As previously discussed in our Insurance and Reinsurance Blog (the relevant post can be found here), the United States District Court for the District of Columbia recently ruled that the excise tax imposed on the foreign insurance/reinsurance of U.S. risks by Section 4371 of the Internal Revenue Code does not apply to retrocessions. Validus, a Bermuda reinsurer, filed the refund suit in this case with respect to excise taxes it had paid on nine retrocession policies. In refusing to extend the application of this insurance/reinsurance excise tax to retrocessions, the Court focused on the plain language of the statute and found that retrocessions fell outside of the definitions of reinsurance and other types of taxable insurance provided in the statute. The decision is subject to appeal by the Internal Revenue Service.
We are monitoring any appeal by the Internal Revenue Service, which must be filed by the beginning of April, and will post any developments to this site. In the interim, if insurers/reinsurers have paid excise tax on retrocession policies with respect to any tax period for which the statute of limitations for obtaining a refund will soon expire, they may want to file a protective excise tax refund claim under the principles of this decision before this period expires. By filing the election prior to the expiration of the statute of limitations, insurers/reinsurers will preserve the ability to receive a refund of the excise tax pending a favorable disposition of the Internal Revenue Service’s presumed appeal of the District Court’s decision.