United American Insurance Company v. Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas and John Cornyn, Attorney General of the State of Texas

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-02-00722-CV

United American Insurance Company, Appellant

v.

Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas and Greg
Abbott, Attorney General of the State of Texas, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
NO. 99-06836, HONORABLE SUZANNE COVINGTON, JUDGE PRESIDING

OPINION

This case requires us to determine whether participation in a limited partnership that holds

mineral interests qualifies as Areal property, or any interest therein@ for the purpose of insurance premium tax

benefits conferred by article 4.11 of the Texas Insurance Code. Tex. Ins. Code Ann. art. 4.11, ' 4(a)(8)

(West Supp. 2003) (hereinafter article 4.11). United American Insurance Co. brought a declaratory

judgment action against the Texas Comptroller, Carole Keeton Strayhorn, and the Texas Attorney General,

Greg Abbott (collectively Athe comptroller@), seeking a determination that its interest in various limited

partnerships qualified for the tax benefits at issue. See Tex. Civ. Prac. & Rem. Code Ann. '' 37.001-.011

(West 1997); Tex. Tax Code Ann. '' 112.051-.060 (West 2002). The trial court granted summary

judgment to the comptroller, and we will affirm that determination.
 BACKGROUND

Texas law imposes a premium tax on all insurance companies. See Tex. Ins. Code Ann.

art. 4.11, ' 1 (West Supp. 2003). If a foreign insurance company maintains certain investments in Texas, it

may be entitled to a lower tax rate. See id. '' 5-5E. To determine this tax benefit, a foreign insurer must

demonstrate that it owns a certain ratio of Texas investments to investments in a comparison state.1 E.g.,

id. art. 4.11, ' 5B (1991 premium tax rate reduced from 2.3% to 1.85%, if Texas investments valued at

90% of comparison state investments, to 1.4% if Texas investments valued at more than 100% of

comparison state investments).2 The Texas investments germane to this appeal are corporate stocks and

bonds, id. art. 4.11, ' 4(a)(4), and Areal property, or any interest therein.@3 Id. art. 4.11, ' 4(a)(8).

1
The Acomparison state@ is the state other than Texas in which a carrier owns the largest
amount of similar investments to those qualified and enumerated in article 4.11, section 4. Tex. Ins. Code
Ann. art. 4.11, ' 2(b) (West Supp. 2003).
2
In 1989, in response to a lawsuit brought by out-of-state insurers, the legislature changed
the premium tax to phase out the allocation procedure and adopt a flat premium tax rate by 1995. See
generally Tex. Ins. Code Ann. art. 4.11, '' 5-5F (West Supp. 2003); see also House Research
Organization, Daily House Floor Reports, May 17, 1989, ' 1, HB 1954.
3
The full list includes: U.S. bonds, mortgage loans, state and municipal bonds, corporate

2
stocks and other obligations, deposits in financial institutions, policy loans, collateral loans, and real
property. Tex. Ins. Code Ann. art. 4.11, ' 4 (West Supp. 2003).

3
 This dispute requires us to determine whether certain assets qualify as Texas assets for the

purpose of calculating tax rates under article 4.11. United American is a Delaware insurance company with

principal offices in McKinney, Texas. United American owns participations in limited partnerships formed

to own and exploit Texas mineral resources. Although it is not clear from the record, it appears that these

partnerships primarily hold fractional interests in various oil and gas properties.4 On its premium tax returns

beginning in 1987, United American consistently listed these partnership interests as corporate stocks,

bonds, or other obligations, qualifying as Texas investments under article 4.11.

In 1999, the comptroller completed an audit of United American=s premium tax returns for

prior years beginning in 1990. See Tex. Ins. Code Ann. art. 4.05 (West Supp. 2003). The comptroller

determined that the limited partnership interests did not qualify as Texas investments under article 4.11.

4
In 1983, United American reported an investment of more than $4.5 million in AOil and
Gas Producing Properties.@ Those interests were reported as being held through a limited partnership
arrangement in 1984. In 1985, the mineral interests were turned over to a corporation, Torch Co., in which
United American held corporate stock. The corporation was dissolved and the mineral interests conveyed
to a Texas limited partnership in 1987. At all times relevant to this dispute, each of the properties at issue
was held in the form of a limited partnership in which United American was the limited partner.

One of the limited partnership agreements contained in the record indicates that the mineral
Aproperties@ to be held by the partnership included:

properties (or interests in properties) producing oil and gas in commercial quantities,
properties (or interests in properties) with shut-in wells capable of producing oil and
gas in commercial quantities or properties adjacent to such properties which are
acquired incidental to the acquisition of such properties. The term also includes well
machinery and equipment, gathering systems, transportation systems, storage facilities
or processing, and other installations or other equipment and property associated with
the production of oil or gas.

