Federal district court rejects IRS’s cascading federal excise tax theory in retrocession insurance case 

February 5:  The U.S. District Court for the District of Columbia held that section 4371 does not impose an excise tax on retrocession insurance transactions and granted the taxpayer’s motion for summary judgment. Valdius Reinsurance, Ltd. v. United States, No. 13-0109 (ABJ) (D. D.C. February 5, 2014)

Read the court’s decision [PDF 76 KB]


The taxpayer filed suit for a refund of excise tax and related interest that it had paid with respect to an IRS assessment of excise taxes imposed on the taxpayer’s foreign “retrocession transactions” (i.e., a form of reinsurance under which the reinsurer buys insurance from yet another insurance company to protect the reinsurer in the event it must pay claims under a reinsurance policy that it issued to the direct insurers).

Section 4371 imposes an excise tax on insurance transactions involving policies issued by foreign insurers or reinsurers. At issue in this case was whether the retrocession transactions were reinsurance subject to the excise tax.

Summary judgment for taxpayer

The D.C. federal district court found that this case presented a straightforward question of law—i.e., did section 4371(3) impose an excise tax on retrocession insurance transactions. The court concluded that under the plain language of the statute, the definition of the term “policy of reinsurance” did not include retrocessions. Accordingly, the court granted the taxpayer’s motion for summary judgment.

KPMG observation

The results in this case are not viewed by tax professionals as being surprising, given what was seen as the overreaching and extraterritorial nature of the IRS’s cascading excise tax position. For instance, courts had previously rejected such a “cascading” theory as applied to royalties.

Some taxpayers have already filed “protective” cascading federal excise tax refund claims and have been awaiting the outcome in Validus. These taxpayers will be waiting and watching to see whether the IRS will appeal today’s decision.

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