Captive promoters sued for exacerbating client's tax burden


Benyamin and Orna Avrahami, the defendants in the 2017 case Avrahami v Commissioner of Internal Revenue, have brought a class action complaint against the parties that sold them the captive at the centre of that case. 

In the 2017 suit, the US Tax Court ruled that Avrahami and other plaintiffs in the class action case owed substantial back taxes and penalties to the Internal Revenue Service (IRS) as a result of their participation in the captive. The court at the time found their captive, Feedback Insurance Company, was not an insurance product for federal tax purposes.

The class action complaint, filed at the US District Court for the District of Arizona this week, sought damages from parties that had sold the captive, including Celia Clark and her law firm, Clark & Gentry. RMS Solutions Incorporated, John Garcia, ACR Solutions Group, Alan Rosenbach, Fennemore Craig, Heritor Management, McEntee & Associates, Neil Hiller and Pan American Reinsurance Company were also named defendants. 

These parties were accused of mass-producing “a flawed insurance product that exacerbated their clients’ tax burdens.” The product legally could and should have alleviated plaintiffs’ tax burdens while also providing insurance benefits, it added. 

The complaint argued the defendants knew the product they were offering could not deliver the insurance and tax advantages they were promising. The product “caused the plaintiffs to incur back taxes, interest, and/or penalties for claiming business insurance expense deductions while also avoiding income recognition under section 831(b) of the Tax Code,” it said.

According to the class action filing, the defendants knew or should have known that the IRS would disallow the captive insurance strategies on the basis that they lacked business purpose and economic substance. The organisational scheme was designed primarily as a way of collecting fees and expenses, without any real intent to fund the captive insurance companies for real risk management purposes, it argued. 

The class action made a list of accusations that included breach of fiduciary duty, negligence, negligent misrepresentation, and fraud. It said the defendants’ “primary motive in their pre-planned scheme was to exact significant fees and commissions.” 

Along with the Avrahamis, the other plaintiffs were Feedback Insurance Company, BYS Company, ACC; Chandler One, Junction Development, O & E Corporation; White Mountain Equities, and White Knight Investment. 

Benyamin Avrahami, US Tax Court, US District Court for the District of Arizona, Clark & Gentry, RMS Solutions Incorporated, Pan American Reinsurance

Captive International