The US Internal Revenue Service (IRS) has taken the Delaware Department of Insurance (DDOI) to court to force the department to release documents pertaining to micro-captives.
The IRS brought a petition to enforce summons to the Delaware District Court last week in relation to micro-captives domiciled in Delaware and managed by Artex and Tribeca Strategic Advisors.
In 2017 the IRS had requested DDOI provide documents relating to the 191 captive insurance companies domiciled in Delaware and managed by Artex.
In response the DDOI provided the files of 16 micro-captives that waved their right to confidentiality, as well as more non-client specific documents.
The IRS believes that the DDOI did not properly respond to the summons, and that there are more documents relevant to the IRS investigation into the micro-captives.
Court documents reveal that Artex was also previously issued summons in 2017, which they complied with.
“The documents produced pursuant to these summonses, as well as the documents produced by the DDOI thus far, strongly indicate that there are additional emails and other documents responsive to the summons that are being withheld,” the IRS stated in court documents.
“They also indicate that the IRS has a legitimate purpose to investigate Artex.”
The IRS are investigating Artex and the mico-captives they manage as part of the focus from the agency on micro-captives, which they claim have “the potential for tax avoidance or evasion”.
In a declaration by IRS revenue agent Bradley Keltner, he stated that he was investigating Artex and Tribeca to determine their role in “captive insurance plans and other potentially abusive transactions.”
“Specifically, the IRS seeks to determine Artex and Tribeca’s role in captive insurance plans and other potentially abusive transactions in order to determine whether those transactions were abusive transactions, and whether Artex or Tribeca made false or fraudulent statements in organising those abusive transactions,” Keltner states.
In the petition to enforce summons, the IRS claims that a number of things in the documents make them believe that Artex and Tribeca needed investigating.
“For instance, in email correspondence that occurred on February 25, 2013, the DDOI agreed to issue Certificates of Authority to an Artex client with a certificate date of December 31, 2012,” the IRS stated.
Having a certificate of authority issued for December 2012, instead of February 2013, means that a captive’s deductibles will be applicable for 2012.
The IRS also claimed that Artex inviting staff from the DDOI to dinner “as a thank you” at the Delaware Captive Insurance Conference provided evidence of a need to investigate.
The email exchange dated 12 April 2013, between Artex Tribeca and the DDOI actually states:
“We would like the opportunity (if appropriate) to treat to you to dinner on Tuesday after the conference or perhaps bring a treat to your office on Tuesday as a thank you for all the hard work you guys do,” the regulatory manager of Artex Tribeca wrote.
The DDOI declined the invitation, because they were already having dinner with another captive manager, and the two organisations met for breakfast the next day instead.
The IRS petition to enforce summons implies that the invitation to dinner- common at conferences- was in connection to the issuing of COAs, but nothing in the documents submitted into evidence proves that.
Despite the DDOI providing more than 1,800 pages of non-client specific documents to the IRS, and 18,331 pages contained in the files of 16 micro-captives, the IRS claims that the department did not comply fully with the initial summons.
“The DDOI failed to comply with Request 1 of the summons, which demanded ‘[a]ll electronic mail between [the DDOI] and Artex or Tribeca related to the Captive Insurance Program'” the IRS state in court documents.
“The DDOI also failed to appear and provide the testimony demanded by the IRS in the summons.”
The DDOI has stated that they have put in requests to all 191 micro-captives for them to voluntarily comply with the IRS summons, but only the 16 they provided files for complied.
In a statement from the DDOI, they department said they have complied as fully as they can.
“Our office has more than complied to the extent that our statute allows, providing nonconfidential information, and even working with the industry to provide additional confidential information with their consent,” a spokesperson said.
“However, confidentiality confines do exist in our state law, and the Department continues to feel strongly these confidentiality provisions are critical to both the state-regulated industry, and to public policy as a whole.”
At the time of publication, Artex had not responded to requests for comment.