vs. ) CASE NO. 76-913
Respondent. )
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, K. N. Ayers, held a public hearing in the above styled case on July 13, 1976, in Jacksonville, Florida.
For Respondent: E. Wilson Crump II, Esquire
Assistant Attorney General Department of Legal Affairs Tax Division, Northwood Mall Tallahassee, Florida 32303
By Petition filed May 7, 1976, Gulf Life Insurance Company requested an administrative hearing to review the Department of Revenue's proposed assessment of additional income taxes for the years ending 12/31/72 and 12/31/73. The Petition alleges that there are no factual issues in dispute and the Department of Revenue joins in the request for the designation of a hearing officer from the Department of Administrative Hearings. At the hearing the parties stipulated to the following:
In 1972 Petitioner received $743,982 of income from state and municipal bonds.
On its federal income tax return the Petitioner allocated $471,229 of this amount to the policyholders' share as required by law and $272,753 to the company's share (Phase I). The Phase II figures were $359,669 and $384,313 respectively.
Respondent has added back the entire $743,982 for purposes of computing Petitioner's Florida taxable income. Petitioner added back the $272,753 (Phase
I) and $384,313 (Phase II).
For 1972 Petitioner accrued $350,000 of Florida taxes on its federal income tax return. In computing its deductions on its federal income tax return 36.6612 percent of this amount was deducted in the Phase I computation and 51.6564 percent in the Phase II computation.
Respondent has added back all of the Florida tax accrued in computing the Florida income tax owed by Petitioner. Petitioner's position is that only the company's percentages were deductible and only these amounts should be added back.
The amount of additional Florida income tax assessment proposed for 1972 by the Respondent over that paid by Petitioner is $21,234.
In 1973 Petitioner received $552,408 of income from state and municipal bonds.
On its federal income tax return Petitioner allocated $335,662 of this amount to policyholders' share as required by law and $216,786 to the company's share (Phase I). The Phase II figures were $248,789 and $303,619 respectively.
Respondent has added back the entire $552,408 for purposes of computing Petitioner's taxable income. Petitioner added back the $216,786 (Phase I) and
$303,619 (Phase II).
For 1973 Petitioner accrued $475,000 of Florida taxes on its federal income tax return. In computing its deductions on its federal income tax return 39.2438 percent of this amount was deductible in Phase I and 54.9628 percent in Phase II.
Respondent has added back all of the Florida tax accrued.
Petitioner's position is that only the company's percentages were deductible and only these amounts should be added back.
The amount of additional Florida income tax assessment proposed for 1973 by Respondent was $20,184.
It was further stipulated that the sole issues here involved are:
The computation of the amount of tax exempt interest which is excludable from taxable income under section 103(a) Internal Revenue Code for purposes of the Florida corporate income tax; and
The computation of the amount of Florida income tax accrued which is deductible for purposes of federal income tax and added back
for purposes of computing the Florida income tax.
CONCLUSIONS OF LAW
By virtue of statutory requirements enacted to protect the policyholders of life insurance companies, all income of such insurance companies is allocated between reserves for policyholders' benefits and the profits to the company. This may also be described as the policyholders' share and the company's share. That amount of the company's income allocated to the policyholders share is exempt from federal income tax by section 103(a) I.R.C.
Investment income is computed (for federal tax purposes) under Phase I, and this income is allocated between the policyholders share and the company's share.
The percentage to be applied is computed by a complicated formula whereby the total amount to be allocated to the reserve is divided by the total investment yield and the resulting percentage is used to allocate each item of investment income, including tax exempt interest, partly to policyholders and partly to the company. From the total amount allocated to the company the I.R.C. allows a deduction [under section 103(a)] of the company's share of tax exempt interest. The policyholders' share of tax exempt interest goes into the non-taxable reserve, the same as all other investment income.
Taxable income of life insurance companies by virtue of the reserve requirement is somewhat complicated. Petitioner must first compute its total investment income (Phase I). To this is added 50 percent of the amount by which its total income (i.e. investment income plus operating income) exceeds investment income. This is Phase II. The sum of Phase I and Phase II income constitutes the taxable income of Petitioner.
Accordingly for federal income tax purposes only that portion of its tax exempt income allocated to the company's share (for 1972, 36.6612 percent under Phase I and 51.6564 percent under Phase II) was deducted in computing the company's adjusted federal income upon which it was taxed. Similar treatment was given for the company's share of income for 1973.
Subsection 220.13(1)(a), F.S. defines adjusted federal income and provides in part:
"There shall be added to such taxable income:
The amount of income tax paid or accrued as a liability to this state which is deductible from gross income in the computation of taxable income for the taxable year;
The amount of interest which is excluded from taxable income under section 103(a) of the Internal Revenue Code or any other federal law, less the associated expenses disallowed in the computation of taxable income under
subsection 265(2) of the Internal Revenue Code. . ."
From the above it is clear that the only tax free interest which was excluded from Petitioner's taxable income was the amount of this tax exempt interest allocated to the company's share of the earnings, both under Phase I and Phase II.
Respondent contends that the words of the statute above quoted requires that all of the tax exempt investment income received by the Petitioner be added back whether this interest was excluded from Petitioner's adjusted federal income or not. Had the statute above quoted denominated this interest as "excludable" rather than "excluded" there would be more merit to this position.
Respondent acknowledges that the position it has taken with respect to adding back all tax exempt income received by Petitioner would result in Petitioner being taxed on income it never received as a part of the company's share of earnings on which its federal income tax was computed.
Furthermore, the expressed intent of the legislature in enacting the Corporate Income Tax Code in Chapter 220 F.S. was to simplify the determination of taxable income by using the same figures used in the federal income tax return of these corporations. Section 220.02 F.S.
Respondent's position that to allow insurance companies the privilege of adding back only that portion of tax exempt investment income that it actually deducted in computing its federal tax would create a situation for insurance companies different from other corporations leads to a non-sequitur. Other corporations add back only the amount of tax exempt investment income actually deducted in arriving at their adjusted federal income. The fact, if such it be, that all of such tax exempt interest received by other corporations is deducted in computing their adjusted federal income only serves to enforce the conclusion that the legislature intended only for all deductions taken to be added back.
With respect to the provisions of subsection 220.13(1)(a)1 above quoted the same considerations apply. Petitioner was allowed to deduct on its federal income tax return only that portion of its Florida income tax allocated to the company, viz. 36.6612 percent in Phase I and 55.6564 percent in Phase II. The statute clearly provides that there shall be added to adjusted federal income "the amount of income tax paid or accrued as a liability to the state under this code which is deductible from gross income in the computation of taxable income for the tax year." (Emphasis added). Since only the above noted percentages were deductible in computing Petitioner's taxable income, only that portion deducted should be added back and not the entire sum shown on the return.
From the foregoing it is concluded that only the tax exempt investment income allocated to the company's share in computing the adjusted federal income and the amount of the Florida income tax deductible by the company on its federal return should be added to the Petitioner's adjusted federal income to determine the income upon which the Florida income tax is computed. It is therefore,
RECOMMENDED that the additional assessments for the years 1972 and 1973 imposed by the Department of Revenue be withdrawn.
DONE and ENTERED this 28th day of July, 1976 in Tallahassee, Florida.
K. N. AYERS, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304
