no. 14-5081 - state · no. 14-5081 . in the united states ... columbia, and judge jackson’s...

11812142.1

[ORAL ARGUMENT NOT YET SCHEDULED]

No. 14-5081 IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

VALIDUS REINSURANCE, LTD.,

Plaintiff-Appellee

v.

UNITED STATES OF AMERICA,

Defendant-Appellant

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

BRIEF FOR THE APPELLANT

TAMARA W. ASHFORD Acting Assistant Attorney General

GILBERT S. ROTHENBERG (202) 514-8128 RICHARD FARBER (202) 514-2959 ELLEN PAGE DELSOLE (202) 514-8128

Attorneys, Tax Division Department of Justice Post Office Box 502 Washington, D.C. 20044

Of Counsel: RONALD C. MACHEN, JR. United States Attorney

USCA Case #14-5081 Document #1510085 Filed: 08/29/2014 of 83

11812142.1

CERTIFICATE OF THE APPELLANT, THE UNITED STATES OF AMERICA, AS TO PARTIES, RULINGS, AND RELATED CASES

(A) Parties and amici

The parties to the above-captioned appeal are the plaintiff-

appellee Validus Reinsurance, Ltd., a Bermuda corporation, and the

defendant-appellant, the United States of America. The International

Underwriting Association of London, Ltd. and the London &

International Insurance Brokers Association have filed a notice of

intent to file an amicus brief in support of the position of the plaintiff-

appellee, Validus Reinsurance, Ltd.

(B) Rulings under review

The rulings under review are the February 5, 2014 opinion of

Judge Amy Berman Jackson ruling on the parties’ cross motions for

summary judgment, entered as docket entry No. 29 in Case No. 1:13-cv-

00109-ABJ in the United States District Court for the District of

Columbia, and Judge Jackson’s corresponding order granting the

motion of Validus Reinsurance, Ltd. for summary judgment and

denying the motion of the United States for summary judgment,

entered as docket entry No. 30 in the same case.


-ii-

11812142.1

(C) Related cases

Counsel for the United States are not aware of any related cases.

This case has not previously been before this Court or any other court of

appeals.


-iii-

11812142.1

TABLE OF CONTENTS

Page

Certificate of the Appellant, the United States of America, as to parties, rulings, and related cases ........................................... i

Table of contents ..................................................................................... iii Table of authorities ................................................................................... v Glossary .................................................................................................... xi Statement of jurisdiction ........................................................................... 1 Statement of the issue ............................................................................... 2 Statutes and regulations ........................................................................... 2 Statement of the case ................................................................................ 3

A. Procedural background .................................................. 3

B. Factual Background ....................................................... 4

1. Validus and its retrocession policies .................... 4

2. The parties’ dispute regarding whether the excise tax imposed by I.R.C. § 4371 applies to Validus’s retrocession policies .......................... 9

C. The District Court’s opinion ........................................ 14

Summary of argument ............................................................................ 16 Argument ................................................................................................. 20

The District Court erred in holding that Validus’s retrocession contracts were not subject to tax under I.R.C. § 4371 ................................................................................... 20

Standard of review ................................................................ 20

A. Overview of the statutory scheme ............................... 20

B. The District Court erred in its plain-language analysis of the statutory language .............................. 25


-iv-

11812142.1

1. The meaning of “covering” is not limited to the narrow meaning adopted by the District Court .................................................................... 27

2. Reading the statute as a whole makes clear that the tax applies to retrocessions .................. 30

3. Legislative history supports application of the excise tax to retrocessions ............................ 39

4. Regulatory guidance supports the Government’s statutory construction ................. 43

5. Case law also supports the Government’s reading of the statute as taxing retrocessions ........................................................ 46

C. Validus’s alternative arguments regarding limits on extraterritorial application of the excise tax are meritless ................................................................. 53

1. Congress clearly expressed its intent that the excise tax on foreign reinsurers should have extraterritorial effect ................................. 54

2. Application of I.R.C. § 4371(3) to Validus’s retrocession contracts is consistent with due process ................................................................. 56

Conclusion ............................................................................................... 62 Certificate of compliance ......................................................................... 63 Certificate of service ................................................................................ 64 Statutory addendum ............................................................................... 65


-v-

11812142.1

TABLE OF AUTHORITIES

Cases: Page(s)

* American Bankers Ins. Co. of Fla. v. United States,

265 F. Supp. 67 (1967), aff’d, 388 F.2d 304 (5th Cir. 1968) ............................................................ 50-51, 53

American Bankers Ins. Co. of Fla. v. United States, 388 F.2d 304 (5th Cir. 1968) ................................................. 53

American Tobacco Co. v. Patterson, 456 U.S. 63 (1982) ................................................................. 25

Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985) ............................................... 45

* Burgess v. United States, 553 U.S. 124 (2008) ............................................................... 26

Burnet v. Brooks, 288 U.S. 378 (1933) ............................................................... 57

* Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) ............................................................... 44

Colautti v. Franklin, 439 U.S. 379 (1979) ............................................................... 26

Coregis Ins. Co. v. Am. Health Found., Inc., 241 F.3d 123 (2d Cir. 2001) ................................................... 35

Decker v. Nw. Envtl. Def. Center, 133 S. Ct 1326 (2013) ............................................................ 44

Dickenson-Russell Coal Co., LLC v. Secretary of Labor, 747 F.3d 251 (4th Cir. 2014) ................................................. 31

Dorelien v. U.S. Atty. Gen., 317 F.3d 1314 (11th Cir. 2003) ............................................. 26

Duncan v. Walker, 533 U.S. 167 (2001) ......................................................... 26, 37

E.E.O.C. v. Arabian Am. Oil Co., 499 U.S. 244 (1991) ............................................................... 54

* FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000) ......................................................... 25, 26

* Authorities on which we chiefly rely are marked with asterisks


-vi-

11812142.1

Cases: Page(s)

FDIC v. Meyer, 510 U.S. 471 (1994) ................................................... 26, 29, 30

Foley Bros. v. Filardo, 336 U.S. 281 (1949) ............................................................... 54

Gordon v. Holder, 721 F.3d 638 (D.C. Cir. 2013) ............................................... 59

Halbig v. Burwell, __ F.3d __, 2014 WL 3579745 (D.C. Cir. 2014) ................... 37

Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993) ................................................ 4, 28, 60-61

Hormel v. Helvering, 312 U.S. 552 (1941) ............................................................... 44

* Huffington v. T.C. Group, LLC, 637 F.3d 18 (1st Cir. 2011) ............................................... 34-35

John Wyeth & Bro. Ltd. v. CIGNA Int’l Corp., 119 F.3d 1070 (3d Cir. 1997) ................................................. 35

Lesesne v. Doe, 712 F.3d 584 (D.C. Cir. 2013) ............................................... 45

* Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704 (2011) ............................................................. 44

McGee v. Int’l Life Ins. Co., 355 U.S. 220 (1957) ............................................................... 62

Meadwestvaco Corp. v. Ill. Dep’t of Revenue, 553 U.S. 16 (2008) ............................................................ 58-59

Miller Bros. Co. v. Md., 347 U.S. 340 (1954) ............................................................... 58

Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010) .......................................................... 54-55

Murray v. Schooner Charming Betsy, 2 Cranch 64, 1804 WL 1103 (1804) ....................................... 61

National Mining Ass’n v. McCarthy, __ F.3d __, 2014 WL 3377245 (D.C. Cir. 2014) ................... 20

* Nat’l R.R. Passenger Corp. v. Boston and Maine Corp., 503 U.S. 407 (1992) ............................................................... 26



-vii-

11812142.1

Cases (cont’d): Page(s)

New Hampshire Fire Ins. Co. v. Commissioner, 2 T.C. 708 (1943), aff’d, 146 F.2d 697 (1st Cir. 1945) ........... 38

* Quill Corp. v. N.D., 504 U.S. 298 (1992) .................................................... 58-59, 61

Robinson v. Shell Oil Co., 519 U.S. 337 (1997) ............................................................... 25

Treichler v. Wisc., 338 U.S. 251 (1949) ............................................................... 57

United States v. LSL Biotechnologies, 379 F.3d 672 (9th Cir. 2004) ................................................. 61

United States v. Alvarez-Sanchez, 511 U.S. 350 (1994) ............................................................... 26

* United States v. Bennett, 232 U.S. 299 (1914) ............................................................... 57

* United States v. Davis, 905 F.2d 245 (9th Cir. 1990) ........................................... 57, 58

United States v. Menasche, 348 U.S. 528 (1955) ............................................................... 37

* United States v. Northumberland Ins. Co., 521 F. Supp. 70 (D.N.J. 1981) ............ 24, 28-30, 42, 44, 46, 49

United States v. Shabani, 513 U.S. 10 (1994) ................................................................. 26

Wisconsin v. J.C. Penney Co., 311 U.S. 435 (1940) ............................................................... 60



-viii-

11812142.1

Statutes: Page(s)

Internal Revenue Code of 1986 (26 U.S.C.):

* § 4371 .................................... 1-4, 9-18, 20-22, 24, 31-33, 38-40 43, 45, 48-49, 51, 53, 55-56, 61

§ 4371(1) ........................ 11, 13-15, 17-18, 22-23, 27, 32, 39-40 43, 47-48, 51-53

§ 4371(2) ...... 11, 13-15, 17-18, 23, 27, 32, 39-40, 43, 47, 51-53

§ 4371(3) ............ 10-17, 27, 30-34, 38, 43-44, 46-48, 50, 52, 56 § 4372 ..................................................... 4, 13, 20, 22, 39-41,55 § 4372(a) .......................................................................... 22, 55 § 4372(d) ............................................................ 9, 22-23, 47-48 § 4372(e) ................................................................................ 23 * § 4372(f) ................... 12-13, 17, 23, 27, 32-33, 36-37, 41, 43-44 § 4373 .......................................... 4, 13, 20, 22-24, 39-40,49, 55 § 4374 ........................................ 4, 13, 20, 22, 24, 39-40, 55, 59 § 6511 ....................................................................................... 1 § 7422 ....................................................................................... 1 28 U.S.C.: § 1291 ....................................................................................... 2 § 1346 ....................................................................................... 1 Internal Revenue Code of 1939, as amended (26 U.S.C.): § 1804 (1940) ........................................................................ 20

* § 1804 (Supp. II to 1940 ed., 1942) ................................ 21, 52

Internal Revenue Code of 1954, Pub. L. No. 83-591, 68A Stat. 521-27, §§ 4371-4374 (codified as 26 U.S.C. § 4371-4374 (1954)) ........................... 41



-ix-

11812142.1

Statutes (cont’d): Page(s)

Revenue Act of 1942, Pub. L. No. 77-753, § 502, 56 Stat. 798 ..................................................... 20, 40, 42

Miscellaneous:

Fed. R. App. P. 4(a)(1)(B)(i) .............................................................. 2

* H.R. Rep. No. 77-2333 (1942), reprinted in 1942-2 C.B. 372 ......................... 21, 23, 42, 48, 61

* H.R. Rep. No. 83-1337 (1954), reprinted in

1954 U.S.C.C.A.N. 4017 ........................................................ 41 IRS Announcement 2008-18, 2008-12 I.R.B. 667 .......................... 10

MERRIAM-WEBSTER ONLINE DICTIONARY, http://www.merriam-

webster.com/dictionary ......................................................... 31 OXFORD ENGLISH DICTIONARY (2d ed. 1989) ............................. 31, 34

Rev. Rul. 2008-15, 2008-12 I.R.B. 633 ..................................... 10, 45

Rev. Rul. 58-612, 1958-2 C.B. 850 ........................................... 45, 48 M. Rosenhouse, Annotation, Validity and Effect of Retrocessional Reinsurance Agreements, 39 A.L.R. 6th 391, § 2 (2014) ....................................... 4, 28, 29 ROBERT W. STRAIN, REINSURANCE (rev. ed. 1997) ................ 5, 30, 38

S. Rep. No. 83-1622 (1954), reprinted in 1954 U.S.C.C.A.N 4621 ..................................................................... 41, 52

* Authorities on which we chiefly rely are marked with asterisks.


http://www.merriam-webster.com/dictionary/each

http://www.merriam-webster.com/dictionary/each

-x-

11812142.1

Miscellaneous (cont’d): Page(s)

STEVEN C. SCHWARTZ, REINSURANCE LAW: AN ANALYTIC APPROACH, § 10.02 (2013) .......................... 28, 36

Treasury Regulations (26 C.F.R.):

* § 46.4371-2(c) ........................................................ 18, 43-44, 48 § 46.4374-1(c) ......................................................................... 24

WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY (1969) ..... 28-30 * Authorities on which we chiefly rely are marked with asterisks.


