The case, which was tried in March 2015, centres on the owner of Arizona jewellery stores whose 831(b) captive provides direct property and casualty coverage to multiple entities, including real estate ventures, and reinsures terrorism coverage.
But the Internal Revenue Service (IRS) believes that the micro captive was organised to provide tax deductions under Section 831(b) of the Internal Revenue Code and lacks insurance risk, and that risk was not shifted to the captive.
According to legal experts from law firm Eversheds Sutherland: “In the case, the IRS argued that the Section 831(b) company in question was formed for income tax evasion purposes—namely, to facilitate deductions under Section 162 for premiums paid for insurance that were improperly deducted because the Section 831(b) company’s transactions did not qualify as insurance for federal tax purposes.”
They predicted: “A decision in this case is expected as early as this spring.”
The Avrahami v Commissioner litigation will be the latest twist in a tumultuous 18 months for micro captives when a decision is finally handed down.
The Protecting Americans from Tax Hikes Act of December 2015 made significant changes to Section 831(b), increasing the maximum premiums for insurance companies making the election to be taxed solely on investment income from $1.2 million per year to $2.2 million.
Then in November last year, the IRS released Notice 2016-66, which formally labelled micro captives as ‘transactions of interest’ and required them to report to the federal agency by 30 January 2017 due to their potential for tax avoidance or evasion.
This deadline was subsequently pushed back to May, but the IRS also named micro captives in its annual ‘Dirty Dozen’ tax scam list in February, for the third year in a row.