The opinion of the court was delivered by: WHIPPLE
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.
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.)
(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).
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").
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.
Approximately 50% to 60% of the insurance ceded consisted of treaty reinsurance,
and approximately 40% was facultative reinsurance.
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.
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:
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 returns
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:
1971 1972 1973
$ 3,601,923.30 $ 2,515,817.23 $ 1,109,646.93
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