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IRS sues insurance regulator for documents on captives

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IRS

The IRS sued the Delaware Department of Insurance on Friday seeking access to information on microcaptives managed by the captive management unit of Arthur J. Gallagher & Co.

In the suit United States of America v. Delaware Department of Insurance, filed in federal court in Delaware, the tax agency says the insurance regulator only turned over information it is seeking on 16 of 191 microcaptives managed by Artex Risk Solutions Inc.

The Delaware insurance department says that state confidentiality laws bar it from releasing the information without the consent of the captive owners.

Delaware is the fifth-largest captive domicile, with 366 captives under management, according to Business Insurance’s most recent ranking. Artex is the third-largest captive manager, with 729 captives under management, including 266 microcaptives, according to BI’s ranking.

The IRS is investigating Artex’s microcaptive business and has initiated audits of the unit’s tax filings since 2012, according to Gallagher’s most recent annual report filed with the Securities and Exchange Commission. The agency also is conducting a broader crackdown on the microcaptive sector and has won several court rulings in which it argued that various so-called 831(b) captives were tax shelters rather than legitimate insurance vehicles.

Artex was also sued in a proposed class action in December 2018 in which a microcaptive owner alleged that the captive manager promoted 831(b) captives that it “knew or should have known” were illegal tax shelters that would be disallowed by the IRS.

A federal court compelled arbitration in August 2019 and dismissed the class-action suit. The case is on appeal with the 9th U.S. Circuit Court of Appeals.

In its suit against the Delaware insurance department, the IRS cited the Artex case, which alleged that Artex worked with the state’s regulators on some of the microcaptive transactions outlined in the earlier suit. Many of the microcaptives were established by Tribeca Strategic Advisors LLC, which Artex acquired in 2010.

“The DDOI has issued approximately 191 insurance certificates of authority to micro-captive insurance companies associated with Artex. The information sought by the IRS summons is likely to be relevant to a determination of whether the Artex or Tribeca transactions were abusive tax shelters and whether Artex or Tribeca made false and fraudulent statements in organizing those abusive tax shelters,” the IRS suit states.

In an emailed statement, Christina Haas, senior policy advisor at the Delaware insurance department, said that the regulator has cooperated with the IRS’s request to the extent allowed by Delaware law.

“We have provided nonconfidential information to the IRS, and even worked with the industry to provide a collection of confidential documents with the companies’ consent. However, except in those cases where consent was given by the company, we must act within the confidentiality confines of our state law,” she said.

Artex did not immediately respond to a request for comment.