Government Urges Third Circuit to Affirm Summons Enforcement

UNITED STATES OF AMERICA,
Plaintiff-Appellee
v.
STATE OF DELAWARE DEPARTMENT OF INSURANCE,
Defendant-Appellant

IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

ON APPEAL FROM THE ORDER OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

BRIEF FOR THE APPELLEE

DAVID A. HUBBERT
Deputy Assistant Attorney General

FRANCESCA UGOLINI
(202) 514-3361
MICHAEL J. HAUNGS
(202) 514-4343
LAUREN E. HUME
(202) 307-2279
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
DAVID C. WEISS
United States Attorney

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TABLE OF CONTENTS

Table of contents

Table of authorities

Statement of subject matter and appellate jurisdiction

Statement of the issue

Statement of related cases and proceedings

Statement of the case

Summary of argument

Argument:

Conclusion

Certificate of bar membership

Certificate of compliance

Certificate of service

TABLE OF AUTHORITIES

Cases:

Am. Bankers Ins. Co. of Fla. v. Inman, 436 F.3d 490 (5th Cir. 2006)

Am. Deposit Corp. v. Schacht, 84 F.3d 834 (7th Cir. 1996)

Avrahami v. Commissioner, 149 T.C. 144 (2017)

Barnett Bank of Marion Cty., N.A. v. Nelson, 517 U.S. 25 (1996)

Blackfeet Nat'l Bank v. Nelson, 171 F.3d 1237 (11th Cir. 1999)

In re Brokerage Antitrust Litig., 618 F.3d 300 (3d Cir. 2010)

Caylor Land & Dev., Inc. v. Commissioner, T.C. Memo. 2021-30, 2021 WL 915613 (2021)

Chamber of Commerce of U.S. v. Whiting, 563 U.S. 582 (2011)

Cochran v. Paco, Inc., 606 F.2d 460 (5th Cir. 1979)

FCC v. AT & T Inc., 562 U.S. 397 (2011)

Forsyth v. Humana, Inc., 114 F.3d 1467 (9th Cir. 1997)

Grp. Life & Health Ins. v. Royal Drug Co., 440 U.S. 205 (1979)

Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d 160 (3d Cir. 2001)

Humana Inc. v. Forsyth, 525 U.S. 299 (1999)

Kenty v. Bank One, Columbus, N.A., 92 F.3d 384 (6th Cir. 1996)

Masciantonio v. United States, 528 F. App'x 120 (3d Cir. 2013)

Merchants Home Delivery Serv., Inc. v. Frank B. Hall & Co., 50 F.3d 1486 (9th Cir. 1995)

Morgan v. Gay, 466 F.3d 276 (3d Cir. 2006)

Owens v. Aetna Life & Cas. Co., 654 F.2d 218 (3d Cir. 1981)

Pardini v. Allegheny Intermediate Unit, 524 F.3d 419 (3d Cir. 2008)

Port Auth. Trans-Hudson Corp. v. Secretary, U.S. Dep't of Lab., 776 F.3d 157 (3d Cir. 2015)

Prudential Ins. Co. v. Benjamin, 328 U.S. 408 (1946)

Reich v. D.M. Sabia Co., 90 F.3d 854 (3d Cir. 1996)

Reisman v. Caplin, 375 U.S. 440 (1964)

RLJCS Enters., Inc. v. Pro. Ben. Tr. Multiple Emp. Welfare Ben. Plan & Tr., 487 F.3d 494 (7th Cir. 2007)

Robertson v. People of State of Calif., 328 U.S. 440 (1946)

Rosenberg v. XM Ventures, 274 F.3d 137 (3d Cir. 2001)

Rsrv. Mech. Corp. v. Commissioner, T.C. Memo. 2018-86, 2018 WL 3046596 (2018)

Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002)

Sabo v. Metro. Life Ins. Co., 137 F.3d 185 (3d Cir. 1998)

SEC v. Nat'l Secs., Inc., 393 U.S. 453 (1969)

Shivkov v. Artex Risk Sols., Inc., 974 F.3d 1051 (9th Cir. 2020)

South Jersey Sanitation Co. v. Applied Underwriters Captive Risk Assurance Co., 840 F.3d 138 (3d Cir. 2016)

St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531 (1978)

Standing Akimbo, LLC v. United States, 955 F.3d 1146 (10th Cir. 2020)

Sugarloaf Funding, LLC v. U.S. Dep't of Treasury, 584 F.3d 340 (1st Cir. 2009)

Suter v. Munich Reinsurance Co., 223 F.3d 150 (3d Cir. 2000)

Syzygy Ins. Co. v. Commissioner, T.C. Memo. 2019-34, 2019 WL 1559540 (2019)

Ticor Title Ins. Co. v. FTC, 998 F.2d 1129 (3d Cir. 1993)

Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310 (1985)

U.S. Dep't of Treasury v. Fabe, 508 U.S. 491 (1993)

Union Lab. Life Ins. Co. v. Pireno, 458 U.S. 119 (1982)

United States v. Artex Risk Sols., Inc., No. 1:14-cv-4081, 2014 WL 4493435 (N.D. Ill. Sept. 11, 2014)

United States v. Arthur Young & Co., 465 U.S. 805 (1984)

United States v. Cortese, 540 F.2d 640 (3d Cir. 1976)

United States v. Cortese, 614 F.2d 914 (3d Cir. 1980)

United States v. Euge, 444 U.S. 707 (1980)

United States v. Garden State Nat'l Bank, 607 F.2d 61 (3d Cir. 1979)

United States v. Ins. Consultants of Knox, Inc., 187 F.3d 755 (7th Cir. 1999)

United States v. LaSalle Nat'l Bank, 437 U.S. 298 (1978)

United States v. Powell, 379 U.S. 48 (1964)

United States v. Rhode Island Insurers' Insolvency Fund, 80 F.3d 616 (1st Cir. 1996)

United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944)

Weiss v. First Unum Life Ins. Co.. 482 F.3d 254 (3d Cir. 2007)

Constitutions:

U.S. Const., art. VI, § 2

Statutes:

15 U.S.C.:

§§ 1011-1015
§ 1011
§ 1012
§ 1012(a)
§ 1012(b)

Internal Revenue Code (26 U.S.C.):

§ 162(a)
§ 831(b)
§ 831(b)(2)(A)(i)
§ 831(b)(2)(E)
§ 6103
§ 6103(h)
§ 6103(h)(4)
§ 6201(a)
§ 6700
§ 6700(a)
§ 7213(a)(1)
§ 7402(b)
§ 7431
§ 7602(a)
§ 7602(a)(1)
§ 7602(a)(2)
§ 7604(a)
§ 7604(b)

28 U.S.C.:

§ 1291
§ 1340
§ 1345

Del. Code Ann. tit. 18:

§ 6920

Rules:

Federal Rules of Appellate Procedure:

Rule 4(a)(1)(B)(i)

Federal Rules of Evidence:

Rule 602
Rule 701
Rule 702

Miscellaneous:

Active NCCIA Members, NCCIA, https://nccia.org/members/ (last visited Apr. 6, 2022)

Approved Captive Managers, DISB, https://disb.dc.gov/page/approved-captive-managers (last visited Apr. 6, 2022)

Black's Law Dictionary 1236 (6th ed. 1990)

Board of Directors, Arizona Captive Insurance Association, https://www.azcia.org/board (last visited Apr. 6, 2022)

Captive Agents, Oklahoma Insurance Department, https://www.oid.ok.gov/captive-insurance-division/captive-agents/ (last visited Apr. 6, 2022)

Captive Managers, DCIA, https://www.delawarecaptive.org/i4a/pages/index.cfm?pageID=3364

Captive Managers, Missouri Department of Insurance, https://insurance.mo.gov/captive/captive_managers.php (last visited Apr. 6, 2022)

Captive Managers, TCIA, https://www.tncaptives.org/page-18075 (last visited Apr. 6, 2022)

Directory, Utah Captive Insurance Association, https://www.utahcaptive.org/directory (last visited Apr. 6, 2022)

Featured Members, Missouri Captive Insurance Association, https://mocaptive.org/Featured-Members (last visited Apr. 6, 2022)

Gold Members, SSIA, https://www.siia.org/i4a/pages/index.cfm?pageid=6824 (last visited Apr. 6, 2022)

Membership, SSCIA, https://www.sccia.org/page/A6 (last visited Apr. 6, 2022)

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STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION

On June 19, 2020, the United States filed a petition to enforce a summons issued by the Internal Revenue Service (“IRS”) under I.R.C. §7602(a), to the Delaware Department of Insurance, Bureau of Captive and Financial Insurance Products (“DDOI”).¹ (A036-44, 049-77.) The District Court had jurisdiction under I.R.C. §§ 7604(a), 7402(b), and 28 U.S.C. §§ 1340, 1345.

