Did you Participate in a 419 or 412i Benefit Plan?
Lance Wallach is the nation's foremost expert on 419 plans, 412i plans, listed transactions, reportable transactions, Section 79 plans, captive Insurance plans
Captive insurance, 831b Micro, the IRS is looking at YOU. 6933 views, 43 likes Published on Published onFebruary 16, 2018 Edit article View stats Lance Wallach Lance Wallach Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker 765 articles Unlike 1 Comment 0
I have been warning about small micro captives for years and have received hundreds of calls for help.
In Avrahami, 149 T.C. No. 7 (2017), a case of first impression, the Tax Court held that amounts that the taxpayers' passthrough business entities paid to a purported insurance company they owned (a captive) were not premiums paid for insurance contracts and were not deductible by the business entities under Sec. 162.
Moreover, the court held that the contracts issued by the captive were not insurance contracts, based in part on its determination that the unrelated offshore company from which the captive accepted pooled terrorism risk was not a bona fide insurance company. Consequently, the court held, the captive was not taxable as an insurance company, and its elections to be taxed as a small (micro) insurance company under Sec. 831(b) and as a domestic corporation under Sec. 953(d) were invalid. The court declined, however, to impose accuracy-relatedpenalties on the Avrahamis, other than with respect to certain unreported distributions made to them by the captive.
Avrahamis' businesses and captive insurance company Benyamin and Orna Avrahami owned jewelry stores and other businesses in Arizona, which reported for federal tax purposes as either S corporations or partnerships. In 2006, these entities paid about $150,000 to insure the businesses. In 2007, the Avrahamis' CPA referred them to a lawyer, Neil Hiller, for estate planning advice. The CPA also suggested that a captive insurance company might be a good fit for the Avrahamis and referred them for this purpose to another lawyer, Celia Clark. Clark had helped draft captive insurance legislation for the Caribbean island nation of St. Kitts and Nevis and had a number of captive insurance clients there, which constituted a large part of herbusiness.
In November 2007, after consulting with Hiller, the Avrahamis signed a retainer agreement with Clark, providing that the Avrahamis would set up a captive insurance company, with Clark and Hiller acting as co-counsel in exchange for a $75,000 fee. To this end, they incorporated Feedback Insurance Co. Ltd. in St. Kitts. Orna Avrahami wholly owned Feedback, and both Avrahamis had signature authority over its bank account. Feedback hired a St. Kitts company to assist with management and compliance with local regulations. In 2008, Feedback made two elections: (1) to be treated as a domestic corporation under Sec. 953(b) for federal tax purposes (an election available only to entities that would be taxed as insurance companies if organized in the United States); and (2) to be taxed as a small insurance company under Sec. 831(b).
Captive insurance payments and reinsurance The Avrahamis' businesses began purchasing various types of insurance coverage from Feedback in 2007. Also in 2007, the Avrahamis' businesses purchased terrorism coverage from an unrelated Nevis corporation, Pan American Reinsurance Co. Ltd. (Pan Am Re) established by Clark to form a pool encompassing risks of multiple clients that could be reinsured by her clients' captives to provide the captives with risks sourced from unrelated insureds. Feedback entered a quota share reinsurance arrangement with Pan Am Re and accepted a portion of the pooled risk proportionate to the portion of the pool's risk attributable to the Avrahamis' entities insured by Pan Am Re. The reinsurance premium paid to Feedback equaled the insurance premiums paid to Pan Am Re by the Avrahamis' businesses.
Captive insurance, 831b Micro, the IRS is looking at YOU. 6933 views, 43 likes
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Lance Wallach
Lance Wallach
Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker
765 articles
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I have been warning about small micro captives for years and have received hundreds of calls for help.
In Avrahami, 149 T.C. No. 7 (2017), a case of first impression, the Tax Court held that amounts that the taxpayers' passthrough business entities paid to a purported insurance company they owned (a captive) were not premiums paid for insurance contracts and were not deductible by the business entities under Sec. 162.
Moreover, the court held that the contracts issued by the captive were not insurance contracts, based in part on its determination that the unrelated offshore company from which the captive accepted pooled terrorism risk was not a bona fide insurance company. Consequently, the court held, the captive was not taxable as an insurance company, and its elections to be taxed as a small (micro) insurance company under Sec. 831(b) and as a domestic corporation under Sec. 953(d) were invalid. The court declined, however, to impose accuracy-relatedpenalties on the Avrahamis, other than with respect to certain unreported distributions made to them by the captive.
Avrahamis' businesses and captive insurance company
Benyamin and Orna Avrahami owned jewelry stores and other businesses in Arizona, which reported for federal tax purposes as either S corporations or partnerships. In 2006, these entities paid about $150,000 to insure the businesses. In 2007, the Avrahamis' CPA referred them to a lawyer, Neil Hiller, for estate planning advice. The CPA also suggested that a captive insurance company might be a good fit for the Avrahamis and referred them for this purpose to another lawyer, Celia Clark. Clark had helped draft captive insurance legislation for the Caribbean island nation of St. Kitts and Nevis and had a number of captive insurance clients there, which constituted a large part of herbusiness.
In November 2007, after consulting with Hiller, the Avrahamis signed a retainer agreement with Clark, providing that the Avrahamis would set up a captive insurance company, with Clark and Hiller acting as co-counsel in exchange for a $75,000 fee. To this end, they incorporated Feedback Insurance Co. Ltd. in St. Kitts. Orna Avrahami wholly owned Feedback, and both Avrahamis had signature authority over its bank account. Feedback hired a St. Kitts company to assist with management and compliance with local regulations. In 2008, Feedback made two elections: (1) to be treated as a domestic corporation under Sec. 953(b) for federal tax purposes (an election available only to entities that would be taxed as insurance companies if organized in the United States); and (2) to be taxed as a small insurance company under Sec. 831(b).
Captive insurance payments and reinsurance
The Avrahamis' businesses began purchasing various types of insurance coverage from Feedback in 2007. Also in 2007, the Avrahamis' businesses purchased terrorism coverage from an unrelated Nevis corporation, Pan American Reinsurance Co. Ltd. (Pan Am Re) established by Clark to form a pool encompassing risks of multiple clients that could be reinsured by her clients' captives to provide the captives with risks sourced from unrelated insureds. Feedback entered a quota share reinsurance arrangement with Pan Am Re and accepted a portion of the pooled risk proportionate to the portion of the pool's risk attributable to the Avrahamis' entities insured by Pan Am Re. The reinsurance premium paid to Feedback equaled the insurance premiums paid to Pan Am Re by the Avrahamis' businesses.