No U.S. Excise Taxes On Foreign Retrocessions

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Foreign retrocession insurance transactions are beyond the reach of IRS excise taxes based on the plain language of 26 U.S.C. § 4371(3), which aims to tax insurance transactions involving policies issued by foreign insurers or reinsurers. The District Court for the District of Columbia recently granted summary judgment to a Bermuda reinsurer in its suit against the IRS for a refund of an excise tax extracted from the foreign reinsurer in connection with its ceding of risk to a retrocessionaire. The Government maintained that Congress intended to impose a tax on any and all successive levels of insurance or reinsurance obtained from a foreign insurer, but the court held that the statute had clear internal limitations on its application. Specifically, taxes could be levied on premiums paid on policies of reinsurance covering specific insurance contracts, including casualty insurance, indemnity bonds, life insurance, sickness or accident insurance, or annuity contracts. However, retrocession policies are reinsurance policies covering the risks of reinsurance policies, not one of the types of insurance contracts enumerated by Section 4371(3). Validus Reinsurance, Ltd. v. United States, Case No. 13-0109 (ABJ) (D.D.C. Feb. 5, 2014).