State Bar of Wisconsin Return to wisbar.org Wisconsin Tax Appeals Commission


[WP]

STATE OF WISCONSIN

TAX APPEALS COMMISSION


GENERAL CASUALTY COMPANY OF

WISCONSIN and

REGENT INSURANCE COMPANY

One General Drive

Sun Prairie, WI 53596

Petitioners,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8907

Madison, WI 53708

Respondent.

DOCKET NO. 99-I-188

and DOCKET NO. 99-I-187

DECISION AND ORDER


THOMAS M. BOYKOFF, COMMISSIONER:

These matters were submitted to the Commission on stipulated facts, related exhibits, and briefs of the parties.

The petitioners, General Casualty Company of Wisconsin ("General Casualty") and Regent Insurance Company ("Regent") are represented by Attorneys James D. Peterson and Robert E. Chritton of LaFollette, Godfrey & Kahn, of Madison, Wisconsin. The respondent, Wisconsin Department of Revenue ("Department") is represented by Attorney Sheree Robertson, of Madison, Wisconsin.

Based on the stipulated facts, related exhibits, and briefs of the parties, the Commission finds, concludes, and orders as follows:

STIPULATED FINDINGS OF FACT

For its Findings of Fact, the Commission adopts and summarizes the following facts as stipulated by the parties, omitting references to exhibits and making some non-substantive changes.

Facts Relating to General Casualty Company of Wisconsin

1. General Casualty is a corporation organized and existing under the laws of the State of Wisconsin. Its principal place of business and domicile are currently located in Sun Prairie, Wisconsin, as they were from May 1, 1990 through December 31, 1995 (the "audit period").

2. In 1990, Winterthur U.S. Holdings, Inc. ("Winterthur"), acquired the stock of General Casualty.

3. On February 4, 1997, Winterthur entered into a Settlement Agreement with the Internal Revenue Service ("IRS") with respect to the amortizable life of intangible assets held by General Casualty.

4. Winterthur had elected, under Internal Revenue Code ("IRC") § 338, to treat the General Casualty stock acquisition as an asset acquisition. Certain intangible assets were included in this asset acquisition, and some of these intangible assets were attributed to General Casualty, which then amortized the intangible assets over various time periods ranging from one to seven years, based on the law in effect prior to enactment of IRC § 197 in 1991.

5. The Settlement Agreement required General Casualty to amortize the intangible assets over 15 years, the amortization period allowed under IRC § 197. The use of the 15-year amortization period created additional federal taxable income for General Casualty during the audit period. This additional federal taxable income, and other adjustments by the Department, increased General Casualty's Wisconsin franchise tax liability for the tax years included in the audit period.

6. By a Notice of Field Audit Action dated August 1, 1997, the Department adjusted General Casualty's franchise tax liability for the audit period. The total assessment was $7,396,190.83, consisting of $4,566,353.49 in franchise tax, $2,382,016.13 in interest, $251,823.62 in interest for the underpayment of estimated taxes, and $195,997.59 for interest on the under-payment interest.

7. By letter dated August 8, 1997, General Casualty sent a check to the Department for $6,873,306.12 in settlement of the assessed franchise taxes and related interest, except for the interest on the under-payment of estimated taxes and the interest on this underpayment interest. This check was received by the Department and credited to General Casualty's tax and interest liability on August 13, 1997.

8. By filing a timely petition for redetermination dated August 8, 1997, General Casualty objected to the assessment of the under-payment interest and interest on the underpayment interest. For reasons unrelated to this appeal, General Casualty and the Department agreed to extensions of the period for the Department to act on the petition for redetermination.

9. By Notice of Action dated August 6, 1999, and received by General Casualty on August 10, 1999, the Department denied General Casualty's petition for redetermination and issued a Notice of Amount Due for $534,650.08, payable on or before October 6, 1999.

10. General Casualty deposited $534,650.08 with the Department on October 5, 1999, to be held pending resolution of this appeal, pursuant to the procedure in Wis. Stat. § 71.90. On October 7, 1999, the State Treasurer accepted the deposit on authorization of the Department and issued Receipt No. CK010000002, dated that same date.

11. General Casualty filed a timely appeal to the Commission.

12. By letter dated February 18, 2000, the Department notified General Casualty that interest due for the period from August 13, 1997 to October 6, 1999 was $98,136.55, not $89,787.18 as indicated in the original assessment.

13. General Casualty filed a request with the Department to extend the deadline for filing its insurance franchise tax return for 1993. The extended deadline was September 15, 1994, and General Casualty had 30 days from that date to file its Wisconsin return. General Casualty's 1993 return is dated September 29, 1994, and the Department received it on October 4, 1994.

14. General Casualty did not pay 90% of the tax shown on its 1993 franchise tax return by March 15, 1994. At the time it filed its 1993 return, General Casualty paid the remaining tax due as shown on the return, along with underpayment interest, delinquent interest on the underpayment amounts, and delinquent interest on the underpayment interest.

Facts Relating to Regent Insurance Company

15. Regent is a corporation organized and existing under the laws of the State of Wisconsin. Its principal place of business and domicile are currently located in Sun Prairie, Wisconsin, as they were from May 1, 1990 through December 31, 1995 (the "audit period").

