Subscribe Sign In Jul 23, 2021,05:24pm EDT|585 views Delaware Department Of Insurance Loses IRS Summons Fight For Artex And Tribeca Captives But Can Appeal Jay AdkissonContributor Personal Finance I cover Wealth Preservation in its legal permutations Listen to article IRS Summons GETTY I have previously written about the lawsuit filed by the U.S. Department of Justice to enforce an IRS summons directed to the Delaware Department of Insurance (DDOI) for its e-mails and other documents relating to the investigation of Artex Risk Solutions, Inc. (which is affiliated with Arthur J. Gallagher & Co.), and Artex's predecessor, Tribeca Strategic Advisors, LLC, which was a prolific if not hyper-aggressive marketer of numerous so-called risk-pooled 831(b) microcaptive tax shelters. Basically, the IRS issued a summons to the DDOI for its information relating to numerous of the Artex microcaptives domiciled in Delaware, and the DDOI refused to produce the documents on the dubious basis that § 6920 of the Delaware Insurance Code requires those documents to be held in confidence. In our latest episode, U.S. Magistrate Judge Christopher J. Burke has ruled in favor of the U.S. Department of Justice and against the DDOI, and recommended that the DDOI be required to make production of the Artex documents. The matter now goes to the U.S. District Court for the District of Delaware to decide whether the U.S. Magistrate Judge's ruling was correct. This case has its genesis in the summons by the IRS to the DDOI for information relating to approximately 200 captive certificates of authority (a/k/a "insurance licenses") issued by the DDOI to microcaptives of Artex and Tribeca that were domiciled in Delaware. Starting in 2018, the DDOI started what is known by litigators as a "slow roll" production, i.e., parceling them out a few at a time, but for only 21 of the Delaware-licensed captives. As for the other 180-odd microcaptives whose information was sought, Delaware refused to provide these on the basis of § 6920 of the Delaware Insurance Code, which requires such information to be kept confidential, and filed a motion to quash the DOJ's petition, or in the alternative the IRS's summons. Part of the DDOI's defense was that the IRS either already had many of the documents that it sought, or could obtain these documents directly from the microcaptive themselves. But many of the sought documents were e-mails, and the court ruled that the IRS was entitled to the DDOI's version of the e-mails and not just be content with whatever were also produced by the microcaptives that are the target of audits. Additionally, it appeared that Artex was itself stonewalling the IRS in the production of documents, so the IRS was entitled to the DDOI's documents to make sure that the IRS has what it needs to make its various cases before the U.S. Tax Court. For its part, the DDOI also argued that because the regulation of insurance companies is a state matter under the McCarran-Ferguson Act ("MFA"), Delaware could assert what is known as "reverse preemption" to block the IRS's summons. This argument went nowhere fast: That Congress gave the states exclusive jurisdiction to regulate insurance companies of course provides no bar to the IRS's jurisdiction to tax those same insurance companies and their owners, and the IRS's tax enforcement function does not unduly interfere with the DDOI's regulatory function; ergo, the enforcement provisions of the U.S. Tax Code were not restrained by reverse preemption. The U.S. Magistrate Judge laboriously and meticulously went through many pages of detailed discussion to reach this result, but that was the bottom line. MORE FROMFORBES ADVISOR Who Is The New Platinum Card From American Express Good For? ByEric RosenContributor What To Do If You Still Haven't Received Your Child Tax Credit Payment ByKemberley WashingtonForbes Advisor Staff ANALYSIS What the Report and Recommendation of the U.S. Magistrate Judge doesn't say is what is commonly known throughout the small captive insurance sector, which is that the insurance regulators for several states, including Delaware, were every bit as culpable in selling microcaptive tax shelters as the actuaries who pulled anticipated loss numbers from the thin blue sky, the underwriters who drafted elaborate policies for risks that would never (or very rarely) occur, and the insurance managers like Tribeca who openly sold microcaptives as tax shelters with only the slightest wink-and-nod towards any real insurance function by the companies. I've personally been to captive conventions where representatives from Delaware (and a few other states) openly hawked their promise of easy approvals and hands-off regulation of microcaptives with the basic idea being to screw Uncle Sam out of tax dollars more efficiently and cheaply than other states that were looking for microcaptive business. To this end, the DDOI was no innocent player in the microcaptive tax shelter business, but instead leveraged its function as a necessary facilitator of the captive insurance license to generate its own fees for the state coffer. The DDOI was up to its neck in the microcaptive tax shelter business, and for the DDOI to now try to sit back and claim that it was a mere regulator disinterested in how the microcaptives avoided federal income tax is wholly at odds with the reality of what occurred. Top Articles READ MORE Ohio State At Michigan Headlines College Football Rivalry Weekend Bets And Odds The sole, only and exclusive difference between the complicit state insurance regulators and the other players in the microcaptive tax shelter games, such as the aforementioned actuaries, underwriters, and captive managers, is that the state regulators can hide behind the sovereign immunity of their states as to promoter penalties ― they are no less dirty than these other players, but they are immune. That immunity should not, however, allow these state regulators to continue to facilitate these shelters even now by blocking the IRS from getting the documents its seeks relating to these transactions. That the DDOI is even fighting the production of its documents, and particularly the e-mails between DDOI staff and the microcaptive shelter promoters, speaks volumes for what is really going on here. This is not an agency faced with a mere technical problem of compliance, but rather an agency that doesn't want it to come out that they were approving microcaptives by the dozens that utterly lacked any real economic substance, and that they were occasionally turning a blind eye to irregularities in the application process. There were times, in fact, that the DDOI process for approving microcaptives ― particularly at the end of the year ― became so lax that it would have been little surprise had they set up a self-serve kiosk for captive insurance licenses at the Phoenix airport by where Tribeca's office was located. And that is just Delaware. A couple of other states (which shall remain nameless here for now) were about as bad, if not worse in some specific cases. They were every bit as complicit in the microcaptive shelter industry too, and hopefully the truth will eventually come out as to the activities of their captive insurance divisions too. All these states made some good money with their initial application fees and then recurring license fees, but unlike the rest of the promoters will not ultimately have to disgorge their profits, although their reputations within the legitimate captive industry are suffering as reputable (real) captive professionals will not refer business to these states. Anyway, I expect that the U.S. District Court will soon rule on this Report and Recommendation from the U.S. Magistrate Judge, so stay tuned. CITE AS U.S. v. Delaware Dept. of Ins., D.Del. 20-CV-829, Dkt. # 28 (July 16, 2021). Follow me on Twitter or LinkedIn. Check out my website or some of my other work here. Jay Adkisson I am a partner of Adkisson Pitet LLP and licensed to practice law in Arizona, California, Nevada, Oklahoma and Texas. My... 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