In Uncategorized on 08/21/2017 at 16:42

As darkness overspread our land, The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Indefatigable, Ineluctable, Ineffable, Incontrovertible, Irrepressible, Illustrious and Irrefragable Foe of the Partitive Genitive (although perhaps in recovery), Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes enlightens us and the Self-Insurance Institute of America, Inc., in Benyamin Avrahami and Orna Avrahami, 149 T. C. 7, filed 8/21/17.

You remember Ben and Orna? No? Then see my blogposts “The Front – Part Deux,” 12/18/15, and “The Fighting Lawyer,” 3/29/16.

Well, now the whole captive insurance business is up for grabs, and Judge Holmes is the man.

The Avrahamis had three jewelry stores and three shopping centers. They also had what they called an insurance company called Feedback, owned by Orna, which paid no claims, but lived up to its name by feeding back to the Avrahamis a lot of the deducted premiums the Avrahamis sent them.

Their CPA turned the Avrahamis on to the Fighting Lawyer, who set up their captive in St. Kitts. I’ve been there. It ain’t much. But the captive filed a 953(d) election to be taxed as a US C Corp, and a Section 831(b) small insurance company election.

Notwithstanding the captive, the Avrahamis insured their multiplex business with US commercial insurers, and IRS has no beef with that. The captive did tax risk, litigation risk, and other exotics.

They also dealt with a St. Kitts outfit that insured against terrorism risks. They also joined a quota share (reinsurance) deal, a favorite of Lloyds of London brokers who were stealing from their Names. Only here it was a roundy-round to move premium money back to the cedant.

The Avrahamis, ever invented, created an entity named Belly Button, Inc., to make loans to themselves with money from Feedback. Judge Holmes says the “omphaloskeptical” St. Kitts insurance regulators gazed askance at these.

IRS elevated this scam to the “dirty dozen” list in 2015 and made them transactions of interest in 20216. See Notice 2016-66, 2016-47 I.R.B. 745; I.R.S. News Release IR-2015-19 (Feb. 3, 2015). But this is the first such case that went to trial.

The bottom line, despite the overlay of tax breaks for small mutual insurance companies, is whether risk has truly shifted, been diversified (so that “no man is undone, but rather the losse falleth lightlie upon many, and not heavilie on fewe” as the English said in 1601), and has been run like a for-profit insurance company.

Remember Rent-A-Center? See my blogpost “Leading Captivity Captive,” 11/4/16. That captive was OK.

Just not the Avrahamis’.

“But it [the captive] might also be run so that related parties pay the captive deductible insurance premiums of just under $1.2 million a year.  In turn the captive might pay out few if any claims, might make a section 831(b) election so it pays tax only on its investment income, and might quickly build up a large surplus.  Then, if the captive were to be licensed and regulated in a jurisdiction with extremely low reserve requirements and loose rules on related-party transactions, it might lend its surplus back to its affiliates.  This might generate nearly $1.2 million in tax deductions while arguably only moving money from one pocket to another.  Or perhaps the captive could be owned by a Roth IRA, which might mean it could make large dividend payments to its stockholder, creating a form of deductible, yet tax-free, retirement savings.  Or perhaps the captive could be owned by its business owner’s children or an irrevocable family trust, which might enable the avoidance of future gift and estate taxes.” 149 T. C. 7, at pp. 58-59.

There was an insufficient spread of risk on the facts, the terrorism quota share was a true roundy-round, the captive didn’t pay claims until the IRS was all over the Avrahamis, and at the end of the day, Judge Holmes finds it wasn’t a true insurance company.

“We have to find that Feedback’s operations left something to be desired.  It dealt with claims ‘on an ad hoc basis.’  It invested only in illiquid, long-term loans to related parties and failed to get regulatory approval before transferring funds to them.  And we will not overlook the fact that the Avrahami entities made no claims whatsoever against Feedback from its inception in 2007 until March 2013–two months after the IRS sent the Avrahamis documents about the audits of the returns of [Avrahamis’ entities] that suggested Feedback was a sham.  And even the claims Feedback did receive it dealt with in questionable ways.  Most of the claims were approved despite being filed late–the policies required that Feedback be notified within 30 days of the loss ‘as a condition precedent to payment of any benefit hereunder.’” 149 T. C. 7, at pp. 78-79.

And Feedback only had cash and loans to the Avrahamis’ entities. But the caselaw says that adequate capitalization in the state or country of organization is sufficient. And even though in St. Kitts to be an insurance company you only need what you need for a MegaMillions ticket (“all you need is a dollar and a dream”), that’s enough.

The policy language was not of the best (claims-made vs when-occurred), but the Avrahamis produced the Incomprehensible Actuary. Judge Holmes couldn’t figure him out, and I didn’t even try.

Finally, a loan between Feedback and Belly Button was a real loan, although barely, so no income to Orna except interest.

The Avrahamis have a partial escape from the accuracy chops, as one person they relied upon had credentials, full information, and wasn’t a promoter.

The rest of you captors, beware.


