As the Supreme Court hears arguments in a case that would have direct implications for the future of the Chevron doctrine, Dustin Carlson, president of SRA 831(b) Admin and the 831(b) Institute explains the impact a ruling overturning Chevron could have for micro-captive insurance companies
If “School House Rock” and other popular understandings of our system of checks and balances are to be believed, the role of the federal executive branch rests in the execution of laws, as the name implies. This definition would seem to exclude the executive branch or its agencies from interpreting the law, as that power ought to rest with the judicial branch.
Despite this, a 1984 SCOTUS ruling set a precedent now known as the “Chevron doctrine,” handing over a serious degree of the judicial system’s authority to interpret law to executive branch agencies.
This expansion of executive branch authority, especially for the IRS, has been deeply concerning for captive insurance industry participants like me. For over a decade, the agency has sought to bring down captives through both regulatory and enforcement actions and has largely been successful in doing so, especially in court.
Most recently, the IRS’s campaign against captives has taken the form of new regulations on those making the 831(b) election, starting with Notice 2016-66 in 2016. These regulations were ultimately struck down in 2022 by the Sixth District Court as arbitrary and capricious.
In April of 2023, the IRS replaced Notice 2016-66 with new proposed regulations. These new regulations have received broad pushback from across the industry as being illogical and poorly designed if the purpose is to actually stop bad actors. This may also be why the IRS has not taken any further action to fully implement them.
Returning to the Chevron doctrine, it states that courts should generally defer to an agency’s interpretation of a law, even if the court disagrees. The doctrine is based on the theory that agencies possess superior subject matter expertise over courts, with the limitation that the agency’s interpretation be a reasonable one. This limitation is also known as a “narrow reading” of the so-called “major questions doctrine.”
The major questions doctrine, or MQD, states that courts should presume Congress does not delegate issues of major political or economic significance to executive agencies. A broad reading of the doctrine states that courts must not interpret statutes as delegating major questions to agencies unless Congress clearly says so.
The Supreme Court is currently hearing arguments surrounding a commercial fishing case that will have direct implications for the future of the Chevron doctrine. If the MQD is read sufficiently broadly, Chevron will be relegated to essentially dealing only with “non-major questions.”
This could eventually have implications for captives making the 831(b) election, as the courts have frequently deferred to the IRS in these cases on questions of how to interpret section 831(b) and regulations around this section of the code.
Previously, this has led to IRS victories even when certain underlying questions cannot be definitively answered. For example, risk distribution is effectively just a legal concept, arbitrarily defined by the IRS to exclude transactions it doesn’t like, yet courts have sided with the agency when it argues that certain captives don’t meet proper standards of risk distribution and should be shut down.
Beyond Chevron, the IRS also possesses another deference standard due to Congress granting the agency the authority to tax under the Constitution. Again, however, this authority must not be exercised arbitrarily or capriciously. I would argue it has been, especially in the case of regulations against 831(b) captives.
Congress has repeatedly and definitively expressed support for section 831(b). Most recently, eight members of the House Ways and Means Committee sent a letter to the IRS asking for the agency to adopt a more reasonable position and work with the industry to develop a mutually agreeable path forward.
In 2015, the PATH Act was passed and signed into law, including a provision increasing the maximum annual premium limitation for section 831(b) micro captives from $1.2 million to $2.2 million and tying future increases to inflation making it $2.8 million this year.
The IRS has disregarded this support for 831(b) captives in its pursuit of shutting down the industry and the courts have generally gone along with it, deferring to the agency as the experts.
The downfall of the Chevron doctrine may serve as an opportunity for future captive arrangements to more successfully defend themselves from an arbitrary and overreaching IRS. I hope it does.
