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Ruling on Macy’s captive insurer’s tax liability vacated


The Court of Special Appeals in Maryland has vacated and remanded a decision awarding summary judgment in a case involving a $23.8 million tax, penalty and interest bill allegedly due to the state of Maryland from Macy’s Retail Holding Inc.’s captive insurer.

In 2010, the Maryland Comptroller for the Treasury audited a Macy’s affiliate and eventually assessed captive Leadville Insurance Co. for intercompany interest payments it received from Macy’s during the 1996-2003 tax years, according to the decision in Comptroller of the Treasury v. Leadville Ins. Co. published on Tuesday. Leadville, which is incorporated in Vermont, is a captive that provides insurance for Macy’s subsidiaries and affiliates, including Macy’s Retail Holdings Inc. and was licensed by the insurance commissioner in Vermont during the relevant time periods, but did not hold a certificate of authority from the Maryland Insurance Commissioner to engage in the insurance business in Maryland.

During the comptroller’s audit, it was discovered that Macy’s Retail Holdings had claimed deductions for substantial amounts of interest paid to Leadville, according to the ruling. The comptroller noted the disparity between Leadville’s premium receipts and its intercompany interest revenue. From 1996 to 2003, Leadville earned more than $2 billion in intercompany interest and $52 million in insurance revenue. In addition, Leadville paid premium receipts taxes in Vermont but paid no premium receipts tax or corporate tax in Maryland despite earning substantial revenue from interest payments apportioned to Maryland, so the comptroller made the $23.8 million assessment in response, according to the ruling.

On Dec. 14, 2010, the comptroller’s hearings and appeals section conducted an informal hearing, during which Leadville argued that it was an insurance company under Title 6 of the Insurance Article and, therefore, exempt from paying income tax, according to the ruling. But Leadville conceded that it had not paid any Maryland premium tax, had not held a license to carry on business in Maryland from the Maryland State Department of Assessments and Taxation, had not held a certificate of authority from the Maryland insurance commissioner, had not conducted or solicited any business activities in Maryland, did not have any agents in Maryland, had not derived any income from Maryland residents or entities attributable to insurance premiums and had not investigated any risks or claims in Maryland. The hearing officer concluded that the intercompany interest payments were taxable and the corporate tax exemption did not apply.

Leadville appealed the final determination to the Maryland Tax Court and moved for summary judgment, which the Tax Court granted on March 30, 2017, citing its 2015 decision in National Indemnity Co., Successor in Interest to Wesco Financial Ins. Co. v. Comptroller of the Treasury, in which it held that the plain language of the statute at issue, regulations and other published guidance provided that insurers similar to the petitioner in that case were not subject to Maryland income tax. Aside from its citation of National Indemnity, the Tax Court memorandum simply listed the comptroller’s assessment and Leadville’s argument that, as a Title 6 insurance company, it is exempt from income tax. The decision by the Tax Court was affirmed on appeal to the Circuit Court for Anne Arundel County, which the comptroller appealed.

The Court of Special Appeals considered three key questions: Did the Tax Court err in concluding that Leadville qualifies as an insurer under Title 6 of the Insurance Article, thereby exempt from corporate income tax, when it is not authorized to operate as an insurer in Maryland and receives no insurance premiums from any Maryland insured; is Leadville, an unauthorized insurer regulated by Title 4 of the Insurance Article, liable for corporate income tax, when it earns interest income from an affiliate operating in Maryland; and is Leadville liable for corporate income tax under Title 4 of the Insurance Article?

“The fact that (Leadville) is authorized to engage in reinsurance transactions and that it is not required to possess a certificate of authority are irrelevant to this Court’s determination of whether (Leadville) is an ‘authorized insurer’ under the Insurance Article,” the appeals court said in rejecting the captive’s arguments. “Simply put, an insurance company that does not possess a certificate of authority is ‘unauthorized.’ The fact that (Leadville) concedes that it possesses no such certificate makes this Court’s finding simple: (Leadville) is an unauthorized insurer.

The Tax Court erred in ruling that the exemption provided by Title 6 applies to Leadville, according to the appeals court.

“In this case, however, there is no indication that the Tax Court fully considered Appellee’s Title 4 tax implications,” the appeals court stated in response to the third question. “As the Tax Court acts as an administrative agency and is tasked with administering the tax statutes of the State of Maryland, it would be illogical for this Court to preemptively determine the implications of Title 4 without first allowing the Tax Court to do so. As such, we believe the best course of action is to vacate the decision of the circuit court and remand for the Tax Court to determine whether Title 4 provides an exception for (Leadville).”

“As a matter of company policy, Macy’s does not comment on ongoing litigation,” a company spokesman said in an email.



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