IRS Slammed by Judge for Improper Excise Tax

(CN) - The U.S. government flouted congressional intent in taxing foreign reinsurance premiums, a federal judge ruled.

Validus Reinsurance Ltd., based in Bermuda, sued the U.S. government in Washington last year, claiming that it wrongly levied an excise tax of $326,000 for overseas reinsurance premiums in 2006.

Validus said it paid that tax, plus an additional $109,000 that the Internal Revenue Service demanded in interest. The company then filed for a refund, but says the IRS never responded to its request.

Uncle Sam tried to justify the imposition of the tax with the position that all policies of reinsurance can be taxed.

U.S. District Judge Amy Berman Jackson disagreed Wednesday with the government's assertion that Congress intended to impose a tax on all successive levels of insurance or reinsurance obtained from a foreign issuer.

"This position cannot be squared with the plain language of the statute," Jackson wrote.

Jackson explained the complicated issues in the foreign reinsurance business: A reinsurance transaction is when an insurance company buys insurance from another to cover risks associated with taking on a policy.

"In other words, reinsurance is insurance for insurance companies, and it covers an insurerer in the event it is required to pay out funds under one or more of the direct insurance policies that it has issued," the 10-page ruling states.

Retrocession is a form of reinsurance "one more step removed from the original direct insurance policy: it occurs when a reinsurerer buys insurance from yet another insurance company ('a retrocessionaire') to protect the reinsurer in the event it is required to pay claims under one or more of the reinsurance policies that it has issued to the direct insurerers," Jackson added.

The judge found that the "plain language" of the law does not impose an excise tax on retrocession insurance transactions.

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