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Allstate Life Insurance Company v. Commonwealth of Pennsylvania

August 2, 2012


Appeal from the Order of Commonwealth Court at No. 89 FR 1997 dated 10-15- vacating the resettlement order of 11-19-: 1996 and remanding to the Board of Finance & Revenue at No. 9545550.

The opinion of the court was delivered by: Mr. Justice Eakin


ARGUED: November 29, 2011 2010 overruling the exceptions and


The Commonwealth of Pennsylvania, Department of Revenue, appeals the Commonwealth Court's order vacating the Board of Finance and Revenue's resettlement order. Being equally divided, we affirm.

The Guaranty Association Act, 40 P.S. § 991.1711, 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.

Id., § 991.1711(a)-(b).

The purpose of the Act is to protect Pennsylvania residents who are policyholders and beneficiaries of policies issued by insurers who become insolvent. In accordance with the Act, insurance companies doing business in Pennsylvania are assessed to contribute to the Pennsylvania Life and Health Insurance Guaranty Association. Id., § 991.1701. If a member insurance company becomes insolvent, the Guaranty Association uses its funds to continue coverage and pay claims.

The assessments exist in the nature of advances or loans by the solvent insurers, which they are authorized to recover in one of two ways -- by adjusting premiums, or through a tax credit. Id., §§ 991.1707(g), 991.1711(a). The tax credit is only available for that portion of the assessment related to policies with fixed premiums that cannot be increased. Id., § 991.1711(b). That is, if the assessment can be recouped by increasing premiums on the policies for which the assessment is attributable, no tax credit is allowed -- conversely, if increasing premiums is not possible, tax credit is the only means of recovering the assessment. The tax credit option is designed to allow the insurer to fully recoup the assessment at a rate of 20% per year over a five-year period following the assessment year. Id., § 991.1711(a). The portion of each assessment eligible for tax credit is established by multiplying the assessment by the "proportionate part factor," a ratio representing that portion of that assessment which is attributable to guaranteed premium policies. Id., § 991.1711(b).

In 1993, Allstate Life Insurance Company filed an Annuity Considerations Tax Report reflecting a tax liability of $486,124; Allstate claimed a tax credit of $319,553 against this amount based on prior years' assessments attributable to annuities. The Pennsylvania Department of Revenue accepted the tax liability as reported, but allowed no tax credit for annuity assessments; it reduced the tax credit to $29,207.74. Allstate filed a petition for resettlement with the Board of Appeals, which increased Allstate's tax credit to $389,148.72. This amount reflected 20% of 1991 and 1992's life insurance assessments statutorily reduced by a proportionate part factor, as well as 20% of the 1991 annuity assessments, unreduced by the proportionate part factor because annuity assessments maintain a fixed premium. The Appeal Board reduced the tax credit for the 1992 annuity assessments by a factor consisting of taxable annuities over total annuities; the factor did not consider the portion of annuities attributable to guaranteed premium policies.

Allstate contested the Appeal Board's disallowance of the tax credit for the 1992 non-taxable annuity assessment to the Board of Finance and Revenue, which found a tax credit should be permitted regarding the 1991 guaranteed premium life and annuity assessments, as well as the 1992 guaranteed premium life assessments. However, the Board of Finance limited the tax credit for 1992 annuity assessments to only those involving taxable annuities, and decreased Allstate's tax credit from $389,148.72 to $380,352.90. Allstate appealed to the Commonwealth Court, contesting the Board's disallowance of the tax credit for the 1992 assessments related to non-taxable annuities.

The Commonwealth Court vacated the Board of Finance's order and remanded the matter for recalculation of Allstate's tax credit. The court, in establishing a method for calculating the tax credit, found the proportionate part factor denominator should be calculated separately for each type of insurance product, and annuities should be included in the factor numerator. Allstate Life Ins. Co. v. Commonwealth, 992 A.2d 910, 921-22 (Pa. Cmwlth. 2010) (Allstate I). The Department filed exceptions to this holding, which the court overruled, finding its interpretation of the Act was ...

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