Great-West Life Assurance Co. v. State Bd. of Equalization

• Decision Date: 06 October 1993
• Docket Number: No. B067607,GREAT-WEST,B067607
• Citation: 19 Cal.App.4th 1553,25 Cal.Rptr.2d 1
• Court: California Court of Appeals
• Parties: LIFE ASSURANCE CO., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

Page 1

25 Cal.Rptr.2d 1

19 Cal.App.4th 1553

GREAT-WEST LIFE ASSURANCE CO., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

No. B067607.

Court of Appeal, Second District, Division 2, California.

Oct. 6, 1993.

As Modified Nov. 5, 1993.

Review Denied Jan. 20, 1994.

Barger & Wolen, J. Russell Stedman and Linda R. Caruso, San Francisco, and W. Kay Adam, Englewood, CO, (Pro Hac Vice), for plaintiff and appellant.

Daniel E. Lungren, Atty. Gen., Edmond B. Mamer and Herbert A. Levin, Deputy Attys. Gen., for defendant and respondent.

NOTT, Associate Justice.

The Great West Life Assurance Company appeals from the judgment entered against it in two consolidated actions brought to recover refunds of taxes paid to respondent, the State Board of Equalization (the "Board"). (Rev. & Tax Code, § 13103.) We modify and affirm the judgment.

FACTUAL & PROCEDURAL BACKGROUND

(1) Introduction and Procedural History

Each insurer in California is required to pay a tax on the gross premiums it receives each year. (Cal. Const., art. XIII, § 28 [formerly § 14-4/5; Rev. & Tax Code, §§ 12221, 12202, 12202.1].) Appellant is an insurance company which issues, inter alia, certain employee benefit policies in California.

Beginning in October 1981, the Board issued a series of Deficiency Assessments against appellant for underpayments of taxes on its gross premiums for the tax years 1978 to 1987.

Appellant paid the disputed amounts, then filed petitions for refund, the first of which the Board denied at a public hearing on December 8, 1988. Appellant then filed suit in superior court for refunds of the approximately $6 million it had paid, claiming that it had been denied equal protection by the Board's ruling. ¹ Following a court trial on stipulated facts, the superior court found that appellant was denied equal protection but was not entitled to a refund. Appellant appeals from the judgment that it take nothing by its complaints for refunds.

(2) The Metropolitan Decision

The Deficiency Assessments were issued against appellant pursuant to a recent Supreme Court decision, Metropolitan Life Ins. Co. v. State Bd. of Equalization (1982) 32 Cal.3d 649, 186 Cal.Rptr. 578, 652 P.2d 426. That case involved the taxability of Metropolitan Life Insurance Company's "Mini-Met" employee medical benefit plan, offered as an option to its standard coverage plan. The Mini-Met plan essentially allowed the employer-policyholder to pay employee claims up to a certain point (the "trigger point"), thereby reducing the amount of actual premiums paid to Metropolitan. The court held this arrangement did not necessarily result in a reduced gross premiums tax liability for Metropolitan, and looked beyond the labels designated by the parties, considering the entire insurance arrangement. It found that under the "Mini-Met" plan, the employer-policyholder was not an independent insurer, but functioned as an agent or distributor of funds. (Id. at p. 657, 186 Cal.Rptr. 578, 652 P.2d 426.) Metropolitan, the insurer, retained control over many aspects of the administration of the plan, including, (1) the determination of benefits to be paid in employee claims, whether or not they were in excess of the predetermined trigger point; (2) the actual disbursement of checks to employees who filed claims; (3) and assumed liability for claims which the employer did not pay, whether or not they were in excess of the trigger point. The court then determined that the measure of tax liability was the "total cost of the insurance coverage provided to the insured" and that the pre-trigger point claims payments by the employer were to be considered in determining Metropolitan's gross premiums tax liability, along with the actual premiums paid by the employer to Metropolitan. (Id. at pp. 661-662, 186 Cal.Rptr. 578, 652 P.2d 426.)

Appellant also issued a "minimum premium plan" to various policyholders, similar to that issued by Metropolitan. Pursuant to the Metropolitan decision, the Board issued Deficiency Assessments against appellant based on insurance it provided to its policyholders for which it did not actually receive premiums.