On September 29, 2021, the District Court issued an order granting the United States' petition. (A008.) The District Court's order was a final decision disposing of all parties' claims. On October 28, 2021, DDOI timely filed a notice of appeal. (A006.) Fed. R. App. P. 4(a)(1)(B)(i). This Court has jurisdiction under 28 U.S.C. § 1291.

STATEMENT OF THE ISSUE

Whether, under the McCarran-Ferguson Act, a Delaware statute restricting DDOI's disclosure of information related to captive insurance companies reverse preempts the IRS's statutory summons authority.

STATEMENT OF RELATED CASES AND PROCEEDINGS

This case has not been before this Court previously, and counsel for the United States are not aware of any other related cases, whether completed or pending, before this Court or any other court.

STATEMENT OF THE CASE

A. Brief Overview of Case

The IRS issued a summons to DDOI, seeking testimony and documents as part of an investigation into alleged promoters of abusive micro-captive insurance transactions. DDOI partially complied with the summons but refused to produce documents related to specific micro-captive insurance companies (except as to a small number that consented) based on its view that, under the McCarran-Ferguson Act, an anti-disclosure provision in the Delaware Insurance Code reverse preempts the IRS's statutory summons authority.

Under the Supremacy Clause, federal laws “shall be the supreme law of the land.” U.S. Const., art. VI, § 2. An IRS summons issued pursuant to I.R.C. § 7602(a) thus generally will be enforced to compel disclosure of information, notwithstanding potentially applicable state anti-disclosure statutes or privileges. See Standing Akimbo, LLC v. United States, 955 F.3d 1146, 1165 (10th Cir. 2020); United States v. Cortese, 540 F.2d 640, 642-43 (3d Cir. 1976).

The McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, however, protects state laws regulating the business of insurance from inadvertent preemption under the Supremacy Clause by federal statutes of general applicability. In particular, the “anti-preemption” or “reverse preemption” section of the Act, 15 U.S.C. § 1012, provides that the “business of insurance” shall be regulated by state law, and that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede” any state law enacted “for the purpose of regulating the business of insurance,” unless such Act of Congress “specifically relates to the business of insurance.”

Here, the United States petitioned the District Court to enforce the IRS's summons against DDOI. The District Court granted the United States' petition, holding that the McCarran-Ferguson Act does not apply because the relevant Delaware statute does not relate to the “business of insurance.” DDOI now appeals.

B. Administrative Background

The IRS is investigating the roles of Artex Risk Solutions, Inc., and Tribeca Strategic Advisors, LLC (an entity wholly owned by Artex), in micro-captive insurance and other transactions, to determine whether Artex and Tribeca are liable for penalties under I.R.C. § 6700 for promoting abusive tax shelters. (A036-37, 045.)

Micro-captive insurance transactions carry the potential for unlawful tax evasion. Micro-captive insurers are a form of captive insurer, an insurance company that “insures only the risks of companies related to [them] by ownership.” Avrahami v. Commissioner, 149 T.C. 144, 176 (2017). Although taxpayers normally cannot deduct “amounts set aside in a loss reserve as a form of self-insurance,” insurance premiums paid to captive insurers may be deductible to the insured-taxpayer under I.R.C. § 162(a) as ordinary and necessary business expenses. Id. at 174. But whereas most insurance companies “are generally taxed on their income in the same manner as other corporations,” micro-captive and other small insurers — insurers with annual premiums below a certain threshold² — may elect to be taxed on only their investment income under I.R.C. § 831(b), and thus may exclude premiums received from their taxable income. Id. at 175-76. In recent years, the Tax Court has repeatedly found that micro-captive insurers did not actually provide insurance, disallowed claimed deductions associated with micro-captive transactions, and penalized taxpayers who entered such transactions. See, e.g., Avrahami, 149 T.C. at 179-80; Rsrv. Mech. Corp. v. Commissioner, T.C. Memo. 2018-86, 2018 WL 3046596, at *16 (2018); Syzygy Ins. Co. v. Commissioner, T.C. Memo. 2019-34, 2019 WL 1559540, at *45 (2019); Caylor Land & Dev., Inc. v. Commissioner, T.C. Memo. 2021-30, 2021 WL 915613, at *1, 4-5, 10-16 (2021) (invalidating micro-captive insurer created by Tribeca).

The IRS has audited and assessed deficiencies against taxpayers who entered into micro-captive transactions set up by Artex and Tribeca. (A093-101, 130-31, 139-40, 148.³) And the Tax Court has determined that a micro-captive insurer established by Tribeca did not actually provide insurance and thus could not provide claimed tax benefits. See Caylor, 2021 WL 915613, at *4-5, 10-16.

As part of its investigation into Artex and Tribeca, the IRS issued two summonses to Artex, which the United States enforced in court after Artex failed to comply. (A040.) See United States v. Artex Risk Sols., Inc., No. 1:14-cv-4081, 2014 WL 4493435 (N.D. Ill. Sept. 11, 2014). After this successful summons enforcement action, Artex produced documents to the United States in 2014. (A046.)

Because DDOI issued 225 insurance certificates of authority to captive insurance companies created by Artex or Tribeca⁴ (A040, 229), on October 30, 2017, the IRS issued an administrative summons to DDOI (A047, 049-50). The summons sought information regarding the micro-captive insurers created by Artex and Tribeca, Artex's and Tribeca's roles in promoting micro-captive insurance transactions to taxpayers, and whether Artex and Tribeca engaged in conduct that would render them liable for penalties under I.R.C. § 6700. (A046.)

The IRS summons directed DDOI to appear before a Revenue Agent to give testimony on and to produce requested documents by November 29, 2017, at 9:00 a.m. (A047, 049.) Among the documents summoned, the IRS directed DDOI, in Request 1 of the summons, to produce “all electronic mail between [DDOI] and Artex and/or Tribeca related to the Captive Insurance Program.” (A065; see also A047.) The term “Captive Insurance Program” was defined in the summons to mean “any arrangement managed by Artex or Tribeca wherein captive insurance companies, defined by Title-18 Chapter 69 of the Delaware Code, provide either insurance or reinsurance.” (A063.)

DDOI did not fully comply with the IRS summons. (A047-48.) No representative of DDOI ever appeared to provide testimony, and DDOI made only a partial, piecemeal production of documents in response to Request 1. (A047-48.) On November 28, 2017, DDOI produced approximately 169 pages of responsive documents. (A047.) On April 30, 2018, DDOI produced approximately 125 additional pages of documents, which did not include any emails. (A047.) DDOI later agreed — after the IRS referred the summons to the Department of Justice for enforcement — to produce additional responsive documents that were not “client specific.” (A042, 047.) By June 2020, it produced approximately 1,591 pages of such documents. (A047.)

DDOI also made a partial production of “client specific” documents, viz., documents related to specific captive insurers created by Artex and Tribeca. But DDOI only produced client-specific documents for those insurers that affirmatively consented to the release of their documents to the IRS. (A042, 047-48, 233.) By June 2020, DDOI produced responsive documents related to 16 insurers (out of the 225 total) that consented to disclosure; it later produced files for three additional insurers that consented. (A040, 042, 047-48, 229-30, 233.)

According to documents received from Artex in 2014 and DDOI's own admissions, DDOI has not produced all documents responsive to Request 1 of the summons. (A040-41, 048, 229-30, 232.)

C. Summons Enforcement Case

In June 2020, the United States filed a petition to enforce the IRS's administrative summons against DDOI. (A036-44.) Specifically, the United States sought an order directing DDOI to obey Request 1 of the summons and the IRS's request for testimony. (A043-44.) The United States submitted a declaration from the Revenue Agent, with exhibits, to establish its prima facie case under United States v. Powell, 379 U.S. 48, 57-58 (1964). (A043; see also A045-48.)

After the District Court issued an order to show cause why DDOI should not be compelled to obey the summons (A224-25), DDOI appeared, opposed the United States' petition to enforce, and moved to quash the summons (A226-38). DDOI argued, as relevant to this appeal, that, under the McCarran-Ferguson Act (15 U.S.C. § 1012⁵), §6920 of the Delaware Insurance Code (Del. Code Ann. tit. 18 § 6920) reverse preempts the IRS's summons authority. (A226-28, 271-78.)

