Magistrate Judge Recommends Enforcement of IRS Summons to Delaware Dept of Insurance for Information Filed by Micro-Captives (7/19/21)

In United States v. Del. Dep't of Ins., Civil Action No. 20-829-MN-CJB, 2021 U.S. Dist. LEXIS 132716 (D. Del. July 16, 2021), here, the magistrate issued a Report and Recommendation that the IRS summons to the Delaware Department of  Insurance (“DDOI”) be enforced to compel production of documents related to “Artex Risk Solutions, Inc. (“Artex”), Tribeca Strategic Advisors, LLC (“Tribeca”) (which is owned by Artex) and others, in transactions involving micro-captive insurance plans.”  The summons “seeks information pertaining to approximately 200 insurance certificates of authority that DDOI issued to micro-captive insurance companies associated with Artex and Tribeca.”

Readers will recall that the routine for such petitions to enforce summons requires a rather minimal showing of need, called the Powell factors (United States v. Powell, 379 U.S. 48, 57-58 (1964)) as stated by the Court:

(1)  “that the investigation will be conducted pursuant to a legitimate purpose”; (2) “that the inquiry may be relevant to the purpose”; (3) “that the information sought is not already within the [IRS’] possession”; and (4) “that the administrative steps required by the Code have been followed.”

The Government handily met that Powell showing and DDOI failed to rebut it (as is usually the case for persons opposing IRS summonses).

The material dispute the Court resolved related to so-called reverse pre-emption.  The State insurance code provided secrecy protections to micro-captive insurance companies submitting documents and information to the DDOI.  Normally, the federal law permitting IRS summonses would pre-empt such a state law.  However, the McCarran-Ferguson Act (“MFA”) permits state statutes to trump federal law in certain circumstances.  The MFA reserves to the states the “regulation and taxation by the several States of the business of insurance.”  The statute, 15 U.S.C. §§ 1012(b), provides that

 (b) Federal regulation
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, [t]hat . . . the Sherman Act, . . . the Clayton Act[] and . . . the Federal Trade Commission Act . . . shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

The Court says (cleaned up):

The MFA makes states supreme as “to laws regulating the business of insurance” not as to “regulating all the activities of insurance companies.” The Supreme Court specifically acknowledged that insurance companies would continue to do “many things” subject to federal regulation; but the Supreme Court emphasized that “only when [such companies] are engaged in the ‘business of insurance’” does federal law potentially yield to state law. Nat’l Secs., Inc., 393 U.S. at 459-60 (emphasis added).

 The Court does an extensive analysis and finally concludes:

Therefore, having determined that the challenged conduct at issue does not constitute the “business of insurance,” the Court declines to apply the MFA to Section 6920. As such, the Court recommends that the Government’s Petition [to enforce] be granted.

 JAT Comments:

1. The obvious question is what the micro-captive industry, to whose tune DDOI likely dances, is trying to hide.  Obviously, there might be some tension between what the federal requirements for insurance are (necessary for the micro-captives to qualify for the federal tax benefits for insurance companies) and what these micro-captives told DDOI in order to decrease the regulatory activity).  Should be interesting.

2.  And, since I did not define micro-captives, lets just say that probably most readers of this blog already know that it is another promoter and taxpayer scam on the federal tax system.