PUBLISHED OPINION
Case No.: 95-3605
Complete Title
of Case:
WISCONSIN DEPARTMENT
OF REVENUE,
Petitioner-Appellant,
v.
HERITAGE MUTUAL
INSURANCE COMPANY,
Respondent-Respondent.
Submitted on Briefs: October 31, 1996
COURT COURT OF APPEALS OF WISCONSIN
Opinion Released: February 12, 1997
Opinion Filed: February
12, 1997
Source of APPEAL Appeal from an order
Full Name JUDGE COURT: Circuit
Lower Court. COUNTY: Sheboygan
(If
"Special", JUDGE: JOHN B. MURPHY
so indicate)
JUDGES: Brown, Nettesheim and Anderson, JJ.
Concurred:
Dissented:
Appellant
ATTORNEYSOn behalf of the petitioner-appellant, the cause was
submited on the brief of James E. Doyle, attorney general, and F.
Thomas Creeron III, assistant attorney general.
Respondent
ATTORNEYSOn behalf of the respondent-respondent, the cause was
submitted on the brief of James R. Lowe of Whyte, Hirschboeck, Dudek,
S.C. of Milwaukee.
COURT OF
APPEALS DECISION DATED AND
RELEASED February
12, 1997 |
NOTICE |
A party may file with the Supreme Court a petition to review an
adverse decision by the Court of Appeals.
See § 808.10 and Rule
809.62, Stats. |
This opinion is subject to further editing. If published, the official version will appear in the bound
volume of the Official Reports. |
No. 95-3605
STATE OF WISCONSIN IN
COURT OF APPEALS
DISTRICT II
WISCONSIN
DEPARTMENT
OF
REVENUE,
Petitioner-Appellant,
v.
HERITAGE
MUTUAL
INSURANCE
COMPANY,
Respondent-Respondent.
APPEAL
from an order of the circuit court for Sheboygan County: JOHN B. MURPHY, Judge. Affirmed.
Before
Brown, Nettesheim and Anderson, JJ.
NETTESHEIM,
J. The Wisconsin Department of Revenue appeals
from a circuit court order affirming a decision of the Wisconsin Tax Appeals
Commission granting Heritage Mutual Insurance Company's claims for a partial
refund of taxes previously paid for the years 1987 and 1988.
The
question in this case is whether Heritage took the proper deduction pursuant to
§ 71.45(2), Stats., 1987-88,
when computing its Wisconsin taxable income.
This statute requires an insurance company to “add back” certain
interest and dividend income allowed as deductions under federal tax law. We agree with the Commission’s determination
that Heritage properly computed its Wisconsin taxable income pursuant to the
statute and the relevant federal law.
We therefore affirm the circuit court order upholding the Commission's
ruling.
COMPUTATION OF
TAXABLE INCOME
Before
we recite the facts, we set out the relevant federal and state tax law bearing
on the issue before us.
The
starting point for computing an insurer's net income for purposes of Wisconsin
tax law is the insurer's federal taxable income. For federal purposes, the insurer must include investment income[1]
and underwriting income.[2] However, federal tax law allows an insurer
to deduct certain interest and dividend income when determining its federal
taxable income.[3] These deductions include the interest earned
on any state or local bond, see 26 U.S.C. § 832(c)(7), and certain
dividends received, see 26 U.S.C. § 832(c)(12).
In
addition, an insured is allowed to exclude from underwriting income its “losses
incurred.” See 26 U.S.C.
§ 832(b)(3). These losses include
losses actually paid plus increases in the reserve for losses incurred but not
yet paid. See 26 U.S.C.
§ 832(b)(5)(A)(i) & (ii).
Prior to the Tax Reform Act of 1986, federal law did not place any
limitation on this “losses incurred” deduction. However, the Tax Reform Act scaled back this deduction. It did so by creating a formula linked to
the amounts of the interest and dividend deduction. Specifically, the Reform Act reduced the “losses incurred” deduction
to 15% of the sum of the exempt interest income and the allowable dividend
deductions. See 26 U.S.C.
§ 832(b)(5)(B).[4]
During
this time, Wisconsin tax law remained constant. Both before and after the Tax Reform Act, § 71.45(2), Stats., 1987-88,[5]
required a Wisconsin insurer to “add back” to its federal taxable income the interest
and dividend deductions which it had taken for federal tax purposes. The statute provides in relevant part:
(2) Determination
of net income. (a) Insurers
subject to taxation under this chapter ¼ shall pay a tax according to or measured by net
income. Such tax is payable under s.