In a July 2021 report and recommendation, Magistrate Judge Christopher J. Burke recommended that the District Court grant the United States' petition.⁶ (A018-33.) As relevant to this appeal, the Magistrate Judge recommended rejecting DDOI's argument under the McCarran-Ferguson Act. (A024-33.) The Magistrate Judge first observed that Supreme Court precedent established a three-part test for whether, outside the antitrust context, a state law reverse preempts a federal law under 15 U.S.C. § 1012(b): “(1) whether the state law is enacted 'for the purpose of regulating the business of insurance'; (2) whether the federal law does not 'specifically relat[e] to the business of insurance'; and (3) whether the federal law would 'invalidate, impair, or supersede' the State's law.” (A026 (quoting Humana Inc. v. Forsyth, 525 U.S. 299, 307 (1999)).) The Magistrate Judge further determined that the Third Circuit recognized an initial “threshold element” under 15 U.S.C. § 1012(a): “whether the activity complained of constitutes the 'business of insurance.'” (A026-028 (quoting Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d 160, 166 (3d Cir. 2001)) (emphasis in report).)

Addressing the threshold element for reverse preemption under §1012(a), the Magistrate Judge concluded that the challenged conduct at issue in the case — that is, the conduct regulated by Delaware Insurance Code § 6920 — was not the “business of insurance.” (A029-33.) In the Magistrate Judge's view, § 6920 instead regulated “[r]ecord maintenance” or “the dissemination and maintenance of information, documents, and communications [maintained by the state],” because §6920 defined the third parties and the circumstances under which DDOI could disclose a captive insurer's information and documents. (A029 (internal quotation marks omitted).) The Magistrate Judge did not view this conduct as the business of insurance because § 6920 “has nothing to do with” transferring or spreading a policyholder's risk and was not related to the relationship between the policyholder and insurer, nor did it fall within the scope of activities that have been held to be the business of insurance. (A029-31.)

The Magistrate Judge rejected DDOI's argument that § 6920 governed the business of insurance because it related to insurer licensing, viewing that argument as “really stretch[ing] the meaning and import of Section 6920's text.” (A032.) Rather, “the core conduct regulated by Section 6920 does not have to do with the licensing process” as the statute “does not speak to the criteria for licensing captive insurance companies, nor to the process by which a captive insurance company can obtain a license.” (A032.) DDOI objected to the Magistrate Judge's report and recommendation. (A266-80.)

In September 2021, the District Court (Judge Maryellen Noreika) overruled DDOI's objections, adopted the Magistrate Judge's report and recommendation, and granted the United States' petition. (A009-17; see also A008.) The District Court agreed with the Magistrate Judge that the Third Circuit recognized a threshold requirement for reverse preemption under 15 U.S.C. § 1012(a), under which the conduct at issue must be the business of insurance. (A013-15 (discussing Sabo v. Metro. Life Ins. Co., 137 F.3d 185 (3d Cir. 1998), and Highmark).) The court was bound to apply the Third Circuit's published opinions in Sabo and Highmark because those opinions were not “overruled by or inconsistent with the Supreme Court's decisions in Humana and Fabe,” nor had they been overruled by an en banc Third Circuit opinion. (A014-15.)

Turning to the threshold requirement, the District Court agreed with the Magistrate Judge that the conduct at issue in § 6920 was not the business of insurance, but rather “'record maintenance' and, more specifically, the dissemination and maintenance of information, documents, and communications maintained by the state” — a description that “flows directly from the language of Section 6920.” (A015.) The District Court rejected DDOI's argument that the Magistrate Judge erred by considering, as part of the business-of-insurance inquiry, factors developed in the antitrust context, because the Supreme Court and Third Circuit recognized those factors as “an appropriate starting point” in non-antitrust cases and the Magistrate Judge did not limit his analysis to only those factors. (A015-16.) The District Court declined to consider what DDOI contended was the purpose underlying § 6920 because purpose is relevant only as part of the three-factor test for reverse preemption under § 1012(b), not the threshold test under § 1012(a). (A015.)

DDOI timely appealed from the District Court's decision. (A006.)

SUMMARY OF ARGUMENT

The IRS is investigating whether Artex and Tribeca are liable for penalties under I.R.C. § 6700 for promoting abusive micro-captive insurance transactions. The IRS issued a summons to DDOI to obtain information about its communications with Artex and Tribeca, as well as about the micro-captive insurers that they established in Delaware. DDOI refused to fully comply with the summons, claiming that Delaware Insurance Code § 6920 reverse preempts the IRS's summons authority under the McCarran-Ferguson Act. The District Court correctly rejected that argument and ordered DDOI to comply with the IRS summons. This Court should affirm.

DDOI's primary argument is that the District Court applied the wrong test for reverse preemption under 15 U.S.C. § 1012(b). In advancing this argument, DDOI erroneously suggests that the District Court applied a four-factor test for reverse preemption under § 1012(b). To the contrary, the District Court (and Magistrate Judge) correctly recognized that the test for reverse preemption under § 1012(b) has only three requirements. But the District Court further recognized that this Court has repeatedly held that another subsection of the McCarran-Ferguson Act, 15 U.S.C. § 1012(a), imposes an initial threshold test for the Act even to apply — precedent that has not been overturned and is binding on lower courts in this circuit. DDOI ignores this analytical distinction, failing to even cite § 1012(a) in its brief.

Alternatively, DDOI argues that the District Court incorrectly applied the threshold test for reverse preemption. This argument is also incorrect. Statutes substantively regulating the insurer licensing process are part of the “business of insurance” within the meaning of the McCarran-Ferguson Act, but § 6920 is not such a statute. Section 6920's text demonstrates that it is not a substantive part of the licensing and examination processes. If DDOI is compelled to obey the IRS's summons, notwithstanding § 6920, there would be no effect on the standards that insurers must satisfy for licensing and examinations. The statute has, at most, indirect effects on licensing and examination, effects that are too attenuated to bring the conduct it regulates within the business of insurance.

Finally, DDOI and the captive insurance lobbying associations that have appeared as amici (most, if not all, of which represent or are associated with Artex) raise purported policy concerns and propose solutions. Like DDOI's substantive arguments, these purported policy concerns and “solutions” lack merit. DDOI and the lobbying associations appear to suggest that if DDOI could be compelled to comply with an IRS summons, then captive insurers would be less forthright in the licensing and examination processes and thereby damage insurer reliability. The implication of this purported policy concern is that captive insurers would not comply with their legal obligations to provide required information to DDOI as part of licensing and examination processes if there were any possibility that DDOI might disclose that information to the IRS. This Court should not lightly assume, however, that captive insurers will fail to meet their own legal obligations.

Nor would the alternatives that DDOI and the lobbying associations propose be equivalent to summons enforcement against DDOI. DDOI and its amici first suggest that the IRS should obtain the information it seeks directly from the 225 captive insurers that Artex and Tribeca established. This suggestion overlooks the fact that the IRS may not know every insurer's identity, that the micro-captive insurers are unlikely to have record retention policies comparable to DDOI, and that insurers (and their controlling taxpayers) have strong incentives not to voluntarily disclose documents to the IRS that might be used to assess tax deficiencies and penalties against them.

DDOI and its amici further suggest that the IRS could simply agree to hold any information it receives confidential in a manner consistent with § 6920. But the IRS is governed by its own comprehensive confidentiality statute, which permits the IRS and the United States to disclose protected information as authorized by Congress in situations not authorized by § 6920, such as when relevant to judicial proceedings. The federal government will not agree to be bound by a more restrictive anti-disclosure statute than what has been mandated by Congress, particularly where such agreement could permit alleged promoters of abusive tax shelters, or participants in such shelters, to determine how or whether information obtained from DDOI could be used against them in eventual litigation.

ARGUMENT

DDOI must comply with the IRS's summons because Delaware Insurance Code § 6920 does not reverse preempt the IRS's statutory summons authority under the McCarran-Ferguson Act

Statement of the standard or scope of review

In appeals from summons enforcement actions, this Court “review[s] questions of fact for clear error and questions of law de novo.” Masciantonio v. United States, 528 F. App'x 120, 121 (3d Cir. 2013) (citing United States v. Ins. Consultants of Knox, Inc., 187 F.3d 755, 759 (7th Cir. 1999)). A district court's determination that the McCarran-Ferguson Act does not preclude application of a federal law is a question of law reviewed de novo. See Weiss v. First Unum Life Ins. Co.. 482 F.3d 254, 263 (3d Cir. 2007).

