Validus Reinsurance, Ltd. v. United States

• Decision Date: 26 May 2015
• Docket Number: No. 14–5081.,14–5081.
• Citation: 786 F.3d 1039
• Parties: VALIDUS REINSURANCE, LTD., Appellee v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

786 F.3d 1039

VALIDUS REINSURANCE, LTD., Appellee

v.UNITED STATES of America, Appellant.

No. 14–5081.

United States Court of Appeals, District of Columbia Circuit.

Argued Feb. 20, 2015.

Decided May 26, 2015.

Ellen Page DelSole, Attorney, U.S. Department of Justice, argued the cause for appellant. With her on the briefs were Tamara W. Ashford, Acting Assistant Attorney General, Ronald C. Machen, Jr., U.S. Attorney, and Gilbert S. Rothenberg and Richard Farber, Attorneys.

Joseph R. Guerra argued the cause for appellee. With him on the brief were Erika L. Maley, R. Lee Christie, and Tracy D. Williams.

M. Kristan Rizzolo was on the brief for amici curiae International Underwriting Association of London, Ltd., et al. in support of appellee.

Before: ROGERS and BROWN, Circuit Judges, and GINSBURG, Senior Circuit Judge.

Opinion

Opinion for the court by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

The United States appeals the grant of summary judgment to Validus Reinsurance, Ltd., in its suit for the refund of excise taxes imposed under 26 U.S.C. § 4371, which taxes certain types of “reinsurance.” Validus, a foreign reinsurer, paid the excise tax on reinsurance policies it had purchased from other foreign reinsurance companies. The government contends that “the best reading of the statute” establishes its applicability to reinsurance purchased by a reinsurer because such policies (known as “retrocessions”) are “a type of reinsurance,” Appellant's Br. 24, and also that interpretation carries out Congress's intent “to level the playing field” between domestic (U.S.) insurance companies subject to U.S. income taxes and foreign insurance companies that are not so burdened, id. at 21. Validus responds that the plain text, considered in the context of reinsurance, and the statutory structure make clear the excise tax does not apply to retrocessions, and further, the presumption against extraterritoriality resolves any doubt that the tax is inapplicable to Validus's purchases of reinsurance from a foreign reinsurer (i.e., to wholly foreign retrocessions). Because both parties offer plausible interpretations, we conclude that the text of the statute is ambiguous with respect to its application to wholly foreign retrocessions. The ambiguity is resolved upon applying the presumption against extraterritoriality because there is no clear indication by Congress that it intended the excise tax to apply to premiums on wholly foreign retrocessions. Accordingly, we affirm the grant of summary judgment, albeit on narrower grounds, on Validus's refund claims.

I.

Validus, a foreign corporation, both (1) sells reinsurance to insurance companies, including insurance companies that are incorporated in the United States or do business in the United States, and (2) purchases reinsurance to protect itself against losses suffered on the reinsurance policies it sells. The former, or first-level reinsurance, is not at issue here. Rather, what is at issue is second-level reinsurance (i.e., “retrocessions”) where the purchase and sale of reinsurance occurs outside of the United States between foreign reinsurance companies. Validus seeks refunds only with respect to the excise taxes imposed on nine reinsurance policies that it purchased from wholly foreign insurance companies.

A.

According to the parties' joint statement of undisputed material facts, Validus is a corporation organized under the laws of Bermuda with its principal place of business in Bermuda. It is in the reinsurance business, providing insurance to insurance companies. During the relevant period, Validus did not conduct business in the United States. Although Validus does not itself operate in the United States, it sells reinsurance to insurance companies that sell policies covering risks, liabilities, and hazards within the United States.

Validus also buys insurance covering portions of its own reinsurance agreements. Transactions in which a reinsurer buys reinsurance are known as “retrocessions,” and the party selling retrocessions is a “retrocessionaire.” Section 4371, in subchapter A of chapter 34 of the Internal Revenue Code, taxes premiums on certain policies of insurance and reinsurance issued by foreign insurers. Validus paid the 2006 excise tax under section 4371 on premiums for nine retrocessions, all purchased from foreign retrocessionaires. These policies were negotiated, executed, and performed outside the United States and are herein referred to as wholly foreign retrocessions.

