Captive owners should not be concerned by the outcome of the Avrahami tax case despite indications that litigation against captives is increasing as a result. Captive owners confident they have formed their operations legitimately should be willing to fight any challenge.
This is according to a session at the CICA 2018 International Conference, “Avrahami and the Legal Landscape for Captives”, featuring speakers John Dies, managing director of tax controversy, alliantgroup; Brandon Keim, tax controversy attorney, Frazer Ryan Goldberg & Arnold; and Chaz Lavelle, attorney, Bingham Greenebaum Doll.
“Prior to Avrahami it had been a long time before IRS has won against any kind of captive regime,” said Dies. “This shouldn’t all be gloom and doom. If you are on the righteous side of this, you should pick a fight.”
In Avrahami v Commissioner, the court found premiums to be grossly excessive - rising from $150,000 to $1.1 million to $1.3 million.
Dies added: “The court found the actuary’s explanations of the premiums incomprehensible and unpersuasive.”
Furthermore, there were many other red flags in this case such as no claims filed until after the beginning of the IRS audit, 65 percent of the assets were illiquid, particularly unsecured loans, meaning they could not have been used to pay claims.
The panel outlined some of the ramifications of Avrahami, which included increased IRS attention, which has led to more captives being examined and more cases going to appeal.
A second consequence is a growing number of cases in the pipeline for the Tax Court.
Some of the more recent cases include Reserve Mechanical Crop v Commissioner, Caylor v Commissioner, Wilson v Commissioner and Syzygy Insurance Co v Commissioner.
Lavelle mentioned that it is possible the IRS will overplay its hand and say that some of these cases are scams no matter what the facts are.
“If you’ve got a good set of facts that could win, it may lead to a positive trend for these cases,” he said.
Keim stressed the importance of making clear the intent surrounding the creation and operation of the captive to avoid a negative outcome.
Dies added: “In most of my interactions, folks are trying to do this the right and proper way.”
CICA 2018, Avrahami tax, Captive insurance, John Dies, alliantgroup, Brandon Keim, Frazer Ryan Goldberg & Arnold, Chaz Lavelle, Bingham Greenebaum Doll