[00:00:01] Speaker 04: Case 14-5081, Validus Reinsurance LTD versus United States of America. [00:00:07] Speaker 04: Ms. [00:00:07] Speaker 00: Del Sol for the appellant, Mr. Guerra for the appellee. [00:00:13] Speaker 02: Good morning. [00:00:15] Speaker 02: Good morning. [00:00:18] Speaker 02: May please the court. [00:00:19] Speaker 02: This case involves whether the excise tax and tax code section 43.71 through 74 on foreign insurance and reinsurance applies to retrocessions, which is reinsurance on reinsurance. [00:00:30] Speaker 02: I think when the statute is considered as a whole, particularly in light of its history, it's very clear that the district court erred in focusing in on a narrow phrase in the statute and disregarding the statute as a whole to conclude that retrocessions are not subject to the tax. [00:00:43] Speaker 02: When Congress first enacted the statute in 1942, it very clearly imposed the excise tax in language that would have reached retrocession. [00:00:52] Speaker 02: It implied the tax that all policies of reinsurance issued by foreign reinsurers that were with respect to hazards, risks, losses, and liabilities that were covered by the direct or primary statutes described in the statute. [00:01:05] Speaker 02: And even Validus has conceded that its policies fall within this language, that they're relating to U.S. [00:01:10] Speaker 02: risks and would be with respect to U.S. [00:01:12] Speaker 02: risks. [00:01:13] Speaker 02: That's found in its summary judgment brief in Dock 22 of the record at pages 10 through 11 and also even in its brief to this court at page 21. [00:01:21] Speaker 04: Let me ask you, as a tax attorney, are you familiar with the tax code in the sense of there often is repetitious language? [00:01:34] Speaker 02: There are incidents, I think, where Congress, I think as with all statutes, there are incidents where there is repetitious language. [00:01:41] Speaker 04: Well, one of the arguments is that in subpart three, there would be surplusage under the governments. [00:01:53] Speaker 02: I don't think that's correct, Your Honor. [00:01:55] Speaker 02: I think if you look at the history of the statute, when Congress broke out the definitions into a separate section in 1954, it first of all specifically said it didn't mean to change the meaning of the statute. [00:02:04] Speaker 02: And I think that's reflected in the Senate and House reports. [00:02:07] Speaker 02: And Congress made very clear that it was still intended to apply the tax to the scope of what it defined as policies of reinsurance. [00:02:15] Speaker 02: And I think the surplusage would exist under the [00:02:20] Speaker 02: District Court's reading, because the statute in 43.71 in its open provision applies the tax to each policy of reinsurance. [00:02:29] Speaker 02: And then in 43.72f, it defines the policy of reinsurance more broadly. [00:02:34] Speaker 02: And validness of the District Court's analysis requires then reading Section 43.71.3 as cutting back what would be taxed. [00:02:41] Speaker 02: In this in what as the American bankers claims is the rate provision for the statute is saying well You know we're gonna find we're gonna say we're gonna attack each policy of Reinsurance and define it broadly and then read 43 71 3 is cutting that back And I think that really doesn't make sense it would make 43 72 F the surplus stage And I think it is a cardinal rule of construction not to read the statute to make any part surplus age [00:03:05] Speaker 04: Well, that's what I'm getting at. [00:03:08] Speaker 04: It cuts both ways. [00:03:08] Speaker 02: Well, I think if you read 43.71.3 with its most natural reading, it fits in with giving 43.72f meaning, and no part of the statute has to be rendered superfluous. [00:03:21] Speaker 02: The district court did, as it read this language covering any of the contracts taxable under paragraph 1 and 2, as requiring a direct coverage or privity of contract between the reinsurer and the insurer. [00:03:33] Speaker 02: Nowhere did Congress use the word direct or require a privity of contract. [00:03:39] Speaker 02: And I think when you look at it, as we set out in our brief, the normal reading of covering and the meaning in many of the cases involving insurance cases contemplates layers of coverage with each layer covering everything underneath. [00:03:53] Speaker 02: Baldus suggests that this only applies to blankets and tablecloths, but I think blankets and tablecloths really give you a very apt analysis. [00:04:00] Speaker 02: If you lay one layer on top of the other, the thing on top covers everything underneath. [00:04:05] Speaker 02: And I think when Congress used the term coverage here, they meant the chain of coverage. [00:04:09] Speaker 02: And just to take an assurance of the risk. [00:04:12] Speaker 02: of the risk, the coverage of the risk. [00:04:14] Speaker 02: And so every layer of reinsurer covers the risk underneath it. [00:04:22] Speaker 04: How do you respond to validness, if I'm pronouncing it correctly, argument about compounding? [00:04:32] Speaker 02: Well, I think you mean the fact that the tax is compounded? [00:04:35] Speaker 02: Well, I think, Your Honor, what Congress intended to do with the statute as explained in the legislative history was to level the playing field between foreign reinsurance companies that don't pay income tax and U.S. [00:04:47] Speaker 02: income tax companies that do pay income tax on their taxes at a very high rate. [00:04:52] Speaker 02: corporate income tax rate is one of the highest in the world. [00:04:55] Speaker 02: And it recognized that that created a competitive imbalance, and what it was trying to do was to create some sort of rough tax parity. [00:05:02] Speaker 02: And I think if you look at sort of, the Treasury Department's done studies and concluded that this actually does produce rough tax parity. [00:05:09] Speaker 02: I mean, if you look at [00:05:10] Speaker 02: the fact that if it was a U.S. [00:05:12] Speaker 02: contract, each insurer in the chain of reinsurance would pay income tax on the premiums. [00:05:19] Speaker 02: And granted, there might be deductions for purchase of reinsurance premiums and other business expenses, but ultimately, the last U.S. [00:05:28] Speaker 02: reinsurer would have no deduction for reinsurance premiums, so it would pay probably most of that 35% tax. [00:05:34] Speaker 02: On the other hand, if there are reinsurers, [00:05:39] Speaker 02: I think in that situation, Congress has imposed on each level of reinsurance a 1% tax. [00:05:45] Speaker 02: So you'd have to have many more levels of reinsurance than I think is a practical matter ever happened to approach what the income tax would be if you just look at the tax rates on its own. [00:05:55] Speaker 02: And I think when you look at the whole issues of how the deductions play in, what the Treasury has found is that this actually gives some sort of tax parity. [00:06:03] Speaker 02: And that was what Congress was aiming at. [00:06:07] Speaker 02: In the U.S. [00:06:08] Speaker 02: context, each level is subject to a tax, and the excess tax simply does the same thing. [00:06:13] Speaker 02: And I think, going back to the meaning of covering, to take an insurance example, if, for example, each reinsurer provided 100% coverage, [00:06:23] Speaker 02: Ultimately, the person at the retrocessionaire at the end of the chain would be paying the full amount of the expense. [00:06:30] Speaker 02: And I think when somebody promises to pay somebody else and somebody pays somebody else and somebody at the end pays the whole thing, it's generally viewed as covering the cost as a matter of ordinary usage. [00:06:42] Speaker 02: So the best rating of 4371.3 is the one the government's urging here that would comport with the rest of the statute. [00:06:49] Speaker 02: None of the statute was meaningless and it would all make sense with the history of the statute and Congress's expressed intent on not to change the meaning from the wording that originally existed that I think pretty clearly would reach these retrocessions