Appeals court agrees, cascading excise tax invalid

In a major victory for the reinsurance industry, the Court of Appeals yesterday issued its ruling upholding the earlier decision of the district court invalidating the IRS’ position on the cascading federal excise tax.

The IRS has taken the position that federal excise tax is due whenever risks located in the United States are reinsured, even if excise tax had already been paid on the original policy of insurance or reinsurance. This position, known as the cascading excise tax, imposed significant costs on international reinsurance.

In its decision, the Court agreed that the statute was ambiguous, and could reasonably be interpreted in the manner suggested by the IRS. However, it held that the policy against extraterritorial application of United States law compelled a contrary reading unless Congress had clearly articulated that it intended for the tax to be imposed on a world-wide basis. Since Congress did not indicate any such intent, the Court held that it was more reasonable to conclude that only transactions involving United States cedents were intended to be within the scope of the taxing statute, and thus upheld the decision of the lower court.