Illinois Clarifies Treatment of Corporate Income Refunds in the Calculation of Retaliatory Tax

By on May 1, 2014

Illinois is one of a small number of states that impose both an income tax and a premium tax on insurance companies.  Disputes have arisen between insurers and the Illinois Department of Insurance (Department) regarding the proper treatment of income tax refunds in the calculation of retaliatory tax.  The dispute typically concerns whether an income tax refund should be included in the Illinois Basis of an insurer’s retaliatory tax computation for the year in which the income tax refund is paid or in the Illinois Basis for retaliatory tax computation for the tax year to which the refund relates.  The Department has taken the position that the income tax refund must be applied to Illinois Basis for the year in which the refund is paid, based on language of a Departmental regulation (50 Ill. Adm. Code Sec. 2515.50(b)) providing that Illinois Basis used to compute retaliatory tax must include “the amount of Illinois corporate and replacement income tax paid, decreased by the amount, if any, of any corporate and/or income replacement tax cash refund received in the same calendar year if that cash refund has been considered part of the Illinois corporate and replacement income tax paid in the calculation of the annual retaliatory tax in a preceding year.” (50 Ill. Adm. Code Sec. 2515.50(b)(5)) (emphasis added).

On March 3, 2014, the Illinois Appellate Court for the Fourth District issued an unpublished ruling in which it found that 50 Ill. Admin. Code Sec. 2515.50(b) was invalid because it conflicted with the state’s mandate that the retaliatory tax include corporate income tax imposed, not paid, in a particular year.  The opinion authorized the taxpayers who challenged the Department’s interpretation to calculate their retaliatory tax by applying their corporate income tax refund to the tax year to which the refund related, regardless of the year in which it was paid.

In its opinion, the appellate court twice noted that if the Department’s interpretation had been upheld, the taxpayers would have been required to pay more retaliatory taxes than they would have originally owed simply because they initially overpaid their corporate income tax.  This point of equity appears to have been a strong supporting factor for the appellate court in its decision to invalidate the regulation.  United States Liability Ins. Co., et al v. The Department of Insurance, 2014 IL App. (4th) 121125-U (March 3, 2014) (Opinion issued pursuant to Illinois Supreme Court Rule 23).

Mary Kay McCalla Martire
Mary Kay McCalla Martire focuses her practice on state and local tax disputes. She helps clients with audits, tax-related litigation, letter rulings and settlement conferences. Mary Kay has experience resolving disputes involving income, sales and use, utility and telecommunications taxes, as well as premium and retaliatory tax. Read Mary Kay McCalla Martire's full bio.

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