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Appeals court affirms IRS summons for Delaware micro-captive info

The Delaware Department of Insurance (DDOI) has lost its latest attempt to block an Internal Revenue Service summons concerning 831(b) captives managed by Artex Risk Solutions and Tribeca Strategic Advisors, wholly owned by Artex, in the State.

The United States Court of Appeals for the Third Circuit on 21 April affirmed the District Court’s decision that the McCarran-Ferguson Act does not protect the documents requested and the threshold for constituting the ‘business of insurance’ was not met.

The IRS originally issued its summons to the DDOI on 30 October, 2017 during its investigation into Artex and Tribeca, seeking filings and communications between the Department and the captive managers.

The Department declined to cooperate with ‘Request 1’ of the summons, citing 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”.

‘Request 1’ was seeking “all electronic mail between [the Department] and Artex and/or Tribeca related to the Captive Insurance Program”.

The request concerned around 200 certificates of authority granted by the DDOI to micro-captives managed by Artex and Tribeca. The IRS initially believe there to be 191 certificates, but the DDOI has represented that it had actually issued 225 certificates.

In its 21 April ruling, the Court disagreed with the Department’s argument that requested information would impact its “business of insurance”.

“For that argument to hold water, however, we must accept that affirming the District Court would lead to a change in behavior by captive insurers (or their managers) that would reduce the reliability of captive insurers,” the Court stated.

“That is a contention that cannot survive scrutiny. As an initial matter, the substantive requirements for licensure and continued permission to operate under certificates of authority issued by the Department is not altered by our affirmance of the District Court’s ruling.

“The Department has the authority to obtain documents it requires for licensure and subsequent examinations and can impose consequences on companies that 38 will not provide them.

“Simply put, the Department will be no less entitled to the information it currently receives to license captive insurance companies than it has previously been. The same is true of the Department’s entitlement to information to determine whether already-licensed captive insurance companies should be allowed to continue to operate.”

Captive Intelligence published on 21 April a Long Read with extensive reaction and analysis of the IRS’ new proposed regulations for captives making the 831(b) tax election.