State Insurance Agency Opposes Enforcement of IRS Summons

UNITED STATES OF AMERICA,
Petitioner,
v.
DELAWARE DEPARTMENT OF INSURANCE,
Respondent.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

OPPOSITION OF RESPONDENT, THE DELAWARE DEPARTMENT
OF INSURANCE, TO PETITION TO ENFORCE SUMMONS

Respondent, the Delaware Department of Insurance (the “Department”) by and through its undersigned counsel, respectfully files this Opposition to the Petition (the “Petition”) of the United States to enforce an Internal Revenue Service (“IRS”) summons (the “Summons”) as set forth below.

In answering the allegations in the Petition, the Department does not intend to waive, and does not waive, any and all applicable objections(s) to the relevance, admissibility, or prejudicial effect of any of the allegations in the Petition. Except as otherwise expressly admitted below, the Department denies all averments and each and every allegation of the Petition. To the extent that any response is required to headings or other unnumbered paragraphs in the Petition or any exhibits thereto, the Department denies all allegations therein. The Department expressly reserves the right to amend and/or supplement this Opposition.

1. Denied. This Court does not have jurisdiction over this matter because the Summons is reverse pre-empted by the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, as set forth in the Department's Brief in Support of Motion of the Respondent, the Delaware Department Of Insurance, to Quash the Petition to Enforce Summons or in the Alternative, for Protective Order (the “Department's Brief”) at pgs. 7 to 18, which is incorporated herein by reference.

2. Admitted.

3. The Department lacks knowledge or information sufficient to form a belief as to the truth of the allegations in this paragraph, but accepts for purposes of this proceeding that such allegations are correct.

4. Denied. It is admitted that the IRS issued the Summons attached to the Petition as Exhibit 1 to the Department. The Department denies the remaining portions of this paragraph, as they purport to characterize the Petition, which is a writing which speaks for itself, and any such characterization is denied. By way of further response, because the IRS has never pressed for Department testimony since issuance of the Summons in 2017 and through the lengthy communications with the Department over the last 3 years, the request for testimony is long ago waived. Compelling the Department to provide testimony over three years after the Summons was issued is prejudicial to the Department. The Department submits that it has produced all records responsive to Request #1 of the Summons within the express statutory confines of 18 Del. C. § 6920. The only records which the Department has not released in response to Request #1 are those company files for which the Department has not received written consents from the Artex managed captive insurance companies as required by Section 6920. Compelling the Department to release the remaining captive insurance company files in response to Request #1 will require the Commissioner and the Department to violate the express legislative directives of Section 6920. By way of further response, the provisions of Section 6920 reverse pre-empt the Tax Code in the matter sub judice pursuant to the McCarran-Ferguson Act as set forth in the Department's Brief at pgs. 7 to 18, which is incorporated herein by reference, and therefore further response or production of documents in response to Request #1 is not required.

5. Denied. It is admitted only that the Department is generally aware that the IRS is conducting an investigation of Artex and related companies relating to micro-captive insurance plans. The Department admits, based on reported information and belief, that Artex purchased Tribeca in 2010. The Department denies that any of the Delaware regulated Artex or Tribeca managed captive insurance companies are “abusive transactions.” The Department lacks knowledge or information sufficient to form a belief as to the specific parameters of the IRS' investigation.

6. Denied. The Department admits that the IRS issued IRS Notice 2016-66, 2016-47 I.R.B. 845 (Nov. 21, 2016). The Department denies any characterization of this Notice and the legal cases cited in this paragraph, as they are writings which speak for themselves.

