Maryland Tax Court dismisses Macy’s captive $24m tax bill

The Maryland Tax Court has ruled that Leadville Insurance Company (Leadville), the wholly-owned captive insurer of Macy’s Retail Holding (MRH), the parent company of the Macy’s department store franchise, will be exempt from paying a $23.8 million tax bill.

In early 2019, in Comptroller Of The Treasury (Comptroller) v Leadville at the Maryland Court of Special Appeals found that Leadville was an unauthorised insurer as it was not licensed to conduct insurance in the state, and is therefore required to pay income tax on its revenues.

The court vacated the decision made by the Circuit Court for Anne Arundel County and remanded it back to the Tax Court.

The case was put forward to the Tax Court as the Court of Special Appeals did not address Title 4 of the Insurance Article.

The Court of Special Appeals held that Leadville, as an insurance company, does not hold – and is not required – a certification from the Maryland Insurance Commissioner and was an unauthorised insurance company and is regulated by Title 4 of the Insurance Article.

In 2010, during an audit of MRH by the comptroller, it was discovered that MRH had claimed deductions for substantial amounts of interest paid to Leadville.

In its review of Leadville’s business, the comptroller found a disparity between its premium receipts and its intercompany interest revenue.

The comptroller also found that the captive had 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.

At the Tax Court, the Comptroller argued that Leadville is subject to Maryland corporate income tax because Title 4 imposes a tax on insurance premiums, not insurance companies.

Leadville did not earn Maryland premiums during the tax years 1997 to 2003 but had substantial income related to non-premium-related investment income.

Leadville engaged in reinsurance transactions and “is not required to possess a certificate or authority”. As a reinsurer, Leadville income provided enough capital for Leadville to meet its “obligations in the event of a covered loss”.

The court also reviewed the legislative history provided by both parties and found no basis for the Comptroller’s position that the income of any unauthorised insurer is subjected to Maryland’s corporate income tax.

The court stated in their ruling that they were not persuaded by the Comptroller’s “dismissive interpretation of the plain meaning of Title 4 or Title 6 of the Insurance Article”.

Maryland Tax Court ruled on 13 July that Leadville was exempt from filing a Maryland corporate income tax return and paying Maryland corporate income tax for the tax years that were stated.