-xi-

11812142.1

GLOSSARY

Acronym Definition

I.R.C. Internal Revenue Code (26 U.S.C.)

IRS Internal Revenue Service

U.S. United States

Validus Validus Reinsurance, Ltd.


11812142.1

STATEMENT OF JURISDICTION

The IRS determined in 2012 that Validus Reinsurance, Ltd.

(“Validus”) was liable for the excise tax imposed by Internal Revenue

Code (I.R.C.) § 4371 (26 U.S.C.)1 on premiums that Validus paid to

foreign reinsurers in 2006 under retrocession agreements – agreements

under which Validus obtained reinsurance from another foreign insurer

to protect it against its risks in reinsuring policies that directly insured

risks in the United States. (JA16.)2 The IRS assessed $326,340 in

excise tax against Validus for 2006 and assessed underpayment interest

of $109,040. (JA16-17, 281.) Validus paid the assessments in full and

filed a timely administrative refund claim. (JA17); I.R.C. § 6511.

When six months had passed without the IRS acting on its refund

claim, Validus timely filed this refund suit. (JA6-10, 17.) The District

Court had jurisdiction under I.R.C. § 7422 and 28 U.S.C. § 1346.

1 Unless otherwise indicated, section references are to the Internal

Revenue Code of 1986, as amended. 2 “JA” references are to the Joint Appendix filed with the

Government’s opening brief. “Doc.” references are to record items not included in the Joint Appendix, as numbered by the District Court Clerk on that court’s docket sheet.


-2-

11812142.1

Following cross-motions for summary judgment, the District Court

(Judge Amy Berman Jackson) ruled for Validus, granting its refund

claim in its entirety, in a February 5, 2014 opinion (JA278-87; __

F. Supp.2d ___, 2014 WL 462886). The same day, the District Court

entered a final order, in accordance with its opinion, granting summary

judgment for Validus and denying the Government’s summary

judgment motion. (JA277.) That order was a final, appealable order

that disposed of all claims of all parties. On April 3, 2014, the

Government timely filed its notice of appeal to this Court. (JA288);

Fed. R. App. P. 4(a)(1)(B)(i). This Court has jurisdiction under 28

U.S.C. § 1291.

STATEMENT OF THE ISSUE

Whether the District Court erred as a matter of law in holding

that the excise tax on reinsurance policies issued by foreign reinsurers

imposed by I.R.C. § 4371 did not apply to Validus’s retrocession

reinsurance transactions, i.e., when it purchased reinsurance from a

second foreign reinsurance company.

STATUTES AND REGULATIONS

Pertinent statutes and regulations are reproduced in the

addendum.


-3-

11812142.1

STATEMENT OF THE CASE

A. Procedural background

This is a tax refund suit in which Validus, a Bermuda corporation,

seeks a refund of excise tax it paid under I.R.C. § 4371 on retrocessions,

or reinsurance policies issued to it by foreign reinsurers. (JA6-10, 15.)

The IRS commenced an examination of Validus and determined that

the reinsurance premiums that Validus paid in 2006 under its

retrocession contracts related to U.S. insurance risks and thus were

subject to tax under I.R.C. § 4371. (JA16.) The IRS assessed $326,340

in excise tax for 2006, plus interest. (JA16-17.) Validus paid the

assessment in full and then filed this refund suit. (Id.; JA6-10.)

The parties filed motions for summary judgment in the District

Court. (Docs. 15, 17.) The relevant facts were undisputed (see JA15-17,

25-28), and the case turned on a question of statutory interpretation:

whether the excise tax imposed in I.R.C. § 4371 applies to a retrocession

reinsurance transaction in which a foreign reinsurer provides a second

level of reinsurance for risks within the United States. Validus argued

that I.R.C. § 4371 did not impose tax on its retrocession transactions,

while the Government argued that it did. (See JA278-87.) The District


-4-

11812142.1

Court ruled for Validus, granting Validus’s summary judgment motion

and denying the Government’s motion. (JA277-87.)

The Government now appeals.

B. Factual Background

1. Validus and its retrocession policies

This case involves taxation of a particular type of insurance

transaction called a retrocession under I.R.C. §§ 4371-4374. In a direct

insurance transaction, a person or entity contracts with an insurance

company to receive protection against a specified loss. In a reinsurance

transaction, an insurance company that provides direct insurance

seeks, inter alia, to protect itself from catastrophic loss by buying

insurance (“reinsurance”) from another insurance company (“the

reinsurer”) to cover the risks associated with the direct insurance

policy. See Hartford Fire Ins. Co. v. California, 509 U.S. 764, 773 (1993)

(reinsurance “protect[s] the primary insurer from catastrophic loss). In

other words, reinsurance is insurance for insurance companies, covering

an insurer in the event it is required to pay out funds under one or more

of the direct insurance policies that it has issued. See M. Rosenhouse,

Annotation, Validity and Effect of Retrocessional Reinsurance

Agreements, 39 A.L.R. 6th 391, § 2 (2014).


-5-

11812142.1

A retrocession, the type of transaction at issue here, is a form of

reinsurance that occurs when a reinsurer buys insurance from yet

another reinsurance company (the “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 direct insurers. (JA16);

ROBERT W. STRAIN, REINSURANCE, at 19 (rev. ed. 1997). (“Retrocesssion

is the reinsuring of reinsurance.”) Although retrocession is a more

specific term for a reinsurer’s purchase, from another reinsurer, of

reinsurance to cover its own risks, a retrocession is merely one type of

reinsurance. STRAIN, supra, at 19-20.

Validus is a Bermuda property and casualty reinsurance company

that does not conduct business in the United States. (JA15.) Validus,

however, reinsures insurance policies issued by insurers that cover

property and casualty risks within the United States, offering the

original insurers “protection against, or compensation or indemnity for,

the liability of [the original insurer] to pay valid claims to its

policyholders.” (JA15-16.) In 2006, Validus, in turn, purchased nine

policies to provide a second level of reinsurance – known as retrocession

reinsurance, or simply retrocession – from other foreign reinsurers


-6-

11812142.1

(which also do not conduct business in the United States), to reinsure

itself for the risks it assumed under the reinsurance policies that it sold

to direct insurers of property and casualty risks within the United

States. (JA16, 52-276.) The retrocession premiums that Validus paid

were directly connected to, and dependent upon, insurance risks in the

United States, because the policies provided reinsurance that covered

Validus’s liability arising out of hazards, risks, losses, or liabilities

within the United States that it had reinsured. (See JA19, 30, 52-276.)

Specifically, Validus bought excess of loss reinsurance from Global

Credit Reinsurance Limited (“GC Re”) and Petrel Re Limited (“Petrel”)

that protected Validus for certain losses arising out of “USA Wind

Event[s],” which are catastrophic events occurring in and/or affecting

the United States. (JA102-04, 125-26; see also JA25-26, 31-32.)3

“Excess of loss” insurance indemnifies the reinsured company against

all or a portion of the amount of loss in excess of the reinsured’s specific

3 We note that the parties’ addendum to the joint statement of

stipulated facts (Doc. 17-1, JA25) provides incorrect references to the some of the exhibit numbers under which certain of the policies were filed. Correct exhibit numbers are contained in the Quinn Declaration (Doc. 17-3, JA29) and in the table of contents to the Joint Appendix.


-7-

11812142.1

loss retention. (JA31 n.2.) These excess of loss reinsurance policies

provided that the retrocessionaires (GC Re and Petrel) would be liable

up to a specified amount if Validus had a net loss of more than $10,000

from a “USA Wind Event” that caused a total industry loss of at least a

specified amount.4 (JA102-04, 125-26). In other words, to recover

under these policies, Validus was required to trace its payouts to the

direct insurance companies to which Validus provided reinsurance, and

ascertain the magnitude of its losses from certain kinds of storms in the

United States. The retrocessionaires then indemnified Validus for a

certain portion of that loss.

Validus bought similar reinsurance policies from Allianz Risk

Transfer (Bermuda) Limited (“Allianz”) and Poseidon Re Ltd.

(“Poseidon”), which also provided excess of loss coverage for certain

losses of Validus arising out of windstorms in the United States. (JA25,

31, 54-60, 78-81.) These reinsurance policies required Validus not only

to trace its payouts to certain weather events in the United States, but

4 Loss triggers are more specifically defined in the contracts.


-8-

11812142.1

also to specify that the losses came from a specific “event” that met the

criteria for coverage. (JA54-60, 78-84.)

Additionally, Validus bought reinsurance policies from Ariel

Reinsurance Limited (“Ariel”), Lancashire Insurance Company Limited

(“Lancashire”), and Flagstone Reinsurance Ltd. (“Flagstone”), which

provide excess of loss coverage for certain losses occurring worldwide,

including the United States. (JA26-27, 33-35, 230-76.) Finally, Validus

bought two quota share reinsurance policies from Petrel, one covering

losses occurring in the Gulf of Mexico, and the other covering losses

occurring worldwide. (JA32-33, 142-229.) Quota share reinsurance is a

form of pro rata or proportional reinsurance in which the reinsurer

assumes an agreed percentage of the insurance (or reinsurance) being

reinsured and shares all premiums and losses accordingly with the

reinsured. (JA32 n.3.)

As the Government’s insurance expert explained, all of these

reinsurance policies protected Validus against risks of loss arising, in

whole or in part, from events in the United States, and thus Validus’s

loss protection under these policies was directly tied to events in the


-9-

11812142.1

United States. (JA30-34.) Validus did not challenge the conclusion of

the Government’s expert in this regard. (See Docs. 15-2, 22.)

2. The parties’ dispute regarding whether the excise tax imposed by I.R.C. § 4371 applies to Validus’s retrocession policies

Section 4371 of the Internal Revenue Code imposes an excise tax

on foreign insurers and reinsurers, as follows:

§ 4371 - Imposition of tax

There is hereby imposed, on each policy of insurance, indemnity bond, annuity contract, or policy of reinsurance issued by any foreign insurer or reinsurer, a tax at the following rates:

(1) Casualty insurance and indemnity bonds. –4 cents on each dollar, or fractional part thereof, of the premium paid on the policy of casualty insurance or the indemnity bond, if issued to or for, or in the name of, an insured as defined in section 4372(d);

(2) Life insurance, sickness, and accident policies, and annuity contracts. –1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of life, sickness, or accident insurance, or annuity contract; and

(3) Reinsurance. –1 cent on each dollar, or

fractional part thereof, of the premium paid on the policy of reinsurance covering any of the contracts taxable under paragraph (1) or (2).

The IRS determined that Validus was liable for the excise tax

imposed by I.R.C. § 4371 with respect to retrocession premiums that it


-10-

11812142.1

had paid to foreign reinsurers in 2006, to the extent those retrocession

premiums related to U.S. risks. (JA16.)5 The IRS assessed the

$326,340 in tax and $109,040 in underpayment interest. 6 (JA16-17.)

Validus paid the assessments in full and timely filed this refund suit.

(JA9, 17.)

The parties filed cross-motions for summary judgment in the

District Court on the question whether I.R.C. § 4371 imposed tax on

retrocessions. (Docs. 15, 17.) Validus claimed that it was entitled to

summary judgment because I.R.C. § 4371(3) was not applicable beyond

5 To the extent tax was owed on first-level reinsurance that

Validus sold to direct insurers, the ceding company (i.e., the direct insurer) assumed responsibility for paying the excise tax under I.R.C. § 4371, and Validus agreed to reimburse the ceding company for the amount of excise tax paid. (JA19.) Validus has not disputed that tax was owed on these first-level reinsurance contracts.

6 Because some of the retrocession policies pertained to risks outside the United States (see pp. 7-9, supra), the IRS, at Validus’s request, used an estimation method, referred to as the “Safe Harbor Formula,” that the IRS had developed as part of a voluntary compliance initiative, to determine the portion of the retrocession premiums allocable to risks in the United States and subject to tax. See IRS Announcement 2008-18, 2008-12 I.R.B. 667. In this process, premiums paid to retrocessionaires in exempt countries (such as those in the United States or in jurisdictions where treaties create an exemption) were excluded from premiums used to calculate tax. See Rev. Rul. 2008-15, 2008-12 I.R.B. 633.