A. Statutory overview: the IRS's statutory summons authority, the McCarran-Ferguson Act, and Delaware Insurance Code § 6920

The question presented in this appeal turns on the interaction between three statutes: I.R.C. § 7602(a), which grants the IRS broad summons authority in support of its mandate to investigate potential violations of the Internal Revenue Code; 15 U.S.C. § 1012, i.e., Section 2 of the McCarran-Ferguson Act,⁷ which allows state laws for the “business of insurance” to reverse preempt federal laws under certain circumstances; and Delaware Insurance Code § 6920, which restricts DDOI's ability to disclose information related to captive insurers. This Section provides an overview of these statutes; the next Section applies that overview to explain why the District Court correctly held that §6920 does not reverse preempt § 7602(a) under the McCarran-Ferguson Act.

1. The IRS's broad statutory summons authority

Congress “authorized and required” the IRS “to make the inquiries, determinations, and assessments of all taxes (including . . . assessable penalties)” imposed by the Internal Revenue Code. I.R.C. §6201(a). In support of that mandate, Congress empowered the IRS to “examine any books, papers, records, or other data which may be relevant or material” to such inquiries, and to summon taxpayers and “any other person the Secretary may deem proper” to appear, produce documents, and testify. I.R.C. § 7602(a)(1), (2). Consistent with §7602(a)'s broad language, the Supreme Court broadly construes “the IRS's general summons power under § 7602(a).” Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 315 (1985); see also United States v. Euge, 444 U.S. 707, 715-16 (1980).

Where, as here, a summonsed party refuses to comply with an IRS summons, the United States may petition a federal district court to enforce the summons, and the court may do so through its contempt powers. I.R.C. § 7604(b). To prevail on a summons enforcement petition, the United States bears only a light burden. See United States v. Powell, 379 U.S. 48, 57-58 (1964). The United States may satisfy its burden by introducing a declaration from the IRS Revenue Agent who issued the summons. See United States v. Garden State Nat'l Bank, 607 F.2d 61, 68 (3d Cir. 1979).

In contrast with the United States' light burden, the noncompliant party opposing enforcement of an IRS summons “bears a heavy burden of establishing an abuse of the court's process.” United States v. Cortese, 614 F.2d 914, 919 (3d Cir. 1980) (citing United States v. LaSalle Nat'l Bank, 437 U.S. 298, 317 (1978)). A noncompliant party may attempt to satisfy its heavy burden by “challeng[ing] the summons on any appropriate ground,” such as affirmatively disproving an element of the United States' prima facie case or proving entitlement to assert a privilege recognized by federal law. Reisman v. Caplin, 375 U.S. 440, 449 (1964); cf. United States v. Arthur Young & Co., 465 U.S. 805, 817-21 (1984) (holding that purported privileges not recognized by federal law did not provide a basis to refuse to comply with summons); United States v. Cortese, 540 F.2d 640, 642-43 (3d Cir. 1976) (holding that state-created privilege did not provide a basis to refuse to comply with summons).

2. The McCarran-Ferguson Act

The McCarran-Ferguson Act (15 U.S.C. §§ 1011-1015) protects state laws regulating the business of insurance from inadvertent preemption by generally-applicable federal statutes. Barnett Bank of Marion Cty., N.A. v. Nelson, 517 U.S. 25, 39 (1996). Congress passed the Act after the Supreme Court held, in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944), that the Commerce Clause authorized Congress to regulate alleged antitrust violations by an insurance company conducting interstate business, thereby causing concern that states would lose the ability to regulate insurers. See Act of Mar. 9, 1945, ch. 20, 59 Stat. 33-34; St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 538-39 (1978).

The McCarran-Ferguson Act declares that continued state regulation of “the business of insurance” is in the public interest and provides that “silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several states.” 15 U.S.C. § 1011. The “anti-preemption” or “reverse preemption” section of the Act, 15 U.S.C. § 1012, provides:

(a) State regulation

The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

(b) Federal regulation

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

Section 1012 “remov[es] obstructions which might be thought to flow from [Congress's] own power . . . except as otherwise expressly provided in the Act itself or in future legislation.” Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 429-30 (1946). To the extent it creates exemptions from federal laws, the Act is narrowly construed. See, e.g., In re Brokerage Antitrust Litig., 618 F.3d 300, 351 (3d Cir. 2010) (relying on Grp. Life & Health Ins. v. Royal Drug Co., 440 U.S. 205, 211 (1979)); Cochran v. Paco, Inc., 606 F.2d 460, 467 (5th Cir. 1979).

a. Reverse preemption under § 1012(b)

Nearly all case law analyzing whether state laws reverse preempt federal laws under the McCarran-Ferguson Act focuses on § 1012(b). Since the Act was enacted in 1945, the Supreme Court has developed a three-part test for reverse preemption under § 1012(b). See, e.g., Suter v. Munich Reinsurance Co., 223 F.3d 150, 160 (3d Cir. 2000). Under this test, a state statute reverse preempts a federal statute “if (1) the state statute was enacted 'for the purpose of regulating the business of insurance,' (2) the federal statute does not 'specifically relate to the business of insurance,' and (3) the federal statute would 'invalidate, impair, or supersede' the state statute.” Id. (citing U.S. Dep't of Treasury v. Fabe, 508 U.S. 491, 501 (1993)). If any of these three requirements are not satisfied, then reverse preemption does not occur. See Humana, 525 U.S. at 311.

b. This Court's threshold test under § 1012(a)

The Third Circuit appears to be the only federal appellate court to have addressed whether § 1012(a) creates an additional obstacle to reverse preemption.

In two published opinions, this Court has held that § 1012(a) presents a “threshold question in determining whether the antipreemption mandate of 15 U.S.C. § 1012(b) applies,” namely, “whether the challenged conduct broadly constitutes the 'business of insurance' in the first place.” Sabo v. Metro. Life Ins. Co., 137 F.3d 185, 190 (3d Cir. 1998); see also Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d 160, 166 (3d Cir. 2001) (“To determine whether the McCarran Act applies, this Court considers the threshold question to be whether the activity complained of constitutes the 'business of insurance.'”). This threshold question recognizes “the structure and purpose of the McCarran-Ferguson Act,” and that § 1012(b) cannot “protect[ ] a state law enacted for the purpose of regulating the insurance business when the activity in question does not relate to insurance” within the meaning of § 1012(a). Sabo, 137 F.3d at 190. The “activity in question” and “challenged conduct” within the meaning of this threshold question are the conduct covered by the state statute at issue in the case. See id. (explaining that threshold question aims to determine whether state statute “was meant to fall within the ambit of the Act's protection”).

Under this Court's authority regarding § 1012(a), if the activities regulated by a state statute “are wholly unrelated to the insurance business, then the McCarran-Ferguson Act has no place in analyzing federal regulation because only when '[insurance companies] are engaged in the 'business of insurance' does the act apply.'” Sabo, 137 F.3d at 190 (quoting SEC v. Nat'l Secs., Inc., 393 U.S. 453, 459-60 (1969)); see also Highmark, 276 F.3d at 166 (“If the activity does not constitute the 'business of insurance,' then the McCarran Act does not apply.”).

c. The meaning of the “business of insurance”

Both this Court's threshold test for applicability of the McCarran-Ferguson Act under § 1012(a) and the Supreme Court's test for reverse preemption under § 1012(b) address, in part, the meaning of the “business of insurance,” because that phrase appears in both subsections of § 1012. Mindful of the general principle that “identical words and phrases within the same statute should normally be given the same meaning,” FCC v. AT & T Inc., 562 U.S. 397, 408 (2011) (internal quotation marks omitted), courts generally interpret the phrase the “business of insurance” consistently across its uses in §1012.⁸ See, e.g., Blackfeet Nat'l Bank v. Nelson, 171 F.3d 1237, 1247 n.13 (11th Cir. 1999) (“We cannot imagine that 'business of insurance' could have two different meanings in the same statutory subsection[.]”); Am. Deposit Corp. v. Schacht, 84 F.3d 834, 840 (7th Cir. 1996) (“[The Supreme Court] assuredly did not give 'business of insurance' one meaning in the first clause [of § 1012(b)] and a different meaning in the second.”); United States v. Rhode Island Insurers' Insolvency Fund, 80 F.3d 616, 622 n.4 (1st Cir. 1996) (“Fabe is apposite to the extent that 'business of insurance' is a term common to both the first and second prongs under § 1012(b).”).

The “business of insurance” does not encompass all activities of insurance companies. See, e.g., Royal Drug, 440 U.S. at 210-211 (“The exemption is for the 'business of insurance,' not the 'business of insurers.'”). Instead, the “business of insurance” encompasses insurers' activities that “relate [ ] closely to their status as reliable insurers,” because the focus is always “on the relationship between the insurance company and the policyholder.” Nat'l Secs., 393 U.S. at 460 (holding that state statute aimed at regulating stockholder-insurer relationship is not business of insurance); see also In re Ins. Brokerage Antitrust Litig., 618 F.3d at 355 (categorizing certain activities as “business of insurance” “either because they pertain to risk-spreading or to the contract between the insurer and the insured”). “[T]he core of the 'business of insurance'” thus involves “[t]he relationship between insurer and insured, the type of policy which could be issued, [the policy's] reliability, interpretation, and enforcement.” Nat'l Secs., 393 U.S. at 460; see also Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 373-74 (2002) (describing “the interpretation of insurance contracts” as “the 'core' of the business of insurance”).

