The IRS has won a case against the Delaware Department of Insurance (DDoI) which is expected to have direct implications for microcaptives. The U.S. Court of Appeals for the Third Circuit has ruled that Delaware insurance regulators cannot rely on its state law preemption to avoid enforcement of IRS summonses requesting their communications with microcaptive companies. The case pitted Delaware’s authority to protect privacy against the power of the IRS to enforce US tax laws. The dispute arose from DDoI’s refusal to comply with an IRS summons. The Department relies on Title 18, 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, without the companies' consent. However, Section 6920 does allow disclosure to the federal government if it agrees in writing to keep the disclosed information confidential. The government did not write an agreement and instead petitioned the District Court to enforce its summons, which the Court granted. The Department appealed for this District Court order to be reversed, arguing that the Delaware Code Section 6920, under the McCarran-Ferguson Act (MFA), overrode IRS’ statutory authority to issue and enforce summonses. Due to the Department’s refusal to produce summoned documents — which must constitute the “business of insurance” within the meaning of the MFA — the District Court held that the threshold requirement was not met in this instance.
