Court Opinion

ID: 9919245
Source: CourtListenerOpinion
Date Created: 2024-01-17 19:02:45.300907+00
Date Added: 2024-06-11T08:06:33.785542
License: Public Domain

FIRST DISTRICT COURT OF APPEAL
                 STATE OF FLORIDA
                  _____________________________

                         No. 1D2021-2793
                  _____________________________

STATE FARM MUTUAL
AUTOMOBILE INSURANCE
COMPANY, et al.,

    Appellants,

    v.

FLORIDA DEPARTMENT OF
REVENUE,

    Appellee.
                  _____________________________

On appeal from the Circuit Court for Leon County.
Angela C. Dempsey, Judge.

                         January 17, 2024

TANENBAUM, J.

     In this appeal, we must address the meaning of a phrase in
Florida’s corporate income tax (“CIT”) code (chapter 220, Florida
Statutes), “excluded from taxable income.” A warning to the
reader: This opinion contains discussion of some dense tax-code
material. Equal doses of patience and attention will be required.

    We begin with the Legislature’s imposition of the CIT. It
imposes tax on the “net income” of corporations that conduct
business or reside in Florida. § 220.11, Fla. Stat. (“A tax measured
by net income is hereby imposed on every taxpayer for each taxable
year . . . .”); see § 220.03(1)(z), Fla. Stat. (defining “taxpayer” in
terms limited to a corporation). 1 “Net income” is based off the
corporation’s “adjusted federal income.” § 220.12, Fla. Stat. The
terminology used by the Legislature to direct the calculation of
“adjusted federal income” is at the heart of this appeal. See
§ 220.13, Fla. Stat. (“‘Adjusted federal income’ defined.–”).

     Our appellants here—State Farm Mutual Automobile
Insurance Company and several of its subsidiaries—received
notice from the Department of Revenue as a result of an audit that
it owed back corporate income taxes and accrued interest for tax
years 2011, 2012, and 2013. The notice indicated a proposed
assessment of $2,677,476.13—$2,099,226.00 in taxes, and
$668,250.13 in interest. According to the department, State Farm
did not correctly calculate its income subject to Florida’s corporate
income tax: It failed to include in its adjusted federal income the
full amount of tax-exempt interest earned from state and local
bonds, as required by section 220.13(1)(a)2., Florida Statutes.
State Farm paid the assessed amount and interest under protest
to avoid interest continuing to accrue. It then sued in circuit court
to contest the legality of that assessment in full. See § 72.011(1)(a),
Fla. Stat. (2018). (authorizing taxpayer suit in circuit court to
“contest the legality of any assessment or denial of refund of tax,
fee, surcharge, permit, interest or penalty”).

    Under section 220.13, an insurance company’s “adjusted
federal income” is its “insurance company taxable income” that is
subject to tax under IRC § 831(a), 2 adjusted by adding and
subtracting specified items. § 220.13(1), (2)(c), Fla. Stat. An
addition in this space, of course, increases the insurance company’s
income subject to the state CIT compared to the income subject to
federal CIT, which means its tax bill will be higher. One such
addition is the “amount of interest which is excluded from taxable

    1 References to Florida Statutes are to the 2011 edition unless

otherwise indicated.
    2 “IRC” refers to the Internal Revenue Code, found at title 26

of the United States Code.

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income under s. 103(a) of the Internal Revenue Code or any other
federal law.” § 220.13(1)(a)2., Fla. Stat. (emphasis supplied). 3

     Subchapter L of the IRC (sections 801 et seq.), meanwhile,
governs taxation of insurance companies. 4 Within subchapter L,
IRC section 831 imposes tax on the taxable income of property and
casualty (“P&C”) insurance companies like State Farm (i.e.,
insurance companies other than life insurance companies). For
State Farm, then, its federal “taxable income” is its gross income
less allowed deductions. One of the deductions allowed to an
insurance company is the interest earned from the state and local
bonds that the IRC makes tax exempt: “the amount of interest
earned during the taxable year which under section 103 is
excluded from gross income.” IRC § 832(c)(7) (emphasis supplied).

