US Supreme Court Won't Hear Delaware Appeal in IRS Summons Case

The US Supreme Court has declined to consider the Delaware Department of Insurance's appeal of a federal appeals court ruling requiring the department to comply with an Internal Revenue Service (IRS) summons for information on two captive insurers domiciled in the state.

In April, the United States Court of Appeals for the Third Circuit upheld a lower court's ruling in the case of United States of America v. State of Delaware Department of Insurance rejecting Delaware's effort to quash the IRS subpoena.

The IRS summons compels the Delaware department to disclose to the IRS regulatory filings and other information provided to the Delaware department by Delaware-domiciled captive insurance companies, which are treated as confidential information under the Delaware Insurance Code.

In its arguments to the federal appeals court, the Delaware department had contended that under the federal McCarran-Ferguson Act, Delaware law overrides the IRS's statutory authority to issue and enforce summonses. But the appeals court found that the Delaware department's refusal to comply with the summons for information regarding certain Delaware-domiciled micro-captives did not constitute "the business of insurance."

The appeals court ruling noted that the IRS had identified micro-captive transactions, small captive insurance companies that elect to be taxed under section 831(b) of the Internal Revenue Code, which allows small insurance companies to be taxed only on their investment income, as having "a potential for tax avoidance or evasion," and had subsequently increased its scrutiny of micro-captive transactions.

Delaware appealed the appeals court ruling to the Supreme Court in July.