here. [00:07:02] Speaker 01: Mr. So the in actual practice in this industry, [00:07:08] Speaker 01: Is it the norm or even, is it the norm or anything close for the initial insurer to lay off the entire risk to a reinsurer? [00:07:22] Speaker 02: There are different types of reinsurance contracts. [00:07:24] Speaker 01: I would think that it would be more the norm that the initial insurer takes the first tranche and if the losses exceed a certain level that laid that off. [00:07:35] Speaker 01: uh... i think that probably is as typical your honor but i was there with that that's the yeah but i i i thought that case the reinsurer is insuring against the risk that claims will rise above a certain level today presented in some ways is a different coverage than first dollar insurance [00:07:55] Speaker 02: Well, Your Honor, I think what's important here is that this statute was intended to apply, you know, it doesn't distinguish between types of reinsurance policies and there can be all types. [00:08:04] Speaker 02: These are identification policies. [00:08:06] Speaker 01: I understand that, but the argument about coverage, your argument about coverage is that it's tortoises all the way down and you get to the same risk at the end of the day. [00:08:17] Speaker 01: They're all insuring against the hurricane in Florida. [00:08:19] Speaker 02: Right. [00:08:20] Speaker 01: But the alternative view of that is that [00:08:25] Speaker 01: Swiss Re who's fourth in the chain is insuring against a hurricane of such a magnitude that the losses for its original insurer exceed some dollar amount. [00:08:37] Speaker 01: well you know i think that is that a totally ridiculous argument i think that can be the case in some circumstances that i think this is an ambiguity in the statute well you know i think you're still covering the rest and i think the reasonable reading is that that also with the rest are covered if you look at the latest levels of women we just a quick everyone agrees no question there's uh... their ultimate risk is a hurricane in florida right the question is whether the coverage [00:09:03] Speaker 02: is the same when in fact somebody down the line re-insure is recovering only risk above a certain level well you're right that the statute doesn't say it has to cover all the rest is that it has to cover the contract you're right and was that it covered all well i was getting that is what an example to try to make you understand that the person who dealt with at the end of line would be paying but i think even if the the person at the end of line only paid part they're still covering the contract and and the underlying rest and i think when you're going [00:09:33] Speaker 01: in a sense, are covering a piece of it, if it rises to a certain level. [00:09:38] Speaker 02: Yes, and that would be within the meaning of covering, if they're covering a piece. [00:09:42] Speaker 02: And I think that's the important thing here. [00:09:45] Speaker 02: And by viewing it as covering, all are part of it. [00:09:47] Speaker 01: Well, it's not covering any of the contracts, but it's covering a portion of one of the contracts. [00:09:53] Speaker 02: Well, but I think it still falls within covering to cover a portion. [00:09:58] Speaker 02: And that's much more reconcilable with the rest of the statute when you look at the definition as being with respect to the risk. [00:10:05] Speaker 02: And by saying covering a portion is enough, [00:10:09] Speaker 02: It's consistent with the legislative intent. [00:10:11] Speaker 02: It's consistent with the only case on the issue, the Northumberland case, which did hold the tax applies to a retrocession between two foreign reinsurers. [00:10:19] Speaker 02: And it's consistent with the regulation, which, Treasury regulation. [00:10:24] Speaker 01: Is that cognizable for us, those considerations, in asking the question of whether the statute is at all ambiguous, or is it a question of whether it's facially ambiguous? [00:10:35] Speaker 02: I'm sorry, I'm not sure I understand your question here. [00:10:37] Speaker 01: if the statute's ambiguous we get to the question of extra-territorial application. [00:10:41] Speaker 02: And I think of deference to the regulation as well. [00:10:44] Speaker 01: So all those things you say come into reading the statute in answering the initial question, is it ambiguous? [00:10:52] Speaker 02: That is true. [00:10:53] Speaker 02: But I don't think you have to get to that because I think the statute on its face can only be reconciled if you give covering a meaning as covering the risks and covering any part of the ultimate financial responsibility. [00:11:07] Speaker 02: But I think if you do get to that point, that the deference to the regulation would be appropriate because the regulation and the case law, the only case law that's been on the books since the 1970s, concluded looking at the legislative intent and the statute of a whole, that the proper construction of the statute was that retrocessions would be taxed. [00:11:27] Speaker 02: And that would be in the Northumberland opinion. [00:11:29] Speaker 02: And it looks at the issue, you know, it says basically, you know, that these arguments that pick out little pieces of 43-71-3 are perhaps facially appealing, but when you look at the statute as a whole, that doesn't make sense when you put all the pieces together, particularly in light of the legislative history. [00:11:45] Speaker 02: That's very, very clear. [00:11:46] Speaker 01: And there's a, you know... Well, aren't there reasons on the other side here, advanced by the other side, [00:11:54] Speaker 01: that suggest that are at least enough to say that they have an argument. [00:12:08] Speaker 01: Let's talk about tax stamps, for instance. [00:12:11] Speaker 01: 1942. [00:12:13] Speaker 01: You have to buy stamps to pay the tax. [00:12:16] Speaker 01: Stamps are sold only at post offices. [00:12:20] Speaker 02: i think well and reassure that it's really businesses had agents there was airmail there was uh... there are means of shipping things abroad at that time and there's no indication any of the legislative history or the earlier case law uh... that indicates that that was a concern so i think this is something that that something analysis come up with which is a creative argument but i don't think that there's any [00:12:41] Speaker 02: foundation for it in fact in terms of what congress was concerned about or what the earlier cases race concerns about and i think the fact that that people could ship things by by airmail uh... really doesn't make that are a real concern and i think it's a very foreign sure would have to have an agent in the u s well i think most of the news reporters in the u.s. [00:13:04] Speaker 02: that's how they sell the insurance in the u.s. [00:13:06] Speaker 02: and and certainly they could have you know they don't have to have an agent to have somebody [00:13:10] Speaker 02: go pick up stamps for them and ship it to them. [00:13:12] Speaker 01: Well, that person would be called an agent. [00:13:14] Speaker 02: I don't know if you're using some technical means of agent, but you know, you could just have a service do that. [00:13:20] Speaker 02: You know, some sort of contractual service do that. [00:13:23] Speaker 01: Just call FedEx. [00:13:24] Speaker 02: 1942. [00:13:24] Speaker 02: 1942 FedEx equivalent, I guess. [00:13:27] Speaker 02: But I think, you know, if the court should conclude it's ambiguous, I don't think that the deciding factor here is the presumption against ex-tutorial allocation, because this statute on its face [00:13:36] Speaker 02: is not like the statutes, for example, in Morrison, that were a primarily domestic statute. [00:13:41] Speaker 02: This is a statute that's entirely designed to reach foreign reinsurers and to eliminate the unfair competitive advantage. [00:13:48] Speaker 01: Well, it can reach foreign insurers who are either in or have a direct connection to the U.S. [00:13:55] Speaker 01: consistent with the point you've just made that it says foreign insurers. [00:13:59] Speaker 