his exempt status, and a tax-exemption statute will receive a strict construction against the claimant. United Power Ass'n v. Board of County Commissioners, 300 N.W.2d 36, 39 (N.D.1980); Butts Feed Lots v. Board of County Commissioners, 261 N.W.2d 667, 672 (N.D.1977); North Dakota Society for Crippled Children & Adults v. Murphy, 94 N.W.2d 343, 345 (N.D.1959). However, words describing the object of a tax exemption will be given a liberal, and not a harsh or strained construction, in order to obtain a reasonable result effectuating the legislative intent in providing a tax exemption. United Power Ass'n, supra; Lutheran Campus Council v. Board of County Com'rs, Ward Co., 174 N.W.2d 362, 365-366 (N.D.1970).

Section 57-38-09(12), N.D.C.C., as it existed during the taxable years involved in the instant case, provided:

"57-38-09. Other organizations not subject to tax.--The following organizations shall be exempt from taxation under this chapter:

* * *

* * *

12. Farmers', and other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments or fees collected from members for the sole purpose of meeting expenses; ..."

We first address Grant Farmers' argument that Sec. 57-38-09(12), N.D.C.C., should be interpreted as providing a tax exemption for any county mutual operating in accordance with Chapter 26-15, N.D.C.C. In order to understand the basis for this assertion, a brief discussion of the history of the laws regarding the organization and operation of county mutuals is necessary.

I

County mutual insurance companies have been authorized to do business in one form or another in this State since North Dakota was a part of Dakota Territory. See Secs. 3083-3102 of the Compiled Laws of the Territory of Dakota (1887). The county mutual organizational statutes have been amended on numerous occasions, culminating in Chapter 26-15, N.D.C.C., which was in effect during the taxable years at issue in the instant case. Most of the amendments have had the effect of expanding both the territorial limits of a county mutual's area of operations [see Sec. 1, Ch. 77, 1890 S.L.; Ch. 121, 1905 S.L.; Sec. 1, Ch. 188, 1913 S.L.; Secs. 1 and 8, Ch. 172, 1915 S.L.; Sec. 1, Ch. 210, 1945 S.L.; Sec. 1, Ch. 191, 1955 S.L.; Sec. 4, Ch. 256, 1975 S.L.] and the types of coverage a company is authorized to provide [see Sec. 1, Ch. 211, 1945 S.L.; Sec. 1, Ch. 215, 1947 S.L.; Sec. 1, Ch. 194, 1953 S.L.; Sec. 1, Ch. 212, 1965 S.L.].

Since its enactment in 1923, Sec. 57-38-09(12), N.D.C.C., has remained virtually unchanged until the 1983 amendment. See Sec. 27, Ch. 312, 1923 S.L.

Grant Farmers asserts that when the exemption statute was initially passed in 1923, the lines of insurance referred to in the statute were the only lines of insurance which county mutuals could write under the then-existing organizational statutes. Therefore, Grant Farmers contends, even though the Legislature has expanded the ability of county mutuals to engage in business while leaving the exemption statute intact, it intended to exempt all county mutuals so long as they were organized and operated in accordance with the organizational provisions. However, we are not persuaded that Grant Farmers' interpretation is correct. It rests on the improper assumption that the Legislature, in enacting the exemption statute in 1923, intended a blanket exclusion of all county mutuals operating in accordance with the organizational statutes in effect at the time of enactment.

In 1919, the Legislature exempted from income tax "[i]nsurance companies ... organized and operated for mutual purposes and without profit; ..." Section 11, Ch. 224, 1919 S.L. In 1923 the Legislature amended the 1919 law, eliminating this provision and enacting the exemption statute at issue in this case. See Secs. 2 and 27, Ch. 312, 1923 S.L. Thus, it would appear that by removing the blanket exemption for insurance companies organized and operated for mutual purposes and enacting the exemption statute with its limiting language, the Legislature intended to narrow the exemption to include only a limited class of county mutuals. ⁴

Had the Legislature intended that all county mutuals be entitled to tax-exempt status, it easily could have done so by express reference to the organizational provisions and by deletion of the limiting language contained in the exemption statute. While the Legislature through the years has expanded the ability of county mutuals to do business, the above-stated considerations, including the fact that the Legislature left the exemption statute unchanged, evinces an intention that only those county mutuals which choose to bring themselves within the express provisions of the exemption statute should be entitled to tax-exempt status.

We conclude that the provisions of Chapter 26-15, N.D.C.C., do not alter the essential characteristics required to enable a county mutual to obtain an exemption under Sec. 57-38-09(12), N.D.C.C.

II

In order to qualify for an exemption under the express terms of Sec. 57-38-09(12), N.D.C.C., the company must meet each of the following requirements: (1) be a farmers' or other mutual hail, cyclone and fire insurance company; (2) be of a purely local character; (3) have income which consists solely of assessments or fees collected from members; and (4) use such income for the sole purpose of meeting expenses.

The Tax Commissioner's findings of fact reveal the...