7. Denied. It is admitted that the lawsuit cited in this paragraph was filed and subsequently dismissed. The remainder of the paragraph, discussing the filings in the lawsuit are denied, as it characterizes the lawsuit and filings in the lawsuit, which are writings which speak for themselves. The Department notes that on September 9, 2020, the Ninth Circuit issued a decision affirming the District Court Opinion dismissing the complaint and compelling arbitration. Shivkov, et al. v. Artex Risk Solutions Inc., et al., 974 F.3d 1051 (9^th Cir. 2020). No further appeal has been taken. By way of further response, the Department contacted the owners of the only Delaware captive insurance company among the plaintiffs in that action, asking that they consent to the disclosure of the company's information to the IRS pursuant to 18 Del. C. § 6920, which prohibits disclosure “except . . . [t]o a law-enforcement official or agency of this State, any other state or the United States of America so long as such official or agency agrees in writing to hold it confidential and in a manner consistent with this section” (emphasis added). Upon information and belief, the IRS has taken no steps to seek consent from this insurer or any other insurer whose information they now seek.

8. Denied. The Department denies that it has issued “approximately 191 insurance certificates of authority . . . associated with Artex.” To date, the Department has issued 225 certificates of authority to Artex or Tribeca entities: 81 are currently active, 133 have dissolved, 11 are dormant. The Department has issued 210 certificates of authority to “micro-captives,” and 68 are of those remain active. The Department lacks knowledge or information sufficient to form a belief as to the truth of whether the “information sought by the IRS Summons is likely to be relevant to” the Artex Investigation. The Department denies that any Artex managed Delaware captive insurance companies are “abusive tax shelters.” The Department lacks knowledge or information sufficient to form a belief as to the truth of the matter as to whether “Artex or Tribeca made false and fraudulent statements in organizing” any Delaware captive insurance company.” The Department denies that it produced “files of 16 micro-captive insurance companies which waived any claim of confidentiality.” The Department produced 16 company files prior to filing of the Petition. The Department produced an additional 3 company files subsequent to the Petition filing, for a total of 19 company files released to the IRS. The Department admits that the owners of all 19 captive insurance companies expressly consented to the release of those files to the IRS. The Department denies that the consents received by the Department waive “any claim of confidentiality.” The Department admits that it has produced all non-company specific records responsive to the Summons in its possession. The Department denies that it has not produced all records responsive to Request #1 of the Summons that it is legally required to produce. To the contrary, the Department has produced all records responsive to Request #1 of the Summons within the express statutory confines of 18 Del. C. § 6920. The only records which the Department has not released in response to Request #1 are those company files for which the Department has not received written consents as required by Section 6920. Compelling the Department to release the remaining captive insurance company files in response to Request #1, would require the Commissioner and the Department to violate the express legislative directives of Section 6920. By way of further response, the provisions of Section 6920 reverse pre-empt the Tax Code in the matter sub judice pursuant to the McCarran-Ferguson Act for the reasons set forth in the Department's Brief at pgs. 7 to 17, which is incorporated herein by reference, and therefore, further response or production of documents in response to Request #1 is not required.

9. Denied. The Department admits, based on information and belief, that the IRS has issued two previous Summons directly to Artex. Further, also upon information and belief, Artex has produced millions of pages of records in response to those two summons, but the Department has not reviewed, received copies of, or is aware of the specific records Artex produced to the IRS in response to those two summons. The Department denies that there are documents which have been improperly withheld, for the reasons set forth in paragraphs 4 and 8 above. Because the documents sought by the IRS include emails between Artex and the Department, the Department believes that there are numerous emails withheld by the Department pursuant to 18 Del. C. § 6920 which are already in the IRS' possession because they were produced by Artex. The IRS' statement that it has a legitimate purpose to investigate Artex is a conclusion of law which is deemed denied.

10. Denied. Admitted that the Department sent an email to Artex on February 25, 2013. The characterization of the contents of that email is denied, as it is a writing which speaks for itself. By way of further response, upon information and belief, the document attached to the Keltner Declaration as Exhibit 3 is a document which was produced to the IRS by Artex. The Department did not produce this email because it is company specific and those company owners did not provide the Department with consent to release the files. The Department denies any suggestion or allegation in this paragraph that the Department improperly back dated a certificate of authority. The Department's previous historical practice was to date certificates of authority no earlier than the date the application was submitted to the Department. The Delaware legislature subsequently enacted 18 Del. C. § 6903(g) which expressly codifies the Department's historical practice of dating certificates of authority no earlier than the application date.

