Section 4371 Excise Tax on Insurance and Reinsurance Contracts: District Court Holds that Federal Excise Tax Does Not Apply to Retrocession Agreements

Sullivan & Cromwell LLP - February 11, 2014

On February 5, 2014, in Validus Reinsurance, Ltd. v. United States, 2014 WL 462886 (D.D.C. Feb. 5, 2014), the District Court for the District of Columbia held that the excise tax imposed on insurance and reinsurance contracts under Section 4371 of the Internal Revenue Code (the “Code”) does not apply to retrocession agreements, reinsurance policies that protect against potential liabilities arising under other reinsurance policies. This decision presents insurance companies that have directly or indirectly paid the excise tax with two opportunities. The first opportunity is to file a claim for refund with respect to retrocession arrangements to recover some or all of the excise taxes paid in the past year. The second opportunity is to take a reporting position in the current and future years based on the result in this case.