01: Right, it's all about foreign insurers. [00:14:01] Speaker 01: It doesn't necessarily mean that it reaches foreign insurers who have nothing to do with the U.S. [00:14:07] Speaker 01: and whose policy relationship is with another foreign insurer. [00:14:10] Speaker 02: Well, Your Honor, it actually does reach foreign insurers that have no connection with a U.S. [00:14:17] Speaker 01: insurer. [00:14:18] Speaker 01: I don't mean due process contact. [00:14:21] Speaker 02: Well, I think, you know, the statute actually does apply if you have a foreign insurer and a foreign reinsurer. [00:14:26] Speaker 02: And I think that's very clear on the face of the statute. [00:14:30] Speaker 02: And I think also that the statute does generally, its whole purpose is to reach foreign insurers who are not doing business in the U.S., and it particularly cars out that line. [00:14:41] Speaker 02: So I think that makes it very clearly intended to reach a certain category of foreign insurers who are not actually here doing business. [00:14:48] Speaker 02: I see I've gone way over my time. [00:14:50] Speaker 02: I hope I can have a few minutes for rebuttal. [00:14:52] Speaker 04: Thank you. [00:14:52] Speaker 04: I would like you to explain something so I'm a little clearer about it. [00:14:57] Speaker 04: In your brief, you make the statement, and I just need to understand it, you say the intent of Congress would be floated. [00:15:08] Speaker 04: if you exclude all retrocessions or at least room for foreign insurers and reinsurers to structure their transactions in a way to allow them to access the U.S. [00:15:20] Speaker 04: insurance market and yet avoid the tax imposed by 4371. [00:15:26] Speaker 02: Thank you for asking that question. [00:15:27] Speaker 02: I think it's a very good question, Your Honor. [00:15:28] Speaker 02: But basically, what could happen if we didn't reach retrocessions here is that a foreign insurer would know that only the first level of insurance and the reinsurance would be taxed. [00:15:38] Speaker 02: And then it could set up a U.S. [00:15:40] Speaker 02: affiliate, you know, the foreign insurer who would otherwise, you know, not be doing business in the U.S. [00:15:45] Speaker 02: It could set up U.S. [00:15:45] Speaker 02: affiliates to sell. [00:15:46] Speaker 04: But wouldn't that affiliate be subject to [00:15:49] Speaker 02: will be subject to income tax in the U.S. [00:15:51] Speaker 02: and the reinsurer who was an affiliate would be subject to tax, but each of them would have really no other U.S. [00:15:58] Speaker 02: business and probably no other U.S. [00:15:59] Speaker 02: business expenses or very minimal ones. [00:16:02] Speaker 02: They could claim deductions for their reinsurance premiums that offset any U.S. [00:16:06] Speaker 02: income tax and then ultimately the retrocessionaire would be able to [00:16:12] Speaker 02: ultimately cover everything when they would have covered it directly and they pay no tax deduction they're claiming is for the exercise for the income tax for the u.s. [00:16:21] Speaker 02: income tax and i think that's it i'm sorry if they're doing business in the u.s. [00:16:25] Speaker 02: the affiliates would be subject to u.s. [00:16:27] Speaker 01: and what is the deduction to what you're referring to? [00:16:28] Speaker 02: well they would take a deduction for premiums that they paid out to the reinsurer so if you pay insurance you get a deduction for reinsurance premiums and they could structure those so that the reinsurance premiums were enough to offset [00:16:41] Speaker 02: any U.S. [00:16:42] Speaker 02: income tax. [00:16:44] Speaker 02: And then the re-retrocessionary... No, they have to offset all U.S. [00:16:48] Speaker 02: income. [00:16:48] Speaker 01: All U.S. [00:16:49] Speaker 01: income tax. [00:16:49] Speaker 01: No, they have to offset the income, not the income tax. [00:16:52] Speaker 02: Right, well they would offset the income so that ultimately they don't pay any U.S. [00:16:57] Speaker 02: income tax, or it's very minimal. [00:16:59] Speaker 02: And then the retrocessionaire would pay no excise tax, so the transaction could be tax free. [00:17:05] Speaker 02: And if you say, you know, it doesn't apply to any retrosections ever, it just gives them, you know, lets them know you need one insurer, one foreign reinsurer, and then you can kick the money out of the country and not pay any tax. [00:17:17] Speaker 04: So where would I find this explained along the lines of what you just said? [00:17:22] Speaker 04: Is there any analysis or something I can read? [00:17:26] Speaker 02: I think the Northumberland decision is the best analysis of that. [00:17:29] Speaker 04: I'm sorry? [00:17:30] Speaker 02: I'm sorry, Your Honor. [00:17:32] Speaker 04: That's the name of the judge who wrote this. [00:17:34] Speaker 02: Oh, I'm sorry, Your Honor. [00:17:35] Speaker 04: I didn't understand what you said. [00:17:36] Speaker 04: So it's his analysis that is really the government's [00:17:43] Speaker 04: point in that statement I just read. [00:17:45] Speaker 02: I think that's really the point, that you'd have the same lack of level in the playing field. [00:17:49] Speaker 02: I don't think he goes into as much detail as I do here, but I think his analysis is along those same lines. [00:17:56] Speaker 02: But I'm not sure that there's an authority, you know, there really only, there's the American bankers in the Northumberland case. [00:18:01] Speaker 02: There's not a lot of case law on this. [00:18:02] Speaker 04: But I do think... And there's not a lot of regulatory explanation either. [00:18:07] Speaker 02: Well, Treasury Regulation 46.4371-2C is directly on point and governs this. [00:18:15] Speaker 02: And there were two other revenue rulings, which are cited in our briefs, that address it. [00:18:20] Speaker 02: But I think that regulation is part of a section of regulations that addresses it. [00:18:25] Speaker 04: So even though the government didn't raise the deference argument in the district court, your point is that even if it had, we would only see what [00:18:36] Speaker 04: we see now, namely, the Treasury regulation and the revenue rulings? [00:18:40] Speaker 02: That is correct, Your Honor. [00:18:41] Speaker 02: And I think, you know, obviously, if this Court were to, you know, a relative discretion, since it wasn't raised below, to decide whether to give that deference, but I would certainly urge the Court to, because I think this is a case where it's a purely legal issue, the regulation speaks for itself, and it, of course, this case would be inconsistent with subsequent cases where the government raised the regulation. [00:19:01] Speaker 02: If the Court should conclude that makes the difference. [00:19:04] Speaker 02: All right, thank you. [00:19:05] Speaker 02: Thank you. [00:19:05] Speaker 02: Any other questions? [00:19:06] Speaker 02: Thank you very much. [00:19:12] Speaker 02: Good morning. [00:19:12] Speaker 00: Good morning, Your Honor. [00:19:14] Speaker 00: May it please the Court, Joe Weir, for validous reinsurance. [00:19:17] Speaker 00: I would just ask the court if I would be accorded additional time in light of the time that the appellant consented. [00:19:24] Speaker 00: Sure. [00:19:24] Speaker 00: Thank you very much. [00:19:27] Speaker 00: Your honor, Judge Ginsburg, you made the point and it's directly on point here. [00:19:31] Speaker 00: The statute doesn't say it imposes a tax on contracts, reinsurance policies that cover risks. [00:19:38] Speaker 00: It says policies of reinsurance that cover contracts taxable under paragraphs one and two. [00:19:43] Speaker 00: And covering a contract in the reinsurance context has a plain and unambiguous meaning. [00:19:48] Speaker 00: It means to provide identification for liabilities that arise under particular contracts. [00:19:53] Speaker 00: Congress didn't need to use the word direct or the word privity in order to convey that. [00:19:57] Speaker 00: That's the background common law rule well established in this area that would have been understood by