United States v. Northumberland Ins. Co., Ltd.

• Decision Date: 28 January 1981
• Docket Number: Civ. A. No. 79-1373.
• Citation: 521 F. Supp. 70
• Parties: UNITED STATES of America v. NORTHUMBERLAND INSURANCE COMPANY, LTD., Defendant.
• Court: U.S. District Court — District of New Jersey

521 F. Supp. 70

UNITED STATES of America v. NORTHUMBERLAND INSURANCE COMPANY, LTD., Defendant.

Civ. A. No. 79-1373.

United States District Court, D. New Jersey.

January 28, 1981.

COPYRIGHT MATERIAL OMITTED

Steven Toscher, Trial Atty., U. S. Dept. of Justice, Tax Division, Washington, D. C., for plaintiff.

Barry H. Evenchick and Frederick S. Title, Livingston, N. J., for defendant.

OPINION

WHIPPLE, Senior District Judge.

This is an action by the United States of America to reduce to judgment federal tax assessments made against the taxpayer-defendant, Northumberland Insurance Co., Ltd., (hereinafter "Northumberland") for the years 1971, 1972 and 1973, and to foreclose federal tax liens against certain personal property belonging to Northumberland and in the possession of the defendant Commissioner of Insurance of the State of New Jersey.¹ The assessments were the result of a determination by the United States that Northumberland was liable for the federal excise tax imposed by Section 4371 et seq. of the Internal Revenue Code of 1954 (26 U.S.C.)² (Policies Issued by Foreign Insurers) on reinsurance premiums it paid to a foreign reinsurer. Included in the assessments made against Northumberland were penalties for its failure to file federal excise tax returns or pay the excise tax. (Section 6651(a), (b)). Jurisdiction over this action is conferred by Sections 1340 and 1345 of Title 28 of the United States Code and by Sections 7402 and 7403 of the Internal Revenue Code.

The case was tried to the Court, sitting without a jury, in November, 1980. The parties submitted trial briefs, proposed findings of fact and conclusions of law, and a stipulation of facts. After careful review of all the testimony, exhibits, memoranda, stipulations and oral argument, the Court hereby adopts the following findings of fact and conclusions of law. Fed.R.Civ.P. 52(a).

FINDINGS OF FACT

Background

The defendant, Northumberland Insurance Co., Ltd. (hereinafter "Northumberland"), was incorporated in the State of New South Wales, Commonwealth of Australia, in 1955. In 1971, Northumberland was authorized to do business as a surplus lines insurer in the State of New Jersey pursuant to the Surplus Lines Law, N.J. S.A. 17:22-6.40 et seq.³ As a condition of its eligibility, Northumberland was required to deposit with the Commissioner of Insurance of the State of New Jersey a trust fund in the amount of $100,000 for the protection of its New Jersey policyholders.

In 1974 Northumberland became insolvent and is presently in liquidation proceedings in the Commonwealth of Australia. Shortly after the liquidation proceedings were commenced the Superior Court of New Jersey, Chancery Division, appointed the Commissioner of Insurance of the State of New Jersey as custodial receiver of the New Jersey Trust Fund. The Commissioner of Insurance, upon completion of his administration of the trust fund, filed an action with the Superior Court of New Jersey, Chancery Division, for approval of his final account, which showed that a balance of approximately $27,000 remained after all proper claims. Thereafter, on October 9, 1978, (Docket No. A-437-97), the Superior Court of New Jersey, Appellate Division, determined that said balance of the trust was the property of Northumberland.

Foreign Reinsurance Transaction

On November 11, 1971, Northumberland entered into a reinsurance agreement (effective January 1, 1971) with AIM Reinsurance Company, Limited (hereinafter "AIM RE").⁴ AIM RE is a foreign corporation; its registered office is 7 Avenue de Rumine, Lausanne, Switzerland. AIM RE maintains no office in the United States and is not authorized to do business in any State of the United States or the District of Columbia.