4
Accordingly, the comptroller assessed an additional $1,270,365.98 in premium taxes, interest, and penalty

for underpayments occurring between 1990 and 1995.5

5
As of 1995, the premium tax rate has been reduced to a flat rate, regardless of an insurance
company=s investments. See Tex. Ins. Code Ann. art. 4.11, ' 5F.

5
 United American appealed to the comptroller and paid the full amount under protest. After

the comptroller denied the appeal, United American sought a declaration that its limited partnership interests

should have been considered Texas assets for the purposes of article 4.11.6 The comptroller responded

that, because partnership interests do not constitute real property under Texas law generally, article 4.11

cannot, based on its plain language, be extended to include partnership interests in real property. The trial

court found that article 4.11 did not include limited partnership interests in mineral producing properties and

granted the comptroller=s traditional summary judgment motion. See Tex. R. Civ. P. 166a(c). This appeal

ensued.

DISCUSSION

We review the grant of a traditional motion for summary judgment de novo. The movant

has the burden to show that no genuine issue of material fact exists and that he is entitled to judgment as a

matter of law. American Tobacco Co. v. Grinnell, 951 S.W.2d 420, 425 (Tex. 1997) (citing Nixon v.

Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548-49 (Tex. 1985)); Tex. R. Civ. P. 166a(c). In this case, if

article 4.11 unambiguously prevents United American from counting its limited partnership interests as a

Texas investment, we will affirm. See Sharp v. Caterpillar, Inc., 932 S.W.2d 230, 234 (Tex.

App.CAustin 1996, no writ) (construction of tax statute on summary judgment is question of law).

6
United American also argues that certain summary judgment evidence offered by the comptroller
was improperly admitted and that its declaratory judgment action should not have been dismissed.

6
 In construing the scope of article 4.11, we are to ascertain the legislature=s intent in enacting

the statute and to effectuate that intent. See Union Bankers Ins. v. Shelton, 889 S.W.2d 278, 280 (Tex.

1994). Article 4.11 is a tax deduction statute. See State Bd. of Ins. v. Petroleum Cas. Co., 447 S.W.2d

666, 668 (Tex. 1969) (determining situs of U.S. treasury certificates for purposes of article 4.11=s

predecessor statute). Tax deductions are a matter of legislative discretion. See Upjohn Co. v. Rylander,

38 S.W.3d 600, 607 (Tex. App.CAustin 2000, pet. denied). Their provisions must be strictly construed.

See, e.g., Morris v. Lone Star Ch. No. 6, 5 S.W. 519, 520 (Tex. 1887). Our task is to determine the

scope of article 4.11, section 4(a)(8). We do so by examining the language used in the statute. See In re

Bay Area Citizens Against Lawsuit Abuse, 982 S.W.2d 371, 380 (Tex. 1998). Every word, phrase, and

expression should be read as if it were deliberately chosen for a purpose. See Upjohn, 38 S.W.3d at 607;

State v. Evangelical Lutheran Good Samaritan Soc=y, 981 S.W.2d 509, 511 (Tex. App.CAustin 1998,

no pet.).

United American argues that Areal property, or any interest therein@ includes interests in

limited partnerships formed to hold mineral-producing real estate. Under Texas law, partnership interests

are not real property, but personal property. See Tex. Rev. Civ. Stat. Ann. art 6132b, ' 5.02 (West Supp.

2003).7 Real property held by a partnership is property of the partnership; the partners have no individual

interest in the partnership property. See Humphrey v. Bullock, 666 S.W.2d 586, 590 (Tex. App.CAustin

7
Although the revised partnership act was adopted in 1993, section 5.02 carries on former
section 26=s provision that partnership interests comprise personal, and not real, property. See Act of May
16, 1961, 57th Leg., R.S., ch. 158, ' 26, 1961 Tex. Gen. Laws 289, 297, superseded by Act of June 19,
1993, 73d Leg., R.S., ch. 917, ' 1, 1993 Tex. Gen. Laws 3887, 3899 (codified at Tex. Rev. Civ. Stat.
Ann. art. 6132b, ' 5.02 (West Supp. 2003)).

