27 November 2017Analysis

Avrahami judge denies motion for reconsideration, cites “sloppy drafting” of policies

The judge involved in the first major micro captive dispute, Mark Holmes, has denied the Avrahami's motion for reconsideration of a couple findings of fact.

The Avrahami's first argument is that their captive, Feedback, must have operated like an insurance company because it reasonably relied upon its advisors to operate it.

"Feedback hired several qualified professionals to ensure it operated within applicable regulatory requirements, issued policies with clear and consistent terms and charged reasonable premiums," they said.

However, Holmes stated whether an arrangement looks like insurance doesn't depend on whether those appearance flowed from professional advice, but rather what actually happened.

He explained: "Here, some of the key facts were the extreme illiquidity of Feedback's investment portfolio - so skewed toward flowing funds back to the Avrahamis that it had no other significant investments - and the very telling pattern of receiving claims only after the IRS started an audit.

“Petitioners cite to no law that says there's a reasonable-reliance defence on the natural consequence of such activities - namely, a more-likely-than-not finding that this was less insurance as that term is commonly understood and more a way of generating tax-deductible financing for the Avrahamis' other investments.

The Avrahmis' second argument is that there should be reasonable dispute that the policies at issue were claims made policies, not occurrence policies.

However, Judge Holmes stated that at least one policy "was so ill-drafted that it was both a claims-made and an occurrence policy."

Holmes explained: “That was an illustration of a couple more general points - sloppy drafting of policy language and actuarial calculations that did not reflect in all cases the actual policy language - that then buttressed the finding of fact that Feedback was not operating like an insurance company.”