The opinion of the court was delivered by: Judge Cohn Jubelirer
BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge, HONORABLE DAN PELLEGRINI, Judge, HONORABLE RENÉE COHN JUBELIRER, Judge, HONORABLE ROBERT SIMPSON, Judge, HONORABLE JOHNNY J. BUTLER, Judge.
Allstate Life Insurance (Allstate) petitions this Court for review of a November 19, 1996 order (Resettlement Order) by the Board of Finance and Revenue (Board),*fn1 which established a tax credit to offset against Allstate's 1993 Gross Premiums and Annuity Considerations Tax (Annuity Considerations Tax)*fn2 liability. The tax credit is determined in accordance with Article XVII of the Insurance Company Law of 1921 (Guaranty Act).*fn3 Allstate contests the Board's disallowance of tax credit with respect to its 1992 assessments by the Pennsylvania Life and Health Insurance Guaranty Association (Association) involving nontaxable annuities. Allstate petitioned this Court for review to determine the correct methodology to be employed in calculating the amount of assessment tax credit to which an insurer providing annuities is entitled. In resolving this issue, this Court must interpret Section 1711(a) and (b) of the Guaranty Act, 40 P.S. § 991.1711(a)-(b), which sets forth a complex mathematical equation for determining a tax credit for assessments paid by insurers.
The Guaranty Act created the Association, which is designed to assure that insurance policy benefits are paid to policyholders when an insurer becomes insolvent. All insurance companies in the Commonwealth must pay assessments to be in good standing with the Association. Section 1707(a) of the Guaranty Act provides that the Association "shall assess the member insurers, separately for each account, at such time and for such amounts as the board finds necessary." 40 P.S. § 991.1707(a). There are two types of assessments: Class A, which funds the Association's expenses, and Class B, which provides funding to cover the policy benefits of insolvent insurers. Class B assessments fund two different accounts: 1) the life insurance and annuity account; and 2) the health insurance account. 40 P.S. § 991.1704(a). Within the life insurance and annuity account are three sub-accounts:
1) life insurance; 2) annuity; and 3) unallocated annuity. Id.*fn4
The Guaranty Act provides two methods for insurers to recoup the assessments they have paid to the Association: 1) they can increase the relevant policy premiums (thus passing the cost to their insureds); or 2) request a credit against their tax liability under the Annuity Considerations Tax. Insurers can only request a tax credit when the amounts of the relevant policy premiums are fixed and cannot be increased, as the policy amounts are for annuities.
The Guaranty Act provides:
(a) A member insurer may offset against its premium tax liability to this Commonwealth a proportionate part of the assessments described in section 1707 to the extent of twenty per centum (20%) of the amount of such assessment for each of the five (5) calendar years following the year in which such assessment was paid. In the event a member insurer should cease doing business, all uncredited assessments may be credited against its premium tax liability for the year it ceases doing business.
(b) The proportionate part of an assessment which may be offset against a member company's premium tax liability to the Commonwealth shall be determined according to a fraction of which the denominator is the total premiums received by the company during the calendar year immediately preceding the year in which the assessment is paid and the numerator is that portion of the premiums received during such year on account of policies of life or health and accident insurance in which the premium rates are guaranteed during the continuance of the respective policies without a right exercisable by the company to increase said premium rates.
40 P.S. § 991.1711(a)-(b) (emphasis added). "Thus, under the scheme, the insurance industry supplies the Guaranty Association with funds necessary to meet the obligations of insolvent insurers, and a portion of such advances are then repaid to the insurers, without interest, as tax credits over a five-year period." Northbrook Life Insurance Company v. Commonwealth, 597 Pa. 18, 20, 949 A.2d 333, 334 (2008) (Northbrook II) (discussing § 1711(a).). Further, under subsection (b), the amount of each assessment subject to the credit is determined by multiplying the assessment by a fraction -- the "proportionate part" -- that represents the portion of each assessment that is tied to fixed or guaranteed premiums. 40 P.S. § 991.1711(b). This limitation assures that insurers cannot recoup, as a tax credit, any amounts that they could otherwise pass through to their insureds as premium increases.