-11-

11812142.1

the first level of reinsurance, while the Government maintained that

the statute was intended to impose a tax on all successive levels of

insurance or reinsurance issued by a foreign insurer that ultimately

covered liabilities in the United States.

Validus advanced several alternative arguments in support of its

contention that the tax did not apply beyond first-level reinsurance. Its

primary argument was that imposition of the tax was contrary to I.R.C.

§ 4371(3)’s plain language. (Doc. 15-2 at 9-12.) Validus asserted that,

with respect to reinsurance, the tax was applicable only as to the

premium paid on a policy of reinsurance “covering” any of the contracts

taxable under paragraph (1) and (2). Validus urged a narrow

construction of this language, under which it maintained that only the

premiums it received from U.S. insurers for first-level reinsurance, and

not the premiums it paid to foreign insurers (its second-level

reinsurance (retrocession) policies), were premiums paid on a policy of

reinsurance covering contracts taxable under paragraph (1) or (2) of

I.R.C. § 4371. In Validus’s view, its retrocession policies only covered

contracts taxable under paragraph (3), so no tax should apply.


-12-

11812142.1

Alternatively, Validus maintained that, even if the language of

I.R.C. § 4371(3) was ambiguous with respect to the application of the

tax to retrocession premiums, it still should prevail under the

presumption against giving any extraterritorial effect to a federal

statute. (Doc. 15-2 at 12-16, 20-28.) Validus further asserted that, even

if Congress affirmatively expressed a clear intent to impose the tax in

the circumstances of this case, the imposition of the tax on its

retrocession policies would violate the Due Process Clause of the Fifth

Amendment or international law, because there was an insufficient

nexus between the retrocession transactions and the United States.

(Doc. 15-2 at 16-20, 29-40.)

The Government maintained that Validus’s plain-language

argument was flawed because it focused on I.R.C. § 4371(3) in isolation

and ignored I.R.C. § 4371’s introductory language, imposing the tax on

“each” policy of reinsurance, and the broad definition of a “policy of

reinsurance” in I.R.C. § 4372(f). (Doc. 17-2 at 10, 16-22.) Section

4372(f) provides (emphasis added):

(f) Policy of reinsurance.—For purposes of section 4371(3), the term “policy of reinsurance” means any policy or other instrument by whatever name called whereby a contract of reinsurance is made, continued, or renewed against, or with


-13-

11812142.1

respect to, any of the hazards, risks, losses or liabilities covered by contracts taxable under paragraph (1) or (2) of section 4371.

The Government asserted that this definition of “policy of reinsurance”

in I.R.C. § 4372(f) plainly encompassed a retrocession policy reinsuring

against risks in the United States. It further maintained that, since

Congress expressly made this definition applicable for purposes of

I.R.C. § 4371(3), it necessarily followed that Congress intended the tax

imposed by I.R.C. § 4371(3) to apply to successive reinsurance policies

and not just to the first reinsurance policy.

With respect to Validus’s argument that the presumption that a

federal statute has no extraterritorial effect required resolving any

statutory ambiguity in its favor, the Government maintained that the

statutory scheme as a whole, i.e., I.R.C. §§ 4371-4374, demonstrated a

clear intent on the part of Congress to impose an excise tax on

successive reinsurance policies issued by foreign insurance companies

where the primary insurance policy insures against risks in the United

States. (Doc. 17-2 at 8.) The Government pointed out that the statute,

by its express terms, is aimed exclusively at policies of insurance or

reinsurance issued by foreign insurers not doing business in the United


-14-

11812142.1

States. Thus, the Government argued, Congress clearly manifested its

intent that I.R.C. § 4371 have extraterritorial effect.

As for Validus’s due process argument, the Government asserted

that the nexus between the retrocession policies and the United States

was more than sufficient to pass constitutional muster. (Doc. 17-2 at

22-28.) The liability of the foreign insurers under the retrocession

policies those foreign insurers had issued to Validus was linked to

events in the United States, because losses incurred by U.S. insureds

from events covered by their primary policies – which policies Validus

and its retrocessionaires reinsured – were what triggered payment

obligations under the reinsurance policies at each level.

C. The District Court’s opinion

The District Court granted summary judgment for Validus based

solely on its argument that I.R.C. § 4371’s plain language did not

impose a tax on retrocession premiums. The court found persuasive

Validus’s plain language argument that the statute limited the tax on

reinsurance to first-level reinsurance that directly reinsured contracts

taxable under § 4371(1) or (2). The court stated that § 4371(3)

contained a “clear internal limitation” on its application to reinsurance


-15-

11812142.1

policies, restricting application of the excise tax to “‘premium[s] paid on

the policy of reinsurance covering any of the contracts taxable under

paragraph (1) or (2).’” (JA284 (quoting I.R.C. § 4371(3) (emphasis

added by the District Court)). The court explained:

The contracts taxable under paragraph (1) are contracts for “[c]asualty insurance and indemnity bonds,” id. § 4371(1), and the contracts taxable under paragraph (2) are contracts for “[l]ife insurance, sickness, and accident policies, and annuity contracts.” Id. § 4371(2). A policy of reinsurance guarding against risk assumed by contracting to provide reinsurance is therefore outside the scope of section 4371(3) and not subject to the tax imposed on reinsurance contracts in that provision.

(Id.)

The court noted that the challenged excise taxes here were

imposed upon premiums paid on policies of reinsurance that Validus

purchased to cover the risks associated with its own reinsurance

contracts, and it concluded that they did not fall within the scope of the

reinsurance contracts taxed under I.R.C. § 4371(3), as follows:

These second-level reinsurance policies do not cover casualty insurance, indemnity bonds, life insurance, sickness or accident insurance, or annuity contracts. Consequently, the transactions giving rise to the challenged tax assessment do not fall within the plain language of section 4371: they are not “premium[s] paid on the policy of reinsurance covering any of the contracts taxable under paragraph (1) or (2)”


-16-

11812142.1

because the premiums paid only provide coverage for a contract that was taxable under paragraph (3).

(JA284 (quoting I.R.C. § 4371(3).)

Because it resolved the case based on its plain-language analysis,

the court did not reach Validus’s alternative arguments that a

presumption against extraterritorial application should apply to resolve

any ambiguity in its favor, and that application of the tax to

retrocession contracts between two foreign insurers would violate due

process or international law. The District Court expressly stated in this

regard that its decision was “in no way predicated on [Validus’s]

argument that Congress did not intend and does not have the power to

tax purely foreign-to-foreign insurance transactions.” (JA 287 n.6.)

SUMMARY OF ARGUMENT

1. The District Court erred in holding that I.R.C. § 4371, which

imposes a federal excise tax on certain insurance and reinsurance

policies issued by foreign insurers and reinsurers, applies only to first-

level reinsurance contracts, and that premiums paid on retrocessions –

i.e., second-level reinsurance – were not taxable. In reaching this

conclusion, the court focused exclusively on the language of I.R.C.

§ 4371(3), which provides the rate of tax for reinsurance, and adopted


-17-

11812142.1

an unduly narrow interpretation of the language therein regarding

reinsurance policies “covering” policies taxable under paragraphs (1) or

(2) of I.R.C. § 4371. The District Court compounded its error by

ignoring the introductory language of I.R.C. § 4371, which actually

imposes the tax, and by failing to give proper weight to the broad

definition of the term “policy of reinsurance” in I.R.C. § 4372(f). Had

the court properly considered the language of I.R.C. § 4371(3) in the

context of the overall statutory scheme, it would not have reached the

erroneous conclusion that the language of I.R.C. § 4371(3) was

unambiguous and that the tax imposed by I.R.C. § 4371 on policies of

reinsurance was limited to the first such policy and did not apply to

successive reinsurance policies.

In this regard, I.R.C. § 4372(f), expressly states that “[f]or

purposes of section 4371(3) the term ‘policy of reinsurance’” means, inter

alia, any policy whereby a contract of reinsurance is made “against, or

with respect to, any of the hazards, risks, losses, or liabilities covered by

contracts taxable under paragraph (1) or (2) of section 4371.”

(Emphasis added). There is no question that the reinsurance policies in

issue (sometimes referred to as retrocessions) were with respect to the


-18-

11812142.1

hazards, risks, losses, etc. covered by contracts taxable under paragraph

(1) or (2) of I.R.C. § 4371. Indeed, Validus expressly so conceded in the

District Court. It therefore follows, contrary to Validus’s illogical

position and the decision of the District Court, that the policies of

reinsurance issued to Validus are subject to the tax imposed by I.R.C.

§ 4371. See Treas. Reg. § 46.4371-2(c).

2. The District Court declined to address Validus’s alternative

arguments (1) that, to the extent the language of § 4371 is ambiguous,

the ambiguity should be resolved in its favor in light of the presumption

against giving a statute an extraterritorial effect; and (2) that, even if

Congress intended such an effect, the application of the statute in the

circumstances of this case would violate the Due Process Clause of the

Fifth Amendment. These alternative arguments are meritless and thus

provide no grounds for affirmance of the District Court’s decision.

Congress made clear its intent to give I.R.C. § 4371 an

extraterritorial effect in the plain terms of the statutory scheme.

Indeed, the tax imposed by I.R.C. § 4371 only applies to foreign insurers

not doing business in the United States, and thus, absent an

extraterritorial effect, the statute would be a complete nullity.


-19-

11812142.1

To pass muster under the Due Process Clause, there only need be

some minimum connection between the extraterritorial event or

transaction that is the subject of the statute and the United States.

Here, there is a clear causal connection between the obligation of

Validus’s reinsurers to indemnify Validus against losses on the policies

of reinsurance that Validus issued to the direct insurers of United

States property and the United States. It is covered losses to property

in the United States that triggers Validus’s liability to the direct

insurers under its policies of reinsurance, and the imposition of those

liabilities on Validus triggers, in turn, the liabilities of the

retrocessionaires who reinsured Validus. This causal connection

between liability under the retrocession contracts and events in the

United States is plainly sufficient to satisfy the requirements of due

process.

The District Court’s judgment is erroneous and should be

reversed.


-20-

11812142.1

ARGUMENT

The District Court erred in holding that Validus’s retrocession contracts were not subject to tax under I.R.C. § 4371

Standard of review

The District Court’s summary judgment ruling is reviewed de

novo. National Mining Ass’n v. McCarthy, __ F.3d __, 2014 WL

3377245 at *3 (D.C. Cir. 2014).

A. Overview of the statutory scheme

This case involves the interpretation of I.R.C. §§ 4371-4374, which

impose an excise tax on insurance and reinsurance policies issued by

foreign reinsurers. Specifically, this case presents the question whether

the tax applies to premiums that Validus, a foreign insurance company,

paid to other foreign insurance companies for second-level reinsurance

policies – or retrocession policies – to protect Validus from its potential

losses arising from reinsurance policies it sold to direct insurers who

insured against U.S. risks.

Although earlier statutes taxed direct insurance provided by

foreign insurance companies (see 26 U.S.C. § 1804 (1940)), the current

statute finds its roots in the Revenue Act of 1942, which first imposed

an excise tax on reinsurance premiums paid to foreign reinsurers. See


-21-

11812142.1

Revenue Act of 1942, Pub. L. No. 77-753, § 502, 56 Stat. 798, 955-56,

codified at 26 U.S.C. § 1804 (Supp. II to 1940 ed., 1942). As Congress

explained when it added the excise tax on reinsurance, the statute was

intended to level the playing field for companies competing for

insurance business that ultimately covered U.S. insureds, so that

domestic insurance companies that paid U.S. income tax could compete

fairly with foreign corporations that did not. H.R. Rep. No. 77-2333, at

61 (1942) (stating that the intent of the excise tax is to “yield an

appreciable amount of revenue” and “eliminate an unwarranted

competitive advantage now favoring foreign insurers”), reprinted in

1942-2 C.B. 372, 420.7

For the year in issue, the excise tax is imposed by I.R.C. § 4371,

which states that a tax is “hereby imposed, on each policy of insurance,

indemnity bond, annuity contract, or policy of reinsurance issued by any

foreign insurer or reinsurer . . . .” The statute sets forth the rates of tax

in three subparagraphs:

7 The tax was originally paid by stamp. See I.R.C. § 1804 (1942).

Congress amended the statute to authorize payment by return in 1965, Pub. L. No. 89-44, § 804, and to require payment by return in 1976, Pub. L. No. 99-455, § 1904(a)(12).