     Pertinent here, the IRC defines a P&C insurance company’s
gross income to include the gross amount earned from both
“investment income” and “underwriting income.” IRC
§ 832(b)(1)(A). Investment income for an insurance company
includes “interest, dividends, and rents.” Id. (2) (emphasis
supplied). Underwriting income is the insurance company’s earned
premiums minus “losses incurred and expenses incurred.” Id. (3).
The dispute between State Farm and the department centers on
the scope of the application of this provision addressing “losses
incurred” vis-à-vis section 220.13(1)(a)2., Florida Statutes. The
department premised its assessment on reading the latter
provision to require an add-back of all tax-exempt, state-and-local-
bond interest income deductible under the former provision. In
other words, the department reads “excluded” in section
220.13(1)(a)2. to mean amounts either expressly not included in
gross income on the front end of a calculation of net or taxable
income, or subtracted from gross income as an expressly identified
deduction on the back end of that calculation.

     State Farm takes a different approach. It notes that when it
calculated its “losses incurred” under IRC section 832—an amount

    3 IRC § 103(a) provides that “gross income does not include

interest on any State or local bond.”
    4 See IRC § 11(c)(2).

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that separately is expressly deductible and serves to reduce the
amount of its underwriting income 5—it had to reduce the amount
of its losses “by an amount equal to 15 percent of the sum of [] tax-
exempt interest,” deductions for certain “dividends,” and “the
increase for the taxable year in policy cash values [] of life
insurance policies and [specified] annuity and endowment
contracts.” IRC § 832(b)(5)(B). As State Farm views the applicable
statutory provisions, because it had to subtract from its losses
(thereby increasing its income) an amount equivalent to fifteen
percent of the state-and-local, tax-exempt interest—among other
amounts—it effectively paid federal tax on that amount, so even
though that interest otherwise was fully deductible from its gross
income, in application the interest was not fully “excluded” from
its gross income. This is the theory it advanced in its suit in the
circuit court. Both State Farm and the department filed summary
judgment motions, each side asserting its respective legal position.
The circuit court agreed with the department and rendered
judgment in its favor and against State Farm. State Farm takes
the same legal position on appeal and argues for reversal. We
disagree with State Farm and affirm.

     The circuit court’s judgment was based purely on an
interpretation of section 220.13(1)(a)2., which we review here de
novo. In its analysis, the circuit court rejected State Farm’s
argument that “excluded from taxable income,” as the phrase is
used in subparagraph two, is broad enough to reference amounts
added to or subtracted from components of gross income or of a
deduction that have the effect of reducing the federal tax bill once
all the calculations are complete. State Farm does not walk
through a textual treatment of the applicable law; instead, it relies
on an in-effect analysis. It goes to great lengths to demonstrate
that all of its tax-exempt interest could not have been excluded
because fifteen percent of the amount of that interest was applied
to reduce the amount of its losses and increase its federal tax bill.
This approach is inconsistent with the specific wording of
subparagraph two.

    5 IRC § 832(b)(3), (b)(5), (c)(4).

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     Our analysis here is aided by a definitional rule provided by
the Legislature: A term used in chapter 220 has “the same
meaning as when used in a comparable context in the Internal
Revenue Code and other statutes of the United States relating to
federal income taxes.” § 220.03(2)(b), (c), Fla. Stat. Section
220.13(1)(a)2. uses the verb “excluded,” as modified by the
prepositional phrase “from taxable income.” We find the use of the
“excluded from” verb-preposition combination “in a comparable
context” in the IRC—section 61, which uses the term “excluded
from gross income” to refer to excepting from the totaling of “all
income from whatever source derived” in determining “gross
income.” IRC § 61(a); id. (b) (cross-referencing part III (sections
101 et seq.) of subchapter B (“Computation of Taxable Income”) for
“items specifically excluded from gross income” (emphasis
supplied)). Part III then identifies a variety of items that “gross
income does not include.” See, e.g., IRC §§ 101(a) (death benefits),
102 (gifts and inheritances), 103 (state and local bond interest).
“Excluded from,” as used in the context of this part of the IRC,
must mean “omitted from the sum.” When this term is applied to
the sum of “gross income,” it becomes a straightforward
calculation: When adding up all a corporation’s income from every
source, do not include in the sum any item listed as being
“excluded.” The key here is that “excluded from” refers to omission
of a specified item from the summing of a list of non-excluded
items, and not to the effect some other calculation might have on
that sum to reduce it.

