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Sticking to the statute: court overturns IRS on excise tax issue

Tax law has an abundance of technical terms. In a complex modern economy, it could hardly be otherwise.

This is one reason why, in order to administer the code passed by Congress, the IRS often issues detailed rules. But just because the IRS takes a certain position on a technical question doesn't mean the IRS is right.

In this post, for example, we will discuss a recent case in which a taxpayer successfully sued the IRS for imposing an improper excise tax.

The case began in 2006 when the IRS levied a tax against a Bermuda company for overseas reinsurance premiums. Reinsurance generally refers to insurance provided to another insurer to take on all or part of the risk that the other insurer has assumed.

The tax levied by the IRS was for $326,000 – a hefty amount.

The company paid the tax, as well as interest. It then filed for a refund and eventually brought tax litigation against the IRS in federal court.

The IRS took the position that policies of reinsurance are taxable, including those taken out from a foreign insurer.

The federal judge held, however, that the plain language of the tax code does not support this assertion.

The judge went on to discuss the complexity of foreign reinsurance transactions. These transactions typically involve insurance that one insurer buys from another for purposes of mitigating risks associated with certain policies.

The judge also went on to discuss a form of reinsurance called “retrocession.” This was the type of insurance involved in the case we are discussing. It involves yet another insurer, who stands behind the reinsurer to protect against losses.

The bottom line, however, was that the IRS was not justified in charging excise taxes on these types of transactions. Even for technical transactions, the IRS has to stick to the statute written by Congress.

Source: Courthouse News Service, "IRS Slammed by Judge for Improper Excise Tax," Nick Divito, Feb. 6, 2014

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