It is anticipated that the IRS’s victory in a case against the Delaware Department of Insurance will directly affect microcaptives.
According to a decision by the U.S. Court of Appeals for the Third Circuit, Delaware insurance regulators cannot use the state law preemption of that state to avoid complying with summonses from the IRS requiring their interactions with microcaptive firms.
The case put the IRS’s ability to enforce US tax laws against Delaware’s right to safeguard privacy.
The disagreement started when Delaware Department of Insurance refused to answer an IRS summons. Title 18, Section 6920 of the Delaware Code, which the Department relies on, usually forbids the Department from sharing certain information concerning captive insurance businesses to anyone, including the federal government, without the companies’ approval.
However, if the federal government agrees in writing to keep the material confidential, Section 6920 does permit disclosure to such entity. Instead of drafting an agreement, the government asked the District Court to let it enforce its summons, and the court agreed.
The Department filed an appeal to have this District Court ruling overturned, claiming that the McCarran-Ferguson Act (MFA), which is codified in Delaware Code Section 6920, supersedes the IRS’ statutory jurisdiction to issue and serve summonses.
The District Court determined that the threshold condition was not satisfied in this case because the Department refused to turn over papers that were subpoenaed and that must represent the “business of insurance” as defined by the MFA.