7
1984, writ ref=d n.r.e.) (absent controlling partnership wind-up agreement, mineral interests held by general

partnership defined as personal, rather than real, property for purposes of probate code). United American

argues, however, that article 4.11 applies both to real property that is directly held by an insurance company

and to any investment that constitutes an interest in real property. See also Tex. Ins. Code Ann. art. 4.11,

' 4(d) (standard for calculating value of real property and any interest in real property for purposes of

section (a)(8)). Because the partnerships own oil and gas properties, United American argues that its

participation in those partnerships constitutes an interest in real property for the purposes of the premium tax

rate calculation.

To bolster its argument, United American urges us to construe article 4.11 in light of article

3.33, which regulates the types of investments insurance companies are permitted to make in Texas assets.

See Tex. Ins. Code Ann. art. 3.33 (West Supp. 2003) (AAuthorized Investments and Loans for Capital

Stock Domestic Life, Health and Accident Insurance Companies@). These regulations apply to foreign

insurance company investments in Texas, as well as domestic insurance company investments generally. Id.

art. 3.41. The list of permitted investments includes, among other things, international bonds, savings

deposit funds, and various pooled investment arrangements. See generally id. art. 3.33. Insurance

companies are authorized to invest in real estate, including their office buildings, improved land, and mineral

reserves. See id. art. 3.33, ' 4(l) (real estate), (m) (oil, gas, and minerals). Insurance companies may hold

Texas assets in their own name or through participations in limited partnerships and joint ventures. Id. art.

3.33, ' 7(e). Before 1997, those limited partnerships and joint ventures could only be entered into for the

purposes of managing real estate loans, owning real estate, or owning and exploiting oil, gas, and minerals.

8
Act of April 9, 1985, 69th Leg., R.S., ch. 36, ' 1, 1985 Tex. Gen. Laws 411, 416-17, superseded by Act

of May 19, 1997, 75th Leg., R.S., ch. 556, ' 6, 1997 Tex. Gen. Laws 1958, 1976. Insurance companies

must maintain reasonable, adequate, and accurate evidence of their ownership of their assets and

investments. Tex. Ins. Code Ann. art. 3.33, ' 7(b) (West Supp. 2003).

United American asserts that article 4.11 is intended to induce foreign insurance companies

to invest in assets that will benefit the Texas economy. It argues that the legislature has specifically provided

that insurance companies may invest in limited partnerships for the purpose of owning real estate and mineral

estates. According to United American, article 4.11 merely provides for the allocation of the various

investments provided for by article 3.33 between Texas and other states for purposes of calculating

premium tax rates. United American contends that, because article 3.33 specifically provides that insurance

companies may hold real property through partnership agreements, article 4.11 refers to those partnership

agreements when it allows for premium tax benefits for Aany interest@ in real property. Any other reading of

the statute, United American concludes, would render the language Aor any interest therein@ meaningless.

The comptroller responds that Areal property, or any interest therein@ means land and every

other legal interest in land, including the various possible leaseholds, licenses, and mineral estates. The

comptroller argues that because article 4.11 is a tax exemption statute it must be strictly construed

according to its explicit terms. According to the comptroller, United American=s interpretation of article

4.11 would extend Texas asset status not only to real property, but also to personal property that is to

some degree related to real property.

9
 The comptroller argues that article 3.33 has no effect on our interpretation of article 4.11

because, while article 3.33 is part of a set of provisions mandating minimum solvency requirements for

insurance providers, article 4.11 is part of the scheme for taxing those insurance providers. Chapter three

of the insurance code governs ALife, Health and Accident Insurance.@ See Tex. Ins. Code Ann. arts. 3.01-

3.97-3 (West 1981 & Supp. 2003). Article 3.33 permits insurance companies to invest in real estate and

mineral properties, but only under certain circumstances and as a limited percentage of their overall

investment. See id. art. 3.33, ' 4(m) (mineral property interests may only be held as investment for

production of income), art. 3.40 (insurance companies may only own income producing interests in mineral

estates to amount of 10% of its admitted assets). By contrast, chapter four of the insurance code deals with

taxation of insurance companies. See Tex. Ins. Code Ann. arts. 4.01-4.74 (West 1981 & Supp. 2003).

Insurance companies are assessed a premium tax as a percentage of their gross premiums. Id. art. 4.11, ''

5-5F. Under article 4.11, a foreign insurance company may bear a lower tax burden if it owns property

designated as a Texas investment. Id.

