Celia Clark, the lawyer that helped to form the micro captive insurance company in the landmark Avrahami case, has filed a lawsuit against the Internal Revenue Service (IRS) seeking refund for the partial payment of penalties imposed under Section 6700 of the Internal Revenue Code (IRC).
Originally tried in March 2015, the case of Avrahami v Commissioner concerned the owners of the micro captive company Feedback, which provided direct property and casualty coverage to entities such as real estate ventures and shopping centres, as well as reinsuring chemical and biological terrorism coverage.
In the first court decision assessing the tax treatment of micro captives, the US Tax Court backed the IRS’ decision to deny the Avrahamis access to the Section 831(b) election of the IRC for certain financial years.
Following denial of a motion for reconsideration, in July 2019 Benyamin and Orna Avrahami launched a class-action lawsuit against the original owners of Feedback, including Clark as a named defendant, claiming they failed to properly apply captive insurance strategies that caused the Avrahamis to incur back taxes, interest and penalties.
In the new lawsuit filed with the US District Court for the Southern District of Florida, Clark brings a suit for refund of her partial payment of penalties under Section 6700 for tax years 2008 to 2016.
The IRS had assessed more than $11 million in penalties against Clark for her role in advising and assisting with the creation of micro captive insurance companies for her clients.
In the suit, Clark argues that “Congress has explicitly encouraged and promoted micro captive insurance companies by conferring upon them favorable tax treatment under section 831(b)”.
The filing adds: “The IRS has sought to destroy the micro captive insurance industry. It has not done so by promulgating regulations, issuing revenue rulings, or providing affirmative guidance that taxpayers and tax practitioners could follow.”
“Rather, the IRS has engaged in the unlawful “administrative repeal” of Section 831(b), thwarting Congress’ intent by wrongfully penalising taxpayers and practitioners in the micro captive space, in a concerted effort to drive them out of that business.”
The suit argues that the IRS’ approach to penalty examination was abusive because it allowed for potential penalties to accumulate over nine years rather than providing clarity.
Clark contends that she would have litigated in a good faith disagreement until the matter was decided had she been aware of the IRS’ ongoing examination, citing the closure of her practice after the Avrahami ruling as a demonstration of good faith.
In addition, the suit argues the IRS acted in an abusive manner as the agency prohibited Clark from litigating the advantages of micro captive company taxation as a non-party in the Avrahami case, which prevented her from participating in the trial (other than as a witness) or presenting a defense of herself.
The suit filed with the Florida district court also sues for unlawful disclosure of Clark’s protected return information under IRC Section 7431.
Clark requests the court grants relief in the form of a refund of the $1,745,544 previously paid in penalties, abatement of the remaining penalties, and a grant of $1,000 for each individual act of unauthorised inspection or disclosure of return information, or else a sum of the actual damages sustained as a result of such unauthorised inspection or disclosure.