The Supreme Court has “identified three criteria relevant to whether a particular practice” constitutes the “business of insurance”: “first, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.” Union Lab. Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982) (emphasis in original). Although none of the criteria are determinative, the first criterion is particularly important because “underwriting or spreading of risk [is] an indispensable characteristic of insurance.” Royal Drug, 440 U.S. at 212; see also id. at 220-221; Owens v. Aetna Life & Cas. Co., 654 F.2d 218, 224 (3d Cir. 1981) (“The earmark of insurance is the underwriting and spreading of risks in exchange for a premium.”).

The Supreme Court and this Court have identified various activities that constitute the “business of insurance.” These activities include: (1) “the fixing of [insurance] rates”; (2) “[t]he selling and advertising of [insurance] policies”; (3) “the licensing of [insurance] companies and their agents”; (4) “preparing and filing a rating-schedule, either on behalf of an individual company or jointly through a rating bureau”; (5) “deciding upon rating classification differences between individual policies and group marketing plans, either individually or jointly through a rating bureau”; (6) “authorizing agents to solicit individual or group policies”; and (7) “accepting or rejecting coverages tendered by brokers.” Nat'l Secs., 393 U.S. at 460; Owens, 654 F.2d at 225-26; see also Sabo, 137 F.3d at 191 (“[T]here is nothing more basically 'insurance' than the sale of an insurance contract and the insurer's unique approach in trading, advertising, or valuing that product.”).

By contrast, activities with only indirect effects on policyholders or on the reliability of insurers are not the “business of insurance.” See Fabe, 508 U.S. at 508-09. For example, a state law that preferences non-policyholder creditors of an insurance company in a liquidation proceeding, a practice that “may redound to the benefit of policyholders by enhancing the reliability of the insurance company,” does not constitute the “business of insurance,” because the effects on insurer reliability and policyholders are too attenuated. Fabe, 508 U.S. at 508-09 (citing Royal Drug, 440 U.S. at 216-17).

3. Delaware's captive insurance anti-disclosure statute

As part of the Captive Insurance Companies chapter of its Insurance Code, Delaware has a statute that prohibits DDOI from disclosing large amounts of information that DDOI receives with respect to captive insurance companies, except under limited circumstances. See Del. Code Ann. tit. 18 § 6920. Section 6920 provides:

All portions of license applications reasonably designated confidential by or on behalf of an applicant captive insurance company, all information and documents, and any copies of the foregoing, produced or obtained by or submitted or disclosed to the Commissioner pursuant to subchapter III of this chapter of this title [which concerns Special Purpose financial Captive Insurance Companies] that are reasonably designated confidential by or on behalf of a special purpose financial captive insurance company, and all examination reports, preliminary examination reports, working papers, recorded information, other documents, and any copies of any of the foregoing, produced or obtained by or submitted or disclosed to the Commissioner that are related to an examination pursuant to this chapter must, unless the prior written consent (which may be given on a case-by-case basis) of the captive insurance company to which it pertains has been obtained, be given confidential treatment, are not subject to subpoena, may not be made public by the Commissioner, and may not be provided or disclosed to any other person at any time except:

(1) To the insurance department of any state or of any country or jurisdiction other than the United States of America; or

(2) To 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.

Id.

The IRS is bound by its own comprehensive confidentiality statute. See I.R.C. § 6103. Although § 6103 protects from disclosure much information received by the IRS and carries serious civil and criminal penalties for violations, I.R.C. §§ 7213(a)(1), 7431, § 6103 permits disclosure in situations not authorized by § 6920, such as judicial proceedings to determine a person's civil or criminal liability under the Internal Revenue Code. I.R.C. § 6103(h)(4).

B. The District Court correctly applied this Court's threshold test under 15 U.S.C. § 1012(a) to hold that the McCarran-Ferguson Act does not apply

This Court has repeatedly recognized that 15 U.S.C. § 1012(a) presents an initial threshold obstacle for the McCarran-Ferguson Act to apply: challenged conduct covered by a state statute must constitute the “business of insurance.” The District Court correctly recognized that this threshold test is part of the law of this Circuit, and correctly applied the test to determine that Delaware Insurance Code § 6920 does not regulate the “business of insurance” and thus that the McCarran-Ferguson Act does not apply. This Court should affirm.

1. The District Court correctly held that this Court's precedents establish a threshold test under § 1012(a) for the McCarran-Ferguson Act to apply

The District Court correctly held that this Court's opinions in Sabo and Highmark required it to apply a threshold test under § 1012(a) for whether the McCarran-Ferguson Act applies. (A013-15.) Sabo and Highmark were both published, precedential opinions of this Court. See Sabo, 137 F.3d 185; Highmark, 276 F.3d 160; 3d Cir. I.O.P. 5.1, 5.2. Neither decision bears a notation that would designate the opinion as “not precedential.” 3d Cir. I.O.P. 5.3. They are thus binding authority in this Circuit. See Reich v. D.M. Sabia Co., 90 F.3d 854, 858 (3d Cir. 1996) (recognizing that subsequent panel is bound by earlier panel's precedential opinion unless “intervening authority [or] amendments to statutes or regulations” “radically altered the legal landscape”).

DDOI attempts to avoid the binding nature of Sabo and Highmark by incorrectly suggesting that those opinions adopted a four-factor test for reverse preemption under § 1012(b), and thus conflict with Supreme Court precedent in Fabe and Humana. (Br. 23-27.) But contrary to DDOI's suggestion, Sabo and Highmark clearly state that the threshold requirement derives from § 1012(a) and is not part of the § 1012(b) analysis. See Sabo, 137 F.3d at 189-90 (“If it is determined that the alleged conduct at issue broadly constitutes the 'business of insurance,' and is therefore subject to state regulation under section 1012(a), . . .”) (emphasis added); Highmark, 276 F.3d at 166 (explaining that only if “the activity does constitute the 'business of insurance,' [does the court] then look to whether § 1012(b) precludes a federal cause of action”). Instead, both Sabo and Highmark recognized that, if the threshold test under § 1012(a) is satisfied, then the Court applies a three-part test for reverse preemption under § 1012(b). See Sabo, 137 F.3d at 189; Highmark, 276 F.3d at 166. DDOI ignores this aspect of Sabo and Highmark, failing to even cite § 1012(a) in its brief.

When the relevant portions of Sabo and Highmark are correctly understood as applying a threshold requirement under § 1012(a), those decisions do not conflict with Fabe and Humana as DDOI contends (Br. 31-32; see also Br. 23-31). In Fabe, decided before Sabo and Highmark, the Supreme Court did not address whether § 1012(a) imposed an initial threshold test for the McCarran-Ferguson Act to apply; indeed, the Court did not analyze any aspect of § 1012(a). See generally Fabe, 508 U.S. 491. Instead, Fabe addressed a narrow question: “whether a state statute establishing the priority of creditors' claims in a proceeding to liquidate an insolvent insurance company is a law enacted 'for the purpose of regulating the business of insurance,' within the meaning of § 2(b)[.]” Id. at 493. In other words, Fabe addressed one of the three requirements under § 1012(b) for reverse preemption. See id. at 500-01. Far from conflicting with Fabe, this Court in Sabo, after determining that the conduct at issue satisfied the threshold test under § 1012(a), applied the three-factor test referenced in Fabe to determine whether Pennsylvania law reverse preempted the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) under § 1012(b). See Sabo, 137 F.3d at 189 (citing Fabe, 508 U.S. 501-02).

Similarly, Humana, decided after Sabo and before Highmark, did not analyze § 1012(a). Instead, in Humana, the Supreme Court addressed another element of § 1012(b)'s three-part test for reverse preemption, analyzing whether RICO would “invalidate, impair, or supersede” a Nevada law. Id. at 302-03. The three-part test under §1012(b) recognized in Humana is consistent with the three-part test that this Court applied in Sabo and Highmark. Compare Humana, 525 U.S. at 307, with Sabo, 137 F.3d at 189, and Highmark, 276 F.3d at 166. Consequently, Humana, like Fabe, does not conflict with Sabo or Highmark.