the Congress. [00:20:04] Speaker 00: And so Congress would have had to countermand that and say we don't mean to incorporate those principles because they weren't there. [00:20:10] Speaker 01: Is there any evidence of this background common law rule? [00:20:13] Speaker 00: Yes, we have, Your Honor. [00:20:16] Speaker 00: We've cited the treaties, the treatises, including one that was passed just or written just shortly after the statute was adopted. [00:20:23] Speaker 04: Not Mr. Strain, somebody else? [00:20:26] Speaker 00: Strain and fear, I think, was the one that's more contemporaneous. [00:20:30] Speaker 00: And they both, and the rules, the two fundamental rules are, and reinsurance is a strictly indemnification contract. [00:20:38] Speaker 00: And there's no privity with third parties. [00:20:40] Speaker 00: That's well established. [00:20:41] Speaker 00: That's been the law for decades. [00:20:43] Speaker 00: And in light of those rules, there is no coverage provided to a primary insurer by a retrocession. [00:20:51] Speaker 00: If Validus defaults on its obligations, the primary insurers whose policies are taxable under paragraph 1 and 2 have no recourse whatsoever against Validus. [00:21:00] Speaker 00: excuse me, against their retrocessionaire. [00:21:03] Speaker 00: They have no rights. [00:21:04] Speaker 00: They derive no protection. [00:21:05] Speaker 00: And if Validus pays its liabilities, then it is Validus alone that has identified them. [00:21:10] Speaker 00: All right. [00:21:11] Speaker 04: So you're speaking as an expert in this area. [00:21:15] Speaker 04: But when Congress passed this statute, it had a goal in mind of protecting American insurance companies. [00:21:24] Speaker 04: And just as I asked counsel for the government, [00:21:30] Speaker 04: Everybody's telling us the statute is plain on its face, et cetera. [00:21:35] Speaker 04: But it's on the assumptions of a lot of practices and understandings that, except for these two district court opinions, really, we don't know all of this. [00:21:50] Speaker 04: And I looked at Mr. Strain, or Professor Strain, and he's talking in very plain terms about what is reinsurance [00:21:58] Speaker 04: what is retrocession, that type of thing, not the type of comments that are being made here this morning. [00:22:03] Speaker 00: No, Your Honor, I'm relying on comments in his treatise and fears. [00:22:07] Speaker 00: That are cited in your brief? [00:22:08] Speaker 00: They are, in fact. [00:22:09] Speaker 01: What's the second treatise? [00:22:10] Speaker 01: There's a reference to Schwartz and Rosenhouse. [00:22:15] Speaker 01: I don't see. [00:22:16] Speaker 01: Oh, I'm sorry. [00:22:21] Speaker 00: We cite Strange and right at the beginning of our brief for these fundamental principles [00:22:26] Speaker 04: Now I'm clear on that, all right? [00:22:29] Speaker 04: But I'm talking about, you say Congress didn't have to put the word direct in because everybody understood. [00:22:36] Speaker 04: This is the nature of the beast. [00:22:38] Speaker 00: That flows from privity. [00:22:40] Speaker 00: That flows from the fundamental rule of privity, Your Honor, because there is no such thing as indirect coverage. [00:22:44] Speaker 04: I understand the privity point. [00:22:46] Speaker 00: But that means there's no indirect coverage. [00:22:48] Speaker 04: And I understand that. [00:22:49] Speaker 04: But I'm not clear why that means necessarily that Congress [00:22:56] Speaker 04: had in mind. [00:22:57] Speaker 04: This excise tax would not reach these other [00:23:02] Speaker 00: Well, I'll address them in pieces if I may, Your Honor. [00:23:04] Speaker 00: First of all, if one case, it's not cited in our brief, but the Supreme Court decision in the I-4-I, the Microsoft case, the general rule is you must presume that Congress is aware of the common law principles in an area when it legislates. [00:23:18] Speaker 00: And so these principles have to have been understood by Congress, unless Congress evidenced a contrary meaning. [00:23:25] Speaker 04: So the presumption... And what is the common law principle you're relying on? [00:23:28] Speaker 00: There was no privity. [00:23:29] Speaker 00: No privity. [00:23:29] Speaker 00: No privity. [00:23:30] Speaker 00: So there's no indirect coverage of protection. [00:23:34] Speaker 00: Your Honor, also on the, with respect to the intention... Can I just be clear? [00:23:38] Speaker 04: If I have a contract of insurance and the insurance company in turn is reinsured and then the reinsurer gets reinsured. [00:23:51] Speaker 00: That's our retrocession. [00:23:52] Speaker 04: I don't have any claim against the ultimate. [00:23:56] Speaker 00: Nor do you have any claim against the First Reinsurer. [00:23:58] Speaker 04: But that's the privity we're talking about. [00:24:00] Speaker 04: That's not what we're talking about in this exercise. [00:24:03] Speaker 00: No, we are, Your Honor. [00:24:03] Speaker 00: We are talking about what coverage means. [00:24:05] Speaker 00: And my retrosession can't cover either your insurance, homeowner's insurance policy, or Allstate for having written you that policy, because there is no privity between you or Allstate and my retrosession error. [00:24:19] Speaker 00: And as a consequence of that rule, the retrosession cannot cover those contracts. [00:24:25] Speaker 00: They only cover the contract of validness to Allstate. [00:24:28] Speaker 04: The government's argument is you're covering the risk [00:24:30] Speaker 00: Right, and that's exactly why the government's argument is incorrect. [00:24:34] Speaker 00: The statute says covering contracts, not risks. [00:24:37] Speaker 04: Your Honor, there's been a lot of... Well, a contract is a contract addressing risk. [00:24:43] Speaker 00: But there are different risks in each contract. [00:24:46] Speaker 00: Your contract with Allstate is, my house may collapse, my roof may blow off. [00:24:50] Speaker 00: Allstate's contract with Valis is, we may suffer losses in the United States from various events. [00:24:55] Speaker 00: Valis' risks are... Among them. [00:24:57] Speaker 00: Among them. [00:24:57] Speaker 00: Yes. [00:24:58] Speaker 00: But the contracts are distinct. [00:25:00] Speaker 00: Right. [00:25:00] Speaker 04: They don't just run altogether, and the risks don't just flow back and forth as though there's no... I understand the flow back and forth, but I'm not understanding why the risk, the underlying risk, isn't relevant. [00:25:13] Speaker 00: We can see that there's a relationship. [00:25:17] Speaker 00: What we're saying is that's not good enough because Congress said covering any contracts, not covering any risks. [00:25:23] Speaker 00: And your honor, if I may, about the 1942 legislation, first point is this court said repeatedly, you're not supposed to look to legislative history and prior legislative language in order to cloud the meaning of an otherwise unambiguous statute. [00:25:36] Speaker 00: Second, the government is just speculating about what the 1942 Act means. [00:25:40] Speaker 00: We didn't concede the scope of that statute. [00:25:42] Speaker 00: We were talking about [00:25:43] Speaker 00: the interplay of language in the current law and what that meant for the definition of reinsurance. [00:25:48] Speaker 00: We never said, of course, the 42 Act reached anything. [00:25:51] Speaker 00: And they're just saying, because there's a sentence in the House report that says we didn't mean to change anything, that means that the 42 Act covered all wholly foreign retrocessions, and the statute still does today. [00:26:01] Speaker 04: If I may, Your Honor. [00:26:02] Speaker 04: So the previous statement that this contract was covered under the 42 Act, that is not something you acknowledged? [00:26:12] Speaker 00: No, Your Honor, our point was, excuse me, our point was that in light of the Roussela Principle that you have to give different language and different clauses different meaning. [00:26:23] Speaker 00: The definition of reinsurance in the current statute had to be understood broadly