Captives that are “poorly designed and half-heartedly managed” such as the entity at dispute in the Avrahami litigation are “destined to fail”, Capstone’s Lance McNeel has said.
In reaction to 21 August’s US Tax Court ruling in Avrahami, McNeel was unsurprised that Judge Mark Holmes found in favour of the Internal Revenue Service (IRS).
He said: “In Avrahami, it was not difficult for the IRS to recognise that no matter how you dress it up, the captive was not a bona fide insurer.”
The US Tax Court has backed the IRS’s decision to deny Benyamin and Orna Avrahami access to the Internal Revenue Code Section 831(b) election for certain financial years.
Judge Holmes ruled that payments made to the Avrahamis by their micro captive, Feedback, amounted to taxable dividends outside of the scope of certain tax elections.
Steven Lonergan, who manages Capstone’s Midwest and Great Plains region practice from the firm’s Minneapolis office, explained: “While there are captives formed by unsophisticated managers that have some issues, this case is unusual in that the structure failed in almost every possible area. The Avrahamis and their advisers got almost everything wrong.”
The Avrahamis received help from certified public accountant Craig McEntee and actuary Allen Rosenbach to set up their captive in St Kitts. David Osbourn, Capstone’s Pittsburgh-based director of Northeast and Mid-Atlantic operations, said: “I’ve met with ‘captive managers’ who have limited insurance knowledge and no legal or tax expertise.”
“They were run by administrative types whose planning is destined to fail. Hiring a captive manager that lacks the professional insurance, tax, and legal experience is the equivalent of hiring an ‘accounting firm’ with no certified public accountants on staff.”
Experts from across captive insurance have also reacted to the Avrahami decision last week.