In Uncategorized on 08/19/2017 at 00:04

It is well, if you are an attorney drafting a motion for summary J, to make it easy for the judge to decide in your favor. And not only in a motion for summary J.

IRS’ counsel in Talib I. Karim, Docket No. 17407-15L, filed 8/18/17, needs reminding.

And who better to remind IRS’ counsel gently but that Obliging Jurist, Judge David Gustafson? And in a designated hitter, making easy the late night work of the blogger surfeited with family’s overwhelming hospitality.

Of course the motion is accompanied by the usual declaration, in this case of the SO who handled the CDP at issue here, plus a bunch of exhibits thereto.

Unhappily, IRS’ counsel didn’t marshal evidence and lay bare the proofs.

“The motion itself consist [sic] of 21 numbered paragraphs. However, the factual assertions in the motion are not in a section distinct from the motion’s legal argument. Paragraphs 4-9, and 12-13 appear to consist of statements of fact on which the motion is based (interspersed among paragraphs making legal argument). The SO’s declaration authenticates documents that are attached thereto as exhibits, but the declaration does not otherwise state the facts underlying the motion. It may be that support for the motion’s factual assertions could be found in exhibits, but we decline to take on that project.” Order, at p. 1.

Maybe I’m just an old fogey, but legal arguments get made in a memorandum of law or in a brief, not in the motion itself. Just the facts, ma’am, as the late Jack Webb used to say.

Tal is flying solo in this one, and judges tend to make life a wee bit easier for the hapless pro se.

Howbeit, “Ideally, whether or not the petitioner is self-represented, a motion for summary judgment will include (either in the motion itself or in an accompanying memorandum) a separate section of numbered paragraphs stating the proposed undisputed facts, and each factual assertion will be supported by a citation to a declaration or an exhibit. The Court can therefore more efficiency evaluate the motion, and the non-movant can more fairly be required to respond to the factual assertions.” Order, at pp. 1-2.

So, IRS counsel, your motion is denied without prejudice. If you decide to do it right, you need not resubmit the declaration and exhibits.

I do not recommend asking the judge to do your work. It is an out-of-title assignment.


In Uncategorized on 08/17/2017 at 18:15

I must again apologize for loquacity and lame attempts at humor today. I throw myself on the mercy of the Court, and hope Judge Posner will forgive me.

As promised, here’s Kurt Hickam and Michelle Hickam, 2017 T. C. Sum. Op. 66, filed 8/17/17, a small-claimer from STJ Diana L. (“Sidewalks of New York”) Leyden. It’s another real estate pro with dodgy substantiation, so nothing novel about that. And Kurt is the only one playing this hand.

The interesting part is that Kurt wants to add in his mortgage brokering hours on top of his running three (count ‘em, three) rental properties for self and family, for which he did everything but keep good time records.

Kurt claims his mortgage brokering is enough of  a real estate activity to qualify within Section 469(c)(7)(C).

“Real property trade or business.–For purposes of this paragraph, the term ‘real property trade or business’ means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.” 2017 T. C. Sum. Op. 676, at p. 13.  (Emphasis by the Court.)

“Mr. Hickam focuses on the word ‘operation’ and argues that his mortgage brokerage services and his loan origination services are performed in trades or businesses in real property operation because the underlying assets in both services are real property.” 2017 T. C. Sum. Op. 66, at p. 13.

Kurt also gripes that IRS retroactively applied CCA 201504010 (Dec. 17, 2014), which said mortgage brokerage wasn’t real estate activity. But that’s nothing new, says STJ Di.

“The legislative history of the statute supports the consequence of this distinction.  Congress considered including ‘finance operations’ in the activities listed in section 469(c)(7)(C) but specifically did not do so.  See H.R. 2264, 103d Cong., sec. 13143 (1993); H.R. 1414, 102d Cong. (1991); S. 1257, 102d Cong. (1991); H.R. 3732, 101st Cong. (1989); S. 2384, 101st Cong. (1989).” 2017 T. C. Memo. 66, at p. 16.

Mortgage brokering, however much time Kurt put in, doesn’t get into the equation.

Kurt relies on a case where a real estate and mortgage broker got treated as a real estate pro, but IRS and broker stipulated she was a pro as to three rental properties she owned, without taking any brokerage time into account. Apparently her timesheets were better than Kurt’s.

But STJ Di gives Kurt a bye from the 20% chop IRS is holding over him.

“The question of whether Mr. Hickam was a real estate professional was partially resolved on technical grounds—whether his mortgage brokerage services and loan origination services constituted real property trades or businesses under section 469(c)(7)(C).  Although the Court found that neither service constituted a real property trade or business and notwithstanding his failure to maintain adequate records, the Court finds that Mr. Hickam acted reasonably and in good faith in taking that position for the years at issue.  Petitioners are therefore not liable for a section 6662(a) accuracy-related penalty….” 2017 T. C. Memo. 66, at pp. 25-26.

The taxpayer’s friend – that’s STJ Di.