11. Denied. Admitted that the Department sent an email to Artex on April 15, 2013. The characterization of the contents of that email is denied, as it is a writing which speaks for itself. By way of further response, upon information and belief, the document attached to the Keltner Declaration as Exhibit 4 is a document which was produced to the IRS by Artex. The Department also produced a copy of that email to the IRS at Bates Number 384. The Department denies any suggestion or allegation in this paragraph that the Department improperly accepted a gift from Artex. The Department is subject to 20 Del. C. § 5813(a)(4)(e) which requires reporting of gifts of more than $250.00. This breakfast meeting was not reported because it was less than $250.00. The Department is also subject to 29 Del. C. § 5806(b) which prohibits state employees from accepting gifts in certain circumstances. The Department has since notified current state employees of their obligations under Section 5806(b). The Department denies any suggestion that employees made or influenced government decisions outside official channels. State employees are entitled to a strong legal presumption of honesty and integrity. See, Beebe Medical Center v. Certificate of Need Appeals Board, C.A. No. 94A-01-004 (Del. Super. June 30, 1995), aff'd, No. 304 (Del. January 29, 1996).

12. Denied. The Department denies that there are documents which have been improperly withheld, for the reasons set forth in paragraphs 4 and 8 above. Because the documents sought by the IRS are emails between Artex and the Department, the Department believes that there are numerous emails which were produced by Artex to the IRS which are being withheld by the Department pursuant to 18 Del. C. § 6920.

13. Denied. This paragraph purports to state legal conclusions which are deemed denied without the necessity of a response.

14. Admitted.

15. Admitted.

16. Denied. The Department fully responded to Request #1 within the express statutory confines of 18 Del. C. § 6920. Compelling the Department to release the remaining captive insurance company files in response to Request #1, will require the Commissioner and the Department to violate the express legislative directives of Section 6920. By way of further response, the provisions of Section 6920 reverse preempt the Tax Code in the matter sub judice pursuant to the McCarran-Ferguson Act for the reasons set forth in the Department's Brief at pgs. 7. to 17, which is incorporated herein by reference, and therefore further response or production of documents in response to Request #1 is not required. It is further denied that the IRS is entitled to testimony. Because the IRS has never pressed for Department testimony since issuance of the Summons in 2017 and through the lengthy communications with the Department over the last 3 years, the Department submits that the request for testimony is waived. Compelling the Department to provide testimony over three years after the Summons was issued is prejudicial to the Department.

17. Admitted.

18. Admitted.

19. Admitted.

20. Denied as stated. Admitted that the Department sent requests to all 225 Artex-related captive insurance company owners requesting that they consent to the release of their respective insurance company files to the IRS in response to the Summons. Admitted that the Department received 16 written consents prior to the filing of the Petition and produced those files to the IRS. The Department received 3 additional written consents subsequent to the Petition being filed and produced those files to the IRS.

21. Denied. It is denied that the documents are not already in the possession of the IRS. Upon information and belief, Artex has already produced millions of pages of documents to the IRS in response to two IRS summons. Because the documents sought by the IRS are emails between Artex and the Department, the Department believes that there are numerous emails which were produced by Artex to the IRS which are being withheld by the Department pursuant to 18 Del. C. § 6920. The Petition and the Keltner Declaration make clear that documents which would be responsive to Request #1 of the Summons are already in the possession of the IRS, and therefore the IRS has failed to set forth a prima facie case, for the reasons set forth in the Department's Brief at pgs. 18 to 20, which is incorporated herein by reference. Accordingly, further response or production of documents in response to Request #1 is not required.