16. Regent is a wholly-owned subsidiary of General Casualty. In 1990, Winterthur acquired the stock of General Casualty, and Regent remained a subsidiary of General Casualty.

17. On February 4, 1997, Winterthur entered into a Settlement Agreement with the IRS with respect to the amortizable life of intangible assets held by Regent.

18. Winterthur had elected, under IRC § 338, to treat the General Casualty stock acquisition as an asset acquisition. Certain intangible assets were included in this asset acquisition, and some of these intangible assets were attributed to Regent, which then amortized the intangible assets over various time periods ranging from one to seven years, based on the law in effect prior to enactment of IRC § 197 in 1991.

19. The Settlement Agreement required Regent to amortize the intangible assets over 15 years, the amortization period allowed under IRC § 197. The use of the 15-year amortization period created additional federal taxable income for Regent during the audit period, which in turn increased Regent's Wisconsin franchise tax liability for the tax years included in the audit period.

20. By a Notice of Field Audit Action dated July 23, 1997, the Department adjusted Regent's franchise tax liability for the audit period. The total assessment was $1,967,650.43, consisting of $1,233,726.36 in franchise tax, $614,350.00 in interest, $68,824.76 in interest for the underpayment of estimated taxes, and $50,749.31 for interest on the underpayment interest.

21. By letter dated August 8, 1997, Regent sent a check to the Department for $1,827,795.86 in settlement of the assessed franchise tax and related interest, except for the interest on the underpayment of estimated taxes and the interest on this underpayment interest. This check was received by the Department and credited to Regent's tax and interest liability on August 13, 1997.

22. By filing a timely petition for redetermination dated August 8, 1997, Regent objected to the assessment of the underpayment interest and the interest on the underpayment interest. For reasons unrelated to this appeal, Regent and the Department agreed to extensions of the period for the Department to act on Regent's petition for redetermination.

23. By Notice of Action dated August 6, 1999, and received by Regent on August 10, 1999, the Department denied Regent's petition for redetermination and issued a Notice of Amount due for $112,577.51, payable on or before October 6, 1999.

24. Regent deposited $112,577.51 with the Department on October 5, 1999, to be held pending resolution of this appeal, pursuant to the procedure in Wis. Stat. § 71.90. On October 7, 1999, the State Treasurer accepted the deposit on authorization of the Department and issued Receipt No. CK010000003, dated that same date.

25. Regent filed a timely appeal to the Commission.

26. By letter dated February 18, 2000, the Department notified Regent that interest due for the period from August 13, 1997 to October 6, 1999 was $27,759.76, not $43,752.75 as in the original assessment.

27. Regent filed a request with the Department to extend the deadline for filing its insurance franchise tax return for 1993. The extended deadline was September 15, 1994, and Regent had 30 days from that date to file its Wisconsin return. Regent's 1993 return is dated September 29, 1994, and the Department received it on October 4, 1994.

28. Regent did not pay 90% of the tax shown on its 1993 insurance franchise tax return by March 15, 1994. At the time it filed its 1993 return, Regent paid the remaining tax due as shown on the return, along with underpayment interest, delinquent interest on the underpayment amount, and delinquent interest on the underpayment interest.

APPLICABLE WISCONSIN STATUTES

71.29 Payments of estimated taxes.

(1) DEFINITIONS. In this section:

(a) "Return" means a return that would show the tax properly due.

(b) "Tax shown on the return" and "tax for the taxable year" mean the net taxes imposed under s. 71.23(1) or (2) after reduction for credits against those taxes but before reduction for amounts paid as estimated tax under this section plus the surcharge imposed under s. 77.93 before reduction for amounts paid as estimated tax under this section for that surcharge.

* * *

71.84 Addition to the tax.

* * *

(2) CORPORATIONS.

(a) Except as provided in s. 71.29(7), in the case of any underpayment of estimated tax under s. 71.29 or 71.48 there shall be added to the aggregate tax for the taxable year interest at the rate of 12% per year on the amount of the underpayment for the period of the underpayment. For corporations, except as provided in par. (b), "period of the underpayment' means the time period from the due date of the instalment until either the 15th day of the 3rd month beginning after the end of the taxable year or the date of payment, whichever is earlier. If 90% of the tax shown on the return is not paid by the 15th day of the 3rd month following the close of the taxable year, the difference between that amount and the estimated taxes paid, along with any interest due, shall accrue delinquent interest under s. 71.91 (1)(a).

* * *

CONCLUSION OF LAW

Under Wis. Stat. § 71.84(2)(a), the Department correctly imposed delinquent interest on the regular interest assessed on the additional estimated taxes due in its assessment to each petitioner.

OPINION

After the Department audited petitioners, an assessment was issued to each. Each assessment had five components: (1) additional franchise taxes due; (2) interest (at 12%) on the franchise taxes from their original date due; (3) additional estimated tax payments due; (4) interest (at 12%) on the additional estimated taxes; and (5) delinquent interest (at 18%) on the under-payment interest.

Petitioners only appeal the fifth component (i.e., delinquent interest) of the assessments. This component is imposed by Wis. Stat. § 71.84(2)(a), sentence 3.

In applying a statute, we must first determine whether it is clear and unambiguous. The Wisconsin Supreme Court has recently stated in State ex rel. Cramer v. Court of Appeals, 236 Wis. 2d 473, 481 (2000) (citations omitted):

The process of statutory interpretation begins with the language of the statute. ... When a statute unambiguously expresses the intent of the legislature, we apply that meaning without resorting to extrinsic resources. ... If a statute is ambiguous, the reviewing court turns to the scope, history, context, and purpose of the statute. ...

During the audit period, each of petitioners' franchise tax returns was prepared on a calendar year basis. The tax returns' unextended due dates were March 15 from 1991 through 1996 for both petitioners. On each due date, petitioners had paid at least 90% of the tax stated on each return as filed, except for each petitioner's 1993 tax return. However, after the returns for each year in the audit period were adjusted by the audits, the income on each return was increased, and petitioners had not paid at least 90% of the tax due on those increased income amounts.

Petitioners argue that "the tax shown on the return" refers to the original tax on each return as filed. The Department asserts that this phrase means the franchise tax shown on the return as adjusted upward by the audits.

We hold that the Department's interpretation is based on the unambiguous language of § 71.84(2)(a) and § 71.29. Section 71.84(2)(a), sentence one, reads in part: " ... in the case of any underpayment of estimated tax under s. 71.29...." This language adopts § 71.29, titled "Payments of estimated taxes," in its entirety in applying § 71.84(2)(a). Section 71.29(1)(intro) and (a) provide: "In this section:" (a) "'Return' means a return that would show the tax properly due." This definition applies to the word "return" in the phrase "tax shown on the return" in § 71.84(2)(a).

Petitioners assert that applying the § 71.29(1)(a) definition of "return" adopts a "technical meaning of 'return'...." and rejects "the common-sense meaning of the delinquent interest provision...."(1) To the contrary, not adopting the § 71.29(1)(a) definition of "return" would ignore the initial sentence of § 71.84(2)(a) which adopts § 71.29 by cross-reference.

Petitioners also argue that the Department's application of the delinquent interest provisions of § 71.84(2)(a) deviates from the plain language of the statute. They assert that the phrase "90% of the tax shown on the return" refers to the tax shown on the originally filed tax return. This interpretation would lead to the absurd result that if, after an audit, the under-payment of taxes were increased, no interest (regular or delinquent) could be imposed on the underpayment of estimated taxes.

Petitioners additionally argue that the Department is ignoring "legislative intent"(2) and "is inconsistent with basic principles of Wisconsin's tax code."(3) Examining § 71.84(2)(a) in light of these assertions is unnecessary because we hold that the statutory language is not ambiguous.

Petitioners further argue that the Department's imposition of the delinquent interest here involved overcompensates the Department for the time value of the additional assessment. This is a policy argument. Even if the Commission agreed with it, we cannot change the meaning of the statute, as petitioners suggest.

IT IS ORDERED

That the Department's actions on petitioners' petitions for redetermination are affirmed.

Dated at Madison, Wisconsin, this 25th day of January, 2001.

WISCONSIN TAX APPEALS COMMISSION

_________________________________________

Mark E. Musolf, Chairperson

(Concurs)

Don M. Millis, Commissioner

__________________________________________

Thomas M. Boykoff, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

DON M. MILLIS, COMMISSIONER, CONCURRING:

I reluctantly concur in the result reached by the majority. My reluctance stems from the havoc that could result if respondent elects to enforce section 71.84(2) to the extent permitted by the language of that statute.

Petitioner correctly points out that respondent is inconsistent in its application of section 71.84(2). Respondent applied delinquent interest only to underpayment interest, not on the underpayment itself. If the view of the statute shared by respondent and the majority is correct, then respondent could have, or perhaps should have, assessed delinquent interest on the underpayment itself. Section 71.84(2) contains no distinction between an underpayment and underpayment interest.

It is not clear whether the failure to assess delinquent interest on the underpayment is the result of mistake, respondent's largesse, or respondent's calculation of the limits it may push the envelope. (Unfortunately respondent failed to address this point in its brief.) In any case, the potential result is unjust and could not have been reasonably contemplated by the legislature.

The problem is, however, that no matter how unjust the result, it is the product of the clear and unambiguous language of the statute. When the statute is clear and unambiguous, resort to rules of statutory construction is impermissible. State ex rel. Milwaukee County v. Wis. Council on Criminal Justice, 73 Wis. 2d 237, 241 (1976). This rule applies even if the result is unjust or inequitable. City of Kenosha v. Phillips, 142 Wis. 2d 549, 560 (1988).

If the Commission's result stands, I hope that the legislature will amend section 71.84(2) before respondent decides to push the envelope any farther.

Respectfully submitted,

Don M. Millis, Commissioner

February 28, 2001 Appealed to Dane County Circuit Court (011CV0553)

1 Petitioners' Initial Brief, p. 8.

2 Petitioners' Initial Brief, p. 10.

3 Petitioner's Initial Brief, p. 10.