Mutual Life Ins. Co. of New York v. Washburn

• Decision Date: 03 July 1990
• Docket Number: No. 68884,68884
• Citation: 148 Ill.Dec. 723,561 N.E.2d 29,137 Ill.2d 312
• Parties: , 148 Ill.Dec. 723 The MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, Appellee, v. John WASHBURN, Director of Insurance of the State of Illinois, et al., Appellants.
• Court: Illinois Supreme Court

Page 29

561 N.E.2d 29

137 Ill.2d 312, 148 Ill.Dec. 723

The MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, Appellee, v. John WASHBURN, Director of Insurance of the State of Illinois, et al., Appellants.

No. 68884.

Supreme Court of Illinois.

July 3, 1990.

Rehearing Denied Oct. 1, 1990.

Neil F. Hartigan, Atty. Gen., Robert J. Ruiz, Sol. Gen., and Pfeifer & Kelty, P.C. (Robert E. Wagner, Sp. Asst. Atty. Gen., of counsel), Springfield, for appellants.

William S. Hanley and Patrick V. Reilly, of Sorling, Northrup, Hanna, Cullen & Cochran, Ltd., Springfield, for appellee.

Justice MILLER delivered the opinion of the court:

The plaintiff, The Mutual Life Insurance Company of New York, brought the present declaratory judgment action in the circuit court of Sangamon County pursuant to the State Officers and Employees Money Disposition Act (Ill.Rev.Stat.1987, ch. 127, par. 170 et seq.). The plaintiff contests the assessment by the Illinois Department of Insurance (the Department) of a retaliatory tax (see Ill.Rev.Stat.1987, ch. 73, par. 1056) in the amount of $234,401.12, plus interest, for the calendar year 1980. The trial judge found the assessment valid and entered summary judgment in favor of the defendants, John Washburn, Director of Insurance of the State of Illinois (the Director), and James Donnewald, State Treasurer of the State of Illinois (the Treasurer). The appellate court reversed the judgment of the trial court, concluding that section 444 of the Illinois Insurance Code (Ill.Rev.Stat.1987, ch. 73, par. 1056) does not authorize the methodology used by the Department in calculating the plaintiff's retaliatory tax. (183 Ill.App.3d 978, 132 Ill.Dec. 472, 539 N.E.2d 1278.) We allowed the defendants' petition for leave to appeal (107 Ill.2d R. 315).

A foreign insurance company doing business in Illinois is obligated to pay the State of Illinois a tax in the amount of 2% of net taxable premium income written on Illinois risks, as well as certain other fees not relevant here, for the privilege of doing business in this State. (Ill.Rev.Stat.1987, ch. 73, par. 1021.) In addition, each foreign insurer is potentially subject to the payment of what has been termed a "retaliatory tax" under section 444 of the Illinois Insurance Code (the retaliatory statute) (Ill.Rev.Stat.1987, ch. 73, par. 1056). Section 444 provides in relevant part:

"Whenever the existing or future laws of any other state or country shall require of companies incorporated or organized under the laws of this State as a condition precedent to their doing business in such other state or country, * * * the payment of penalties, fees, charges or taxes greater than the penalties, fees, charges or taxes required in the aggregate for like purposes by this Code or any other law of this State, * * * then such laws * * * of said other state or country shall apply to companies incorporated or organized under the laws of such state or country doing business in this State, and all such companies * * * shall be required to make deposits, pay penalties, fees, charges and taxes, in amounts equal to those required in the aggregate for like purposes of Illinois companies doing business in such state or country * * *." Ill.Rev.Stat.1987, ch. 73, par. 1056.

The Department administers section 444 by requiring all foreign insurers to pay the "penalties, fees, charges or taxes" imposed by Illinois insurance tax provisions apart from the retaliatory tax. The Department then collects as a retaliatory tax any excess over the total of those amounts which would have been due from a hypothetical Illinois company with a similar business experience in the company's home jurisdiction. If the hypothetical Illinois insurer would have been required to pay an equal or lesser amount than the amount assessed the foreign insurer under Illinois insurance tax provisions, then no retaliatory tax is levied.

