The IRS has racked up a big win against an offshore captive insurance agency in a tax case.
The case involved husband and wife Benyamin and Orna Avrahami, who owned shopping centers and jewelry stores in the Phoenix area. The Avrahamis consulted their CPA in hopes of finding tax relief, and he referred them to an estate planner, who in turn referred them to a New York attorney named Celia Clark. Clark advised them in the setting up of an offshore captive insurance company, Feedback Insurance, which was domiciled in St. Kitts. Feedback was owned by Orna Avrahami.
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The Avrahamis companies then insured vaguely defined risks through Feedback, according to a report in Forbes. Once they started insuring through a company owned by Orna, the premiums for the Avrahamis’ properties skyrocketed.
In 2006, the Avrahamis spent about $150,000 insuring their three jewelry stores and three strip malls, according to the United States Tax Court ruling. In 2009 they spent $1.1 million, and in 2010, $1.3 million.
“The Avrahamis were paying the overwhelming share of these big bills to a new insurance company called Feedback that was wholly owned by Mrs. Avrahami,” the ruling said. “…With money flooding in and none going back out to pay claims, Feedback accumulated a surplus of more than $3.8 million by the end of 2010, $1.7 million of which ended up back in the Avrahamis’ bank account…”
The IRS maintained that what Feedback was selling wasn’t insurance, meaning that the premiums weren’t deductible as business expenses. The court agreed with the IRS and sustained its penalty against the Avrahamis for underpaying their taxes.
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