The United States Tax Court recently made it harder for business owners to form captive insurance companies for the sole purpose of obtaining tax benefits.
In Benyamin Avrahami and Orna Avrahami v. Commissioner of Internal Revenue, the owners of a jewelry business formed a captive that collected exorbitant premiums, which the owners then attempted to write off as business expenses. An investigation by the Tax Commissioner revealed that the owners maintained commercial insurance to cover realistic risk at a fraction of the premium that they paid to their captive to cover doubtful risk. More critically, the Commissioner’s investigation revealed that the owners did not operate their captive as a real insurance company and that the captive did not adequately distribute risk.
In a 105-page decision, the Court agreed with the Commissioner’s findings on these points and would not allow the captive owners to deduct the large premium it paid to its captive as an ordinary and necessary business expense.
Click here to read the Case Alert.
Sep 05, 2017