Excise Tax on Foreign Insurance Premiums Held Unconstitutional

By Kral, Kenneth H.; Alek, Elizabeth | Journal of Accountancy, October 1994 | Go to article overview

Excise Tax on Foreign Insurance Premiums Held Unconstitutional


Kral, Kenneth H., Alek, Elizabeth, Journal of Accountancy


The court of federal claims ruled that a tax imposed under IRC section 4371 on foreign insurance premiums violated the export clause of the U.S. Constitution (Article 1, Section 9, Clause 5). The court, in International Business Machines (IBM) v. U.S. (74 AFTR2d Par. 94-5029), sided with IBM because its insurance premiums were based on shipped goods' value, and the tax was therefore a tax on exported goods.

IBM insured all U.S.-manufactured products sold to foreign subsidiaries traveling between U.S. facilities and foreign customers and foreign subsidiaries' consolidation centers with casualty insurance.

The Internal Revenue Service asserted IBM was liable for excise tax under section 4371 for the casualty insurance premiums paid on U.S. goods sold to foreign subsidiaries when the insurance was purchased from a foreign insurance company. Section 4371 imposes an excise tax on insurance and reinsurance policies, indemnity bonds and annuity contracts issued by any foreign insurer, and section 4371(1) specifically imposes a 4% tax on premiums paid on casualty insurance policies and indemnity bonds.

However, the export clause of the U.S. Constitution says. "No tax or duty shall be laid on articles exported from any state." Pointing to Thames & Mersey Marine Insurance Co. v. U.S. (237 U.S. 19 [1915]), which held that the export clause prohibited the levying of stamp taxes on policies for marine insurance on exports, IBM argued that the section 4371 excise tax's application violated the export clause. …

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