Artex and Arthur J Gallagher accused of selling and managing illegal tax-shelter captives


Artex and Arthur J Gallagher accused of selling and managing illegal tax-shelter captives

Tzahiv /

An Arizona-based lawsuit is seeking damages from a group of defendants including Artex Risk Solutions, Arthur J Gallagher among other captive service providers for conspiring to design, promote, sell, implement and manage illegal tax-advantaged captive insurance strategies using unlawful attempted 831(b) elections.

Shivkov v Artex Risk Solutions (Case No. 18-CV-4514) was filed in the US District Court for the District of Arizona–Phoenix Division, with the group of plaintiffs alleging the defendants of being part of a massive captive insurance strategy conspiracy. The plaintiffs were represented by David R. Deary, Ralph Canada, and Jim Flegle of Loewinsohn Flegle Deary Simon (LFDS).

The group of defendants also includes TSA Holdings, PRS Insurance, Epsilon Actuarial Solutions, AmeRisk Consulting, Provincial Insurance, along with various employees of the companies.

Artex, Arthur J Gallagher and the other defendants had suggested that the captive insurance strategies provided highly rated insurance and at the same time legally reduced taxes, according to LFDS.

The suit alleges the defendants promoted and sold the captive strategies for the purpose of receiving and splitting substantial fees. The lawsuit also stated that the transactions under the captive insurance strategies were not insurance, the plaintiffs and class members' captives were not insurance companies and their attempted 831(b) elections were unlawful.

LFDS suggested that instead of providing highly rated insurance and decreasing the plaintiffs' tax burdens as promised, the captive strategies were nothing more than illegal and abusive tax shelters. Furthermore, the firm claims that the defendants unlawfully abused their positions by fraudulently inducing client to pay substantial fees fees for insurance, legal, accounting, tax, and actuarial advice and services in connection with the captives.

"The particulars of captive insurance strategies are complicated, but the defendants' motivation is quite ordinary," said Deary, attorney for the plaintiffs. "Greed. Plain and simple. The defendants sold products and services they knew were illegal and would be disallowed as abusive and illegal tax shelters, resulting in their client sustaining substantial damages, for the sole purpose of earning significant fees and commissions. And they did all this while they were supposed to be acting as loyal fiduciaries."

The Internal Revenue Services (IRS) concluded that the strategies were illegal and abusive tax shelters, disallowed the tax benefits, and assessed the plaintiffs with substantial back taxes, interest, and penalties. The plaintiffs seek recovery of damages associated with their participation in the captive strategies.

Furthermore, the suit also alleges that the defendants had entered into undisclosed, illegal business arrangements with each other and a nationwide referral network of investment, accounting, and legal advisors to refer clients to them. Defendants systematically identified potential or existing clients who had substantial income in a particular tax year, the filing stated. The defendants were then accused of unlawfully abusing their positions of trust, confidence, and prestige by fraudulently inducing those clients to pay substantial fees for insurance, legal, accounting, tax, and actuarial advice and services in connection with the captive insurance strategies.

Following US Tax Court decisions that disallowed deductions claimed through other captive insurance strategies, LFDS added that the defendant continued to advise, promote and encourage the plaintiffs to use the  strategies and that they would defend any IRS audit or Tax Court proceeding, assuring plaintiffs that the captive insurance strategies complied with all applicable tax and insurance laws.

Specifically, the plaintiffs bring claims for breach of fiduciary duty, negligence, negligent misrepresentation, disgorgement, rescission, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), violations of Arizona's RICO statute, breach of contract/duty of good faith and fair dealing, civil conspiracy, and aiding and abetting breaches of fiduciary duty and fraud.

Deary added: "The predatory behavior of the defendants has gone on for too long. We're asking the court to give these plaintiffs – and the potentially hundreds or thousands of other class members around the country – justice, and send a clear message to industry: these practices will not stand."

The plaintiffs seek actual, consequential, incidental, punitive, and treble damages; rescission and disgorgement; pre- and post-judgment interest at the highest legal rate allowed by law; and all attorneys' fees and costs in pursuing this matter.

Captive International has reached out to Artex and Arthur J Gallagher for comment.

Artex, Arthur J Gallagher, Tax, Captives, Loewinsohn Flegle Deary Simon, Arizona, North America

Captive International