DDOI makes much of the fact that the Ninth Circuit in Humana had applied a four-factor test for reverse preemption under § 1012(b), whereas the Supreme Court applied a three-factor test. (Br. 32.) Compare Forsyth v. Humana, Inc., 114 F.3d 1467, 1479 (9th Cir. 1997), with Humana, 525 U.S. at 307. But the Supreme Court in Humana did not address whether § 1012(a) imposed a threshold requirement for reverse preemption — the relevant holding in Sabo and Highmark — which is unsurprising because the Ninth Circuit had not held that §1012(a) imposed such a requirement. See generally Humana, 525 U.S. 299. That the Supreme Court did not adopt the Ninth Circuit's incorrect test under § 1012(b) is not relevant to whether § 1012(a) imposes an initial threshold requirement.

DDOI also incorrectly suggests that subsequent decisions of this Court overruled the portions of Sabo and Highmark related to §1012(a). (Br. 33-35.) As precedential opinions, Sabo and Highmark are “binding on subsequent panels” of this Court, and their holding with respect to § 1012(a) can only be overturned by this Court sitting en banc, 3d Cir. I.O.P. 9.1, unless “intervening authority [or] amendments to statutes or regulations” “radically alter[ ] the legal landscape,” Reich, 90 F.3d at 858. But DDOI failed to identify any intervening authority that provides that § 1012(a) does not impose a threshold test for the McCarran-Ferguson Act to apply, because neither Fabe nor Humana addressed that issue. So even if this Court's subsequent decisions in Suter and South Jersey Sanitation Co. v. Applied Underwriters Captive Risk Assurance Co., 840 F.3d 138 (3d Cir. 2016), could be read as inconsistent with Sabo and Highmark, as DDOI contends (Br. 33-35), Sabo, as the earliest precedent, controls. See Pardini v. Allegheny Intermediate Unit, 524 F.3d 419, 426 (3d Cir. 2008) (“[T]his Circuit has long held that if its cases conflict, the earlier is the controlling authority and the latter is ineffective as precedents.”) (internal quotation marks omitted).

In any event, this Court's subsequent decisions in Suter and South Jersey Sanitation Co. are not inconsistent with Sabo and Highmark, for essentially the same reason that Fabe and Humana are not inconsistent with those opinions. Neither Suter nor South Jersey Sanitation Co. addressed whether § 1012(a) imposed a threshold test for the McCarran-Ferguson Act to apply. See Suter, 223 F.3d at 160-61; S. Jersey Sanitation Co., 840 F.3d at 142 n.7. Instead, in Suter, this Court addressed whether the three-part test for reverse preemption in non-antitrust contexts under the first clause of § 1012(b) was satisfied, see Suter, 223 F.3d at 160-61, while in South Jersey Sanitation Co., this Court simply stated the three-factor § 1012(b) test in a footnote and the opinion addressed whether either fraud or a Nebraska statute rendered a contractual arbitration provision unenforceable, see S. Jersey Sanitation Co., 840 F.3d 142 & n.7, 143-46. Suter and South Jersey Sanitation Co., like Fabe and Humana, thus do not conflict with the portions of Sabo and Highmark related to § 1012(a), and the District Court correctly viewed Sabo and Highmark as binding.

2. DDOI failed to satisfy the threshold test under § 1012(a)

The District Court correctly held, applying Sabo and Highmark, that the McCarran-Ferguson Act does not apply because the challenged conduct is not the “business of insurance.” (A015-16.)

Under Sabo and Highmark, the McCarran-Ferguson Act does not apply unless the challenged conduct is the “business of insurance” within the meaning of § 1012(a). See Sabo, 137 F.3d at 190-91; Highmark, 276 F.3d at 166. Here, as the District Court correctly recognized (A015), the challenged conduct was “'record maintenance' and, more specifically, the dissemination and maintenance of information, documents, and communications maintained by the state.” Delaware Insurance Code § 6920 requires DDOI to treat as confidential large amounts of information and documents that it receives from and about captive insurers, and prohibits disclosure of such information and documents except in limited circumstances. See Del. Code Ann. tit. 18 §6920. Rules about how a state must maintain, and when it may disclose, information received from or about insurers govern record maintenance and dissemination; they do not govern the business of insurance.

As discussed above in Section A.2.c, courts generally consider three criteria when assessing whether conduct is the business of insurance: “first, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.” Pireno, 458 U.S. at 129 (emphasis in original).⁹

The Supreme Court developed these factors based on its recognition that the “core” of the business of insurance involves “[t]he relationship between insurer and insured, the type of policy which could be issued, [the policy's] reliability, interpretation, and enforcement.” Nat'l Secs., 393 U.S. at 460.

Applying the Supreme Court's guidance, the challenged conduct at issue in this case is not the business of insurance. Again, § 6920 requires DDOI to treat as confidential broad swathes of information that DDOI receives (or itself creates) from, on behalf of, or about captive insurance companies, and prohibits disclosure of such information except in limited circumstances. See Del. Code Ann. tit. 18 § 6920. A statute regarding how a state insurance regulator must treat information received from insurance companies does not concern the relationship between those insurance companies and their insureds, the type of policies that insurers can issue, or the reliability, interpretation, or enforcement of such policies. See Nat'l Secs., 393 U.S. at 460. Moreover, such a statute and the conduct it covers do not have “the effect of transferring or spreading a policyholder's risk,” nor are they “an integral part of the policy relationship between the insurer and the insured,” even if the statute does only apply to entities in the insurance industry. Pireno, 458 U.S. at 129. Instead, § 6920 is a statute regarding record maintenance and disclosure by a regulator, and not the business of insurance as that phrase has been defined by the Supreme Court and this Court.

Attempting to bring the state statute within the scope of the McCarran-Ferguson Act, DDOI argues that § 6920 relates to licensing and examination of captive insurers. (Br. 35-41; see also Am. Br. 7.) State laws defining substantive licensing requirements for insurance companies do regulate the business of insurance. See Nat'l Secs., 393 at 462 (discussing state law requiring state insurance director to find that proposed merger would not “substantially reduce the security of and service to be rendered to policyholders” before approving merger). But § 6920 is not such a law. Section 6920 does not relate to any substantive aspects of licensing or examining captive insurers.¹⁰ Section 6920 does not define the requirements that a captive insurer must satisfy to become licensed, nor does it require DDOI as the regulator to make findings that licensing requirements are satisfied. Indeed, § 6920 does not even define the documents that a prospective captive insurer must submit to DDOI as part of its licensing application. Nor does § 6920 define when or how DDOI will examine captive insurers, what standards captive insurers will need to satisfy to pass an examination, or what findings DDOI must make as part of the examination process. Section 6920 is thus wholly unlike the substantive licensing law found to encompass the “business of insurance” in National Securities, which required the state insurance director to make a substantive finding about the effect of a proposed insurance company merger before it could approve that merger. See Nat'l Secs., 393 U.S. at 462; cf. Robertson v. People of State of Calif., 328 U.S. 440, 446-49 (1946) (recognizing validity of California laws requiring insurance brokers to be licensed and defining standards prospective brokers needed to satisfy to obtain license). Instead, § 6920 focuses solely on DDOI's treatment and disclosure of information about captive insurers. If DDOI were compelled to comply with the IRS's summons, as the District Court ordered, the requirements and processes for licensing and examining captive insurers in Delaware would not change. Section 6920 thus cannot be fairly read to relate to captive insurer licensing or examination.

To the extent that § 6920 has any effects on captive insurer licensing and examination, those effects are too indirect to render the conduct covered by § 6920 the business of insurance. The Supreme Court has recognized that not all aspects of insurer conduct or practices, or all laws governing insurers, constitute the “business of insurance.” Instead, the focus is on conduct or laws that have a direct impact on insurer reliability and the insurer-insured relationship. See, e.g., Nat'l Secs., 393 U.S. at 460; cf. Royal Drug, 440 U.S. at 216-17 (explaining that insurer reliability is not interpreted in “broad sense” because McCarran-Ferguson Act protects “the 'business of insurance' and not the 'business of insurance companies'”). Laws that have only indirect effects on insurer reliability or the insurer-insured relationship are not the “business of insurance.” See Fabe, 508 U.S. 508-09 (holding that law prioritizing non-policyholder creditors in insurer liquidation were not enacted for purpose of regulating business of insurance because law had only “indirect effects” on insurer reliability); Royal Drug, 440 U.S. at 216-17 (holding that agreements between insurers and pharmacies, despite possibly lowering premiums, were not business of insurance). Section 6920 encompasses conduct with, at most, only indirect effects on insurer reliability and the insurer-insured relationship, because it covers regulator treatment of information related to captive insurers, not substantive standards governing those insurers, their policyholders, or their policies. See Royal Drug, 440 U.S. at 214 (holding that practices were not business of insurance when “policyholders are basically unconcerned with” said practices). Section 6920 thus does not cover conduct that falls within the business of insurance.