to encompass all reinsurance policies because of the narrower language covering any contracts in paragraph three. [00:26:34] Speaker 00: That language, that narrowing language, wasn't in the 42 Act, so the rule that you have to give different clauses different meaning didn't apply to the 42 Act. [00:26:42] Speaker 00: And there are two fundamental points to bear in mind about the 42 Act. [00:26:44] Speaker 00: First of all, as Judge Ginsburg alluded to, it's unimaginable that the 42 Congress thought, not just that they had the difficulty of buying stamps, that the United States could actually administer and enforce a tax on transactions between entirely foreign entities around the globe, which would no one in the United States would even know about. [00:27:02] Speaker 01: Around the globe, but isn't this industry basically in London and Switzerland? [00:27:06] Speaker 01: It's no longer just in those places. [00:27:08] Speaker 00: But even so, Your Honor, we point out retrocessions are not even known necessarily to primary insurers, so they would not have any idea that this contract existed. [00:27:19] Speaker 00: And the government says, oh, that's just speculation. [00:27:24] Speaker 00: No, no, I'm saying that when, if you're, if all state has a policy with you, all state reinsurance is valid, ballast reinsurance itself with petrol, all state may not even know about that. [00:27:37] Speaker 00: So how's the United States government going to find out about it? [00:27:39] Speaker 01: It's a question of administration. [00:27:43] Speaker 01: The tax is imposed, if it applies, on the reinsurer. [00:27:49] Speaker 01: It's the reinsurer's obligation to pay the tax. [00:27:52] Speaker 01: If it doesn't, it's in violation of the law. [00:27:55] Speaker 01: How does the United States government know about the existence of John Doe in California because he files a return? [00:28:00] Speaker 00: These concerns are the very concerns that the Fifth Circuit pointed to in the American banker's case. [00:28:04] Speaker 00: They say, oh, this is speculation. [00:28:06] Speaker 00: You say, well, that somebody would have had the duty to report. [00:28:08] Speaker 00: The Fifth Circuit said, the problems of administering a tax in wholly foreign transactions would be so substantial that we will not even give the word taxable its plain and ordinary meaning. [00:28:19] Speaker 00: And they also thought it would raise fundamental constitutional concerns, which we have also identified. [00:28:24] Speaker 00: uh... on the leveling the playing field for your honor with respect to listen to his tickets it was a very short a very short opinion on it [00:28:35] Speaker 00: The leveling the playing field, it's simply not the case that applying the tax in this cascading fashion keeps the playing field level. [00:28:42] Speaker 00: If you look at page 44 of our brief, we explain the mechanics of this. [00:28:46] Speaker 00: The income tax is based on profits. [00:28:48] Speaker 00: The retrocession tax is based on, the federal excise tax is based on each time of a session of risk. [00:28:56] Speaker 00: And so it's cumulative. [00:28:58] Speaker 00: If you have $10 million of profit, as we explained in our example, that leads to $3.5 million of tax divvied up among all of the US reinsurers in their hypothetical. [00:29:09] Speaker 00: There is no accumulation of more tax, whereas if the policy is ultimately the first premium is $200 million and it's a 1% tax, every single time you have another $2 million of tax. [00:29:22] Speaker 00: And that goes to their economic burden point. [00:29:24] Speaker 00: They say, well, the last person in the chain bears the economic burden. [00:29:27] Speaker 00: But under their theory, everybody in the chain is paying the tax. [00:29:30] Speaker 00: It's not a question of only the last person pays. [00:29:31] Speaker 01: Only if everybody in the chain is taking 100% of the risk. [00:29:35] Speaker 00: But no matter how much they take, Your Honor, they're taking a percentage. [00:29:38] Speaker 00: They have to pay the tax on whatever the premiums are for whatever percentage they take. [00:29:43] Speaker 01: And at the end, it should add up to the same amount. [00:29:45] Speaker 00: No, it won't, Your Honor. [00:29:47] Speaker 00: I encourage you to take a look. [00:29:48] Speaker 00: I'm not doing justice to the math here. [00:29:50] Speaker 00: But if you look at page 44, it's cumulative in the foreign cascading setting. [00:29:55] Speaker 00: It's not in the domestic setting. [00:29:57] Speaker 00: And if I could get to the presumption of extraterritoriality. [00:30:01] Speaker 04: Is that because, for example, as the green brief [00:30:05] Speaker 04: points out the... [00:30:09] Speaker 04: They pay a local tax and they don't get credit? [00:30:13] Speaker 00: No, it has nothing to do with it. [00:30:14] Speaker 00: It doesn't have to do with the credit, Your Honor. [00:30:16] Speaker 00: It has to do with the fact that every single time there's a new reinsurance transaction, according to them, there's a new excise tax of 1% imposed. [00:30:26] Speaker 00: And it just keeps adding up. [00:30:28] Speaker 00: Whereas in the United States, it's based on overall profit derived from that first contract, and it doesn't get added up. [00:30:34] Speaker 00: The tax doesn't get added up, it gets divvied up. [00:30:37] Speaker 00: On the presumption against extraditoriality, Your Honors, the government's simply wrong in claiming that that presumption is out of this case because the statute is only concerned with foreign entities. [00:30:46] Speaker 04: So it distinguishes Morrison by saying that, you know, the allusions to the Commerce Clause, this is a very different type of specific statement by Congress that this was going [00:31:00] Speaker 00: Right, Your Honor, but there are two problems with that argument. [00:31:03] Speaker 00: Morrison says, to the extent you find any extraterritorial scope clearly authorized, you have to limit it to that scope unless you find additional evidence for the expansion. [00:31:13] Speaker 04: That just takes us back to the beginning. [00:31:15] Speaker 00: But Morrison relies on Microsoft v. AT&T. [00:31:18] Speaker 00: And in that case, AT&T made the same argument, essentially. [00:31:21] Speaker 00: They said, this patent law that we're dealing with here was passed only to reach foreign conduct. [00:31:26] Speaker 00: So the presumption should just be kicked out of the case. [00:31:28] Speaker 00: It plays no role. [00:31:30] Speaker 00: And the Supreme Court said, no, no, no. [00:31:31] Speaker 00: It continues to operate to limit the scope of the extension into foreign affairs. [00:31:36] Speaker 00: And that's exactly the passage that the Supreme Court is relying on in the Morrison case. [00:31:42] Speaker 04: And it makes perfect sense. [00:31:51] Speaker 00: That's no limitation at all, Your Honor, because that's a cascading tax. [00:31:54] Speaker 04: I know. [00:31:55] Speaker 00: The point is, Congress clearly intended to capture first-level foreign reinsurance policies. [00:32:00] Speaker 00: We all agree on that. [00:32:01] Speaker 00: We think it's clear that's the only policies they meant to tax. [00:32:05] Speaker 00: But if there's any doubt about whether it goes beyond that, that's precisely when the presumption kicks in and says, we win. [00:32:12] Speaker 00: And even if you take their example, counsel alluded to the possibility of a foreign direct insurer and a first-level foreign reinsurer. [00:32:21] Speaker 00: And she said that shows that they wanted to reach transactions with two foreign entities. [00:32:26] Speaker 00: That's just a one-step, first-level contract. [00:32:31] Speaker 00: What they're asking you to assume is that if this cascades seven times, that you can just keep applying the tax to every link in that chain. [00:32:38] Speaker 04: Well, I was going to ask you, your example on page 44 is exactly that. [00:32:43] Speaker 04: It's a hypothetical. [00:32:44] Speaker 04: And Judge Ginsburg asked counsel for the government what's the