-22-

11812142.1

(1) Casualty insurance and indemnity bonds. – 4 cents on each dollar, or fractional part thereof, of the premium paid on the policy of casualty insurance or the indemnity bond, if issued to or for, or in the name of, an insured as defined in section 4372(d);

(2) Life insurance, sickness, and accident policies, and annuity contracts. – 1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of life, sickness, or accident insurance, or annuity contract; and

(3) Reinsurance. – 1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of reinsurance covering any of the contracts taxable under paragraph (1) or (2).

I.R.C. § 4371.

Sections 4372, 4373, and 4374 of the Internal Revenue Code

provide definitions, exclusions, and designate the persons responsible

for payment, respectively. The definitions clarify that a “foreign insurer

or reinsurer” is “an insurer or reinsurer who is a nonresident alien

individual, foreign partnership, or foreign corporation.” I.R.C.

§ 4372(a). It is undisputed that Validus and its retrocessionaires meet

this definition of a “foreign insurer or reinsurer.” (JA16, 279-80.)

The definitions also make clear that, for the tax to apply, the

policy must insure against risks to property or persons in the United

States. The casualty insurance and indemnity bonds described in

I.R.C. § 4371(1) are taxable if issued “to or for, or in the name of, an


-23-

11812142.1

insured,” and § 4372(d) defines an “insured” as “a domestic corporation

or partnership, or an individual resident of the United States,” or a

foreign corporation, partnership, or nonresident individual doing

business in the United States, that obtains a policy that provides

insurance “against, or with respect to, hazards, risks, losses, or

liabilities” within the United States. I.R.C. § 4372(d). Similarly, I.R.C.

§ 4372(e) defines a “policy of life, sickness, or accident insurance” on

which tax is imposed under I.R.C. § 4371(2) as a policy “with respect to

the life or hazards to the person of a citizen or resident of the United

States.” A “policy of reinsurance” is defined in I.R.C. § 4372(f) as “any

policy or other instrument by whatever name called whereby a contract

of reinsurance is made, continued, or renewed against, or with respect

to, any of the hazards, risks, losses, or liabilities covered by contracts

taxable under paragraph (1) or (2) of section 4371.” (Emphasis added).

Consistent with Congress’s purpose that the excise tax should

level the playing field between those insurers required to pay U.S.

income tax on income associated with their policies and those foreign

insurers that do not pay U.S. income tax (see H.R. Rep. No. 77-2333,

supra), I.R.C. § 4373 exempts from the excise tax premium payments


-24-

11812142.1

that are “effectively connected with the conduct of a trade or business

within the United States,” I.R.C. § 4373, and, as such, would be subject

to U.S. income tax.

Under I.R.C. § 4374, liability for the tax rests on “any person who

makes, signs, issues, or sells any of the documents and instruments

subject to the tax, or for whose use or benefit the same are made,

signed, issued, or sold.” Although the statute imposes liability for the

tax on either the insurer or reinsurer, the insurance broker, or the

insured, Treas. Reg. § 46.4374-1(c) imposes the primary duty to remit

the tax on the person who makes the payment of the premium to the

foreign insurer or reinsurer. See United States v. Northumberland Ins.

Co., 521 F. Supp. 70, 75 (D.N.J. 1981).8

This appeal raises the purely legal issue whether, as a matter of

statutory construction, the excise tax in I.R.C. § 4371 applies to

retrocessions. As we shall show, the best reading of the statute is that

retrocessions, as a type of reinsurance contract, are subject to the tax.

8 The taxpayer bears the burden of proof with respect to showing

that the amounts assessed were not proper. See Northumberland, 521 F. Supp. at 75 (taxpayer bore burden of proof in I.R.C. § 4371 case of showing risks were not U.S. risks).


-25-

11812142.1

That is a reasonable reading of the statute and is the only reading that

gives meaning to the statute as a whole and that carries out Congress’s

expressed legislative purpose.

B. The District Court erred in its plain-language analysis of the statutory language

To be sure, the “first step in interpreting a statute is to determine

whether the language at issue has a plain and unambiguous meaning

with regard to the particular dispute in the case.” Robinson v. Shell Oil

Co., 519 U.S. 337, 340 (1997); see also American Tobacco Co. v.

Patterson, 456 U.S. 63, 68 (1982) (“starting point” in statutory

construction is “the language employed by Congress.”) (internal

quotation marks omitted). Statutory construction, however, does not

mean focusing simply on a single statutory phrase in isolation. Rather,

it requires looking to the plain text of the statute within the context of

the whole statutory scheme, including the object and policy for which

the statute was designed. FDA v. Brown & Williamson Tobacco Corp.,

529 U.S. 120, 133 (2000) (“words of a statute must be read in their

context and with a view to their place in the overall statutory scheme”)

(internal quotation marks omitted); see also Robinson, 519 U.S. at 341-

42. Accordingly, the determination whether a statute’s plain language


-26-

11812142.1

unambiguously provides for a particular result should not be confined to

examination of a disputed phrase “in isolation.” Brown & Williamson,

529 U.S. at 132. “The meaning—or ambiguity—of certain words or

phrases may only become evident when placed in context.” Id.

In ascertaining the meaning of statutory language, it is well

settled that a statutory definition provided by Congress controls the

meaning of a statutory phrase or term. See Burgess v. United States,

553 U.S. 124, 129 (2008); Colautti v. Franklin, 439 U.S. 379, 392 n.10

(1979). Where Congress has not provided a clear definition of a

statutory term, it is appropriate to consider the “‘ordinary or natural

meaning’” of the words, United States v. Alvarez-Sanchez, 511 U.S. 350,

357 (1994) (quoting FDIC v. Meyer, 510 U.S. 471, 476 (1994)), and to

consider dictionary definitions. Nat’l R.R. Passenger Corp. v. Boston

and Maine Corp., 503 U.S. 407, 418 (1992). Where a term has a legal

meaning, the term’s ordinary legal usage is also relevant. See United

States v. Shabani, 513 U.S. 10, 13 (1994); Dorelien v. U.S. Atty. Gen.,

317 F.3d 1314, 1321 (11th Cir. 2003). Additionally, no part of the

statute should be rendered superfluous. Duncan v. Walker, 533 U.S.

167, 174 (2001).


-27-

11812142.1

Here, the District Court erroneously focused its statutory analysis

on an isolated phrase in § 4371(3), the provision setting forth the rate of

tax, and, as a result, adopted an overly narrow interpretation of the

term policy of reinsurance. The District Court, moreover, failed to give

effect to other relevant statutory language that should have guided its

construction, including the broad language imposing the tax generally

and the definition of a policy of reinsurance set forth in I.R.C. § 4372(f).

1. The meaning of “covering” is not limited to the narrow meaning adopted by the District Court

The District Court’s decision is founded on its conclusion that,

under I.R.C. § 4371(3), where there are successive policies of

reinsurance, only the first such policy is subject to tax, because it is only

the first reinsurance policy that covers insurance contracts taxable

under paragraphs (1) or (2) of I.R.C. § 4371. Even without looking to

the statute as a whole, however, it is apparent from the broader

alternative meanings of the term “covering” and the scope of what

retrocession contracts “cover[ ]” as a matter of insurance law that the

District Court’s plain-meaning analysis of I.R.C. § 4371(3) was flawed.

The dictionary defines “cover” in ways that encompass a retrocession

agreement. “Cover” means, inter alia, “to put, lay, or spread something


-28-

11812142.1

over, on, or before (as for protecting . . .),” “to afford protection or

security to,” to “compensate or indemnify for,” or to “defray the cost of.”

WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY at 524 (1969)

(hereinafter, “WEBSTER’S”).

Retrocessions, through an unbroken causal chain, lie over and

protect against the risks covered under the original insurance policy,

because they impose on the retrocessionaire obligations that flow from

claims made on the ceding company. See STEVEN C. SCHWARTZ,

REINSURANCE LAW: AN ANALYTIC APPROACH, § 10.02 (2013)

(“Reinsurance contracts . . . provide indemnification for claims the

cedent pays under particular insurance policies.”). When a reinsurance

contract, including a retrocession, is made, the “insurer shifts or ‘cedes’

some of the risk and a share of the associated premiums to the

reinsurer.” Rosenhouse, supra, 39 A.L.R. 6th 391, § 2.9 The terms of a

retrocession can include the reinsurer covering part of the risk under

9 See also Hartford Fire, 509 U.S. at 773 (“Insurers who sell

reinsurance themselves often purchase insurance to cover part of the risk they assume from the primary insurer”); Northumberland, 521 F. Supp. at 73 & n.5 (a reinsurer “assumes all or part of the insurance or reinsurance written by another insurer” and a portion of the ceding company’s business is transferred to the reinsurer).


-29-

11812142.1

certain policies or covering specific classes of losses under the ceding

insurer’s portfolio. Id.; Northumberland, 521 F. Supp. at 73

(retrocession contract called for Northumberland to cede, and its

retrocessionaire to accept, a percentage of insurance written by

Northumberland). But, in either case, the retrocessionaire agrees to

“defray the costs,” WEBSTER’S, supra, at 524, of any liabilities by

agreeing to provide indemnification in a chain of “cover[age]” that is

directly traceable to the original policyholder. There is thus a clear

causal connection between the occurrence of the covered events and the

retrocessionaire’s obligation to pay. (See, e.g., JA56 (providing

reinsurance that would pay “only in the event of an Original Insured

Market Loss, which arises from [a] Windstorm” and exceeds a specified

amount).) In other words, when an insured incurs a covered loss, that

loss is passed on, in whole or in part, from the direct insurer to the

reinsurer and then to the retrocessionaire.

Because the same risk is being passed up the insurance chain, the

retrocessionaire “cover[s],” at least in part, the risks specified in the

original insurance policy. Not only does this risk-shifting mean that the

retrocessionaire “lies over” the original insurance policy, it also means


-30-

11812142.1

that the retrocessionaire “affords protection or security to” the original

ceding company and the original policy holder by effectively increasing

the reserves of the original insurer. See WEBSTER’S, supra, at 524.

Accordingly, even before considering the statute as a whole, the

most reasonable reading of I.R.C. § 4371(3) is that a retrocessionaire

who provides reinsurance with respect to the risks insured by a contract

taxable under paragraph (1) or (2) is providing reinsurance that

“cover[s]” such contracts. At all events, it is certainly not plain,

contrary to the conclusion of the District Court, that a retrocession does

not “cover[ ]” a contract taxable under paragraph 1 or 2 within the

meaning of I.R.C. § 4371(3).10

2. Reading the statute as a whole makes clear that the tax applies to retrocessions

When the language of I.R.C. § 4371(3) is considered in the context

of the statute as a whole, as the case law requires (see pp. 25-26, supra),

10 That the statute does not use the term “retrocession” is of no

moment, because retrocession is simply a type of reinsurance. STRAIN, supra, at 19-20 (in the insurance business “[r]etrocession is the reinsuring of reinsurance. . . [and] [e]verything . . . about reinsurance applies equally to a retrocession”); Northumberland, 521 F. Supp. at 73 n.5 (“reinsurer” is a company that assumes “insurance or reinsurance” written by another company).


-31-

11812142.1

it becomes even more apparent that the District Court erred in its

analysis. Contrary to the District Court’s determination that its focus

should be on the wording of I.R.C. § 4371(3) because that subsection is

the “active taxing provision” (JA283, 285), the tax on reinsurance

policies is actually imposed in I.R.C. § 4371’s introductory language.

That introductory language states that a tax is “hereby imposed, on

each policy of insurance . . . or policy of reinsurance issued by any

foreign insurer or reinsurer . . . .” I.R.C. § 4371 (emphasis added).

Congress’s use of the term “each” connotes breadth, for “each” is an

expansive term that reaches broadly to every policy of reinsurance

issued by a foreign reinsurer. See Dickenson-Russell Coal Co., LLC v.

