Tennessee Farmers Assur. Co. v. Chumley

• Decision Date: 03 February 2006
• Docket Number: No. M2004-02530-COA-R3-CV.,M2004-02530-COA-R3-CV.
• Parties: TENNESSEE FARMERS ASSURANCE COMPANY, et al v. Loren L. CHUMLEY.
• Court: Tennessee Court of Appeals

197 S.W.3d 767

TENNESSEE FARMERS ASSURANCE COMPANY, et al v. Loren L. CHUMLEY.

No. M2004-02530-COA-R3-CV.

Court of Appeals of Tennessee, Western Section, at Nashville.

November 15, 2005 Session.

February 3, 2006.

Permission to Appeal Denied by Supreme Court May 30, 2006.

Paul G. Summers, Attorney General and Reporter; Jimmy G. Creecy, Chief Special Counsel for Appellant, Loren L. Chumley, Commissioner of Revenue, State of Tennessee.

Charles A. Trost, Michael G. Stewart, Ramin M. Olson of Nashville; Christopher M. Was of Nashville; Edward K. Lancaster of Columbia, Tennessee for Appellee, Tennessee Farmers Assurance Company and Tennessee Farmers Mutual Insurance Company.

OPINION

W. FRANK CRAWFORD, P.J., W.S., delivered the opinion of the court, in which DAVID R. FARMER, J. and HOLLY M. KIRBY, J., joined.

Taxpayer insurance companies brought suit in consolidated cases for refund of franchise and excise taxes which taxpayers had paid under protest. The taxes were assessed as a result of an audit conducted by the Tennessee Department of Revenue's field audit division and covering tax years 1995 through 1998. The taxpayers assert that they are allowed to take credit against the franchise and excise taxes for the amount they actually paid in gross premiums tax plus the credit they were granted against said tax by virtue of Tennessee investments. The Commissioner asserts that they are only entitled to credit on the franchise and excise taxes for the amount of gross premiums tax actually paid. The Chancery Court of Maury County entered judgment granting taxpayers motion for summary judgment holding that the commissioner's interpretation of the statutes defeated the incentives for investment in Tennessee securities provided under the gross premiums tax statutes. The revenue commissioner appealed. Finding that Commissioner of the Department of Revenue is not estopped from assessing franchise and excise taxes against the Appellee, either by statute or by equity, and that the credit against franchise and excise taxes includes only the amount of gross premiums taxes paid and collected by the Department of Commerce and Insurance, we vacate the summary judgment granted to the Appellees and grant summary judgment for Appellant.

Taxpayer insurance companies operate in the State of Tennessee with their principal places of business in Columbia, Tennessee. Tennessee Farmers Assurance Company ("Appellee Assurance") is a for-profit stock insurance company that was incorporated in 1991. Tennessee Farmers Mutual Insurance Company ("Appellee Mutual") is a for-profit mutual insurance company, which began operating in Tennessee in 1952. The Appellant, Loren L. Chumley, is the Commissioner of Revenue for the State of Tennessee ("Commissioner") charged with the duty to collect taxes and state revenues for the state, including franchise and excise taxes for which refund is sought by the Appellees.

The dispute between the parties centers around the interpretation of several sections of the Tennessee tax code as they existed in the pertinent tax years of 1995-1998, and how they interact with each other. Under T.C.A. § 56-4-205¹ all insurance companies writing life, fire, marine, fidelity, surety, casualty, liability insurance are required to pay a two and one-half percent (2.5%) tax on gross premiums paid by policyholders residing in Tennessee or on property located in Tennessee. Pursuant to T.C.A. § 56-4-210² all insurance companies falling into the categories covered by § 56-4-205, with a few exceptions, are entitled to a reduction of, or credit upon, its gross premiums tax for investments in Tennessee securities. The amount of credit depends on the level of investment made in Tennessee securities by the insurance company compared to the level of investment in the other state as designated and as described in T.C.A. § 56-4-210 as shown below:

                                                             Percentage
                    Investment Level in                       of Credit
                    Tennessee Securities or Reduction
                    70% minimum, not more than 80%              25%
                    80% minimum, not more than 90%              50%
                    90% or greater                              75%
                

Both Appellee Assurance and Appellee Mutual were subject to the premiums tax outlined in T.C.A. § 56-4-205, and were eligible for the credit for investment in Tennessee securities set forth in T.C.A. § 56-4-210 based upon their respective levels of investment in Tennessee securities. During the relevant tax years of 1995 through 1998, both Appellee Assurance and Appellee Mutual qualified and received a seventy-five percent (75%) credit upon their gross premium tax because they maintained a ninety percent (90%) or greater level of investment in Tennessee securities. Thus, the Appellees paid their premiums tax liability by taking the seventy-five percent (75%) in-state investment credit pursuant to T.C.A. § 56-4-210, and paid the remaining twenty-five percent (25%) liability in cash.

