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Delaware Must Turnover Communications with Microcaptive Promoters

By Joel N. Crouch on April 26, 2023
On April 21st, a Third Circuit Court of Appeals panel ruled that the Delaware Department of Insurance (DDOI) must comply with a 2020 summons from the IRS for all communications with microcaptive insurance companies and their managers. This is another step in the IRS continuing attack on microcaptive insurance companies.

It's worth noting that this isn't the first time the IRS has targeted captive insurance companies. In recent years, the agency has been focusing on these entities as a potential source of tax fraud. In 2016, the IRS issued a notice warning taxpayers about abusive practices related to captive insurance companies and stating that it would be increasing its scrutiny of these entities.

The IRS issued the summons to the DDOI as part of the IRS investigation of potential penalty against Artex Risk Solutions, Inc. and Tribeca Strategic Advisors for promoting allegedly abusive tax shelters involving microcaptives. The summons was issued after the IRS obtained email exchanges between Artex and the DDOI during the IRS investigation. According to the IRS, the correspondence included an email in which the DDOI agrees to backdate documents for an Artex client. In addition, the correspondence included an email from then DDOI Director of Captive and Financial Products, Steve Kinion, declining a dinner invitation from Artex, because, “its not that we don’t want to, but we’ve already accepted the invitation of another captive manager for dinner” that same evening.

The IRS issued a summons to the DDOI for all email communications between Artex and/or Tribeca related to any captive insurance arrangements managed by those two companies. The DDOI objected to the summons and in June 2020, the IRS filed a petition in U.S. District Court to enforce the summons. The DDOI argued that under the federal McCarran-Ferguson Act, the Delaware statute conferring confidential treatment on insurance regulatory communications, preempted and barred a federal government summons for that information. The Third Circuit affirmed the lower court ruling that the McCarran-Ferguson Act does not apply unless the conduct at issue constitutes the “business of insurance.” The Third Circuit dismissed arguments by the DDOI that this threshold test conflicts with Supreme Court precedent and recent case law in the Third Circuit.

Although the DDOI is expected to appeal the Third Circuit ruling to the U.S. Supreme Court, the IRS's efforts to crack down on alleged tax fraud are likely to continue, and companies that engage in questionable practices will face increased scrutiny.

If you have any tax-related questions please feel free to contact me at jcrouch@meadowscollier.com.