Locke Lord QuickStudy: Validus Court of Appeals Decision - Wholly-Foreign Retrocessions Not Subject to Federal Excise Tax

by Locke Lord LLP
Contact

On May 26, 2015, the United States Court of Appeals for the District of Columbia upheld a District Court decision and ruled that the Internal Revenue Service could not impose excise tax on certain wholly-foreign retrocessions of insurance under Section 4371 of the Internal Revenue Code.  Code Section 4371 generally imposes an excise tax on premiums paid to certain foreign insurers and reinsurers related to policies of insurance or reinsurance and indemnity bonds covering certain United States risks.  The Internal Revenue Service takes the position that this tax can apply multiple times through cascading layers of reinsurance, including where both parties to such contracts are wholly outside the United States.

Background 
This decision represents a second major victory for Validus, a Bermuda reinsurer, who was seeking a refund from the Internal Revenue Service of excise tax previously imposed on nine retrocession policies it had with foreign retrocessionaires. [The facts of the case are described in greater detail in a previous post on our Insurance and Reinsurance Blog, available here.] In the earlier decision, the District Court for the District of Columbia held that such tax was not permitted under the applicable statute, determining that “retrocessions” fell outside the literal definitions of reinsurance and other types of taxable insurance subject to the excise tax under Code Section 4371.

The Decision
In its decision, the Court of Appeals held that the excise tax assessed against Validus with respect to its retrocession contracts with other foreign insurers was not authorized by Code Section 4371, although on different, narrower grounds than the lower court.  After examining the plain language of the statute, the Court of Appeals found the text of Section 4371 to be ambiguous as to whether or not Congress intended to tax wholly-foreign retrocessions such as those involved in the case.  To resolve this ambiguity, the Court of Appeals turned to the legislative history of the statute, noting the long-standing judicial doctrine that, unless a contrary intent is apparent, Congressional legislation is not meant to apply to transactions wholly outside the territorial jurisdiction of the United States, generally known as the “presumption against extraterritoriality.”  The Court of Appeals could not find any explicit evidence of Congress’ intent to apply the Code Section 4371 excise tax to wholly-foreign retrocessions and, accordingly, applied the presumption against extraterritoriality to refuse to interpret the statute to allow the Internal Revenue Service to impose excise tax on wholly-foreign retrocessions. 

Takeaways
Despite this important victory for Validus, one should note as mentioned above that the Court of Appeals’ holding is narrower than the District Court’s earlier decision.  By limiting its holding to wholly-foreign retrocessions, the Court of Appeals did not question the application of the excise tax to retrocessions from domestic reinsurance policies, i.e., U.S. reinsurers ceding risk to a non-U.S. retrocessionaire.  As with the District Court decision, there remains the possibility of a further government appeal of this case (for example, if another federal circuit decision results in a split in the relevant circuits).  However, the narrower holding of the Court of Appeals decision may provide a middle ground sufficient to placate both sides of the issue.  

We are monitoring this situation and will keep you informed of any developments.  In the interim, if you have paid federal excise tax on wholly-foreign retrocessions, you should consider seeking a refund of such taxes based upon the current holding.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Locke Lord LLP | Attorney Advertising

Written by:

Locke Lord LLP
Contact
more
less

Locke Lord LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.