Finally, DDOI's attempt to bring the purported purpose of § 6920 into the analysis (Br. 36-39) is improper and meritless. The District Court correctly declined to consider § 6920's purpose as part of the threshold analysis under § 1012(a) because statutory purpose is relevant as part of the three-factor test under § 1012(b), not under § 1012(a). See supra pages 23-24. See 15 U.S.C. § 1012(b) (first clause); Highmark, 276 F.3d at 166; Sabo, 137 F.3d at 189-90.

Even if it were appropriate to consider purpose as part of the §1012(a) threshold test, DDOI improperly attempts to establish the purpose of § 6920 based on a declaration from one of its employees. The best evidence of legislative purpose is the text of the statute itself. See, e.g., Chamber of Commerce of U.S. v. Whiting, 563 U.S. 582, 594, 599 (2011) (explaining that “the plain wording of” statute “necessarily contains the best evidence of [the legislature's] [ ] intent”) (internal quotation marks omitted); Port Auth. Trans-Hudson Corp. v. Secretary, U.S. Dep't of Lab., 776 F.3d 157, 163-64 (3d Cir. 2015) (“[T]he best evidence of the purpose of a statute is the statutory text adopted by [the legislature].”) (internal quotation marks omitted). Moving beyond statutory text to discern legislative intent from other sources, such as legislative history, “should be done with caution, if at all,” because multiple legislators collectively enact statutes and may lack a unified legislative intent. Morgan v. Gay, 466 F.3d 276, 278 (3d Cir. 2006). And even when extrinsic evidence is consulted to establish legislative intent, courts consult legislative history, such as committee reports or speeches or debates accompanying the bill. Courts do not consider, as DDOI would have this Court do (Br. 36-38), one party's employee's declaration providing his opinion of a statute's purpose or function. A party's legal arguments or opinion “belong[ ] in briefs, not in 'experts' reports'” or declarations. RLJCS Enters., Inc. v. Pro. Ben. Tr. Multiple Emp. Welfare Ben. Plan & Tr., 487 F.3d 494, 498 (7th Cir. 2007); see also Fed. R. Evid. 602, 701, 702 (requiring witnesses to have personal knowledge of facts and generally prohibiting opinion testimony absent qualification as expert witness).

Here, the purpose of § 6920 is evidenced by its text: for DDOI to treat as confidential much information received from or about captive insurers, subject to limited exceptions for disclosure. See Del. Code Ann. tit. 18 § 6920. Any other purported purpose is unfounded speculation. Because this limited purpose falls outside the scope of the business of insurance, it does not allow DDOI to meet its heavy burden to show that the McCarran-Ferguson Act provides a basis to allow it to refuse to comply with the IRS's summons.

3. Even if this Court could overrule prior panel decisions, this Court correctly decided the § 1012(a) issue in Sabo and Highmark

As explained above at pages 32-38, the portions of Sabo and Highmark regarding the threshold test imposed by § 1012(a) are binding precedent in this Circuit. But even if this Court could revisit this holding outside of an en banc setting, Sabo persuasively explained why § 1012(a) imposes a threshold test, and its holding should be followed.

This Court explained in Sabo why § 1012(a) creates a threshold requirement for reverse preemption, separate from the § 1012(b) analysis. While § 1012(b) defines the circumstances in which federal laws will or will not invalidate state laws relating to the business of insurance, § 1012(a) defines the conduct and the state laws to which the McCarran-Ferguson Act applies. It provides that “[t]he business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.” 15 U.S.C. § 1012(a). Sabo recognized that although a state law might have been enacted for the purpose of regulating the business of insurance under § 1012(b), that law might still not have been “meant to fall within the ambit of the Act's protection” as defined by § 1012(a). Sabo, 137 F.3d at 190-91. To determine whether a state law was intended to be within the scope of the McCarran-Ferguson Act, this Court viewed § 1012(a) as creating a threshold requirement that the challenged conduct constitute the “business of insurance.” See id. This requirement upheld the structure of the Act by imbuing § 1012(a) with meaning. See id. at 190. Holding that § 1012(a) does not impose a threshold requirement would render that subsection of the Act superfluous, which this Court should not do. See, e.g., Rosenberg v. XM Ventures, 274 F.3d 137, 141-42 (3d Cir. 2001) (“[W]hen interpreting a statute, courts should endeavor to give meaning to every word which Congress used and therefore should avoid an interpretation which renders an element of the language superfluous.”) (collecting cases). By failing to acknowledge that the relevant portion of Sabo and Highmark interpreted § 1012(a), DDOI ignores that its interpretation would render that subsection superfluous.

By incorrectly suggesting that the threshold requirement in Sabo and Highmark formed part of the § 1012(b) (and not § 1012(a)) analysis, DDOI mischaracterized those opinions as conflicting with the decisions of other federal courts of appeals. (Br. 24-28.) Just as it failed to clarify that Sabo and Highmark were interpreting § 1012(a), DDOI further failed to clarify that none of the courts in the cases it cited were interpreting that subsection. Instead, the courts that previously used a four-factor test for reverse preemption did so under § 1012(b); those opinions did not analyze whether § 1012(a) imposed any additional requirements.¹¹ See Merchants Home Delivery Serv., Inc. v. Frank B. Hall & Co., 50 F.3d 1486, 1489 (9th Cir. 1995) (explaining test for reverse preemption under § 1012(b)); Cochran, 606 F.2d at 464 (same). Thus, the fact that courts that previously applied a four-factor test to §1012(b) switched to a three-factor test based on Fabe and Humana — which is the same test this Court applies to § 1012(b) — is not relevant to whether § 1012(a) also imposes any requirements. See, e.g., Am. Bankers Ins. Co. of Fla. v. Inman, 436 F.3d 490, 493 (5th Cir. 2006) (applying three-factor test under § 1012(b)).

C. Even if this Court did not apply a threshold test under 15 U.S.C. § 1012(a), the District Court correctly held that the McCarran-Ferguson Act does not apply because Delaware Insurance Code § 6920 was not enacted for the purpose of regulating the business of insurance

Even if there were a basis (which there is not) for this Court to depart from its precedential opinions in Sabo and Highmark and not apply the threshold requirement under 15 U.S.C. § 1012(a), the District Court nonetheless correctly held that Delaware Insurance Code § 6920 does not reverse preempt I.R.C. § 7602(a) under the McCarran-Ferguson Act. Just as DDOI cannot establish the threshold requirement under § 1012(a), DDOI cannot establish that § 6920 was “enacted for the purpose of regulating the business of insurance.” This Court thus should affirm.¹²

The parties agree that, if there were no threshold test under §1012(a), then DDOI would need to establish the three requirements for reverse preemption under the first clause of § 1012(b). (Br. 9 n.8, 11, 14 n.10, 23.) Two of the requirements are uncontested in this case: I.R.C. § 7602(a) is not a law that specifically relates to the business of insurance, and applying § 7602(a) here would impair or supersede Delaware Insurance Code § 6920 by requiring DDOI to disclose information to the IRS under circumstances not permitted by § 6920. Reverse preemption nonetheless is not appropriate because DDOI cannot establish the third requirement, as § 6920 was not enacted for the purpose of regulating the business of insurance.

Laws enacted for the purpose of regulating the business of insurance are those “laws that possess the 'end, intention, or aim' of adjusting, managing, or controlling the business of insurance.” Fabe, 508 U.S. at 505 (quoting Black's Law Dictionary 1236, 1286 (6th ed. 1990)). Although this category is broader than the category of laws that directly regulate the business of insurance, see id., the phrase the “business of insurance” nonetheless carries the same meaning in this context as it does in other parts of § 1012. See supra pages 26-27 & n.8. And § 6920 does not possess the end, intention, or aim of adjusting, managing, or controlling any conduct that constitutes the business of insurance.

For essentially the same reasons that § 6920 cannot satisfy the threshold requirement under § 1012(a) (see supra pages 38-46), § 6920 was not enacted for the purpose of regulating the business of insurance. Instead, as discussed above at pages 44-46, § 6920's text demonstrates that its purpose is to mandate how DDOI must treat significant amounts of information received from or about captive insurers (in a confidential manner), and to define two exceptions to that treatment. See Del. Code Ann. tit. 18 § 6920. In other words, § 6920 was enacted for the purpose of regulating DDOI's record maintenance and dissemination policies for information regarding captive insurers. (A015-16.) But because regulator record maintenance and dissemination policies are not part of the business of insurance (see supra pages 38-46), § 6920 was not enacted for the purpose of regulating the business of insurance.

