Captive Owners Sue Legal Advisors After IRS Levies Penalties

Captive Owners Sue Legal Advisors After IRS Levies Penalties

The owners of an 831(b) captive that the Internal Revenue Service ruled did not qualify for various tax benefits is now suing the lawyer who allegedly advised them to establish the microcaptive, Business Insurance reports.

Last month, Benyamin and Orna Avrahami, the owner of a jewelry firm and various other businesses in Phoenix, last month sued Celia Clark, a former partner and now counsel at Clark & Gentry PLLC in New York, alleging that Clark and her firm knew that the “captive insurance strategies” she recommended “did not provide insurance recognized under the Internal Revenue Code,” court papers say.

According to the suit, the plaintiffs relied on Clark for advice on “complex insurance and tax matters, including tax law and captive insurance.” The suit, filed in U.S. District Court in Phoenix, seeks class action status.

The St. Kitts-based captive, Feedback Insurance Co. Ltd., and the transactions it was involved in, failed to pass muster with the IRS, resulting in the IRS assessing the Avrahamis more than $1.5 million in back taxes and penalties.

As additional background, in August 2017, the U.S. Tax Court ruled that Feedback Insurance Co. Ltd., charged unrealistic premiums and did not meet risk distribution requirements for captives, among other things, notes the Business Insurance report.  The court found that the captive paid few claims and the surplus was paid back to the Avrahamis in various ways.

In the latest suit, the Avrahamis seek unspecified damages from Clark and other defendants, including a local Phoenix law firm allegedly involved in establishing the captive. The Avrahamis allege the firms charged them $75,000 to set up the captive and $2,000 a quarter thereafter.

Business Insurance reports that the lawyers should have known that the IRS would disallow the captive and “the organizational scheme that was designed by the defendants primarily to allow them to charge and collect, in multiple ways, fees and expenses across the entire structure, without any real intent to fund the captive insurance companies for real risk management and in a structure that supported actual insurance and reinsurance purposes,” the suit states.

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