24 April 2023Analysis

IRS wins microcaptive case against Delaware DoI

The Delaware Department of Insurance (DDoI) has lost a case brought against it by the Internal Revenue Service (IRS) that directly impacts microcaptives.

The US Court of Appeals for the Third Circuit has ruled that Delaware insurance regulators can not rely on state law preemption to avoid enforcement of IRS summonses seeking their communications with microcaptive companies and managers.

The case pitted Delaware's authority to protect corporate privacy against the power of the IRS to enforce the tax laws of the United States.

The dispute arose from the refusal of the DDoI to comply with an IRS summons. The Department relies on Title 18, Section 6920 of the Delaware Code, which generally prohibits the Department from disclosing certain information about captive insurance companies to anyone, including the federal government, absent the companies' consent.1 But §6920 does allow disclosure to the federal government if it agrees in writing to keep the disclosed information confidential.

The government did not agree and instead petitioned the District Court to enforce its summons. The Court granted that petition. The DDoI argued that, under the McCarran-Ferguson Act (MFA), 15 U.S.C. §1011 et seq., Delaware law as embodied in §6920 overrides the IRS's statutory authority to issue and enforce summonses, so the District Court's order should be reversed.

According to the Third Circuit ruling: “While the MFA does protect state insurance laws from intrusive federal action when certain requirements are met, the District Court concluded that, before any such reverse-preemption occurs, our precedent requires that the conduct at issue — in this case, the refusal to produce summonsed documents — must constitute the “business of insurance” within the meaning of the MFA. The District Court held that this threshold requirement was not met here, and we agree. We will therefore affirm.”

The case is the latest in a number of such lawsuits brought by the IRS against microcaptives.