normal situation. [00:32:53] Speaker 00: The norm, as I understand it, Your Honor. [00:32:54] Speaker 04: And counsel, I think, argued something like, well, there may be four links, but that's about it. [00:33:00] Speaker 04: We're not up to five or nine. [00:33:02] Speaker 00: Well, four links would consume way more of the profit than four domestic retrocessions, Your Honor. [00:33:08] Speaker 00: So the problem is still the same in terms of the economics. [00:33:13] Speaker 00: On the question of deference, the government is asking you to defer to what their briefs say this regulation means. [00:33:24] Speaker 00: The reason they didn't invoke it in the district court we submit is because no one read it to say that wholly foreign retrocessions are subject to the tax. [00:33:32] Speaker 00: And we have identified compelling evidence that no one, in fact, had that understanding because it was issued in conjunction with the regulation that said the tax only attaches when you have [00:33:43] Speaker 00: in a U.S. [00:33:44] Speaker 00: resident sending premiums out of the country. [00:33:47] Speaker 00: That never happens in a foreign reinsurance context. [00:33:49] Speaker 00: So a companion regulation completely refuted what the government now claims that other regulation means, and the IRS would have never written revenue rule in 2008 the way it did if it thought that that regulation applied tax to holy foreign retrocessions. [00:34:04] Speaker 00: It said that the foreign retrocessions are taxable because the tax applies to contracts, reinsurance contracts, [00:34:11] Speaker 00: covering contracts taxable under paragraphs one, two, or three. [00:34:15] Speaker 00: The statute obviously doesn't say that. [00:34:17] Speaker 00: It doesn't say anything about or three. [00:34:19] Speaker 00: The reason they had to insert those words was precisely because they understand that retrocessions only cover contract, only cover reinsurance contracts, which are only taxable under paragraph three. [00:34:31] Speaker 00: So those two examples show that what they now say is the meaning of the regulation is in fact not what anyone would have reasonably understood to mean. [00:34:38] Speaker 00: And so it shouldn't get deference for that reason alone. [00:34:41] Speaker 00: But if you even clear that hurdle and the waiver problem, you still run into the problem of the presumption against extraterritoriality. [00:34:47] Speaker 00: At Chevron step one, you would have to apply that presumption to determine whether the statute [00:34:52] Speaker 00: had a plain meaning or was ambiguous, and you would have to resolve any ambiguity against their interpretation at step one of Chevron. [00:34:59] Speaker 00: So you would never get to step two. [00:35:01] Speaker 00: And if you look at Justice Scalia's concurrence in the Aramco case, he gets to the same result a different way. [00:35:09] Speaker 00: He says, any time a regulation affords a statute extraterritorial scope that isn't clearly provided for in the statute, [00:35:16] Speaker 00: It's unreasonable. [00:35:17] Speaker 00: So either they never get to step two or they always lose at step two, but there is no deference owed. [00:35:23] Speaker 00: And another reason, Your Honor, to go back, Judge Rogers, to your earliest question, their statute renders the phrase covering any contracts meaningless. [00:35:31] Speaker 00: They say the tax is coterminous with the definition of reinsurance. [00:35:35] Speaker 00: If that were true, the statute would say 1% tax on a policy of reinsurance, full stop. [00:35:42] Speaker 00: The statute goes on for 11 more words to say, covering any of the contracts taxable under paragraphs one or two, and they give no meaning to that. [00:35:50] Speaker 00: They now say that our interpretation renders the reinsurance definition meaningless. [00:35:54] Speaker 04: That's not true. [00:35:55] Speaker 04: I understand Council want to talk in extremes here, but I don't think that's what the government's arguing. [00:35:59] Speaker 04: They acknowledged the limit in one and two. [00:36:03] Speaker 04: All right? [00:36:04] Speaker 04: So moving from that limit, the question is, does the excise tax reach these other links? [00:36:13] Speaker 04: I'm not sure. [00:36:15] Speaker 00: But the question, Your Honor, is the limit of covering any contracts in paragraph three. [00:36:20] Speaker 04: They're saying that... But you said they're ignoring one and two. [00:36:23] Speaker 00: No, they're ignoring the entire phrase. [00:36:26] Speaker 00: The entire phrase says the tax is imposed on one re-insurance policy that covers primary insurance policies. [00:36:31] Speaker 00: No, I understand. [00:36:32] Speaker 04: You're saying contract is not the same as risk. [00:36:34] Speaker 00: And they've given no independent meaning to that clause. [00:36:38] Speaker 00: And instead they say, well, it doesn't make any sense for Congress to write a broad definition if it's not going to tax everything in that definition. [00:36:45] Speaker 00: What rule is there that says that Congress can't write a statute that way? [00:36:47] Speaker 04: Congress did exactly that in paragraph one with casualty insurance. [00:36:54] Speaker 00: Your Honor, they haven't made that argument, and I don't think it's fair to say. [00:36:58] Speaker 00: I mean, it's a cardinal rule. [00:36:58] Speaker 04: Well, both of you are arguing the other side's interpretation results in surplus. [00:37:05] Speaker 00: But they haven't demonstrated that that's true in our case. [00:37:08] Speaker 00: I was trying to explain, Your Honor, that if they're right, then that's exactly what paragraph one does. [00:37:13] Speaker 00: Paragraph one says, foreign casualty insurance or casualty insurance, everything that isn't life insurance. [00:37:19] Speaker 00: The opening clause says, tax imposed on every policy of insurance issued by a foreign insurer. [00:37:24] Speaker 00: If you stop reading there, that means the United States purports to tax every foreign casualty policy in the world. [00:37:30] Speaker 00: That's insane. [00:37:31] Speaker 00: Then Congress goes on to paragraph one and says, [00:37:33] Speaker 00: If issued in the name of an insurer, that obviously drastically narrows the definition of casualty insurance. [00:37:40] Speaker 00: And on their view, that can't be right because that would render the definition surplusage. [00:37:45] Speaker 00: That just makes no sense. [00:37:47] Speaker 00: And there's very compelling reasons for why Congress wouldn't want the scope that they have suggested. [00:37:52] Speaker 00: You read the brief of our amici. [00:37:54] Speaker 00: They explain the burdens and difficulties that would arise from opposing the tax in this cascading fashion that would raise significant comedy concerns. [00:38:02] Speaker 00: And as I said earlier, Your Honor, the government, the Fifth Circuit recognized that the sweeping scope they purport to give the statute would result in enormous difficulties of administration and enforcement. [00:38:14] Speaker 00: And the avoidance point, and they say, well, you can create, they sort of speculate about the kinds of structures that would be created and the tax consequences of those structures. [00:38:24] Speaker 00: We pointed out in our brief that the United States has tools to prevent tax avoidance basically relying on [00:38:30] Speaker 00: shamed transactions just to avoid tax. [00:38:33] Speaker 00: But even if you could posit that, maybe some people will be able to reduce their tax burdens. [00:38:39] Speaker 00: I mean, I've never heard that structuring transactions in order to minimize taxes is an absurdity under the U.S. [00:38:45] Speaker 00: laws. [00:38:45] Speaker 00: I mean, I think that's [00:38:46] Speaker 00: part of the business world's mindset. [00:38:49] Speaker 00: And an absurdity means that the line Congress drew is irrational. [00:38:53] Speaker 00: And here the line Congress drew is totally rational because Congress didn't want a tax that raises constitutional concerns, that would raise comedy concerns, that