Captive Associations join Delaware confidentiality battle

Captive associations across the US have thrown their support behind the Delaware Department of Insurance’s battle with the IRS over confidentiality.

The industry associations from Arizona, District of Columbia, Missouri, North Carolina, South Carolina, Oklahoma, Tennessee and Utah, as well as the Self Insurance Institute of America, have joined Delaware Captive Insurance Association in submitting an amicus brief to the Court of Appeal.

The brief concerns the ongoing battle between the IRS and Delaware over access to records in its attempts to crackdown on micro-captives.

“The crux of this case is whether the United States Internal Revenue Service (“IRS”) can circumvent federal and Delaware statutory law to obtain confidential documents pertaining to captive insurance companies through a third-party administrative summons to the Insurance Commissioner of Delaware (the “Commissioner”) as opposed to seeking the documents directly from the entities themselves,” the brief filed last week explains.

The District Court ruled that it could and that the summons against the Delaware Department of Insurance should be granted.

“Amici respectfully submit that the District Court erred,” the brief reads.

“By seeking a court order compelling the Commissioner to violate Delaware law by producing confidential information relating to captive insurance companies, the IRS is effectively treating state insurance departments as a drop box of confidential information easily accessible to the IRS. Stated differently, the IRS’s position is that States can require the submission of confidential and proprietary information as part of a regulatory scheme, but, as a result, the information is readily available to the IRS anytime it wishes,” it continues.

“This makes little sense—particularly where, as here, the IRS could simply subpoena captive managers or captive insurance companies for information without involving the Commissioner or the Delaware Department of Insurance.”

The brief cites the first section of the McCarran Ferguson Act of 1945: “Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.”

Calling on the Court of Appeal to reverse the District Court’s decision, it concludes that “Congress’s intent is clear and adopting the appellee’s [IRS’s] argument would undermine the insurance industry.”