Supreme Court Corner Post decision to have significant impact on captives
Peter Dawson, 831(b) Institute advisor and chief executive of Dawson, discusses the Supreme Court decision in Corner Post and the impacts it will have on the captive insurance market.
A lot of attention has been given to the Supreme Court’s overturning of the Chevron deference doctrine, a precedent established following the Court’s 1984 ruling in Chevron USA, Inc. v Natural Resources Defense Council, Inc.
As a professional in the captive insurance industry, I would argue that another, less prominent ruling will have as significant an impact as the overturning of Chevron by the Supreme Court in the captive insurance market. I am referring to Corner Post v Board of Governors of the Federal Reserve System, which was decided on July 1 this year.
Corner Post was brought to the Supreme Court by Corner Post, a North Dakota convenience store which, like most American businesses, uses debit cards for sales transactions. The store brought the suit to challenge the high rates of debit card transaction interchange fees outlined in the 2011 Regulation II by the Federal Reserve Board.
The case was initially dismissed by the district court and Court of Appeals for the Eighth Circuit on the grounds that under the Administrative Procedure Act (APA), an action could not be brought challenging a regulation after the six-year statute of limitations expired. That means that Corner Post would have had to have brought a challenge to the regulation in 2017—one year before Corner Post opened for business.
As a result of the dismissals, Corner Post joined a suit in 2021 against the Federal Reserve Board under the APA, asserting that an APA claim does not accrue for purposes of a six-year statute of limitations until after the plaintiff is injured by final agency action. The Supreme Court agreed with this assertion in a 6–3 majority opinion.
In the opinion of the court, Justice Barrett confirmed that “a claim accrues when the plaintiff has the right to assert it in court—and in the case of the APA, that is when the plaintiff is injured by final agency action”. This opinion is substantive for many industries, but particularly of interest to small business owners that use captive insurance companies to mitigate significant fortuitous risk.
By affirming that the accrual of a claim begins at the point of injury, and not at the point of introduction of said regulation, the Supreme Court is correct in allowing small businesses like Corner Post to challenge over-reaching and draconian laws. The court is again acknowledging the importance of balance between government oversight and business necessity. This is essential—captive insurance companies help strengthen the finances and resilience of small businesses, which are a primary component of the US economy and job market.
This decision, like several others throughout the year, has drawn a clear line of delineation between the three branches of government and has put agencies on notice that the judicial branch will hold the executive and legislative branches accountable to their constituents: the citizens and taxpayers of the US.
This will allow small businesses that would benefit from a captive insurance company to move forward without fear of prior Internal Revenue Service (IRS) decisions. Also, it is likely to have the effect of the IRS finally defining with clarity proper rules, guidelines and protocols for the utilisation and establishment of captive insurance companies.
“The court is again acknowledging the importance of balance between government oversight and business necessity.”
Opinions
Justice Jackson, in her dissenting opinion, stated that this ruling means “there is effectively no longer any limitations period for lawsuits that challenge agency regulations”. While stated as a negative, that is exactly what should take place. As in the case of Corner Post, how can a plaintiff be shut off from all recourse by a regulation, and a statute of limitations that passed before it came into existence? On its face, it is absurd!
Corner Post will potentially have even greater impact. In his concurring opinion, Justice Kavanaugh analysed the role of vacatur regarding agency rules and lower-level court rulings. In his assessment, he posed the question of whether, in light of this case, a district court can find regulations unlawful nationwide. He asserts that they can.
To Kavanaugh’s point, in March 2022, the US District Court for the Eastern District of Tennessee vacated Notice 2016-66 on the grounds that the IRS failed to comply with the APA’s notice-and-comment procedures. Notice 2016-66 outlines requirements microcaptive taxpayers must adhere to—one such requirement being the filing of Forms 8886. Thus, if substantiated, Kavanagh’s assessment may eliminate the need for certain captive insurance owners and managers to submit Forms 8886. It will be interesting to see how his concurring opinion plays out over coming Supreme Court sessions, and whether the concurring opinion will stand, as in this case.
As stated initially, Corner Post appears to be a major win for the captive insurance market, and frankly for all taxpayers in the US. While I am aware that taxes are necessary in order to run a country, the purpose of the tax revenue is ostensibly to provide a better life for those very citizens. Thus, it is imperative that the executive branch does better.
The ultimate hope is that there is less litigation, as this ruling will serve as call to the IRS to provide additional guidance and clarity around captive insurance companies—something the industry has been calling on them to do for years.
Peter Dawson is CEO of Dawson, a micro-captive insurance consultant and an advisor to the 831(b) Institute. He can be contacted at: info@831binstitute.org
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