Secretary of Labor, 747 F.3d 251 (4th Cir. 2014) (ordinary meaning of

the word “each” is “‘every one of two or more people or things considered

separately’”) (quoting MERRIAM–WEBSTER ONLINE DICTIONARY, http://

www. merriam- webster. com/ dictionary/each (Mar. 6, 2014) (emphasis

added in opinion)); OXFORD ENGLISH DICTIONARY, vol. 5, at 16 (2d ed.

1989) (defining the word “each” as meaning “every (individual of a

number) regarded or treated separately”).


-32-

11812142.1

No resort to canons of statutory construction, however, is

necessary to determine what constitutes a policy of reinsurance for

purposes of the tax imposed on such a policy under § 4371. On the

contrary, Congress expressly provided in § 4372(f) that, “[f]or purposes

of section 4371(3), the term ‘policy of reinsurance’ means,” inter alia,

“any policy” whereby a contract of reinsurance is made “against, or with

respect to, any of the hazards, risks, losses, or liabilities covered by

contracts taxable under paragraph (1) or (2) of section 4371.”

(Emphasis added). There is no question, as demonstrated below, that

Validus’s retrocession policies are contracts of reinsurance that are

made “with respect to the hazards, risks, losses, or liabilities covered by

contracts taxable under paragraph (1) or (2).” Indeed, Validus expressly

conceded as much in the District Court. (Doc. 22 at 11.)

The District Court dismissed the Government’s reliance on the

definition of the term policy of reinsurance in I.R.C. § 4372(f) with the

statement that “both the active taxing provision and the definition of

‘policy of reinsurance’ explicitly restrict section 4371(3)’s application to

transactions where the reinsurance purchased covers contractually

assumed risks described in paragraph (1) or (2) of section 4371, and not


-33-

11812142.1

those described in paragraph 3.” (JA285 (footnote omitted).) Contrary

to the District Court’s statement, however, there is no such explicit

limitation in either the “active taxing provision” or the definition of

policy of reinsurance. As explained above, the tax in issue is imposed

by the introductory language of I.R.C. § 4371, which provides, inter alia,

that there is hereby imposed “on each. . . policy of reinsurance issued by

any foreign insurer or reinsurer, a tax at the following rates . . . .” I.R.C.

§ 4371 (emphasis added). As is apparent, the active taxing provision –

the introductory language – does not contain the limitation ascribed to

it by the District Court; on the contrary, it imposes a tax on each policy

of reinsurance issued by any foreign reinsurer. The rate of tax on

reinsurance policies is set forth in I.R.C. § 4371(3), but that provision

neither imposes the tax nor defines what constitutes a policy of

reinsurance for purposes of the tax imposed on such policies. Rather,

Congress expressly specified in I.R.C. § 4372(f) that, for purposes of

§ 4371(3), the term policy of reinsurance means, inter alia, a policy or

contract that is “with respect to, any of the hazards, risks, losses, or

liabilities covered by contracts taxable under paragraph (1) or (2).”

I.R.C. § 4372(f) (emphasis added).


-34-

11812142.1

As even Validus conceded in the District Court, the policies of

reinsurance in issue were “with respect to” the hazards, risks, losses,

etc. covered by contracts taxable under paragraph (1) or (2). (Doc. 22 at

11.) Indeed, just as the reinsurance policies that Validus issued to the

direct insurers of the U.S. policy holders were with respect to the risks,

liabilities, etc. covered by the original policies, the retrocession policies

issued by other foreign insurers to Validus were with respect to the

risks, liabilities, etc. covered by the original policies. Thus, the

distinction drawn by the District Court between the reinsurance

policies that Validus issued to the direct insurers and the subsequent

reinsurance policies that were issued to Validus by other foreign

insurers not only is not compelled by the plain language of the statute,

but instead also flies in the face of such language.

In this regard, the phrase “with respect to” has been described as

“synonymous with the phrase ‘with reference or regard to something.’”

Huffington v. T.C. Group, LLC, 637 F.3d 18, 22 (1st Cir. 2011) (citing

THE OXFORD ENGLISH DICTIONARY, at 732 (2d ed. 1989) and observing

that dictionaries define the word “respect” in the context of the phrase

“with respect to” as meaning “‘relation,’ ‘reference,’ ‘connection,’ or


-35-

11812142.1

‘association’ to a particular thing”); see also WEBSTER’S, supra, at 1934

(defining “respect” as “a relation or reference to a particular thing or

situation”). In Huffington, the court concluded that a suit would be

“with respect to” an agreement if the suit were related to that

agreement and further elaborated:

So, too, courts describe the phrase “with respect to” as synonymous with the phrases “with reference to,” “relating to,” “in connection with,” and “associated with,” and they have held such phrases to be broader in scope than the term “arising out of,” to be broader than the concept of a causal connection, and to mean simply “connected by reason of an established or discoverable relation.”

Id. at 22 (quoting Coregis Ins. Co. v. Am. Health Found., Inc., 241 F.3d

123, 128–29 (2d Cir. 2001) (Sotomayor, J.) (collecting authorities), and

citing John Wyeth & Bro. Ltd. v. CIGNA Int’l Corp., 119 F.3d 1070,

1074–75 (3d Cir. 1997) (Alito, J.)).

It follows that Validus’s retrocession policies that provide

reinsurance for risks or hazards in the United States are “polic[ies] of

reinsurance” under the statutory definition. Unquestionably, such

retrocession contracts “relate to” or “are connected to” the underlying

direct insurance contracts. At each level of reinsurance, the reinsurer

assumes liability or agrees to provide indemnification based on claims


-36-

11812142.1

made under the direct insurance policy, thus creating a connected chain

between the retrocessionaire and the original insured. See pp. 28-30,

supra; Rosenhouse, supra, 39 A.L.R. 6th, § 2; SCHWARTZ, supra, § 10.02.

Indeed, this connection is illustrated in the retrocession contracts here,

which specify that the obligation to pay thereunder is connected to or

related to the particular hazards or risks covered by underlying direct

insurance contracts. (See, e.g., JA101-135 (allowing Validus to recover

under retrocession agreement only by showing it had losses above a

specified amount that could be traced to specified U.S. wind events that

Validus had reinsured)). Because the occurrence of events such as

windstorms, death, fire, or accident that give rise to claims on a direct

insurance policy are a but-for cause of ultimate liability at each level of

reinsurance, it naturally follows that retrocession contracts are

contracts providing insurance “against” or “with respect to” such risks.

Validus acknowledged as much in conceding below that “the broad

definition of ‘reinsurance’ in § 4372(f) encompasses all reinsurance

contracts that relate to underlying U.S. risks,” as its retrocession

contracts do here. (Doc. 22 at 11.)


-37-

11812142.1

Validus contends that, despite its concession regarding the

breadth of the definition of “policy of reinsurance” in § 4372(f) (Doc. 22

at 11-12), the tax does not apply here because Congress did not impose

an excise tax on all reinsurance policies, but, rather, in § 4371(3)

imposed a tax on only a subset of reinsurance policies, consisting of

first-level reinsurance policies directly “covering” contracts taxable

under paragraph (1) or (2). That contention, however, is meritless and

should be rejected. It makes no sense that Congress would have

imposed a tax on “each” policy of reinsurance issued by any foreign

insurer, and further provided in I.R.C. § 4372(f) a definition of a “policy

of reinsurance” for purposes of § 4371(3), that even Validus has

conceded includes retrocessions, if it had been its intent to exempt such

policies from tax. Acceptance of Validus’s position would render I.R.C.

§ 4372(f) virtually meaningless, contrary to the well-established rule of

statutory construction that a statute should be read so that no part is

rendered superfluous. Duncan, 533 U.S. at 174; United States v.

Menasche, 348 U.S. 528, 538-39 (1955).

Moreover, the District Court’s reading should be rejected because

it creates anomalous results in several other respects. See Halbig v.


-38-

11812142.1

Burwell, __ F.3d __, 2014 WL 3579745 at *10 (D.C. Cir. 2014) (noting

“obligation to avoid adopting statutory constructions with absurd

results”). First, to distinguish between first-level reinsurance and

retrocessions in imposing the excise tax is inconsistent with the

longstanding construction of provisions governing income taxation of

insurance companies under subchapter L of the Internal Revenue Code,

under which insurance terms have long been construed as having the

same meaning as in industry usage. See New Hampshire Fire Ins. Co. v.

Commissioner, 2 T.C. 708 (1943), aff’d, 146 F.2d 697 (1st Cir. 1945). As

we have explained, retrocession arrangements fall within the meaning

of reinsurance as a matter of industry usage and insurance law

generally. See STRAIN, supra, at 19-20; pp. 28-30, supra. It makes no

sense that Congress would have intended “reinsurance” to have a

different meaning in the context of the excise tax imposed by § 4371.

Furthermore, the District Court’s statutory construction thwarts

the intent of Congress because, by excluding all retrocessions from

I.R.C. § 4371(3), it leaves room for foreign insurers and reinsurers to

structure their transactions in a way that allows them access to the U.S

insurance market, and, at the same time, to avoid the tax imposed by


-39-

11812142.1

§ 4371. Primary foreign insurers, who otherwise would be subject to tax

under I.R.C. § 4371(1) and (2) might instead decide to set up an

affiliated primary domestic insurer that reinsures its risks with a newly

formed affiliated domestic reinsurer, and in turn retrocedes those risks

to the primary foreign insurer that – except for the tax benefits to be

gained – otherwise would have just provided direct insurance. Both the

domestic insurer and the domestic reinsurer would be subject to

relatively minimal income U.S. income taxes on the premiums they

receive, because they would claim an offsetting deduction for the

reinsurance premiums they paid. And, under the District Court’s

reading of § 4371, the retrocession transaction would not be subject to

excise tax. That would lead to the anomalous result that Congress left

a gaping hole through which foreign insurers could structure their

dealings to allow them to insure U.S. interests and pay no tax.

3. Legislative history supports application of the excise tax to retrocessions

The statute’s history and purpose provide strong evidence that the

District Court’s interpretation was not what Congress intended. The

active taxing provision of the 1942 statute that first imposed a tax on

foreign reinsurers, from which I.R.C. §§ 4371-74 derive, provided that a


-40-

11812142.1

tax was to be paid on “each policy of reinsurance . . . or other

instrument by whatever name called whereby a contract of reinsurance

is made, continued, or renewed against, or with respect to, any of the

hazards, risks, losses, or liabilities covered by contracts described in

subsections (a) and (b) of this section if the reinsurer is . . . a foreign

corporation.” Revenue Act of 1942, Pub. L. No. 77-753, § 502, 56 Stat.

at 956. The references to paragraphs (a) and (b) are to the paragraphs

setting out the categories of direct insurance contracts subject to the tax

– material that currently is contained in § 4371(1) and (2). Thus, the

original taxing statute clearly imposed tax on contracts of reinsurance

that were “with respect to” the “hazards, risks, losses, or liabilities”

covered by direct insurance contracts of the type “described in” what

was then subparagraphs (a) and (b) (now § 4371(1) and (2)). 56 Stat. at

955-56. As discussed above, the ordinary meaning of this language,

using the phrase “with respect to,” clearly reaches retrocession

contracts. See pp. 34-36, supra. Indeed, Validus has not disputed that

its retrocession contracts meet this definition. (See Doc. 22 at 11.)

In 1954, Congress amended the Internal Revenue Code and

created §§ 4371-74. When it did so, it moved to a separate definitional


-41-

11812142.1

section (I.R.C. § 4372) the language providing that taxable polices of

reinsurance included those “with respect to” the hazards, risks, losses,

or liabilities covered by direct insurance contracts that were subject to

tax. See Internal Revenue Code of 1954, Pub. L. No. 83-591, 68A Stat.

521-24, §§ 4371-4374 (codified as 26 U.S.C. §§ 4371-4374 (1954)). In

doing so, Congress specifically stated that this amendment was merely

a “rearrangement and simplification of the taxing provisions” and that

“[n]o substantive changes have been made in the provisions” imposing

the excise tax. H.R. Rep. No. 83-1337, at A325 (1954), reprinted in 1954

U.S.C.C.A.N. 4017, 4468; see also S. Rep. No. 83-1622, at 482 (1954),

reprinted in 1954 U.S.C.C.A.N 4621, 5127. The District Court’s

disregard of the definition of a policy of reinsurance in I.R.C. § 4372(f)

cannot be squared with this history, which confirms that Congress

intended no substantive change in the law when it relocated the “with

respect to” language from the statute imposing the tax to a separate

definitional provision.