would entail significant problems of administration and enforcement. [00:39:06] Speaker 00: And the last point I'd like to make, Your Honors, is they have no explanation for why over a dozen treaties have anti-conduit provisions if the tax, in fact, cascades, is the way they claim. [00:39:18] Speaker 00: As we've explained, those treaties say you issue a policy to a company in Treaty Nation A [00:39:26] Speaker 00: will waive the tax. [00:39:28] Speaker 00: But if that company turns around and reinsures it with a company in country B that doesn't have the tax protection, the treaty, we're going to reimpose the tax on that first transaction. [00:39:39] Speaker 00: Why? [00:39:40] Speaker 00: The whole point of the anti-condo provision is because otherwise the tax would be completely evaded. [00:39:47] Speaker 00: But on their theory, it wouldn't ever be completely evaded. [00:39:50] Speaker 00: It would just apply at the next leg. [00:39:52] Speaker 00: They wrote three pages in their reply brief on this point. [00:39:55] Speaker 00: And I, with all due respect, I do not understand what competing explanation they have put forward for those treaty provisions. [00:40:01] Speaker 00: We think they're just one of the many pieces of evidence that demonstrate that Congress never intended to tax wholly foreign retrocessions, such as the ones that are issued here. [00:40:11] Speaker 04: So at the first level, you concede the tax applause? [00:40:17] Speaker 00: Yes, Your Honor. [00:40:19] Speaker 00: We paid that tax. [00:40:19] Speaker 04: I just want to be clear. [00:40:20] Speaker 04: I understand you paid it, but you're seeking a refund, too, as to the link. [00:40:25] Speaker 04: No, no, we pay – As through the second level. [00:40:27] Speaker 00: Correct. [00:40:27] Speaker 00: No, but what I'm saying is on the first level, when all states – Right. [00:40:31] Speaker 00: We paid that tax and we've never disputed that tax. [00:40:35] Speaker 00: Right. [00:40:35] Speaker 00: And we think that tax is constitutional because in that sale, a ballast is benefiting from a market the United States has made available. [00:40:42] Speaker 00: Then we turn around and we buy protection for ourselves, which is an asset for our business, from petrol. [00:40:48] Speaker 00: Bermuda Company. [00:40:49] Speaker 00: In that circumstance, we're not availing ourselves of any benefit that the United States has made for us. [00:40:59] Speaker 04: in the opening brief. [00:41:01] Speaker 04: Do you remember that question? [00:41:02] Speaker 04: I'm sorry, I don't remember. [00:41:03] Speaker 04: Well, it was that the intent of Congress would be afforded if it excludes all retrocessions or it leaves rooms for foreign insurers and reinsurers to structure their transactions in a way to allow them access to the U.S. [00:41:16] Speaker 04: insurance market and yet avoid the tax imposed [00:41:20] Speaker 04: by 4371, and you heard what counsel responded, namely with the affiliates, et cetera, and you could structure the arrangements so that you'd end up paying no tax. [00:41:36] Speaker 04: What's your response? [00:41:37] Speaker 00: Your Honor, my response is the one I gave a moment ago, which is that the United States government has tools available to prevent transactions that have no business purpose other than to evade U.S. [00:41:45] Speaker 04: taxes, but that the argument that you could... No, this was not her... As I understood counsel's response, it was not that anybody was unlawfully evading taxes. [00:41:58] Speaker 04: It was just that they were structuring their business arrangements so that they paid little, if any, taxes. [00:42:05] Speaker 00: But Your Honor, if there's no business purpose other than the purpose of what you just described, then that is when the United States has tools to step in. [00:42:12] Speaker 01: But the more fundamental- It's not a sham transaction. [00:42:15] Speaker 01: The risk is actually transferred to the foreign affiliate. [00:42:21] Speaker 00: But it's not done for any purpose other than to evade the tax. [00:42:25] Speaker 00: That's the test of sham. [00:42:26] Speaker 01: No, suppose it's not a subsidiary. [00:42:28] Speaker 01: there's some percentage ownership so that the reason for transferring the selling the risk to the affiliate in Europe is to adjust the actual allocation of risk. [00:42:40] Speaker 01: They retain 10% or so. [00:42:42] Speaker 00: Right, my understanding is that there wasn't, I confess, I don't know the ins and outs of the affiliate structures, but I think if the only purpose of doing that is to evade the tax, then that's the government can respond to that. [00:42:56] Speaker 00: They can also issue regulations to address, even if it's not a sham, they can issue regulations to address this problem. [00:43:02] Speaker 00: But the more fundamental point, Your Honor, is I don't think you can interpret this statute. [00:43:05] Speaker 00: You can't say, there's a plain meaning, but we're going to decide to let them [00:43:10] Speaker 00: ignore the plain meaning to give a statute sweeping extraterritorial scope in order to address possible problems with the real answer to that is Congress can do something about that. [00:43:23] Speaker 00: It can't be the answer isn't, oh, we're going to contort the language of the statute and give it an extraordinary extraterritorial scope. [00:43:31] Speaker 00: Because that's not an absurdity. [00:43:32] Speaker 00: The only reason you can say we're not going to enforce this statute in accordance with the plain language is because it would lead to an absurd result. [00:43:39] Speaker 00: And the reason Congress drew the line here is perfectly rational for the reasons I previously gave. [00:43:46] Speaker 00: The Court has no other questions. [00:43:48] Speaker 00: All right, thank you. [00:43:48] Speaker 00: Thank you, Your Honor. [00:43:52] Speaker 04: All right, Councilor Pellin. [00:44:01] Speaker 02: I don't think you need to contort the statutory language here to get to the result the government's urging. [00:44:06] Speaker 02: I think the ordinary meaning of covering certainly contemplates the situation where there's a chain of responsibility that ultimately gets paid by someone else or in part by someone else. [00:44:16] Speaker 02: And I think if you just think about the situation where, you know, like if I go on government travel and I charge money to my credit card, there's an agreement, you know, [00:44:25] Speaker 02: the credit card has to pay the hotel, and then the government ultimately pays the credit card company, and you think of the government as covering the charge for my business travel, but there's never any contract between the hotel and the government. [00:44:38] Speaker 02: So I think if you take other ordinary examples, that fits with the ordinary usage of covering. [00:44:44] Speaker 03: There is a difference between covering risk and covering contract. [00:44:51] Speaker 02: Well, I think as the American Bankers Court explained, what Congress clearly intended in the original statute was to cover risk. [00:44:58] Speaker 02: That's what they spelled out. [00:44:59] Speaker 02: And then Congress again specifically said they didn't mean to change the meaning when they reorganized. [00:45:04] Speaker 02: And I think you can read covering contracts as covering the risks associated with them. [00:45:08] Speaker 03: Well, when you say this is what Congress intended in the original statute, are you saying that if Congress says that's what it's doing, [00:45:16] Speaker 03: But the words of the statute actually do something else. [00:45:20] Speaker 03: We ignore the words of the statute and look to the legislative history. [00:45:24] Speaker 02: Well, I'm saying the original words of the statute would have reached the risks. [00:45:29] Speaker 02: And then Congress said, we don't mean to change the meaning. [00:45:32] Speaker 02: There's a reading of covering that is consistent with the original meaning. [00:45:36] Speaker 02: And it makes sense to adopt that meaning. [00:45:38] Speaker 02: I would just also emphasize