The State of Tennessee in the relevant years imposed two additional taxes on corporations that are pertinent to the present case. The Tennessee excise tax, pursuant to T.C.A. § 67-4-806,³ is accessed annually and is equal to six percent (6%) of the net earnings of a corporation. The Tennessee franchise tax, pursuant to T.C.A. § 67-4-904,⁴ is also accessed annually and is a tax of twenty-five cents (25¢) on every one hundred dollars ($100) of the issued and outstanding stock, surplus and undivided profits of a corporation. In the tax years of 1995 through 1998, Appellee Assurance and Appellee Mutual were subject to both the Tennessee excise and the franchise taxes.⁵ However, pursuant to T.C.A. § 56-4-217⁶ effective during the relevant tax years, "the amount of premiums taxes collected" from insurance companies is allowed as "a single credit against the sum total of the taxes imposed" by the franchise tax, and the excise tax. The allowance of this credit is repeated in separate individual sections under both the franchise and excise tax law. The pertinent parts of those sections are shown below:

T.C.A. § 67-4-808. [Excise Tax] Credits.

The tax herein imposed shall be in addition to all other taxes and there shall be no credit allowed upon it except the following:

(1) On each annual excise tax return, insurance companies shall be allowed, as provided in § 56-4-217, a credit of the net amount of gross premiums tax paid which is measured by a period that corresponds to the excise tax period on which the return is based, plus any amount used to offset payment to the Tennessee guaranty association which has not otherwise been recovered, but not including the gross premiums receipts tax paid by fire insurance companies for the purpose of executing the fire marshal law.⁷

T.C.A. § 67-4-908(a). [Franchise Tax] Credits for gross premiums tax.

(a) In accordance with § 56-4-217, there shall be credited upon the tax hereby imposed the net amount of gross premiums tax paid which is measured by a period that corresponds to the franchise tax period on which the return is based, plus any amount used to offset payment to the Tennessee guaranty association which has not otherwise been recovered, but not including the gross premiums receipts tax paid by fire insurance companies for the purpose of executing the fire marshal law.⁸

What constitutes the amount of credit allowed against the state franchise and excise taxes is the primary issue in this case.

During the tax years at issue, 1995 through 1998, Appellees Mutual and Assurance were each entitled to a seventy-five percent (75%) in-state investment credit against premiums taxes under. T.C.A. § 56-4-210 for maintaining investments in Tennessee securities exceeding the ninety percent (90%) statutory threshold. The Appellees then calculated the credit allowed insurance companies towards their excise tax pursuant to T.C.A. § 67-4-808, and franchise tax pursuant to T.C.A. § 67-4-908(a), in the amount of their entire premiums tax liability; the twenty-five percent (25%) paid in cash, and the seventy-five percent (75%) that was offset by the Appellees over ninety percent (90%) investment in Tennessee securities.

The Department of Revenue conducted a field audit of the Appellees, after which the Commissioner, on June 27, 2000, assessed the Appellees with additional franchise and excise tax. The assessment against the Appellees was due to the Commissioner allowing the Appellees a credit against its franchise and excise tax only in the amount of the gross premiums tax paid in cash and collected by the Department of Commerce and Insurance. The Commissioner disallowed the credit against the franchise and excise tax for the credit granted on the gross premiums tax because of investment in Tennessee securities. The Commissioner assessed Appellee Mutual additional franchise and excise tax in the amount of $3,899,401.00 plus interest in the amount of $1,420,668.18 for a total of $5,320,069.18 for the period January 1, 1995 through December 31, 1998. Due to the accumulation of additional interest, Appellee Mutual paid $5,925,449.00 to the Department of Revenue under protest on October 4, 2001.

On August 13, 2000, Appellee Assurance was likewise assessed additional franchise and excise tax in the amount of $7,798,010.00 plus interest in the amount of $3,131,468.62 for a total of $10,929,478.62 for the period January 1, 1995 through December 31, 1998. Due to the accumulation of additional interest, Appellee Assurance paid $12,004,654.00 to the Department of Revenue under protest on October 4, 2001. Both Appellees filed claims for refunds in the amounts of $5,925,449 (Mutual) and $12,004,654 (Assurance), and both claims were denied.

On April 2, 2002, Appellee Mutual filed suit seeking a refund of franchise and excise taxes paid for the 1995 through 1998 period in the amount of $5,925,449 plus interest, expenses, and attorney's fees. Likewise, on April 2, 2002, Appellee Assurance filed...