The legislative history of the statute further confirms that the

excise tax should apply to retrocessions. Congress’s expressed purpose

in imposing the excise tax on foreign reinsurers was to level the playing


-42-

11812142.1

field between U.S. insurers and foreign insurers who, not being subject

to U.S. income tax, were able to offer lower premiums than U.S. based

companies. Specifically, H.R. Rep. No. 77-2333, at 61 (1942), expressed

Congress’s intent that the tax would “yield an appreciable amount of

revenue” and would “eliminate an unwarranted competitive advantage

now favoring foreign insurers.” See also Hearings on H.R. 7378,

Revenue Act of 1942, before the Senate Committee on Finance, 77th

Cong., 2d Sess, at 121-22 (1942).

The same concerns apply with equal force in the case of

retrocessions as they do in cases of insurance and reinsurance. See

Northumberland, 521 F. Supp. at 78-79 (reimposing excise tax in case of

foreign retrocession “serves to further the legislative policy” of

eliminating competitive advantage). There is no reason to think that

Congress was concerned about U.S. insurance companies being at a

competitive disadvantage in regard to primary insurance policies and

first-level policies of reinsurance, but not concerned with their

disadvantage when it comes to retrocessions. As explained, supra,

(pp. 38-39), if the statute does not apply to retrocessions, it might open

the door to schemes using layers of insurance companies to avoid tax


-43-

11812142.1

altogether – a result clearly contrary to Congress’s expressed intent.11

Because the statute is readily susceptible to a reasonable, and, indeed,

better reading, that does not conflict with Congress’s intent, this Court

should not follow the District Court down a path that does not

accomplish what Congress intended.

4. Regulatory guidance supports the Government’s statutory construction

Longstanding administrative guidance supports the conclusion

that I.R.C. § 4371 imposes an excise tax on retrocession contracts issued

by foreign insurers because they are “with respect to” risks covered by

contracts of the type taxable under paragraphs (1) and (2) of § 4371.

Treas. Reg. § 46.4371-2(c) provides that “Section 4371(3) imposes a tax

upon each policy of reinsurance” issued by a foreign “reinsurer” that is

“against, or with respect to, any of the hazards, risks, losses, or

liabilities covered by contracts of the type described in section 4371(1)

or (2).” The regulation harmonizes I.R.C. §§ 4371(3) and 4372(f) and

clarifies that the tax applies to all reinsurance that meets § 4372(f)’s

11 Notably, even the District Court acknowledged that its

interpretation would undermine Congress’s purpose underlying the legislation. (See JA286.)


-44-

11812142.1

definition of a policy of reinsurance. See Northumberland, 521 F. Supp.

at 77 (relying on Treas. Reg. § 46.4371-2(c) in holding excise tax applied

to retrocession).

The Treasury Regulation resolves any statutory ambiguity by

adopting a reasonable construction of § 4371(3) that gives meaning to

all parts of the statute and harmonizes the definition of “policy of

reinsurance” in § 4372(f) with the rate provision in § 4371(3).

Furthermore, it is consistent with the legislative history and provides a

result consistent with treatment of retrocessions under the income tax

laws. As such, this regulatory clarification is entitled to deference.

Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct.

704, 711-12 (2011); Chevron, U.S.A., Inc. v. Natural Res. Def. Council,

Inc., 467 U.S. 837 (1984); see also Decker v. Nw. Envtl. Def. Center, 133

S. Ct 1326, 1337 (2013) (to be entitled to deference, a regulation need

not offer the only possible construction or even, in this Court’s view, the

best construction, but simply must offer a reasonable interpretation).12

12 Although the Government did not assert a deference argument

below and this Court ordinarily will not consider arguments not raised below, it has the power to do so. See Hormel v. Helvering, 312 U.S. 552, 557–59 (1941). Courts of appeals have exercised that power to consider

(continued…)


-45-

11812142.1

Longstanding revenue rulings further support application of the

excise tax to Validus’s retrocession contracts. These rulings confirm

that the tax imposed by I.R.C. § 4371 applies to contracts of reinsurance

between two foreign insurers. See Rev. Rul. 58-612, 1958-2 C.B. 850

(declining to read the statute so literally as to require the underlying

contracts to be actually “taxable” and holding tax applied regardless

whether the direct insurer was a foreign insurer or a domestic insurer

not taxed under paragraph 1 or 2); Rev. Rul. 2008-15, 2008-12 I.R.B.

633 (addressing application of tax between levels of insurers and

reinsurers when one insurer in the chain is exempt from tax, and

clarifying that the excise tax applies to contracts between two foreign

insurers).

(…continued) arguments for the first time on appeal when the issue presented is purely one of law, as is the question of the scope of the tax imposed under I.R.C. § 4371 here. See Lesesne v. Doe, 712 F.3d 584, 588 (D.C. Cir. 2013) (citing cases); Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985). Taking the regulation into account and according it the appropriate deference will also further the integrity of the judicial process, by avoiding conflict between this case and an essentially identical case in which the deference argument is raised below. See Bolker, 760 F.2d at 1042 (consideration of an issue not raised below is appropriate when it furthers the integrity of the judicial process).


-46-

11812142.1

5. Case law also supports the Government’s reading of the statute as taxing retrocessions

Case law also supports reversal here. The District Court’s holding

that I.R.C. § 4371(3) does not apply to retrocessions conflicts with

United States v. Northumberland Ins. Co., 521 F. Supp. 70, which is the

only other case to address application of the excise tax to retrocessions

and which held the tax applied. Northumberland, an Australian

reinsurer, entered into a reinsurance agreement with AIM RE, a Swiss

reinsurer not authorized to do business in the United States, under

which Northumberland ceded, and AIM RE assumed by way of

reinsurance, approximately 90 percent of the insurance written by

Northumberland. Id. at 73. Since much of Northumberland’s business

was reinsurance for other direct insurers, “AIM RE functioned

primarily as a retrocessionaire,” i.e. as a “reinsurer of a reinsurer.” Id.

Thus, at issue was a retrocession contract between two foreign

reinsurers, like the contracts at issue here.13 Id. at 73-74.

13 Although Northumberland was a licensed surplus lines broker,

it was not authorized to do business in the United States generally, and, therefore, no exemption from the excise tax applied.


-47-

11812142.1

Although it seized upon a different part of the statutory language

to make its argument, Northumberland urged a very literal reading of

the statute, analogous to Validus’s argument here. Northumberland

contended that the tax on reinsurance policies could only be imposed

where the reinsured company qualifies as an “insured” under I.R.C.

§ 4372(d), and that Northumberland did not so qualify. In that regard,

it contended that § 4371(3) imposes the excise tax only on “a policy of

reinsurance covering any of the contracts taxable under paragraph (1)

or (2)” and that paragraph (1) dealing with casualty insurance (the

underlying insurance) imposed a tax only on policies issues to an

insured, as defined in § 4372(d). See § 4371(1). The court rejected

Northumberland’s argument.

Applying the rule of statutory construction that “all parts of a

statute must be read together,” the court concluded that “[s]ection

4371(3) becomes clouded with uncertainty when perused carefully.” Id.

at 76. It thus was “incumbent” on the court “to utilize other aids of

statutory construction in order to define the legislative intent.” Id.

Those aids to the construction led the court to reject Northumberland’s

literalistic reading. Considering the statute as a whole, the court


-48-

11812142.1

concluded that when I.R.C. § 4372(d), defining an insured, was read in

conjunction with I.R.C. § 4371(1) and (3), “it becomes clear that there is

no requirement that a reinsured qualify as an insured to be subject to

the excise tax, so long as the underlying primary policies were issued to

‘insureds’ under § 4732(d).” Id at 76.

The court relied upon Treas. Reg. § 46.4371-2(c) and Rev. Rul. 58-

612, 1958-2 C.B. 850, 851, which “reinforced” its construction of the

statute. The court also relied upon the legislative history and

Congress’s expressed purpose for imposition of the excise tax: to

“‘eliminate an unwarranted competitive advantage now favoring foreign

insurers.’” Id. at 77 (quoting H.R. Rep. No. 77-2333, at 61). The court

determined that the premiums ceded to AIM RE were “precisely those

which made up the ‘competitive imbalance’ Congress sought to

eliminate by enacting the excise tax,” because AIM RE, which had no

office in the United States and no business here, was not subject to

income tax on the premiums it received from Northumberland. Id. at

77-78. The court thus concluded that the correct reading of § 4371 was

that an excise tax could be imposed on the retrocession premiums ceded


-49-

11812142.1

by Northumberland to AIM RE, “so long as the underlying risks” were

situated in the United States. Id. at 78.

The Northumberland court further rejected the argument that

Congress could not have intended the taxation at each level of

reinsurance that followed from the court’s decision. The court

emphasized that I.R.C. § 4371’s plain language “states that the tax is to

be imposed on ‘each’ policy of reinsurance issued by any foreign

insurer . . . ,” subject to one exception provided for in I.R.C. § 4373,

which exempts from the tax a foreign insurer doing business in the

United States. Id. at 78 (quoting I.R.C. § 4371). The court stated that

Congress would have explicitly delineated a further exception if one

were intended and concluded that imposing the excise tax in the context

of the retrocession at issue “accords with the . . . legislative intent” of

“eliminating the competitive advantage afforded to foreign insurance

companies.” Id. The court explained:

In the first instance, the excise tax was withheld from the premiums ceded by the direct insurers to Northumberland as reinsurer. This served to equalize Northumberland’s position as a foreign reinsurer. In the second instance the tax was imposed on the premiums as transferred to AIM RE as a separate foreign reinsurer, or in this case, retrocessionaire. Imposition of the tax to this transaction thus serves to further the legislative policy.


-50-

11812142.1

Id. at 78-79. As the court recognized, reading the excise tax statute to

extend to retrocessions levels the playing field, as Congress intended,

because the same concern that foreign companies not be advantaged

vis-à-vis U.S. companies exists at each level of reinsurance.

American Bankers Ins. Co. of Fla. v. United States, 265 F. Supp.

67 (1967), aff’d, 388 F.2d 304 (5th Cir. 1968), also supports reversal

here. Although that case did not involve a retrocession, the District

Court’s analysis of § 4371(3) here is directly analogous to the unduly

literalistic interpretation of the phrase “covering contracts taxable

under paragraph (1) or (2)” that the American Bankers court rejected.

The issue in American Bankers was whether the plaintiffs, who were

domestic insurance companies, were liable for the excise tax under

§ 4371(3) on premiums paid for reinsurance policies they obtained from

foreign insurance companies not doing business in the United States.

Similarly to the narrow, literalistic focus on the word “covering”

that Validus urged here, the American Bankers plaintiffs maintained

that, because I.R.C. § 4371(3) refers to reinsurance covering “contracts

taxable under paragraph (1) or (2),” I.R.C. § 4371(3) (emphasis added),

and because only those insurance contracts issued by a foreign insurer


-51-

11812142.1

are taxable under I.R.C. § 4371(1) or (2), a reinsurance policy issued by

a foreign insurer that reinsured direct insurance provided by a domestic

insurer was not subject to tax. The American Bankers plaintiffs

contended that the meaning of what contracts were “taxable” under

paragraph (1) or (2) was so “crystal clear and free of ambiguity” that it

precluded the court “from analyzing the entire section and its legislative

history and purpose.” Id. at 73.

The American Bankers court acknowledged that a narrow and

literal reading supported the plaintiffs’ view, as the direct insurance

contracts there were not taxable under paragraphs (1) or (2), because

they were contracts with domestic insurers. Id. at 74. It further noted

its general obligation to give full force and effect to clear statutory

language. Id. The court found, however, that only a “superficial

reading” of the word “‘taxable,’” “isolated from its surroundings”

supported the plaintiffs’ argument. Id. The court stated that the

“superficial . . . crystal clarity” “becomes clouded with ambiguity and

uncertainty” when § 4371 “is read with care” in context. Id.

