Taisei Fire and Marine Insurance Co., Ltd. v. Commissioner of Internal Revenue

Taisei Fire and Marine Insurance Co., Ltd. (Taisei) (plaintiff) is one of several corporate entities in this suit that are property and casualty insurance companies with principal places of business in Japan. These companies write direct insurance in Japan but also assume reinsurance ceded by insurers and reinsurers, including American insurers and reinsurers through Tokyo-based reinsurance departments. Taisei and the other plaintiffs all grant authority to multiple United States agents, including Fortress Re, Inc. (Fortress). Fortress acted as a reinsurance underwriting manager for several insurance companies. Fortress had a separate agreement with each insurance company Fortress limits, which were all identical except for the net acceptance limit. That limit is the maximum amount of net liability for any reinsurance contract that Fortress can accept regarding a specific insurance company. Fortress was not subject to any gross limit and was not directed on any individual transaction, although Fortress was paid from management fees, contingent commissions, and override commissions payable under the agreements. These relationships were established under the authority of the US-Japan Convention of 1971, a treaty designed to prevent double taxation. Under that treaty, the commercial profits of a Japanese resident are exempt from US federal income tax unless the profits are attributable to a US permanent establishment. No dispute was presented that Fortress had the authority on behalf of Taisei and the other plaintiffs to enter contracts on the plaintiffs’ behalf. Unless Fortress were found to be a broker, general commission agent, or “other agent of an independent status,” the income would be taxable. Similarly, no dispute existed that Fortress was neither a broker nor a general commission agent. Taisei and the other plaintiffs argued that Fortress was independent in terms of legal and economic independence, meaning that Fortress was not a permanent establishment for tax purposes. The Commissioner of Internal Revenue (defendant) agreed that Fortress was independent in day-to-day operations but that the acceptance limits and limits on net premium income were control exercised by the plaintiffs and that the income was thus taxable.