(3) The December 8, 1988, Board Hearing

One of appellant's petitions for refund was considered at a public hearing held by the Board on December 8, 1988. At that hearing, the Board considered a number of petitions from different insurance companies. Several of those petitions involved assessment of gross premiums taxes, following the Metropolitan decision, to different types of insurance contracts, including minimum premium plans, administrative services contracts (ASO's), and stop loss contracts. Also at issue were petitions from companies which issued minimum premium plans to Taft-Hartley trusts. ² Appellant's petition included requests for refunds of taxes imposed on its minimum premium plans, ASO's and stop loss contracts, but did not involve any plans issued to Taft-Hartley trusts.

Prior to the public hearing, the Board's staff had apparently written recommendations as to each petition, on a case-by-case basis. The Board's members had those recommendations at hand during the hearing and frequently referred to them. Those recommendations, however, are not part of the record and do not appear to have been introduced at trial. ³

The Board began its consideration of the petitions for refunds of gross premiums taxes on the minimum premium plans with a discussion about the variances between the particular policies at issue and those involved in the Metropolitan decision. The staff's review had discovered that the minimum premium plans issued by the various petitioning companies were not identical.

The Board next considered whether ASO's and stop-loss contracts were taxable and found them both to be exempt. ⁴

Next, the Board embarked on a protracted discussion of the application of the Metropolitan case to both Taft-Hartley trusts, and ERISA plans ⁵ which did not involve Taft-Hartley trusts. After a motion was made to grant refunds as to those portions of petitions involving Taft-Hartley trusts, it was suggested by one Board member that the independent nature of such trusts under federal law essentially prohibits the characterization of them as agents of insurance companies, as in the Metropolitan case. The Board focused on the legal fiction created in Metropolitan, of the employer as the agent for the insurer. The Board discussed the impact of the federal decision in General Motors Corp. v. California State Bd. of Equalization (9th Cir.1987) 8l5 F.2d 1305, cert. den. in 485 U.S. 941, 108 S.Ct. 1122, 99 L.Ed.2d 282 and noted that that case, which held that employee benefit plans could be taxed, did not involve Taft-Hartley trusts. It also considered the impact of Elfstrom v. New York Life Insurance Co. (1967) 67 Cal.2d 503, 63 Cal.Rptr. 35, 432 P.2d 731, in which the insurance company was held liable for the erroneous exclusion of an employee from a benefit plan. Further discussion ensued about the preemption of federal law over state agency law. The Board then voted to exclude from taxation those portions of minimum premium policies issued to Taft-Hartley trusts.

The Board's decision was summarized in a letter to appellant's counsel. The letter stated, inter alia: "With the exception of arrangements made with Taft-Hartley trusts (discussed below), the Board concluded that claim amounts paid in connection with such three-party arrangements should be utilized in calculating gross premium taxes due pursuant to the Metropolitan decision. As you know, the typical three-party arrangement involves an insurance company, an employer/policyholder, and the insured employees. The minimum premium aspect of these arrangements (usually in the form of a rider added to an existing group health insurance policy between the insurance company and the employer/policyholder) imposes primary liability for claims below a so-called 'trigger-point' on the employer/policyholder while liability above that point is borne by the insurance company. Claim payments may be made by the insurance company or employer through a variety of joint or separate banking arrangements. The insurance company generally retains the final authority as to claim payments and claim settlement and litigation. Viewed as a whole these arrangements show a 'highly entangled, symbiotic relationship' between the employer/policyholder and the insurance company and were found taxable under the rules of the Metropolitan case. [p] When the policyholder is a so-called 'Taft-Hartley trust' established under section 302 of the Labor Management Relations Act of 1974 (29 U.S.C. § 186(c)(5)), the Board concluded that claim payments could not be used as a basis for calculating the gross premiums tax."

(5) The Trial Court's Judgment

The trial court found, after a submission by the parties on documentary evidence and stipulated facts, that appellant had been denied equal protection because there was no rational basis for differentiating between policies issued to employers and those issued to Taft-Hartley trusts. ⁶ The court held, however, that if an exemption of Taft-Hartley trusts is improper, then appellant's remedy is not to seek a refund, but to file an action to compel the Board to impose the same taxes on Taft-Hartley trusts. Accordingly, it ordered that appellant take nothing by its complaints.

CONTENTIONS ON APPEAL

Appellant contends the trial court erred in finding that it was not entitled to a refund of taxes paid and in finding that the Board's failure to assess the same taxes on Taft-Hartley trusts resulted in a denial of equal protection to appellant, but that appellant was still not entitled to a refund. Appellant contends that since its equal protection rights were violated, its only appropriate remedy is a tax refund. It also claims that even if the refund was properly denied, the Board erred in calculating the interest due on its deficiency assessments....