Plaintiff is a life insurance company organized under the laws of the State of New York and authorized to do business in the State of Illinois. In early 1984, the Department conducted an audit of plaintiff for the years 1980 through 1982. New York statutes during that period contained a complex taxation system that imposed a two-tiered tax on foreign insurers. (The New York tax law was modified in 1982, but because the Department does not claim that plaintiff owes retaliatory tax under the law as modified, we need not discuss the modifications.) First, New York imposed a premium tax on both foreign and domestic companies of 1% on gross premiums written in New York. (N.Y.Tax Law § 1510(c) (McKinney 1980).) Second, it added an additional two-component "franchise" tax. The first component consisted of the highest of four elements: (1) 9% of the taxpayer's net income allocated within New York; (2) 1.6 mills for each dollar of the taxpayer's total business and investment capital allocated within New York; (3) 9% on 30% of the taxpayer's net income in New York plus salaries and other compensation paid to the taxpayer's officers and stockholders owning in excess of 5% of its issued capital stock, minus $15,000 and any net loss for the reported year; or (4) $125. (N.Y.Tax Law § 1502 (McKinney 1980).) The New York law then added to the highest of the four elements a 0.8 mill levy for each dollar of subsidiary capital allocated within the State. However, a company could not be assessed a combined franchise and privilege tax greater than 2.6% of the insurer's gross premiums. N.Y.Tax Law § 1505(a) (McKinney 1980).

The plaintiff's initial retaliatory tax statements filed with the Department for the calendar years 1980, 1981 and 1982 disclosed only the 1% New York premium tax. The statement did not calculate into the possible retaliatory tax the second tier of the New York taxing scheme. During its audit, the Department requested that plaintiff furnish the Department with New York's Franchise Tax Form CT33. The Department instructed plaintiff to complete the form to reflect what the total New York tax would have been, taking into account the second tier of the taxation scheme, had plaintiff conducted its Illinois business as a foreign insurance company under New York law during each of the years under audit.

The Director reviewed the information provided by the plaintiff in the completed New York franchise tax forms and assessed plaintiff a net retaliatory tax of $234,401.12, plus interest on the past-due amount, for the calendar year 1980. No deficiency is claimed for the calendar years 1981 and 1982. On April 10, 1986, plaintiff paid to the Department $321,129.54, consisting of the $234,401.12 retaliatory tax assessed by the Department and $86,728.42 in interest. At that time, plaintiff filed a written notice to the Director stating that the payment was made under protest. See Ill.Rev.Stat.1987, ch. 127, pars. 170 through 172a.

The plaintiff then brought this action in equity in the circuit court of Sangamon County on April 28, 1986. Plaintiff sought a temporary restraining order, a preliminary injunction, and a permanent injunction, each without bond, to: (1) enjoin and restrain the Treasurer from transferring the money paid by plaintiff from the protest fund to any other fund; (2) enjoin and restrain the Director from paying or depositing into any fund other than the protest fund, or disposing of in any other manner, the money paid by plaintiff; and (3) enjoin and restrain the Director and Treasurer from assessing against, imposing upon, or collecting from plaintiff any additional tax, deficiencies, interest or penalties connected with this matter and from taking any action to collect or recover any of the money paid under protest. The complaint further sought a final decree declaring the collection of the retaliatory tax unwarranted and an order to the Director and Treasurer to refund to plaintiff the money it paid under protest, plus interest.

On May 7, 1986, the trial court issued a preliminary injunction enjoining and restraining the defendants from transferring from the protest fund or paying or depositing into any other fund other than the protest fund the money paid by plaintiff. In addition, the order restrained and enjoined the defendants from assessing against, imposing upon or collecting from plaintiff any tax, deficiencies, interest or penalties as a result of the entry of the injunction.

Defendants filed with the trial court an answer to plaintiff's complaint. Plaintiff thereafter filed a motion for summary judgment, arguing that it was not subject to a retaliatory tax because New York laws are not more burdensome than the relevant provisions of Illinois law. Plaintiff further argued that the Department's scheme of taxation violates the equal protection, due process and uniformity clauses of the Federal and State Constitutions.

Defendants filed a cross-motion for summary judgment, alleging that on its face, New York law is more burdensome than Illinois' insurance tax law. Defendants also alleged that in applying New York law the Department must evaluate the individual business experience of the company subject to retaliation to determine which New York provision is applicable to the company. Defendants further argued that the Department's method of applying the retaliatory statute to New York companies does not violate the constitutional rights of plaintiff.

At a hearing on July 20, 1988, the trial judge found that there were no issues of material fact. In a written order dated July 29, 1988, the trial judge denied plaintiff's motion and granted defendants' motion for summary judgment. The judge stated: "The State of New York imposes a tax on Illinois insurance companies, when stripped of all its apparent complexities, of as much as 2.6 percent of gross premiums whereas Illinois imposes a tax of not more than 2 percent of gross premiums."

Plaintiff moved the trial court to vacate its judgment and reopen the record, and subsequently made a motion to...