The state of Delaware has lost its 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 declined the state’s request for review of a federal appeals court ruling that mandated that the Delaware insurance commissioner comply with a summons for release of the information to the federal tax agency.
The fight placed Delaware’s state regulation of insurance and its authority to protect corporate privacy up against the power of the IRS to enforce federal tax laws.
The IRS wants the Delaware Department of Insurance to give it data on two captive insurers for an investigation it is conducting into potential tax avoidance by micro-captives. The IRS has been warning about alleged “abusive micro-captive insurance” transactions for years, even placing them on an annual “Dirty Dozen” list of tax scams. The IRS insists it is entitled to the information under federal tax laws.
But Delaware has a corporate privacy law that the insurance department says bars it from disclosing certain information about captive insurance companies to anyone, including the federal government, without the companies’ consent. However, the law does allow disclosure to the federal government if it agrees in writing to keep the disclosed information confidential. The IRS would not agree to do that and instead petitioned the federal district court to enforce its summons against the insurance regulator.
The Department of Insurance argued that, under the federal McCarran-Ferguson Act, which established state regulation of the business of insurance, Delaware law overrides the IRS’s statutory authority, and it should not have to provide the information to the IRS.
The federal district court backed the IRS. While the McCarran-Ferguson Act does protect state insurance laws from federal intrusion in certain situations, the court concluded that, before any such reverse- preemption occurs, precedent requires that the conduct at issue – in this case, the refusal to produce summonsed documents – must constitute the “business of insurance” within the meaning of the federal McCarran-Ferguson law. The district court held that this threshold requirement was not met.
In late April, the Third Circuit Court of Appeals affirmed the district court’s ruling and mandated that the Delaware insurance commissioner comply with the summons for information.
The state then asked for an emergency order pausing the Third Circuit’s mandatory order pending consideration of its appeal of the ruling to the full Supreme Court. The state withdrew that emergency order request after the parties agreed to a deal in which the department began producing files and the IRS agreed to hold those files as confidential until the Supreme Court resolved the case. The Supreme Court has now declined to hear the case.
The state calls the lower courts’ rulings a “misapplication” of “reverse-preemption” under McCarran-Ferguson. These courts found that a state insurance regulatory statute did not reverse-preempt a federal statute that is not about insurance regulation. But the insurance department maintains this is an error because its protection of the captive insurance data falls under the meaning of the “business of insurance” under McCarran-Ferguson.
The department claims that this is a matter of the “business of insurance” because the confidentiality provision at issue deals with materials submitted in connection with the licensure and examinations of captive insurers “for the purpose of determining the solvency and safety of insurers, and for the protection of its policyholders.”
But the Third Circuit asserted in upholding the lower courts that the department’s “refusal to provide documents and testimony responsive to” the IRS request “is not the ‘business of insurance,'” adding that it is plainly not the “core of the ‘business of insurance.'”
The court added that after complying with the IRS requests, the department will be no less entitled to the information it currently receives to license captive insurance companies than it has previously been.
In petitioning for the emergency order from the high court, Delaware argued that the mandate would require the state insurance commissioner to violate the insurance laws of his own state, “an outcome that upends Congress’ stated purpose in enacting the McCarran-Ferguson Act.”
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