71.44(1). “Net income” of an insurer
subject to taxation under this chapter means federal taxable income as
determined in accordance with the provisions of the internal revenue code adjusted
as follows:
¼.
3.
By adding to federal taxable income an amount equal to interest income
received or accrued during the taxable year to the extent such interest income
was used as a deduction in determining federal taxable income.
4. By adding to federal taxable income an
amount equal to dividend income received or accrued during the taxable year to
the extent such dividend income was used as a deduction in determining federal
taxable income ¼.
The
issue in this case is what constitutes the correct amount of Heritage's “add
back” under this statute. The
Department contends that the proper amount of the “add back” was the full
amount of the federal deduction as reported by Heritage in its original state
returns. Heritage contends that the
proper amount is 85% of the federal deduction pursuant to the Tax Reform
Act.
FACTS
This
matter comes to us on the basis of stipulated facts. Heritage is organized as a mutual insurance corporation under ch.
611 of the Wisconsin Statutes and is engaged in the business of selling
property and casualty liability insurance in Wisconsin. Heritage filed its federal tax returns for
the years in question, taking the allowable deductions for interest and
dividends.[6] It also took its allowable deductions for
losses incurred, reducing that amount by the 15% formula set out in the Tax
Reform Act.
In
its Wisconsin Franchise Income Tax Returns for the same years, Heritage added
back 100% of the amounts it had taken as the interest and dividend deductions
on its federal returns. Later, however,
Heritage filed amended state returns, seeking refunds of $19,393 and $19,068
for the 1987 and 1988 years, respectively.
Relying on the Tax Reform Act, Heritage's amended returns reduced the
amount of “add backs” pursuant to the formula set out in the Tax Reform Act.
The
Department of Revenue rejected Heritage’s refund claims. Later, the Department also rejected
Heritage's Petition for Redetermination.
Heritage then sought and received a review of the Department's ruling
before the Tax Appeals Commission.
In
a decision dated March 31, 1995, the Commission reversed the Department’s
ruling. The Commission concluded that
the language of § 71.45(2)(a)3 and 4, Stats.,
was clear and unambiguous. The
Commission ruled that the “add back” for Wisconsin franchise tax purposes is
“limited to the extent that such [dividend or interest] income was used as a
deduction in determining federal taxable income.” The Department sought and received judicial review in the circuit
court. As noted, the court upheld the
Commission's decision. The Department
further appeals to us.
DISCUSSION
Standard of Review
We
begin with our standard of review—a point on which the parties disagree. The Department contends that the effect of
the Tax Reform Act of 1986 upon the computation of Wisconsin taxable income is
a question of first impression for the Commission and therefore we should not
pay deference to the Commission’s determination. Heritage contends that the question is “very nearly” one of first
impression requiring us to give the Commission’s determination, if reasonable,
great bearing or due weight.
The
issue before us requires that we construe § 71.45(2), Stats.
That presents a question of law which we ordinarily would review de
novo. See Kelley Co. v.
Marquardt, 172 Wis.2d 234, 244, 493 N.W.2d 68, 73 (1992). However, we accord varying degrees of
deference to an administrative agency’s interpretation of a statute which the
agency has been legislatively charged to administer:
First,
if the administrative agency’s experience, technical competence, and
specialized knowledge aid the agency in its interpretation and application of
the statute, the agency determination is entitled to “great weight.” The second level of review is a mid-level
standard that provides if the agency decision is “very nearly” one of first
impression it is entitled to “due weight” or “great bearing.” The third level of review is de novo and is
applied when the case is clearly one of first impression for the agency and the
agency lacks special expertise or experience in determining the question
presented.
Id. at 244-45, 493 N.W.2d at 73 (citations omitted).
This
case involves a legal question intertwined with policy determinations. Because the Commission has primary
responsibility for policy determinations, we conclude that the agency
determination is properly accorded some degree of deference. See Sauk County v. WERC,
165 Wis.2d 406, 413-14, 477 N.W.2d 267, 270 (1991). We say this while recognizing that the issue is one of first
impression. Nonetheless, the issue
invokes the agency's expertise and experience in construing the tax laws
generally, and the interrelationship between the federal and state tax laws
specifically. When this situation
arises, Wisconsin Dep't of Revenue v. Lake Wis. Country Club, 123
Wis.2d 239, 242-43, 365 N.W.2d 916, 918 (Ct. App. 1985), instructs that we give
due weight and great bearing to the agency ruling.