Supreme Court precedent defining the scope of laws enacted for the purpose of regulating the business of insurance confirms the District Court's conclusion. Statutes “aimed at protecting or regulating [the insurance company-policyholder] relationship,” and relatedly those “aimed at protecting or regulating the performance of an insurance contract,” are laws enacted for the purpose of regulating the business of insurance. Nat'l Secs., 393 U.S. at 457, 460; Fabe, 508 U.S. at 505. Under this standard, a state statute requiring a state insurance director to find that a merger would not impair the services provided to policyholders, and a state statute prioritizing repayment of policyholders in the event of an insurance company liquidation, are enacted for the purpose of regulating the business of insurance. See Nat'l Secs., 393 U.S. at 462; Fabe, 508 U.S. at 505. By contrast, a state statute regulating the stockholder-insurer relationship, and a state statute prioritizing non-policyholder creditors in an insurer liquidation, are not enacted for the purpose of regulating the business of insurance. See Nat'l Secs., 393 U.S. at 460; Fabe, 508 U.S. at 508-09.

Section 6920 is more akin to the types of statutes that the Supreme Court has determined are not enacted for the purpose of regulating the business of insurance. Section 6920 is not aimed at protecting the insurer-policyholder relationship, see Nat'l Secs., 393 U.S. at 460, nor is it aimed at protecting the performance of an insurance contract, Fabe, 508 U.S. at 505. Instead, § 6920 is aimed at protecting either the insurer-regulator relationship or the regulator-foreign regulator relationship.

Section 6920 has, at most, only highly attenuated effects on the insurer-policyholder relationship or the performance of any insurance contract. DDOI appears to suggest (Br. 37 & n.29, 41, 47) that § 6920 affects insurer reliability, and therefore the insurer-policyholder relationship, because insurers would be less forthright in disclosures as part of licensing applications and examinations. But this suggestion hinges on the assumption that prospective and existing insurers would not comply with their legal obligations to disclose required information to DDOI absent § 6920. This Court should not lightly assume that insurers would shirk their legal obligations in this way. Moreover, even if there were merit to the assumption that any impairment of § 6920 would lead insurers to violate other aspects of Delaware law and thus damage their reliability (which there is not), any such effects are too indirect to bring § 6920 within the scope of laws enacted for the purpose of regulating the business of insurance. See Fabe, 508 U.S. 508-09; Royal Drug, 440 U.S. at 216-17. Indeed, the suggestion that an impairment of § 6920 would negatively affect insurer reliability, and so the insurer-policyholder relationship, is particularly inapt in the captive and micro-captive insurance context, where policyholders control the insurer and thus policyholders effectively decide whether to impact their insurer's reliability by complying with Delaware insurance licensing and examination laws.

D. Purported policy concerns and alternatives raised by captive insurance lobbying associations representing Artex and others lack any merit

Ten captive insurance lobbying associations filed an amicus brief in this appeal, in which they, like DDOI, argue that Delaware Insurance Code § 6920 reverse preempts I.R.C. § 7602(a). (Am. Br. 6-11.) DDOI and the lobbying associations raise purported policy concerns that they believe would arise if DDOI were compelled to comply with the IRS's summons and suggest alternatives to summons enforcement. (Br. 6 & n.6, 8 & n.7; Am. Br. 11-15). These purported policy concerns and proposed alternatives do not, however, satisfy DDOI's heavy burden to prevent enforcement of the IRS's summons.

As an initial matter, the lobbying associations' brief fails to clarify the nature of their interest in this case. Artex — which, with its subsidiary Tribeca, is the subject of the promoter penalty investigation that prompted the IRS summons at issue in this case — is associated with at least eight of the ten associations.¹³ Artex has strong incentives to reduce the information available to the IRS to build its promoter penalty case because promoters can be liable for penalties as high as “50 percent of the gross income derived” from the promotion activities. I.R.C. § 6700(a) (flush text). The Tax Court has already determined that a purported micro-captive insurer established by Tribeca did not actually provide insurance and held the taxpayer who entered into that micro-captive transaction liable for tax deficiencies and accuracy-related penalties. See Caylor, 2021 WL 915613, at *4-5, 16-17. If the allegations in the Shivkov complaint are true (see supra page 6 n.3), Artex, Tribeca, and their principals may be liable for millions of dollars in § 6700 promoter penalties. Any claims by lobbying associations representing Artex that the IRS should not be able to enforce a summons in an investigation of Artex thus must be viewed with an extremely skeptical eye.

DDOI and the lobbying associations suggest — without evidence — that compelling DDOI to comply with the IRS's summons will undermine prospective insurers' incentives to make “full and complete disclosure of information in the license application process.” (Am. Br. 13-14; see also Br. 37 & n.29, 41, 47.) In other words, they imply that if DDOI were compelled to comply with the IRS's summons, then prospective captive insurers will not fully disclose to state insurance departments all information required to become licensed. As discussed above at pages 53-54, this suggestion is meritless. And even if there were any merit to the concerns that DDOI and the lobbying associations raise, the Supreme Court has recognized that, when the public interest is served by encouraging full disclosures, “the need of the Government for full disclosure of all information relevant to tax liability must also [nonetheless] weigh in that balance.” Arthur Young & Co., 465 U.S. at 821.

DDOI and the lobbying associations attempt to provide alternatives to summons enforcement: the IRS could directly summons each of the 225 micro-captive insurers or else simply agree to maintain confidentiality consistent with § 6920. (Am. Br. 14-15; see also Br. 6-8, nn.6-7.) They cite no legal authority for the proposition that the existence of an alternative to enforcing a particular summons provides a basis for a court to decline enforcement. In any event, the alternatives that DDOI and the lobbying associations suggest are inadequate.

The first proposed alternative to summons enforcement incorrectly assumes that the IRS is aware of the identity of each of the 225 micro-captive insurers. But until DDOI responded to the summons enforcement petition, the IRS believed that Artex and Tribeca had established only 191 captive insurers in Delaware. See supra page 7 n.4. Moreover, as demonstrated by the fact that only 19 of the 225 captive insurers established by Artex and Tribeca in Delaware consented to disclose their information (see supra page 9), the IRS cannot rely on captive insurers to voluntarily comply with a summons. Indeed, like Artex and Tribeca, the captive insurers that those entities established (or their controlling taxpayers) have incentives not to cooperate with IRS summonses, because responsive information could be used to assess tax deficiencies and penalties against them. See generally Caylor, 2021 WL 915613. Captive insurers also are unlikely to have document preservation policies comparable to DDOI, making it unlikely that even cooperative insurers could produce all the information that DDOI possesses. And Congress authorized the IRS to summon “any [ ] person the Secretary may deem proper, to appear . . . and to produce” documents, I.R.C. § 7602(a)(2) (emphasis added), recognizing that third parties may produce more complete or reliable information than the targets of investigations. Indeed, the IRS may summon records from multiple sources to confirm that the information provided by one entity is accurate and complete. See, e.g., Sugarloaf Funding, LLC v. U.S. Dep't of Treasury, 584 F.3d 340, 350 (1st Cir. 2009).

Regarding the second proposed alternative to summons enforcement, the IRS cannot agree to be bound by § 6920's limitations regarding how it may use information received from DDOI. Most notably, § 6920 does not permit disclosure of information or documents for use in judicial proceedings, unless the insurer consents. Here, the United States may eventually become involved in litigation with Artex and Tribeca or their principals, or against the taxpayers who participated in micro-captive transactions allegedly promoted by Artex and Tribeca. Congress has mandated in I.R.C. § 6103 how the IRS and the United States may disclose confidential tax return information. The Internal Revenue Code's confidentiality statute recognizes that such confidential information may need to be used in judicial proceedings and creates an exception for such use. See I.R.C. § 6103(h). Congress thus has spoken on the issue of the required protection of tax return information and, more specifically, the question of when disclosure is permissible. The federal government will adhere to Congress's mandate, but will not agree to allow alleged promoters or participants in allegedly unlawful tax shelters to control how and whether information that could prove their wrongdoing could be used against them.

CONCLUSION

The order of the District Court should be affirmed.

Respectfully submitted,

DAVID A. HUBBERT
Deputy Assistant Attorney General

FRANCESCA UGOLINI
(202) 514-3361
MICHAEL J. HAUNGS
(202) 514-4343
LAUREN E. HUME
(202) 307-2279
State Bar No. 5098959 (NY)
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
DAVID C. WEISS
United States Attorney

APRIL 7, 2022