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Increase In Value of Insurance Policies From Interest, Dividends Is Not Tax-Deferred ‘Appreciation’
2005-1562, 2005-1563, 2005-1564, 2005-1565, and 2005-1566. Natl. City Bank v. Wilkins, 2006-Ohio-6110.
Board of Tax Appeals, Nos. 2003-A-1326, 2003-A-1327, 2003-A-1328, 2003-A-1329, and 2003-A-1330. Decision affirmed.
Moyer, C.J., Resnick, Pfeifer, Lundberg Stratton, O'Connor and O'Donnell, JJ., concur.
Lanzinger, J., dissents.
Opinion: http://www.supremecourtofohio.gov/rod/newpdf/0/2006/2006-Ohio-6110.pdf
(Dec. 6, 2006) The Supreme Court of Ohio ruled today that, under a former provision of state law, when a bank calculated its taxable net worth for corporate franchise tax purposes, it was required to include annual increases in the cash surrender value of bank-owned life insurance policies that resulted from reinvested interest and dividends.
In a 6-1 decision written by Justice Terrence O'Donnell, the Court affirmed rulings by the state tax commissioner and Board of Tax Appeals (BTA) that five subsidiaries of National City Bank were not entitled to partial refunds of their corporate franchise taxes from 1994 through 1998.
The banks filed for refunds based on claims that they had overstated their net worth for the tax years in question by including in their returns annual increases in the cash surrender value of bank-owned whole life insurance policies that resulted from reinvestment of interest and dividends. They argued that under state tax laws in force during the disputed period, a year-to-year increase in the surrender value of a bank-owned life insurance (BOLI) policy was entitled to be treated as tax-deferred “appreciation” of a corporate asset that need not be included in the banks' stated net worth for franchise tax purposes until the bank actually “realized” the increase in value by collecting a death benefit or cashing in the policy.
Both the tax commissioner and the BTA denied the banks' refund petitions. In today's decision, the Supreme Court affirmed those holdings.
“As stated by the BTA in its decision, the cash-surrender-value aspect of a BOLI policy ‘is, in effect, an investment device,'” wrote Justice O'Donnell. “When the bank's investment in its insurance policies generated interest or dividends, it asked the carriers to add those payments to the cash value of its policies, thereby adding to the base amount on which the next interest or dividend payment would be calculated. The cash surrender value did not appreciate; instead, it grew larger solely because additional interest or dividend payments were added to it over time.”
The Court agreed with the BTA's determination that: “Because the cash surrender value of the BOLI policies did not increase separately from the reinvested interest and dividend payments, that value did not appreciate, and National City is not entitled to treat those payments as appreciation pursuant to R.C. 5733.056(B) and former R.C. 5733.05(A)(4) as it existed for the years in question. The conclusion of the BTA that the full cash surrender value of National City's life-insurance policies – including any periodic increases in those values resulting from interest and dividend payments – should have been counted by the bank as part of its book value for corporate franchise-tax purposes during the tax years in question is both reasonable and lawful, and we therefore affirm that decision.”
The majority decision was joined by Chief Justice Thomas J. Moyer and Justices Alice Robie Resnick, Paul E. Pfeifer, Evelyn Lundberg Stratton and Maureen O'Connor. Justice Judith Ann Lanzinger dissented.
Contacts
Raymond D. Anderson, 614.464.6447, for
National City Bank.
Robert C. Maier, 614.466.5967, for the State Tax Commissioner.
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