The US Tax Court’s ruling in Avrahami might not be the victory for the IRS that everyone thinks it is, according to Stewart Feldman, CEO and general counsel of Capstone Associated Services.
Following the Tax Court’s decision on 21 August to deny Benyamin and Orna Avrahami access to the Internal Revenue Code Section 831(b) election for certain financial years, Feldman argued that the IRS might have difficulty applying the Avrahami facts to the usual captive situation.
He said: “Bad facts make bad law. If a captive is operated as the personal chequebook of its owner, no one should be surprised that the captive is disregarded. In Avrahami, it appears that the captive was formed in a lax, small foreign jurisdiction, which was impliedly controlled by the captive’s lawyer. The jurisdiction was not even a traditional domicile like a British colony controlled by the UK government out of London.”
In particular, US Tax Court’s held that the pooling entity was not a bona fide insurance company, and that the captive did not operate like an insurance company because it issued policies with unclear and contradictory terms, and charged wholly unreasonable premiums.
According to Feldman, the terrorism policy was the sole pooled policy and was excessively priced under any reasonable measure.
He said: “There was insufficient risk distribution under what most tax practitioners consider existing law and there was essentially no pooling or other third-party insurance so as to achieve risk distribution.”
“The taxpayer’s actuary himself admitted that the risks covered by the sole pooled policy were never experienced in the long history of the world. The policies were poorly manuscripted. The actuary couldn’t articulate the basis of the policies’ pricing and the lawyer directed the actuary to arrive at a dollar specific premium desired by the client. It appears there was no shortage of inadequacies.”
Feldman stated: “It is not surprising that the opinion recited the lack of a professionally run and administered insurance arrangement.”