Third Circuit Court of Appeals Affirms District Court Regarding IRS Subpoena

Recently, in seeking information in cases involving captives taxed under section 831(b) of the Internal Revenue Code of 1986, as amended (IRC), the Internal Revenue Service (IRS) has issued subpoenas when requests for such information have been refused either in whole or in part.

In connection with the IRS' request for information (i.e., documents) from the Delaware Department of Insurance (DDI) with regard to information that had been filed in connection with the formation of certain captive insurance companies, the DDI had initially refused to provide the information on the ground that such information was confidential under Delaware law. In addition, Delaware argued that given the provisions of the McCarran-Ferguson Act, which generally gives the states the right to regulate the "business of insurance" (and other arguments), Delaware need not produce the requested documents because such documents were created in support of the "business of insurance," and as such the federal government did not have the right to compel Delaware to provide the documents. The Magistrate Judge who heard the case found in favor of the IRS, as did the US District Court Judge who reviewed the Magistrate Judge's findings. Delaware appealed the decision of the District Court to the US Court of Appeals for the Third Circuit, which has now affirmed the decision of the District Court requiring Delaware to provide the IRS with the requested documentation.

It is interesting to note that there have been at least two other recent cases involving IRC section 831(b) companies' production of documentation in response to an IRS subpoena that has made their way to Circuit Courts of Appeal.

In February of this year, the US District Court for the Middle District of Florida, Tampa Division, made another holding ostensibly in favor of the IRS in connection with a request for information in USA v. Captive Alternatives, LLC (CAL). As brief background, CAL, a captive manager and adviser, was apparently at some time in the past the target of a criminal investigation by the IRS, pursuant to which a search warrant was issued and the IRS obtained computers, electrical devices, servers maintained at third party locations and paper documentation. Subsequently, the criminal matter was closed, and a civil matter was instigated, pursuant to which CAL was served with an Information Document Request (IDR) by the IRS. The IDR contained 30 categories of documents. Also, third-party service providers were served with summonses seeking some of the same data. CAL objected, and the IRS argued that all of the information was relevant or could lead to relevant information. CAL argued that the IRS had not followed its procedures, and the IRS served CAL with an administrative summons. CAL argued that the summons requested almost every document in its possession for the period January 1, 2011, through the present, and the IRS petitioned the District Court to decide.

The IRS stated that the information requested was relevant and was necessary in connection with its belief that some of the arrangements constructed by CAL were abusive tax shelters and may require information regarding each captive's business that CAL had formed. CAL also sought to put under seal documents from the grand jury investigation from the criminal proceeding. For the most part, the Court found for the IRS and refused to put under seal the information arising from the grand jury investigation.

Finally, last year in USA v. Moore, Ingram, Johnson and Steele, LLP, the 11th Circuit Court of Appeals, in an unpublished opinion, affirmed a District Court ruling that Moore, a law firm that facilitated the formation of a number of captives, could not avoid a summons requesting documentation related to the law firm's practice of promoting and managing captive insurance companies. After receiving the summons, Moore did not fully comply, and the District Court required an Item-by-item privilege log for documents that Moore argued were subject to the attorney-client privilege, whereas Moore had argued for a categorical assertion of the privilege. The 11th Circuit noted that Moore was being investigated by the IRS for the promotion of abusive captive programs and that some Moore clients were also being investigated by them and ultimately concluded that the privilege log required by the District Court was appropriate.