The comptroller asserts that article 4.11 must be read on its own terms, because it is a tax

exemption statute drafted to name particular assets that qualify for a lower tax rate rather than a reflection of

the investments an insurance company may make under article 3.33. The comptroller argues that in chapter

four of the insurance code the legislature has routinely distinguished between real property and personal

property. See, e.g., Tex. Ins. Code Ann. art. 4.01 (Areal estate and tangible personal property@, Aall other

personal property@); art. 4.01(b) (all intangible or tangible personal property); art. 4.01(c) (Aall other

personal property@) (emphasis added). The comptroller takes the position that the legislature would have

10
referred to personal property if it intended for limited partnership interests to qualify as Texas assets for the

purpose of calculating premium tax rates under article 4.11. The comptroller concludes that extending the

scope of article 4.11 would violate the legislature=s express designation of a narrow tax exemption.

We agree with the comptroller that we must construe article 4.11 without regard to article

3.33 and that, because article 4.11 is a tax exemption statute, we must strictly construe its terms. The 1951

insurance code allowed a premium tax rate benefit for all real estate in Texas acquired according to the

provisions of chapter three of the code. Act of June 28, 1951, 52d Leg., R.S., ch. 491, 1951 Tex. Gen.

Laws 868, 895 (current version at Tex. Ins. Code Ann. art. 4.11). In 1984, the legislature moved the

definitional provision to article 4.11 and removed any reference to chapter three. See Act of July 13, 1984,

68th Leg., 2d C.S., ch. 31, art. 4, ' 1, 1984 Tex. Gen. Laws 215 (codified at Tex. Ins. Code Ann. art.

4.11).8 There is no statutory indication in article 4.11 that the two articles are to be read together. Because

8
Historically, the comparative premium tax rate provision has given foreign insurers a reduced
premium tax if they maintained a certain percentage of their assets in Aproperty in this State@ as defined by a
separate statutory provision. See Board of Ins. Comm=rs v. Prudential Fire Ins. Co. 167 S.W.2d 578,

11
article 4.11 is a tax exemption statute and must be strictly construed, we decline to link its interpretation with

the provisions of article 3.33.

The assets listed in article 4.11 are all items that must be held in direct ownership by the

foreign insurance company applying for beneficial tax treatment. Several of those items constitute intangible

personal property that can only be owned directly by an insurance company. E.g., Tex. Ins. Code Ann. art.

4.11, ' 4(a)(1) (U.S. Bonds), (2) (mortgage loans held by insurance company), (3) (state and local

government bonds), (5) (bank deposits and loans). The provision at issue, by contrast, provides tax

benefits for ownership of real property. Id. ' 4(a)(8). The limited partnership participations involved in

578-79 (Tex. Civ. App.CAustin 1943, writ refused) (benefit derived from investment in Texas property
offset decreased tax rate). The 1951 Insurance Code allowed a premium tax rate benefit for all real estate
acquired according to the provisions of chapter three. See Act of June 28, 1951, 52d Leg., R.S., ch. 491,
1951 Tex. Gen. Laws 868, 895 (current version at Tex. Ins. Code Ann. art. 4.11). In 1963, this was
amended explicitly to apply to Aall real estate situated in this state . . . owned and held by such insurance
company in accordance with the provisions of [chapter three].@ Act of June 17, 1961, 57th Leg., R.S., ch.
411, 1961 Tex. Gen. Laws 933, 935 (emphasis added) (current version at Tex. Ins. Code Ann. art. 4.11
(West Supp. 2003)); see also Tex. Ins. Code Ann. art. 3.40, ' 5 (West 1981) (allowing insurance
companies to hold real estate and various mineral estates). However, when article 3.34 was incorporated
into article 4.11 in 1985, the present list of eligible assets was adopted and all reference to the definitions of
real property in chapter three were removed. See Act of July 13, 1984, 68th Leg., 2d C.S., ch. 31, art. 4,
' 1, 1984 Tex. Gen. Laws 215 (codified at Tex. Ins. Code Ann. art. 4.11).

12
this case are personal property, not real property. Furthermore, the real property at issue is owned by the

limited partnerships, not by the insurance company. As the comptroller argues, if the legislature had

intended for article 4.11 to apply to limited partnership interests, it could have indicated that both real

property and personal property related to oil and gas production would be accounted Texas assets for

premium tax rate purposes. We conclude that article 4.11 does not extend to interests in limited

partnerships.

Because we hold that article 4.11 does not as a matter of law include mineral interests held

through limited partnerships, we overrule United American=s issue.9

CONCLUSION

The judgment of the trial court is affirmed.

Mack Kidd, Justice

Before Justices Kidd, Yeakel and Puryear

Affirmed

Filed: May 22, 2003

9
Because we believe that the comptroller=s interpretation of article 4.11 is correct as a matter of
law, we will not address United American=s various issues regarding the burden of proof on its own motion
for summary judgment.

13