This
standard is complemented by the rule stated in Nigbor v. DILHR,
115 Wis.2d 606, 611, 340 N.W.2d 918, 921 (Ct. App. 1983), aff’d, 120
Wis.2d 375, 355 N.W.2d 532 (1984):
“When reviewing an administrative agency’s conclusions of law, the
reviewing court is not bound by those conclusions but will sustain them if
reasonable, even though an alternative view exists that is equally
reasonable.” See also Lake
Wis. Country Club, 123 Wis.2d at 242-43, 365 N.W.2d at 918.
We
therefore will accord the Commission's ruling due weight and we will also
inquire whether the ruling represents a reasonable construction of the statute.
Construction and
Application of
§ 71.45(2), Stats.
The
resolution of this case turns on an interpretation of § 71.45(2), Stats.
Our primary purpose when interpreting a statute is to give effect to the
legislature's intent. See Riverwood
Park, Inc. v. Central Ready-Mixed Concrete, Inc., 195 Wis.2d 821, 827,
536 N.W.2d 722, 724 (Ct. App. 1995).
Our first resort is to the language of the statute, and where that
language is plain on its face, we apply it to the facts; “we do not look beyond
the plain and unambiguous language of a statute.” See Vogel v. Grant-Lafayette Elec. Coop.,
195 Wis.2d 198, 220, 536 N.W.2d 140, 149 (Ct. App. 1995), rev'd on other
grounds, 201 Wis.2d 416, 548 N.W.2d 829 (1996). If, however, the statute is ambiguous, we may examine the scope,
history, context, subject matter and purpose of the statute. See Riverwood Park, 195
Wis.2d at 828, 536 N.W.2d at 724.
Furthermore, if an administrative agency has been charged with the
statute's enforcement, we may also look to the agency's interpretation. See UFE, Inc. v. LIRC,
201 Wis.2d 274, 282, 548 N.W.2d 57, 60 (1996).
Here,
we agree with the Commission's conclusion that § 71.45(2)(a)3 and 4, Stats., is clear and unambiguous. Both as to the interest and the dividend
deduction, the statute clearly instructs the insurer to compute its Wisconsin
taxable income by adding to federal taxable income an amount equal to
interest/dividend income received to the extent such interest/dividend income
was used as a deduction in determining the company's federal taxable income. See § 71.45(2)(a)3 and 4. Here, pursuant to the Tax Reform Act,
Heritage deducted the permitted 85% of its exempt interest and deductible
dividends in determining its federal taxable income. Pursuant to the clear language of the statute, Heritage was thus
entitled to add back this same amount when determining its Wisconsin taxable
income.
The Department argues that under the Tax
Reform Act the interest and dividend deductions are not the deductions
themselves. Rather, those items are
used only as a measure to determine the allowable “losses incurred” deduction. The Department contends that the loss
reserves deduction has no bearing on the computation of Wisconsin taxable
income because the Wisconsin tax statutes “never required the add back of the
federal deduction for federal loss reserves ¼ in connection with the computation of Wisconsin net
income.”
However,
even if the Department's grammatical parsing of the Tax Reform Act is correct,
the argument overlooks the clear language of § 71.45(2)(a)3 and 4, Stats.
The statute does not make the “computation/deduction” distinction which
the Department perceives in the federal statute. Rather, the statute simply directs and allows the insurer to add
back the amount of the federal deduction, regardless of how it was
computed. This, of course, is precisely
what Heritage did in its amended state returns.
The
Department's argument also glosses over the interplay between the federal and
state statutes. Section 71.45(2), Stats, is an “elastic” statute,
operating in “lockstep” with the federal law.
The amount of the deduction produced by the federal statute is the
corresponding amount of the “add back” under the state statute. This is true whether amendments to the
federal law expand or, as in this case, diminish the amount of the federal
deduction.[7]
The
Department further contends that allowing insurance companies to add back only
85% of their interest and dividend income will result in a windfall to
insurance companies. The Department's
concern stems from the fact that a portion of the tax-exempt loss reserves is
funded with tax-exempt interest and dividend income. By reducing the loss reserves deduction by 15% of the interest
and dividend income, the Tax Reform Act of 1986 prevented insurance companies
from receiving a double deduction on that portion of its loss reserves which is
funded with tax-exempt income.
