IRS intended to use undercover tapes in Artex microcaptive case


Owen Faulkner

The Internal Revenue Service (IRS) had planned to use tape recordings of an undercover agent looking to form an 831(b) captive with Tribeca Strategic Advisors - now part of Artex Risk Solutions - in order to support its argument that a captive in a recent lawsuit lacked economic substance.

Pilot Series of Fortress Insurance v Commissioner, a case in which the taxpayer is accused of using a captive as a tax shelter, was scheduled for trial on June 3, 2019, although the case has now settled, with the taxpayers conceding beforehand.

This case follows former clients of Artex seeking damages from it in an Arizona-based lawsuit, Shivkov v Artex Risk Solutions, accusing the captive manager of conspiring to design, promote, sell, implement and manage illegal tax-advantaged captive insurance strategies using unlawful attempted 831(b) elections.

An undercover agent recorded three conversations between 2006 and 2008 of Tribecca executives, as part of an investigation by the Criminal Investigation Division of the IRS relating to Tribeca and other affiliates.

The recordings were made to help determine whether the primary purpose of the captive insurance programmes being offered by Artex was tax avoidance - where programmes were designed to have little chance of incurring losses and to avoid IRS audits. These facts are said to be relevant in deciding whether the captive in Pilot v Commissioner lacked economic substance.

Pilot Series of Fortress Insurance v Commissioner involves Jim Cameron, the sole shareholder of glass manufacturing business Cameron Glass, based in Oklahoma, who formed Pilot Series of Fortress Insurance (Pilot) as a Delaware-based captive insurance company with the assistance of Artex Risk Solutions. Pilot subsequently made an election to be taxed as an insurance company under IRC 831(b).

It is alleged that the ownership of the captive was structured to allow some or all of the wealth accumulated in it be passed to Cameron’s children and grandchildren, in order to avoid the application of gift taxes or the use of Cameron’s lifetime exclusion.

During each of the years at issue, Cameron Glass is said to have paid approximately $400,000 to an Artex entity - allegedly for insurance purposes.

Each year, Pilot is said to have received from Provincial Insurance - a separate Artex entity domiciled in Anguilla - an amount roughly equaling the paid premiums, minus a 2.5 percent fee through a supposed reinsurance arrangement where Pilot is to reinsure the first 25 percent of losses for the policies issued to Cameron Glass and that remaining 75 percent of losses for policies of other participants in Artex’s quota share reinsurance risk pool.

Pilot is said to have paid out no claims on the policies issued to Cameron Glass and only paid out minimal amounts for claims purportedly incurred from other participants in Artex’s risk pool.

The court had to determine whether the captive insurance transaction in this case lacked economic substance - transactions that lack business purpose and economic substance other than tax avoidance may be treated as a sham for federal income tax purposes.

Each of these individuals who had been recorded are said to have authenticated their voice in another microcaptive insurance case currently pending opinion before Judge Holmes in Caylor Land & Development et al v Commissioner.

One of the lead lawyers involved in Shivkov v Artex Risk Solutions previously said that the alleged conspiracy that Artex sold and managed illegal tax shelter captive insurance strategies is larger than it seems, and that he believes the same type of conspiratorial conduct exists in a number of other major microcaptive management companies.

Artex Risk Solutions, Tribeca Strategic Advisors

Captive International