Retaliatory Tax Statute Unambiguously Specifies that Income-Tax Component of Retaliatory Tax is Income Tax Accrued
In United States Liability Insurance Company v. Department of Insurance, after filing amended state income tax returns for tax years 1999 and 2000, plaintiffs collectively received a refund of approximately $8.6 million. On their 2004 retaliatory tax return, plaintiffs included approximately $1.9 million of the $8.6 million refund based on plaintiffs’ belief that the refund should be counted for the years in which they made overpayments-1999, 2000, and 2001. In October 2005, the Department of Insurance (“Department”) issued an invoice to one of the plaintiffs, United States Liability Insurance Company (“USLIC”), alleging USLIC owed additional privilege and retaliatory taxes for 2004. USLIC filed a protest challenging the Department’s proposed assessment and requesting a hearing on the matter. Specifically, USLIC argued it correctly reported the refund of Illinois income tax it received in 2004 because its share of the refund had to “be taken into account in 2004 only to the extent it was considered part of the ‘income tax paid’ that generated a privilege or retaliatory tax benefit for a year prior to 2004.” Alternatively, USLIC claimed that Section 444(3) of the Insurance Code required “that the amount of Illinois Income Tax imposed be taken into account on an incurred basis rather than a cash basis, so that no amount of the 1999-2000 Income Tax refund received in 2004 should have been taken into account in 2004.” In May 2011, plaintiffs filed a complaint for administrative review in the Sangamon County Circuit Court.
The court reviewed whether the targeted tender doctrine allows insurers to deselect themselves as targeted insurers following the settlement of the insured’s underlying lawsuit.
Under the Illinois Insurance Code, Section 444(3) can be read as stating the “penalties,” “fees,” “charges,” and “taxes” include the Illinois corporate income taxes that “accrued” or “became due” under subsections (a) to (d) of Section 201 of the Income Tax Act. The court rejected defendants’ contention that because Section 444(1) of the Insurance Code specifies a foreign corporation owes a retaliatory tax if the foreign state requires “the payment of penalties, fees, charges, or taxes” (emphasis added) (215 ILCS 5/444(1) (West 2010)) greater than those required under Illinois law, then the Department can use the time of payment, not the time of accrual, to calculate the Illinois income-tax component. Section 444(3) goes on to specify that the ” ‘penalties,’ ” ” ‘fees,’ ” ” ‘charges,’ ” and ” ‘taxes’ ” in section 443(1) include “income or personal property taxes imposed by other states or countries.” (Emphasis added.) 215 ILCS 5/444(3) (West 2010). Thus, the language used to specify the foreign income-tax component of the retaliatory tax mimics the language used to specify the Illinois income-tax component of the retaliatory tax. In other words, Section 444(3) does not define the foreign states’ income-tax component as the “income tax paid” but rather as the “income or personal property taxes imposed.” (Emphasis added.) 215 ILCS 5/444(3) (West 2010). Again, to “impose” is “to establish or apply by authority.”
The court found that the retaliatory tax statute unambiguously specifies that the income-tax component of the retaliatory tax is the income tax that accrued under Section 201(a) through (d) of the Income Tax Act, not the income tax paid. We now turn to whether the Department’s regulation is consistent with the statute.
U.S. Liab. Ins. Co. v. Dep’t of Ins., 2014 IL App (4th) 121125.