We
conclude that this court is not the proper forum for this argument. As we have noted, the legislature chose to
write § 71.45(2), Stats., as
an “elastic” statute which works in “lockstep” with federal tax law. Certainly the legislature knew that
subsequent changes in federal law could alter an insurer's computation of
Wisconsin taxable income under the state statute. If the Tax Reform Act has produced unacceptable or unanticipated
tax benefits to property and casualty insurance companies, it is for the
legislature, not us, to rewrite § 71.45(2).
In
short, absent equal protection considerations or a statutory interpretation
which produces an absurd or unreasonable result (neither of which is present here),
our resolution of this case does not turn on whether a particular category of
taxpayers receives favorable or unfavorable treatment.
Moreover,
we note that § 71.45, Stats.,
has been amended several times since the passage of the Tax Reform Act of 1986. See § 71.45 (amended 1987, 1989,
1991, 1993). In doing so, the
legislature is presumed to have acted with full knowledge of the Tax Reform
Act. See Glinski v.
Sheldon, 88 Wis.2d 509, 519-20, 276 N.W.2d 815, 820 (1979). Yet, the legislature has not amended the
statutory provisions at issue in this case.
CONCLUSION
In
many instances, the Wisconsin and federal taxation systems operate in
lockstep. When changes in federal law
produce a corresponding effect in Wisconsin tax procedures, it is for the legislature,
not the courts, to consider whether such change represents good policy. Oftentimes, the legislature has responded to
federal law by directing the taxpayer to deviate from the federal law. However, in this instance it has not. Unless and until it does, we properly follow
the clear and unambiguous language of § 71.45(2), Stats. Accordingly,
we affirm the circuit court's order upholding the decision of the Commission.[8]
By
the Court.—Order affirmed.
[1] “Investment
income” means the gross amount of income earned during the taxable year from
interest, dividends, and rents. See
26 U.S.C. § 832(b)(2).
[2] “Underwriting
income” means the premiums earned on insurance contracts during the taxable
year less losses incurred and expenses incurred. See 26 U.S.C. § 832(b)(3).
[3] Actually, the
interest income is treated as an exclusion from gross income, see 26
U.S.C. § 832(c)(7), while the dividend income is treated as a deduction, see
26 U.S.C. § 832(c)(12). For ease
of reference, we will refer to both categories as deductions.
[4] 26 U.S.C.
§ 832(b)(5) provides in relevant part:
(5)
Losses incurred.--
(A) In general.--The term “losses incurred” means losses incurred during
the taxable year on insurance contracts ¼.
(B) Reduction of deduction.--The
amount which would (but for this subparagraph) be taken into account under
subparagraph (A) shall be reduced by an amount equal to 15 percent of the sum
of--
(i) tax-exempt interest received or
accrued during such taxable year, and
(ii) the aggregate amount of
deductions provided by section 243, 244 and 245 for--
(I) dividends ¼ received during the taxable year ¼.
See also 1987 Federal Tax Return Form 1120-PC, Schedule F, lines 6-9.
[5] We note that the
statute in effect at the times relevant to this case was § 71.01(4)(a)4 and 5, Stats., 1985-86. This statute was repealed and renumbered by
1987 Wis. Act 312 and is substantially the same as § 71.45(2)(a)3 and 4, Stats., 1987-88. Both parties on appeal refer only to §
71.45(2)(a)3 and 4. To clarify, all citations to § 71.45 throughout the
opinion refer to the 1987-88 version of the statute.
[6] For 1987,
Heritage's federally tax-exempt interest income was $4,703,878 and its allowable
federal dividend deductions were $135,434.
For 1988, the corresponding amounts were $4,705,280 and $114,212.
[7] Thus, we reject
the Department's further argument that the Wisconsin Legislature's inaction
subsequent to the Tax Reform Act of 1986 signals the legislature's intent that
the add back required under prior federal law remained the required add back
after the Reform Act. As we will note
later in this opinion, the legislature has amended § 71.45, Stats., since the passage of the Tax
Reform Act. See infra at
12. However, it has not tampered with
the provisions at issue in this case.