The state of Delaware has lost a fight with the Internal Revenue Service (IRS) over the release of information on captive insurers, a fight the state took all the way to the Supreme Court.
The Supreme Court on Monday denied the state’s request for review of a federal appeals court ruling that ordered Delaware’s insurance commissioner to comply with a subpoena for the release of information by the federal tax agency. .
The fight pits Delaware’s state insurance regulation and its authority to protect corporate privacy against the IRS’s power to enforce federal tax laws.
The IRS wants the Delaware Department of Insurance to provide it with data on two captive insurers for an investigation it is conducting into potential tax evasion by micro-captives. The IRS has been warning about so-called “abusive micro-captive insurance” transactions for years, even placing them on an annual “Dirty Dozen” list of tax scams. The IRS insists it has a right to the information under federal tax laws.
But Delaware has a corporate privacy law that the insurance department says prohibits it from disclosing certain information about captive insurance companies to anyone, including the federal government, without the companies’ consent. However, the law allows disclosure to the federal government if it agrees in writing to keep the disclosed information confidential. The IRS refused to do that and instead petitioned a federal district court to enforce its subpoenas against the insurance regulator.
The Department of Insurance argued that, under the federal McCarran-Ferguson Act, which established state regulation of the insurance business, Delaware law overrides the statutory authority of the IRS, and is not required to provide the information to IRS.
A federal district court upheld the IRS. While the McCarran-Ferguson Act protects state insurance laws from federal interference in certain situations, the court concluded that, before any reverse-preemption can occur, precedent requires that the ethical issue – in this case, the refusal to produce the summoned documents – should constitute “insurance business” within the meaning of the federal McCarran-Ferguson law. The district court held that this fundamental requirement was not met.
In late April, the Third Circuit Court of Appeals affirmed the district court’s decision and ordered that Delaware’s insurance commissioner comply with subpoenas for information.
The state then asked for an emergency order halting the mandatory order in the Third Circuit pending consideration of its appeal of the decision to the full Supreme Court. The state withdrew its request for the emergency order after the parties agreed to a settlement in which the department began producing files and the IRS agreed to keep the files confidential until the Supreme Court resolved the case. The Supreme Court has now refused to hear the case.
The state called the lower court’s rulings a “misuse” of “reverse-preemption” under McCarran-Ferguson. These courts have found that a state insurance regulation law does not supersede a federal law that is not part of insurance regulation. But the insurance department maintains that this is a mistake because its protection of captive insurance data falls under the definition of “insurance business” under McCarran-Ferguson.
The department claims that it is a matter of “insurance business” because the confidentiality provision in the issue deals with the materials submitted in connection with the license and examinations of captive insurers “for the purpose of determining the solvency and safety of insurers, and for the protection of its policy holders.”
But the Third Circuit stated in support of the lower courts that the “refusal to provide documents and testimony in response to” the IRS request “is not the ‘business of insurance,'” adding that it is clearly not the “core in ‘business. in insurance.'”
The court added that after complying with the IRS’s requests, the department is no longer entitled to the information now received by captive insurance companies than before.
In petitioning for an emergency injunction from the high court, Delaware argued that the mandate would require the state’s insurance commissioner to override his own state’s insurance laws, “a result that raises the specter of purpose of Congress in enacting the McCarran-Ferguson Act.”
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