that while these contracts are indemnification contracts, reinsurance contracts could take different forms. [00:45:45] Speaker 02: There could be an assumption contract where the reinsurer assumes risks and lets the original insurer off the hook. [00:45:50] Speaker 02: There could be any variety of contracts. [00:45:52] Speaker 02: And so they're focusing on the particular contracts that are at issue here, which are indemnification contracts. [00:45:56] Speaker 02: But I'm not sure that you necessarily have to look that narrowly. [00:46:00] Speaker 02: And I think that, as Judge Rogers pointed out, that Congress, when they're rewriting the statute and trying to just reorganize and make it more readable, which is what the legislative history indicates they were trying to do, would have looked at what was sort of the normal meaning of covering. [00:46:13] Speaker 02: And they would have thought covering the risks associated with that contract fell within the language covering the contracts. [00:46:19] Speaker 02: And so I think that meaning is the most reasonable reading of the statute, and it is one that comports with the case law and the regulations and the history of the statute. [00:46:28] Speaker 01: Now, so if the distinction between assuming the risk and indemnification is helpful to your argument, then develop it, because I'm not sure [00:46:36] Speaker 02: Well, I think, you know, depending on what the reinsurance contract says, which is something that's up to the reinsurers, there could be different arrangements between two reinsurers. [00:46:45] Speaker 02: It might be one of indemnification. [00:46:47] Speaker 01: You know, my understanding... So what is the difference in that between assuming the risk and indemnification? [00:46:51] Speaker 02: Well, if there was an assumption of the risk and an innovation that freed the original insurer of liability, then the reinsurer would be ultimately on the hook for the contract. [00:47:01] Speaker 01: And I think... Would that mean that the insured would have a right of action against the reinsurer? [00:47:06] Speaker 02: That is my understanding. [00:47:07] Speaker 02: I don't claim to be an insurance expert, but that's my understanding. [00:47:10] Speaker 02: And in fact, the Northumberland case talks about and refers to the treatises which talk about different types of reinsurance. [00:47:15] Speaker 02: So I think, you know, the ballast's approach is really narrowing this to the contracts that are an issue here, and we need the court just to think about the issue of whether there could be different structures to reinsurance contracts. [00:47:27] Speaker 02: Is that in your brief? [00:47:28] Speaker 02: I don't believe that is in my brief, Your Honor. [00:47:30] Speaker 02: That's actually something [00:47:31] Speaker 02: that came to mind more recently rereading Northumberland, but I think it's important to think about that, you know, there could be different types of contracts. [00:47:40] Speaker 02: And even if it is, you know, even if you were to conclude it's limited to re-intended education, I think the reading of covering reasonably contemplates [00:47:48] Speaker 02: assuming that the loss is associated. [00:47:50] Speaker 02: When you look at these contracts, all the underlying risks are what trigger the obligation to pay under the contract. [00:47:55] Speaker 02: So I think that's a reasonable reading of covering. [00:47:58] Speaker 02: And just touching briefly on the issue of where the extraterritorial presumption falls with respect to Chevron deference, I think that's a rule of construction that would be applied with the statute. [00:48:11] Speaker 02: But I think certainly, given the history, it's a reasonable reading to adopt the approach in the regulation. [00:48:17] Speaker 02: So the court doesn't have to get to using a rule of construction to resolve it because we've got a reasonable reading in light of the history and there are a lot of other rules of construction that I've discussed like looking at the statute as a whole and not disregarding the definition of policy of reinsurance that would counsel in favor of reading the statute consistently with the regulation. [00:48:36] Speaker 02: And I also just would point out that I think the idea that Chevron deference doesn't play a role when the extraterritorial presumption is involved [00:48:44] Speaker 02: is not clear. [00:48:45] Speaker 02: I mean, I think in Morrison and the Arabian oil case both, that Chevron arguments were raised and the court didn't adopt them because it included the particular ruling at issue wasn't entitled to deference. [00:48:58] Speaker 02: And it didn't say Chevron deference could never apply in this context. [00:49:01] Speaker 02: So I think the court has perhaps has left that open. [00:49:05] Speaker 02: But I think here, [00:49:06] Speaker 02: For the reasons, the court doesn't have to get to that because this is clearly a statute that was intended to have for an application, and I think it's reasonably read consistently with the regulation here. [00:49:16] Speaker 03: Can you tell me, given your interpretation of the statute, what is your response to councils pointing out these anti-conduit provisions in the treaties? [00:49:32] Speaker 02: Your Honor, I really view that as a red herring. [00:49:34] Speaker 02: The treaties are negotiated with treaty partners and provide for exemptions from certain tax. [00:49:38] Speaker 02: And basically, as we lay on the brief, what the Treasury Department does in negotiating these treaties is a very general matter, is to try to look at, do we have tax partners who have similar tax schemes where things would be taxed twice? [00:49:54] Speaker 02: Because, for example, we have an income tax and the foreign country has an income tax that's comparable. [00:50:01] Speaker 02: And those exemptions are intended to provide exemptions for treaty partners that have a comparable income tax, where there wasn't the same issue of a competitive advantage because the foreign insurer would pay no income tax. [00:50:12] Speaker 02: And the different wording of the different treaties is a product of negotiation. [00:50:17] Speaker 02: And I think if the tax generally applies to each level of rest recession, it makes clear that it makes sense that there will be negotiations regarding, well, if at a certain point the tax gets passed, [00:50:29] Speaker 02: beyond the treaty partner, then should the tax apply just to the next step in the chain, or should the treaty partner lose their exemption? [00:50:37] Speaker 02: And I think that's the subject of negotiations that really aren't part of the statute, that aren't part of how you interpret the statute, that might have to do with things totally unrelated to the statute. [00:50:45] Speaker 02: So I think those, the balance is reading weight. [00:50:48] Speaker 01: They reflect the government's understanding of the statute. [00:50:51] Speaker 02: Well, I think, and I don't think there's anything in the discussion of the treaties in revenue ruling 2008-15, which I think is what they're relying on, that is inconsistent with our construction of the statute. [00:51:02] Speaker 02: I mean, it just explains how different treaty provisions are interpreted. [00:51:07] Speaker 02: And it all rests on the fundamental conclusion, consistent with the Treasury regulation that it relies on, 43-71-2C, that each retrosession would be taxed [00:51:19] Speaker 02: but for some treaty provision to the contrary. [00:51:22] Speaker 02: And I think that's wholly consistent with our position here. [00:51:26] Speaker 02: And to the extent that there's some exception to that based on what's in the treaties doesn't indicate a different interpretation should be adopted. [00:51:36] Speaker 02: So I don't think the treaties really add anything to the analysis here. [00:51:40] Speaker 02: And it's certainly not inconsistent with our position. [00:51:42] Speaker 04: All right. [00:51:43] Speaker 04: Thank you. [00:51:44] Speaker 04: We'll take the case under advisement. [00:51:45] Speaker 04: We'll take a short recess.