B. Northbrook Life Insurance Cases
This Court and the Supreme Court have previously examined Section 1711 in two reported opinions in Northbrook Life Insurance v. Commonwealth, 890 A.2d 1223 (Pa. Cmwlth. 2006) (Northbrook I) and Northbrook II. Because the Supreme Court ultimately reversed and vacated this Court's order in that case based on a stipulation of the parties, which we do not have here, and carefully left open the issues now before us, these opinions provide helpful background, but do not resolve the issues in this case.
The facts in Northbrook I were as follows. Prior to August 1995, the Department of Revenue (Department) denied tax credits to Northbrook for any of Northbrook's annuity assessments pursuant to the Department's Corporate Tax Bulletin No. 95. However, in August 1995, the Department revised Bulletin No. 95 and allowed Northbrook to take a tax credit based on the annuity assessments on Northbrook's taxable annuities.*fn5 Thus, on appeal to this Court, Northbrook requested only a tax credit for the assessments on its non-taxable annuities. Before this Court, the Department changed its position and argued that there should be no tax credit for any annuity assessment, whether taxable or non-taxable.
This Court held that an insurer could receive a tax credit for assessments related to both taxable and non-taxable annuities interpreting the language in Section 1711(a) -- "assessments described in section 1707" -- to "include assessments necessary to fund each account and sub-account" established by the Guaranty Act. Northbrook I, 890 A.2d at 1226 (citing 40 P.S. § 991.1707(a)). This Court noted that two of the sub-accounts are the annuity sub-account and the unallocated annuity sub-account, which includes non-taxable annuity contracts qualified under Section 403(b) of the Internal Revenue Code of 1986. Id. (citing 40 P.S. § 991.1704(a)(1)). Thus, the Court held that,
[b]ecause a tax credit is allowed for all assessments described in section 1707 and because section 1707 describes assessments necessary to fund taxable and non-taxable annuity accounts, we conclude that an insurer is entitled to a tax credit for "a proportionate part" of its assessments related to both taxable and non-taxable annuities.
Id. (emphasis in original).
Having determined that there could be a tax credit for all annuity assessments, this Court then examined what the amount of the credit would be. This determination involved the "proportionate part factor." This Court noted that the parties had entered into a stipulation of facts that included an agreement providing that, if tax credits were allowed for both taxable and non-taxable annuities, the applicable proportionate part factor would be 1.0, resulting in a full tax credit. However, this Court rejected that stipulation stating that "the parties cannot stipulate to a 'fact' that actually is a matter of law." Id. This Court also determined that the proportionate part factor could never be 1.0 when calculating the tax credit for assessments related to annuities. This Court explained:
According to section 1711(b) of the Guaranty Association Act, the proportionate part of an assessment which may be offset against a company's [Annuity Consideration Tax] liability is a fraction which has, as a denominator, "the total premiums received by the company during the calendar year immediately preceding the year in which the assessment is paid." 40 P.S. § 991.1711(b) (emphasis added). The word "premiums" is defined by statute to include amounts received on "covered policies." 40 P.S. § 991.1702. "Covered polic[ies]" are defined as policies or contracts within the scope of section 1703 of the Guaranty Association Act. 40 P.S. § 991.1702. Section 1703 of the Guaranty Association Act encompasses life and health insurance policies, as well as annuity contracts. See 40 P.S. § 991.1703(b)(1). Therefore, the denominator of the proportionate part fraction is the total amount received on all types of covered policies.
The numerator of the proportionate part fraction is "that portion of the premiums received during such year on account of policies of life or health and accident insurance in which the premium rates are guaranteed during the continuance of the respective policies without a right exercisable by the company to increase said premium rates." 40 P.S. § 991.1711(b) (emphasis added). The numerator never includes amounts received on annuities. Thus, the numerator could never be as great as the denominator, meaning that the proportionate part factor could never be "1.00."
Id. at 1226-27 (emphasis in original) (footnote omitted). Accordingly, this Court reversed the Board's decision and remanded the matter to the Board to recalculate the insurer's tax ...