By way of further response, the assertion in this paragraph (and paragraph 14 of the Ketner Declaration) that “[a]side from those documents [already produced by the Department] the documents described in Request #1 of the summons are not already in the possession of the IRS” is directly contradicted by two paragraphs of the Keltner Declaration:

• Paragraph 5 (stating “As part of the Artex investigation, I have obtained email correspondence between Artex and the [Department]. This correspondence was produced to the IRS as part of a response from Artex to an administrative summons served on Artex” and attaching emails from that production);

• Paragraph 15 (stating “A comparison of the documents produced by the DDOI thus far to the documents produced by Artex in the summons enforcement action against Artex indicates that there are documents responsive to Request #1 of the Summons in the possession of the DDOI that the DDOI has not produced), which is an admission that documents which would be responsive to Request #1 of the Summons are already in the possession of the IRS.

Admitted that the Department has not provided testimony. Because the IRS has never pressed for Department testimony since issuance of the Summons in 2017 and through the lengthy communications with the Department over the last 3 years, the Department submits that the request for testimony is waived. Compelling the Department to provide testimony over three years after the Summons was issued is prejudicial to the Department.

22. Denied. The Petition fails to demonstrate any facts to support this allegation, and the Department lacks knowledge or information sufficient to form a belief as to the truth of the allegations in this paragraph.

23. Denied. The Department lacks knowledge or information sufficient to form a belief as to the truth of whether the information sought by the IRS Summons “may be relevant to” the Artex Investigation.

24. Denied. The Department lacks knowledge or information sufficient to form a belief as to the truth of the allegations in this paragraph.

25. Admitted.

26. Denied. It is denied that the Declaration of Revenue Agent Keltner or the Petition establishes the government's prima facie case under Powell. By way of further response:

• The Summons was not issued for a legitimate purpose, and enforcing the Summons would be an abuse of process, as it seeks information which is barred by application of the McCarran Ferguson Act for the reasons set forth in the Department's Brief at pgs. 18 to 20, which is incorporated herein by reference;

• The Summons was not issued for a legitimate purpose, and enforcing the Summons would be an abuse of process as the IRS has refused to take easily acceptable substitute actions which would allow it to gather the requested information in accordance with 18 Del. C. § 6920, without implicating the McCarran-Ferguson Act by obtaining the requested information from other parties¹ or complying with the statute's requirement. Thus, the IRS' efforts to compel the Commissioner to violate Delaware law make the Petition unnecessary and do not evince a legitimate purpose; and

• The Summons seeks information that is already within the IRS' possession; and

WHEREFORE, the Department respectfully requests that this Court enter an order denying further enforcement of the Summons and denying enforcement of the Petition.

STATE OF DELAWARE
DELAWARE DEPARTMENT OF JUSTICE

OF COUNSEL:

James J. Black, III (pro hac pending)
Jeffrey B. Miceli (pro hac pending)
Mark W. Drasnin (pro hac pending)
Black & Gerngross, P.C.
1617 John F. Kennedy Blvd.
Suite 1575
Philadelphia, PA 19103
Tel. (215) 636-1650
jblack@blackgern.com
jmiceli@blackgern.com
mdrasnin@blackgern.com

Kathleen P. Makowski
Kathleen P. Makowski, Esq. (#3648)
Deputy Attorney General
1007 Orange Street, Suite 1010
Wilmington, DE 19801
(302) 674-7326
Kathleen.Makowski@Delaware.gov

and

Patricia A. Davis, Esq. (#3857)
Deputy State Solicitor
102 W. Water Street
Dover, DE 19904
(302) 257-3233
PatriciaA.Davis@Delaware.gov

Attorneys for the Respondent,
Delaware Department of Insurance

Dated: February 8, 2021

ORDER

AND NOW, this ____ day of _____________, 2021, upon consideration of the Petition to Enforce Summons (the “Petition”), the Opposition thereto, and any hearing and/or argument, it is hereby ORDERED that the Petition is DENIED.

BY THE COURT: