a regulator’s perspective
The captives world is processing the implications of two high-profi le court
cases involving captives. Here, John Talley, captive program manager in the
Missouri Department of Insurance, gives his perspective on what the cases
mean for regulators.
to reinsure terrorism insurance for other small captive insurers through a
risk-distribution pool set up by Clark, exclusively for her clients.
The court noted in the first sentences of the decision that the
insurance bill for 2006 for the Avrahamis’ business was $150,000.
In 2009–2010, after the formation of Feedback, the insurance bills
increased to more than $1.1 million and $1.3 million, respectively.
The court did not indicate that the businesses being insured had
substantially changed or increased during those years. It did note that
the overwhelming portion of the new premium was paid to Feedback
and that no claims were made on any of Feedback’s policies until the
Internal Revenue Service (IRS) began its audit of the Avrahamis.
The Reserve case has similar and dissimilar facts. Norman
Zumbaum and Cory Weikel were co-owners of several businesses
including Peak Mechanical & Components (Peak), a mining
equipment provider and servicer. Peak employed 13 to 17 employees
during the years in question.
Prior to the tax years in question (2008–2010), Zumbaum and
Weikel were introduced to Capstone, a captive manager and turnkey
captive formation company. Capstone helped Zumbaum and Weikel
form Reserve Mechanical Corp in Anguilla on December 4, 2008 and
became its captive manager.
In the past year, the captive insurance world has been shaken by
two US Tax Court decisions, Avrahami v Commissioner of Internal
Revenue (Avrahami) and Reserve Mechanical Corp v Commissioner
of Internal Revenue (Reserve). Some commentators have speculated
that the decisions will end the existence of micro captives. Others
have postulated that these opinions are the death nail in the coffins of
831(b) captives and small captive risk-pooling purveyors.
As a regulator of a captive insurance domicile, I do not know the
effect these decisions will have on small captives in the US. But after
reading the decisions and the numerous commentaries, I found
myself asking one question: what do these cases mean for captives
regulators and the domiciles they serve?
With the thought of lowering their potential income tax burden due to
their thriving business ventures, the Avrahamis sought the counsel of
their accountant, who then recommended that they consult an estate
planning attorney, Neil Hiller.
After being advised the Avrahamis were thinking of forming a captive,
Hiller recommended they also consult with captive insurance lawyer,
Celia Clark. Feedback Insurance was formed in St. Kitts in November
2007. At that time, Feedback entered into a cross-insurance programme
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