The court specifically noted that the opening paragraph imposed

the tax on “each policy of insurance and related contracts issued by a


-52-

11812142.1

foreign insurer,” followed by the three paragraphs containing rates for

different categories of insurance. Id. The court then looked to the

statute’s history and was guided by the original wording of the statute

as enacted in 1942. Id. at 75. The court found that under the original

wording, the plain language would have imposed the tax on foreign

reinsurers of contracts issued by domestic insurers. Citing Congress’s

statement that the “‘rearrangement and simplification’” that occurred

in 1954 “‘made no substantive changes’” to the former § 1804, the court

concluded that Congress did not intend to change the prior law which

was most reasonably read to impose the tax on reinsurance contracts

issued by foreign insurers, even when a domestic insurer was the direct

insurer. Id. at 75 (quoting S. Rep. No. 83-1622 at 482-83).

The court thus concluded that the word “taxable” as used in I.R.C.

§ 4371(3) did not literally mean that the underlying insurance contracts

had to be subject to the excise tax under I.R.C. § 4371(1) or (2) in order

for the subsequent reinsurance contracts to be subject to the excise tax

under I.R.C. § 4371(3), because such a reading would render an entire

group of reinsurance policies untaxable – a result clearly contrary to

Congress’s intent. Rather, the court concluded, I.R.C. § 4371 imposes


-53-

11812142.1

tax on policies reinsuring risks under the types of contracts described in

I.R.C. § 4371(1) or (2). Affirming, the Fifth Circuit agreed with the

district court’s analysis and emphasized that the “only relevant

legislative history show[ed] that Congress intended no substantial

change in the provisions [t]here in question.” American Bankers, 388

F.2d 304, 305 (5th Cir. 1968).

As these cases demonstrate, similarly situated taxpayers have

proffered literalistic interpretations of I.R.C. § 4371 to narrow its scope,

and the courts have rejected such attempts as contrary to Congress’s

intent. Here, too, this Court should reject Validus’s similar attempt to

circumvent the tax that Congress intended should apply to its

reinsurance transactions.

C. Validus’s alternative arguments regarding limits on extraterritorial application of the excise tax are meritless

The District Court, in granting Validus’s summary judgment

motion on the basis of its plain language argument, expressly declined

to reach Validus’s alternative arguments that Congress did not intend

to or was not empowered to tax a retrocession entered into outside the

United States between two foreign insurers. In the event this Court


-54-

11812142.1

rejects the District Court’s plain language analysis, the alternative

arguments advanced by Validus below provide no valid basis for

affirmance of the District Court’s decision.

1. Congress clearly expressed its intent that the excise tax on foreign reinsurers should have extraterritorial effect

In general, there is a presumption that a federal statute has no

application outside of the territorial jurisdiction of the United States

unless Congress has explicitly so provided. See Morrison v. Nat’l

Australia Bank Ltd., 561 U.S. 247 (2010); E.E.O.C. v. Arabian Am. Oil

Co., 499 U.S. 244, 248 (1991) (superseded by statute). “This principle,”

however, “represents a canon of construction, or a presumption about a

statute’s meaning, rather than a limit upon Congress’s power to

legislate.” Morrison, 561 U.S. at 255; see also Arabian Am. Oil, 499

U.S. at 248; Foley Bros. v. Filardo, 336 U.S. 281, 284-85 (1949). Under

this canon, “‘unless there is the affirmative intention of the Congress

clearly expressed’ to give a statute extraterritorial effect, “‘[the court]

must presume it is primarily concerned with domestic conditions.’”

Morrison, 531 U.S. at 255 (quoting Arabian Am. Oil, 499 U.S. at 248)

(internal quotations omitted).


-55-

11812142.1

This presumption does not apply here, because Congress “‘clearly

expressed’” (Morrison, 561 U.S. at 255) its intent that I.R.C. §§ 4371-74

should have extraterritorial effect. Indeed, the entire statutory scheme

would be a nullity in the absence of an extraterritorial effect. That

§ 4371 was intended to apply extraterritorially is readily apparent from

the terms of the statute. Section 4371 provides that the tax is imposed

on “each policy of insurance . . . or policy of reinsurance issued by any

foreign insurer or reinsurer.” I.R.C. § 4371. The definition of a “foreign

insurer or reinsurer” in I.R.C. § 4372(a), in turn, makes clear that the

statute is intended to reach foreign entities doing business outside the

United States, providing that a foreign insurer or reinsurer includes:

an insurer or reinsurer who is a nonresident alien individual, or a foreign partnership, or a foreign corporation. The term includes a nonresident alien individual, foreign partnership, or foreign corporation which shall become bound by an obligation of the nature of an indemnity bond.

I.R.C. § 4372(a).

The statute further clearly establishes that, in imposing an excise

tax on foreign reinsurers, Congress intended to tax only those foreign

companies that were operating extraterritorially and, as such, not

subject to the U.S. income tax. In this regard, I.R.C. § 4373 excludes

from the excise tax imposed by I.R.C. § 4371 any amount which is


-56-

11812142.1

effectively connected to the conduct of a trade or business within the

United States. Thus, because the excise tax imposed by § 4371 applies

only to foreign insurers doing business outside of the United States, it

would be utterly meaningless absent an extraterritorial effect.

To the extent there is any ambiguity as to Congress’s intent, the

ambiguity does not involve whether I.R.C. § 4371 has extraterritorial

application, but only whether the statute applies to retrocessions – a

question that (as explained above) should be resolved on the side of

imposing the tax on retrocessions. In short, the presumption against

extraterritorial application of a statute simply has no relevance in

interpreting a statutory provision that, by its plain terms, only applies

to extraterritorial transactions by foreign insurance and reinsurance

companies.

2. Application of I.R.C. § 4371(3) to Validus’s retrocession contracts is consistent with due process

Congress’s imposition of the excise tax in § 4371 on retrocession

contracts that ultimately reinsure risks within the United States, like

those at issue here, is well within its authority. Where Congress

manifests a clear intent to give a statute extraterritorial effect, such


-57-

11812142.1

extraterritorial effect must be given effect, subject only to the

requirement under the Due Process Clause of the Fifth Amendment

that there be a sufficient connection between the extraterritorial events

that are the subject of the statute and the United States. See United

States v. Bennett, 232 U.S. 299, 304-05 (1914); United States v. Davis,

905 F.2d 245, 248-49 (9th Cir. 1990).14 As the Supreme Court explained

in Bennett, for an extraterritorial imposition of federal tax to be

unconstitutional it must be “so in conflict with obvious principles of

justice, and so inconsistent with every conception of representative and

free government, as to cause the exertion of power to come within the

limitations of the due process clause of the 5th amendment.” Bennett,

232 U.S. at 304-05 (holding due process was not violated by taxation of

a yacht owned by a U.S. citizen but kept outside the United States).

14 Notably, other Constitutional checks that limit the power of the

states to levy taxes outside their boundaries do not limit the federal Government’s power to tax extraterritorially. See Burnet v. Brooks, 288 U.S. 378, 400, 403 (1933) (limitations on jurisdiction of states’ taxing power do not apply to federal government); Bennett, 232 U.S. at 305-06 (same); Treichler v. Wisc., 338 U.S. 251, 256-57 (1949) (federal Government, unlike states, has the “undoubted right to measure its tax upon foreign property”); Davis, 905 F.2d at 248.


-58-

11812142.1

In evaluating whether or not extraterritorial application of a

statute satisfies due process requirements, courts inquire into whether

there is a sufficient nexus between the extraterritorial person or entity

to whom the statute is applied and the United States, so that

application of the statute would not be arbitrary and unfair. See Davis,

905 F.2d at 249 & n.2 (finding sufficient nexus for applying Maritime

Drug Enforcement Act extraterritorially to seize drug smuggling boats,

because the boats were engaged in a transaction intended to result in

criminal acts within the United States). Although no bright-line test

has developed for evaluating whether extraterritorial application of a

tax has the necessary connection to the United States, case law

addressing similar due-process inquiries in the context of whether a

state can impose tax outside its territory or on persons who are not

citizens of the state provides relevant guidance and makes clear that

only some link or minimum connection is required. See Quill Corp. v.

N.D., 504 U.S. 298, 306 (1992) (“Due Process Clause “‘requires some

definite link, some minimum connection, between a state and the

person, property or transaction it seeks to tax’”) (quoting Miller Bros.

Co. v. Md., 347 U.S. 340, 344-345 (1954)); Meadwestvaco Corp. v. Ill.


-59-

11812142.1

Dep’t of Revenue, 553 U.S. 16, 24 (2008) (same); Gordon v. Holder, 721

F.3d 638, 647 (D.C. Cir. 2013).15

Factors considered in determining whether such a link or

minimum connection exists include the volume of the contacts, whether

the taxed entity (usually a seller of goods or services) purposefully

directed itself at activities or business within the taxing jurisdiction,

and whether the taxed entity received benefits from its contact with the

state. See Quill, 504 U.S. at 307-08 (required contact existed even

though contact was only made by mail, but the volume was large). As

the Court explained in Quill, as long as a “foreign corporation

purposefully avails itself of the benefits of an economic market in the

forum State,” the “requirements of due process are met irrespective of a

corporation’s lack of physical presence in the taxing State.” Id. Other

15 As these authorities make clear, the requirements of due

process can be met based on either the person subject to tax or the property or transaction subject to tax having the requisite link or minimum connection to the taxing state. Here, the tax is imposed on the policy of reinsurance, i.e., the transaction, and the tax can be collected from either party to the contract, see I.R.C. § 4374, and thus due process can be satisfied by any one of the parties, or the reinsurance policy itself, having the requisite minimum contacts with the United States.


-60-

11812142.1

cases similarly have focused on whether the taxed entity availed itself

of a benefit of doing business in the forum state, either because of its

beneficial laws or regulations or its economic market. See, e.g.,

Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444 (1940).

Applying these standards, it follows that there is a sufficient

nexus to satisfy due process here. The retrocession contracts are

plainly connected to the United States in that the obligation of the

retrocessionaires to indemnify Validus arises only upon the occurrence

of specified events in the United States. Because it is the practice of

insurance companies to obtain reinsurance to allow them to insure more

than their own reserves can cover (see Hartford Fire, 509 US. at 773

(reinsurance “allow[s] the primary insurer to sell more insurance than

its own financial capacity might otherwise permit”)), whether Validus

and its retrocessionaires have maintained the reserves necessary to

meet their reinsurance obligations could have a significant impact on

the ability of U.S. insureds to collect on policy claims. Thus, each

reinsurer is linked in an unbroken chain to the United States and can

significantly affect the interests of U.S. citizens.


-61-

11812142.1

Moreover, Validus and its retrocessionaires “purposely direct[ed]

[their] activities” towards the United States when they elected to buy

and sell reinsurance for U.S. risks. Quill, 504 U.S. at 308. By

participating in the reinsurance of U.S. risks, Validus and its

retrocessionaires have a significant impact, not only on any potential

insureds who may make claims based on a particular transaction, but

also on the U.S. insurance market generally, by impacting competition

for insurance and reinsurance coverage. See United States v. LSL

Biotechnologies, 379 F.3d 672, 682 (9th Cir. 2004) (discussing Hartford

Fire, 509 U.S. 764, and the Court’s recognition that availability of

foreign reinsurance impacts the market for primary insurance in the

U.S.); H.R. Rep. No. 77-2333 (explaining the tax is necessary to

eliminate unfair advantage for foreign insurers over U.S. insurers who

pay income tax).16

16 Validus also argued below that extraterritorial application of

I.R.C. § 4371 violated international law. (Doc. 15-2 at 16-18.) In this regard, Validus pointed to the Charming Betsy canon, which instructs that statutes reaching extraterritorially should not be construed so as to violate international law. See Murray v. Schooner Charming Betsy, 2 Cranch 64, 1804 WL 1103 (1804). Validus, however, pointed to no specific principles of international law or treaties that were violated, but rather only asserted that taxation of those who are not residents or

(continued…)


-62-

11812142.1

CONCLUSION

The District Court’s judgment should be reversed.

Respectfully submitted,

TAMARA W. ASHFORD Acting Assistant Attorney General

/s/ ELLEN PAGE DELSOLE

GILBERT S. ROTHENBERG (202) 514-3361 RICHARD FARBER (202) 514-2959 ELLEN PAGE DELSOLE (202) 514-8128

Attorneys Tax Division

Of Counsel Department of Justice RONALD C. MACHEN, JR. Post Office Box 502 United States Attorney Washington, D.C. 20044 AUGUST 2014

(…continued) doing business here is permissible only if based on a transaction that has a “substantial connection” to the state, and that such a connection did not exist. (Doc. 15-2 at 18.) That inquiry, however, is not fundamentally different from the due process analysis. Cf. McGee v. Int’l Life Ins. Co., 355 U.S. 220 (1957) (single insurance contract provided “substantial connection” to state to support jurisdiction and withstand Fourteenth Amendment due process challenge). And, as we have shown, the necessary connection to the United States is present here.


