News & Events

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.

Senate Finance Committee votes to raise threshold for Section 831(b) status to $2.2 million of annual premiums

Tax Court upholds captive insurance arrangement

In another victory for the captive insurance industry, the Tax Court has affirmed the validity of another captive insurance arrangement. Securitas Holdings, TC Memo 2014-225 (Oct. 29, 2014). The major issue in the case is that the Court confirmed that a parental guaranty of the captive’s insurance obligations does not invalidate the structure, in a case in which the insurer was held to be well-capitalized.

Court rejects cascading excise tax theory

In a major victory for international reinsurers, a Federal District Court in the United States rejected the cascading excise tax theory, holding that any such excise tax paid by reinsurers must be refunded. This decision is particularly significant for international groups that include reinsurers that are located in offshore financial centers, such as Bermuda.

The Internal Revenue Service has not yet indicated whether it intends to appeal the decision, so it is not yet entirely clear whether this is the last word on the subject.  Any reinsurers who have paid excise tax on retrocessions should carefully review whether they should file claims for refund of the tax, and should be aware that the statute of limitations may preclude them from filing a refund claim if they fail to do so on a timely basis.

IRS Concedes: Innocent Spouse denial subject to full judicial review

In a major victory for those whose claims for innocent spouse relief are denied by the IRS, it has conceded that the denial is subject to judicial review by the Tax Court, and that the review is not limited to the record that had been developed at the administrative level.

Under the Internal Revenue Code, each person who joins in signing a joint federal income tax return is jointly and severally liable for any income tax liabilities related to the year for which the return is filed. Spouses who become subject to claims for tax related to income earned by a spouse (or ex-spouse) may qualify for relief under certain circumstances under the “innocent spouse” rules.

Because the requirements needed to qualify for innocent spouse relief are rigid, in many cases the IRS will deny relief, forcing the party who is facing tax liability for income earned by the other party to turn to the Tax Court for judicial review. The nature of this review was the subject of litigation in Wilson v. Commissioner, in which the Ninth Circuit affirmed the Tax Court’s holding that its review was de novo, enabling the Court to consider evidence outside the administrative record that had been developed in the case.

In AOD 2012-007, the IRS acquiesced in the Ninth Circuit decision, conceding the greater role of the court in reviewing the determinations of the IRS. This acquiescence gives those claiming innocent spouse relief greater assurance that their specific circumstances can be reviewed by the judicial system, and will not be limited to a cursory review of the IRS’ decision.