     This use of “excluded from” gets us most of the way home, but
not quite. The object of the preposition “from” as it is used in
section 220.13(1)(a)2. is “taxable income” rather than “gross
income.” In section 220.13, “taxable income” refers to “insurance
company taxable income” when looking at “an insurance company
subject to the tax imposed by s. 831(a) of the [IRC],” which State
Farm is. The IRC provides that “insurance company taxable
income” is gross income minus allowable deductions. IRC § 832(a).
In this context, then, calculating “taxable income” involves
subtracting specified items from the sum constituting gross
income, which is similar to omitting items from those being
summed to calculate gross income. In turn, the reference in section
220.13(1)(a)2. to “excluded from taxable income” must address
items that are not included in (or omitted from) the sum of gross

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income and those items specifically subtracted from that sum to
determine “taxable income.” It is not a reference to whether the
treatment of a particular item in combination with other
calculations has the effect of increasing the net sum from where it
might be had the item not been treated in a specified way.

     It is in IRC section 832(c) that we find listed, among several
deductions, two that are relevant here. One deduction is “the
amount of interest earned during the taxable year which under
section 103 is excluded from gross income”—interest from state
and local bonds. Id. (7). Under our application of “excluded from
taxable income,” this deduction counts. Even though the interest
is not omitted from the sum of items that together constitute gross
income (i.e., the interest is included in that sum), it is removed by
deduction from the sum that ends up being taxable income.

     The other deduction is “losses incurred, as defined in
subsection (b)(5) of this section.” Id. (5). Applying the same
“excluded from taxable income” logic here, “losses incurred” is a
number calculated under subsection (b)(5) that then is removed
from the sum that becomes taxable income. Under IRC section
832(b)(5), the deduction that is the “losses incurred” sum is
reduced by a percentage of a sum that includes the otherwise
exempt interest. Id. (B). The “losses incurred” deduction then
becomes lower by operation of this subparagraph (B). See IRC §
832(b)(5)(B) (“Reduction of deduction”). That reduction, however,
has no effect on the removal of the state-and-local-bond interest
from the taxable interest total. In other words, the amount of state-
and-local-bond interest serves as an addend in the formula for
reducing the amount of the “losses incurred” deduction, but that
service is not the equivalent of diminution in the amount of the
separate omission by deduction of the interest amount from the
taxable income total. The interest deduction stands on its own, and
the total amount of that interest calculated as the deduction under
IRC section 832(c)(7) is the amount excluded from taxable income
for the purpose of section 220.13(1)(a)2., regardless of whether the
same total amount of interest is used in some other calculation.

    To be sure, the analysis would be different had the Legislature
specified that the “excluded” amount to be added back to taxable
income under section 220.13(1)(a)2. is reduced by “an amount

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equal to” the “portion” of the interest included in the formula that
serves either to “reduce” the losses-incurred deduction or to
“reduce federal taxable income for the taxable year.” Indeed, the
Legislature has used these quoted terms in its description of other
adjustments in section 220.13(1), meaning the Legislature knows
how to use these terms for specificity where appropriate. See id.
(1)(a)3., 4., 5., 7., 8., 10., (e)1.a., b., c.2., 3., 5.a. (“amount equal to”);
id. (1)(a)4., 5., 7., 13. (“portion”); id. (1)(a)14. (“reduce federal
taxable income for the taxable year”). It did not use any of these
terms with regard to the state-and-local bond interest. Instead, it
simply requires that the total amount (with some adjustments not
relevant here) of state-and-local-bond interest excluded from the
insurance company’s taxable income—by express omission or
deduction from gross income—is to be added back into that taxable
income to calculate “adjusted federal income” subject to the State’s
CIT.

     The department, then, lawfully assessed State Farm for the
fifteen percent of the state-and-local-bond interest utilized in its
“losses incurred” calculation that it subtracted from the add-back
of “excluded” interest required under section 220.13(1)(a)2. The
circuit court’s reading of section 220.13(1)(a)2. in support of its
judgment in favor of the department is consistent with the reading
of that statute as we have explained here. We, in turn, find no legal
error in the judgment on review.

     AFFIRMED.

LEWIS and M.K. THOMAS, JJ., concur. 6

     6  Judge Lewis substituted for Judge Jay, who was
recommissioned as a judge of the District Court of Appeal, Fifth
District. Judge Lewis has viewed the video recording of the oral
argument held in this case.

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                _____________________________

    Not final until disposition of any timely and
    authorized motion under Fla. R. App. P. 9.330 or
    9.331.
               _____________________________

Kevin W. Cox and Tiffany Roddenberry of Holland & Knight, LLP,
Tallahassee, for Appellants.

J. Clifton Cox, Special Counsel, Office of the Attorney General,
Tallahassee, for Appellee.

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