-63-

11812142.1

CERTIFICATE OF COMPLIANCE

With Type-Volume Limitation, Typeface Requirements, and Type Style Requirements of Federal Rule of Appellate Procedure 32(a)

Case No. 14-5081 _ 1. This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) because:

[X] this brief contains 12,640 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii), or

[ ] this brief uses a monospaced typeface and contains [state the

number of] lines of text, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because:

[X] this brief has been prepared in a proportionally spaced typeface using Microsoft Word 2010 in 14-point Century Schoolbook, or

[ ] this brief has been prepared in a monospaced typeface using

[state name and version of word processing program] with [state number of characters per inch and name of type style].

(s) /s/ Ellen Page DelSole _ Attorney for the United States _ Dated: August 29, 2014 _


-64-

11812142.1

CERTIFICATE OF SERVICE

I hereby certify that I electronically filed the foregoing brief with

the Clerk of the Court for the United States Court of Appeals for the

District of Columbia Circuit by using the appellate CM/ECF system on

August 29, 2014. I further certify that eight copies of the foregoing brief

have been delivered to by hand to the Court on August 29, 2014. All

counsel are registered CM/ECF users and will be served via the

CM/ECF system.

/s/ ELLEN PAGE DELSOLE ELLEN PAGE DELSOLE

Attorney


-65-

11812142.1

STATUTORY ADDENDUM

Internal Revenue Code of 1986, as amended (26 U.S.C.):

§ 4371. Imposition of tax

There is hereby imposed, on each policy of insurance, indemnity bond, annuity contract, or policy of reinsurance issued by any foreign insurer or reinsurer, a tax at the following rates:

(1) Casualty insurance and indemnity bonds.--4 cents on

each dollar, or fractional part thereof, of the premium paid on the policy of casualty insurance or the indemnity bond, if issued to or for, or in the name of, an insured as defined in section 4372(d);

(2) Life insurance, sickness, and accident policies, and

annuity contracts.--1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of life, sickness, or accident insurance, or annuity contract; and

(3) Reinsurance.--1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of reinsurance covering any of the contracts taxable under paragraph (1) or (2).

§ 4372. Definitions

(a) Foreign insurer or reinsurer.--For purposes of section 4371, the term “foreign insurer or reinsurer” means an insurer or reinsurer who is a nonresident alien individual, or a foreign partnership, or a foreign corporation. The term includes a nonresident alien individual, foreign partnership, or foreign corporation which shall become bound by an obligation of the nature of an indemnity bond. The term does not include a foreign government, or municipal or other corporation exercising the taxing power.

(b) Policy of casualty insurance.--For purposes of section 4371(1), the term “policy of casualty insurance” means any policy (other than life) or


-66-

11812142.1

other instrument by whatever name called whereby a contract of insurance is made, continued, or renewed.

(c) Indemnity bond.--For purposes of this chapter, the term “indemnity bond” means any instrument by whatever name called whereby an obligation of the nature of an indemnity, fidelity, or surety bond is made, continued, or renewed. The term includes any bond for indemnifying any person who shall have become bound or engaged as surety, and any bond for the due execution or performance of any contract, obligation, or requirement, or the duties of any office or position, and to account for money received by virtue thereof, where a premium is charged for the execution of such bond.

(d) Insured.--For purposes of section 4371(1), the term “insured” means-

(1) a domestic corporation or partnership, or an individual

resident of the United States, against, or with respect to, hazards, risks, losses, or liabilities wholly or partly within the United States, or

(2) a foreign corporation, foreign partnership, or nonresident

individual, engaged in a trade or business within the United States, against, or with respect to, hazards, risks, losses, or liabilities within the United States.

(e) Policy of life, sickness, or accident insurance, or annuity contract.--For purposes of section 4371(2), the term “policy of life, sickness, or accident insurance, or annuity contract” means any policy or other instrument by whatever name called whereby a contract of insurance or an annuity contract is made, continued, or renewed with respect to the life or hazards to the person of a citizen or resident of the United States.

(f) Policy of reinsurance.--For purposes of section 4371(3), the term “policy of reinsurance” means any policy or other instrument by whatever name called whereby a contract of reinsurance is made, continued, or renewed against, or with respect to, any of the hazards, risks, losses, or liabilities covered by contracts taxable under paragraph (1) or (2) of section 4371.


-67-

11812142.1

§ 4373. Exemptions

The tax imposed by section 4371 shall not apply to--

(1) Effectively connected items.--Any amount which is effectively connected with the conduct of a trade or business within the United States unless such amount is exempt from the application of section 882(a) pursuant to a treaty obligation of the United States.

(2) Indemnity bond.--Any indemnity bond required to be filed by

any person to secure payment of any pension, allowance, allotment, relief, or insurance by the United States, or to secure a duplicate for, or the payment of, any bond, note, certificate of indebtedness, war-saving certificate, warrant or check, issued by the United States. § 4374. Liability for tax

The tax imposed by this chapter shall be paid, on the basis of a return, by any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit the same are made, signed, issued, or sold. The United States or any agency or instrumentality thereof shall not be liable for the tax.

Revenue Act of 1942, Pub. L. 77-753, § 502, 56 Stat. at 956 (codified at 26 U.S.C. § 1804 (Supp. II to 1940 ed., 1942): (a) Insurance Policies Other than Life, and Indemnity, Fidelity, or Surety Bonds–On each policy of insurance (other than life), indemnity, fidelity, or surety bond, or certificate, binder, covering note, receipt, memorandum, cablegram, letter, or other instrument by whatever name called whereby a contract of insurance or an obligation of the nature of an indemnity, fidelity, or surety bond is made, continued, or renewed against, or with respect to, hazards, risks, losses, or liabilities wholly or partly within the United States, if issued to or for, or in the name of, a domestic corporation or partnership, or an individual resident of the United States, or with respect to hazards, risks, or liabilities within the United States, if issued to or for, or in the name of, a foreign corporation, foreign partnership, or nonresident individual, engaged in


-68-

11812142.1

a trade or business within the United States, and if the insurer is a nonresident alien individual, or a foreign partnership, or a foreign corporation, and if such policy or other instrument is not signed or countersigned by an officer or agent of the insurer in a State, Territory, or District of the United States within which such insurer is authorized to do business, a tax of 4 cents on each dollar, or fractional part thereof, of the premium charged. (b) Life Insurance, Sickness, and Accident Policies, and Annuity Contracts–On each policy of insurance or annuity contract, or certificate, binder, covering note, receipt, memorandum, cablegram, letter, or other instrument by whatever name called whereby a contract of insurance or an annuity contract is made, continued, or renewed with respect to the life or hazards to the person of a citizen or resident of the United States, if the insurer is a nonresident alien individual, or a foreign partnership, or a foreign corporation, unless such policy or other instrument is signed or countersigned by an officer or agent of the insurer in a State, Territory, or District of the United States within which such insurer is authorized to do business, or unless the insurer is subject to tax under section 201, a tax of 1 cent on each dollar or fractional part thereof, of the premium charged. (c) Reinsurance–On each policy of reinsurance, certificate, binder, covering note, receipt, memorandum, cablegram, letter or other instrument by whatever name called whereby a contract of reinsurance is made, continued, or renewed against, or with respect to, any of the hazards, risks, losses, or liabilities covered by contracts described in subsections (a) and (b) of this section if the reinsurer is a nonresident alien individual, or a foreign partnership, or a foreign corporation, and if such policy or other instrument is not signed or countersigned by an officer or agent of the reinsurer in a State, Territory or District of the United States within such reinsurer is authorized to do business, a tax of 1 cent on each dollar, or fractional part thereof, of the premium charged.

* * *


-69-

11812142.1

Treasury Regulations (26 C.F.R.):

§ 46.4371–2 Imposition of tax on policies issued by foreign insurers; scope of tax.

(a) Certain insurance policies, and indemnity, fidelity, or surety bonds. Section 4371(1) imposes a tax upon each policy of insurance (other than those referred to in paragraph (b) of this section), upon each indemnity, fidelity, or surety bond, or upon each certificate, binder, covering note, receipt, memorandum, cablegram, letter, or other instrument by whatever name called, whereby a contract of insurance or an obligation in the nature of an indemnity, fidelity, or surety bond is made, continued, or renewed, if issued:

(1) By a nonresident alien individual, a foreign partnership,

or a foreign corporation, as insurer (unless the policy or other instrument is signed or countersigned by an officer or agent of the insurer in a State, Territory, or the District of Columbia in which the insurer is authorized to do business); and either

(2) To or for, or in the name of, a domestic corporation, domestic partnership, or an individual resident of the United States, against or with respect to hazards, risks, losses, or liabilities wholly or partly within the United States; or

(3) To or for, or in the name of, a foreign corporation, foreign partnership, or nonresident individual, engaged in a trade or business within the United States with respect to hazards, risks, or liabilities wholly within the United States. For definition of the term “indemnity bond,” see section 4372(c).

(b) Life insurance, sickness, and accident policies, and annuity contracts. Unless the insurer is subject to tax under section 819, section 4371(2) imposes a tax upon each policy of insurance or annuity contract, or upon each certificate, binder, covering note, receipt, memorandum, cablegram, letter, or other instrument by whatever name called,


-70-

11812142.1

whereby a contract of insurance or an annuity contract is made, continued, or renewed, if issued:


or a foreign corporation, as insurer (unless the policy or other instrument is signed or countersigned by an officer or agent of the insurer in a State, Territory, or the District of Columbia in which such insurer is authorized to do business); and

(2) To any person with respect to the life or hazards to the person of a citizen or resident of the United States.

(c) Reinsurance. Section 4371(3) imposes a tax upon each policy of reinsurance, certificate, binder, covering note, receipt, memorandum, cablegram, letter, or other instrument by whatever name called, whereby a contract of reinsurance is made, continued, or renewed, if issued:


or a foreign corporation, as reinsurer (unless the policy or other instrument is signed or countersigned by an officer or agent of the reinsurer in a State, Territory, or the District of Columbia in which such reinsurer is authorized to do business); and

(2) To any person against, or with respect to, any of the hazards, risks, losses, or liabilities covered by contracts of the type described in section 4371(1) or (2).

(d) Exempt indemnity bonds. The tax imposed by section 4371 does not apply to any indemnity bond described in section 4373(2).

§ 46.4374–1 Liability for tax.

(a) In general. Any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit the same are made, signed, issued, or sold, shall be liable for the tax imposed by section 4371. For purposes of this section, in the case of


-71-

11812142.1

a reinsurance policy that is subject to the tax imposed by section 4371(3), other than assumption reinsurance, the insured person on the underlying insurance policy, the risk of which is covered in whole or in part by such reinsurance policy, shall not constitute a person for whose use or benefit the reinsurance policy is made, signed, issued, or sold.

(b) When liability for tax attaches. The liability for the tax imposed by section 4371 shall attach at the time the premium payment is transferred to the foreign insurer or reinsurer (including transfers to any bank, trust fund, or similar recipient, designated by the foreign insurer or reinsurer), or to any nonresident agent, solicitor, or broker. A person required to pay tax under this section may remit such tax before the time the tax attaches if he keeps records consistent with such practice.

(c) Payment of tax. The tax imposed by section 4371 shall be paid on the basis of a return by the person who makes payment of the premium to a foreign insurer or reinsurer or to any nonresident agent, solicitor, or broker. If the tax is not paid by the person who paid the premium, the tax imposed by section 4371 shall be paid on the basis of a return by any person who makes, signs, issues, or sells any of the documents or instruments subject to the tax imposed by section 4371, or for whose use or benefit such document or instrument is made, signed, issued, or sold.

(d) Penalty for failure to pay tax. Any person who fails to comply with the requirements of this section with intent to evade the tax shall, in addition to other penalties provided therefor, pay a fine of double the amount of tax. (See section 7270.)

(e) Effective date. This section is applicable for premiums paid on or after November 27, 2002.


no. 14-5081 - state · no. 14-5081 . in the united states ... columbia, and judge jackson’s...

Documents