The Internal Revenue Service (“IRS”) determined that Validus owed section 4371 excise taxes on the portions of its 2006 wholly foreign retrocessions relating to underlying U.S. risks. Validus paid the assessed tax, with interest, and timely filed claims for refunds under 26 U.S.C. § 6511, on the grounds that the excise tax did not apply and, alternatively, that if it did, then the tax was unconstitutional. When the IRS did not act on the refund claims within six months, Validus filed suit in the federal district court.

The district court granted summary judgment to Validus, ruling that, under the plain text of section 4371(3), the excise tax reached only reinsurance policies (level one), not retrocessions (level two). Validus Reinsurance, Ltd. v. United States, 19 F.Supp.3d 225, 229 (D.D.C.2014). The government contends that the district court erred because it focused on section 4371, the provision setting the tax rate, in isolation and as a result “adopted an overly narrow interpretation” of the statutory term “policy of reinsurance,” failing to give effect to other relevant statutory text. Appellant's Br. 27. Our review of the grant of summary judgment is de novo. See McCormick v. District of Columbia, 752 F.3d 980, 986 (D.C.Cir.2014). Our consideration of a pure legal question of statutory interpretation is also de novo. See United States v. Wilson, 290 F.3d 347, 352 (D.C.Cir.2002).

B.

Section 4371 of the Internal Revenue Code provides:

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).

26 U.S.C. § 4371 (emphasis added). This is one of four sections in subchapter A of chapter 34 on policies issued by foreign insurers. As relevant, section 4372 provides definitions of “insured” and “policy of reinsurance.” Id. §§ 4372(d), (f). Two exemptions are provided in section 4373, one for certain amounts “effectively connected with” trade or business within the United States and another for certain indemnity bonds. Section 4374 provides that liability for the excise tax is imposed on both the purchaser and seller when not the United States or its agencies or instrumentalities.

Section 4371 derives from an expansion of the excise tax on foreign insurance enacted during World War II as part of the Revenue Act of 1942 (“1942 Act”), Pub.L. No. 77–753, § 502, 56 Stat. 798, 955–56. The text of the 1942 statute made clear that its purpose was not only to raise revenues during a time of tremendous strain on the national fisc, see H.R.Rep. No. 77–2333, at 1–2 (1942), but also to help U.S. insurance companies compete with foreign insurers. The stamp tax of 4 cents for each dollar of premium was extended beyond marine and fire insurance policies to all kinds of insurance policies issued to domestic entities and individual residents by foreign insurers. Compare 26 U.S.C. § 1804 (1940), with id. §§ 1804(a)-(b) (Supp. II 1942). Congress also, for the first time, subjected reinsurance policies to the tax. Compare id. § 1804 (1940), with id. § 1804(c) (Supp. II 1942). The 1942 Act exempted from the tax policies “signed or countersigned by an officer or agent of the reinsurer in a State, Territory, or District of the United States within which such reinsurer is authorized to do business.” Id. § 1804(c) (Supp. II 1942); see also id. §§ 1804(a)-(b) (Supp. II 1942). In other words, the excise tax did not apply when insurance premiums were subject to U.S. income taxes, see Neptune Mut. Ass'n, Ltd. of Berm. v. United States, 862 F.2d 1546, 1549 (Fed.Cir.1988) ; 61 Cong. Rec. 7180–81 (1921) (discussing the predecessor to § 1804), an exemption carried forward in current section 4373(1). As the 1942 House Committee Report explains, the excise tax thereby “eliminate[s] an unwarranted competitive advantage now favoring foreign insurers.” H.R.Rep. No. 77–2333, at 61 ; see also 61 Cong. Rec . 7180–81.

II.

“The plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole.” Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997).

A.

At first glance, the plain text of section 4371 appears to extend the reach of the IRS Commissioner to any casualty and life insurance policy issued by a foreign insurer anywhere in the world. Read in conjunction with the statutory definitions, however, section 4371's reach is more modest. Applying the definition of an “insured,” paragraph (1) of section 4371 taxes premiums paid on casualty insurance and indemnity bonds issued by foreign insurers to domestic entities or individual residents “against, or with respect to, hazards, risks, losses, or liabilities wholly or partly...