The reinsurance agreement provided that Northumberland would cede and the reinsurer would accept by way of reinsurance 90% of all insurance written by Northumberland through its United States branch for a period of ten years.⁵ Approximately 50% to 60% of the insurance ceded consisted of treaty reinsurance,⁶ and approximately 40% was facultative reinsurance.⁷ Consequently, AIM RE functioned primarily as a retrocessionaire—the reinsurer of a reinsurer. All of the underlying policies of basic insurance constituted policies of casualty insurance under 26 U.S.C. § 4372(b). Pursuant to this reinsurance agreement, Northumberland ceded to AIM RE 90 percent of all insurance written by its United States branch for calendar years 1971, 1972, and 1973. The parties stipulated that at least 80% of the insurance ceded to AIM RE under the terms of the reinsurance agreement covered hazards, risks, losses or liabilities within the United States. The evidence adduced at trial, however, established that almost 100% of the ceded insurance covered risks located in the United States.⁸ The amounts of reinsurance premiums paid to and charged by AIM RE under the terms of the insurance agreement, net of commissions, are as follows:

                1971                1972            1973
                $ 3,601,923.30    $ 2,515,817.23   $ 1,109,646.93
                

Internal Revenue Service Assessments

Northumberland neither filed federal excise tax returns nor paid the federal excise tax imposed by 26 U.S.C. § 4371 on the AIM RE agreement for the calendar years 1971, 1972, and 1973. In 1974, the Internal Revenue Service, by its agent Mr. Peix, examined Northumberland's income tax returns⁹ and subsequently determined that Northumberland was liable for the federal excise tax imposed by 26 U.S.C. § 4371 for those three calendar years. Accordingly, assessments were made against Northumberland for unpaid federal excise taxes, delinquency penalties, and statutory interest, as follows:

                              Date of
                Taxable       Assessment and       Amount of          Unpaid Assessed
                Period        Notice and Demand    Assessment         Balance Due*
                1971            08-25-75            $36,019.23(T)      $ 51,817.86
                                                      9,004.81(P)
                                                      6,793.82(I)
                1972            03-25-75             25,158.77(T)        34,684.29
                                                      6,289.69(P)
                                                      3,235.83(I)
                1973            03-25-75             11,096.45(T)        14,631.99
                                                      2,774.12(P)
                                                        761.40(I)
                                                        TOTAL
                                                                      _________________
                                                                       $101,134.14
                (T) Assessed tax
                (P) Assessed delinquency penalty, I.R.C. § 6651(a)(1)
                (I) Assessed interest, Internal Revenue Code § 6601
                

There presently remains outstanding an unpaid assessed balance of $101,134.14, plus accrued interest.

In addition, in 1973, Northumberland engaged in a series of communications with the Internal Revenue Service regarding the applicability of the federal excise tax, 26 U.S.C. § 4371, on the business ceded to Northumberland as the reinsurer. Specifically, Northumberland requested tax status as a company authorized to do business in the United States in order to fall under the exemption from the excise tax provided in 26 U.S.C. § 4373(1).¹⁰ In response to a request for advice on this matter by the District Director of the I.R.S., Wilmington District, the I.R.S. National Office issued a Technical Advice Memorandum¹¹ stating that Northumberland was not authorized to do business in the United States within the meaning of the exemption provided in 26 U.S.C. § 4373(1). The I.R.S. noted that Northumberland was not licensed to do general insurance business in any state pursuant to that state's prescribed domestication laws; rather, the only business Northumberland was qualified to transact was the business which came to it from a licensed surplus lines broker. Accordingly, the exemption did not apply.¹²

CONCLUSIONS OF LAW

The issue presented is whether Northumberland, a foreign corporation, is liable for the federal excise tax imposed by Section 4371(3) on the reinsurance policy issued to it by AIM RE, also a foreign corporation, as well as the assessments for interest and penalties. Northumberland bears the burden of proving that these assessments are erroneous, because a presumption of validity attaches to the I.R.S.'s determination. Psaty v. United States, 442 F.2d 1154, 1160 (3d Cir. 1971); United States v. Rexach, 482 F.2d 10, 16 (1st Cir. 1973).

Section 4371 of the Internal Revenue Code of 1954, 26 U.S.C. § 4371, reads as follows:

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, unless the insurer is subject to tax under section 819; 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). Emphasis added.

Pursuant to Section 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 and benefits the same are made, signed, issued or sold." Thus, the statute ostensibly imposes responsibility on either the insurer or reinsurer ("any person who makes ... sells ..."), the insurance broker ("any person who signs or issues"), or the insured ("or for whose benefit the same are made ..."). Nevertheless, Treasury...