In the Matter of the Application of The Prudential Insurance Co. of America, Petitioner, For Judgment Pursuant to Article 78 of the Civil Practice Law and Rules,
James J. Wrynn, in his official capacity as Superintendent of Insurance, Respondent.
PETER H. MOULTON, J.
Petitioner Prudential Insurance Company of America ("Prudential") brings this proceeding to annul respondent's determination, dated November 18, 2010, denying it a refund and credit for retaliatory taxes. Petitioner maintains that the determination was affected by error of law, is arbitrary and capricious, and is an abuse of discretion. Respondent opposes the petition. 
The central issue in this proceeding is the interpretation of Tax Law § 1511 (b) and Insurance Law § 9109, as those statutes relate to retaliatory taxes. Retaliatory taxation is designed to keep other states from discriminating against companies domestic to the forum (see 19bf-367 Appleman on Insurance 1st § 10929). Under a retaliatory tax scheme, if State "A" imposes a higher tax burden on companies doing business in State A, but based in other states, thereby favoring its own domestic companies, then State B may use a retaliatory tax to impose an equal tax burden on State A's companies when they do business in State B.
It is undisputed that New York State's retaliatory taxes(which are imposed pursuant to Insurance Law § 1112) may be offset by the amounts paid for franchise taxes, for the same tax year (see United Servs. Auto. Assn. v Curiale, 88 N.Y.2d 306');">88 N.Y.2d 306  [insurer was entitled to offset the amount it owed in retaliatory taxes for the tax year 1987, by the amount it paid in franchise taxes for the tax year 1987]). Here, petitioner seeks a credit of retaliatory taxes for the tax year 2003, an offset for the retaliatory taxes due and unpaid, for the tax year 2007, with a carryover for future years. However, petitioner seeks this relief as the result of a 2006 payment of additional franchise taxes for the tax year 1995, which does not correspond directly to the years for which the credit and offsets are sought.
Petitioner is a New Jersey corporation doing business in New York (Pet ¶ 2). All out of state insurers doing business in New York must pay a retaliatory tax, which is intended to pressure other states to maintain low taxes for New York based insurance companies that operate in foreign states (see Western & S. Life Ins. Co. v Bd. of Equalization, 451 U.S. 648, 669-70 ).
In 2006, Prudential recalculated the amount it owed to the Department of Taxation and Finance ("DFT") for franchise taxes, for the tax year 1995, and paid DFT $8, 351, 720, plus $9, 231, 058 in interest, for a total of $17, 582, 778 (Pet ¶ 11). The recalculation was prompted by an Internal Revenue Service ("IRS") audit of the insurer's federal income tax liability, for the tax years 1997-2001 (id. ¶ 12). As a result of petitioner's overstatement of its federal net operating loss ("NOL") deductions for 1997-2001, a portion of petitioner's NOL for those tax years was disallowed (id.).  This, in turn, affected the amount of franchise taxes Prudential owed to DFT for the tax year 1995, because the federal NOL is used in calculating state franchise tax liability, and because petitioner originally carried the NOL deductions, as permitted by law, back to the tax year 1995 (id.).
After Prudential's 2006 payment of $17, 582, 778, it applied for a refund or credit of retaliatory taxes (id. ¶ 13). Specifically, petitioner sought a refund of retaliatory taxes for the tax year 2003, of $2, 935, 493, and cancellation of an assessment of retaliatory taxes for the tax year 2007, of $4, 266, 551 (id. ¶ 8, 10). Respondent's counsel issued a legal opinion, dated November 2, 2010, concluding that Prudential was not entitled to a refund or credit and, respondent issued a denial by letter, dated November 18, 2010 (id. ¶ 14-15).
The retaliatory tax scheme
The superintendent of the New York State Insurance Department (the "Insurance Department") is responsible for assessing and collecting retaliatory taxes imposed on foreign insurers (see United Servs. Auto Assn., 88 N.Y.2d at 309). In assessing the amount of retaliatory taxes owed, the foreign insurer is generally entitled to a credit for the amount of article 33 franchise taxes that it pays to New York (id.). This credit operates to "equalize the total taxes paid by the foreign insurer to New York—the article 33 franchise taxes plus the retaliatory tax—with the total amount of taxes that would be imposed on a comparable New York insurer doing business in the foreign State" (id.).
Two calculations are performed to determine whether a retaliatory tax is owed. As explained by the Court of Appeals, in United Servs. Auto. Assn.:
The first calculation is the total amount of taxes, aside from any potential retaliatory tax, that New York imposes on the foreign insurer for the privilege of conducting an insurance business within its borders. The second calculation is the total amount of taxes that the foreign insurer's State of domicile would impose on a comparable New York insurer for the privilege of doing business in the foreign State. If the foreign State's hypothetical tax bill is higher than New York's actual tax bill, New York adopts the foreign State's greater tax burden as its own and imposes it on the foreign insurer.
(United Servs. Auto. Assn., 88 N.Y.2d at 308-09).
The relevant statute
Prudential maintains that Tax Law § 1511 (b), which is part of article 33's "Franchise Taxes on Insurance Corporations" supports the verified petition. ...