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Avrahami v. Comm'r

United States Tax Court

August 21, 2017, Filed

Docket Nos. 17594-13, 18274-13.

Opinion

 [*145]  HOLMES, Judge: Benyamin and Orna Avrahami own three shopping centers and three thriving jewelry stores. In 2006 they spent a little more than $150,000 insuring them. In 2009 this insurance bill soared to more than $1.1 million and it flew even higher, to more than $1.3 million, in 2010. 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. Yet there were no claims made on any of the Feedback policies until the IRS began an audit of the Avrahamis' and their various entities' returns. 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--as loans and loan repayments, say the Avrahamis; as distributions, says the Commissioner. Also included in Feedback's surplus was $720,000 that the Avrahamis' jewelry stores sent down to a Caribbean company for terrorism-risk insurance. The full $720,000 [**2]  then flew right back to Feedback after--the Avrahamis argue--it distributed enough risk for the whole  [*146]  plan to constitute insurance as that term is commonly understood.

FINDINGS OF FACT

A. The Avrahamis and Their Businesses

Benyamin Avrahami was born in Iran but was raised in Israel where his family fled religious persecution. He immigrated to the United States in 1974, went to college, and obtained degrees in both business administration and gemology as well as a real-estate license. He met and married Orna Avrahami, who was born and raised in Israel but moved to the United States in 1980. The couple now live near Phoenix, Arizona, and have three adult children.

In 1980 Mr. Avrahami decided to go into business with his brother, so he created American Findings Corporation (American Findings).2 As its name implies, American Findings started out as a supplier of findings--the components that go into finished pieces of jewelry including clasps, split-rings, solder, and settings for stones. A few years later, however, American Findings bought an existing but financially troubled jewelry store named London Gold and got out of the wholesale findings business. The Avrahamis are talented businesspeople. [**3]  They turned London Gold around, and now American Findings (d.b.a. London Gold) operates--and operated during the years at issue in these cases--three successful retail jewelry stores that employ 35 people in the Phoenix metropolitan area.

OPINION

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149 T.C. 144 *; 2017 U.S. Tax Ct. LEXIS 40 **; 149 T.C. No. 7

BENYAMIN AVRAHAMI AND ORNA AVRAHAMI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent;FEEDBACK INSURANCE COMPANY, LTD., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Disposition: Decisions will be entered under Rule 155.

CORE TERMS

premium, coverage, captive, policies, insured, insurance company, entities, calculated, terrorism, reinsurer, deductible, actuary, factors, regulated, repayment, election, distributed, parties, cases, risks, tax return, Indemnity, transferred, losses, transactions, capitalized, multiplied, dividend, started, promissory note

Tax Law, Federal Taxpayer Groups, S Corporations, Election of S Status, Shareholders, Business & Corporate Compliance, Contracts Law, Types of Contracts, Aleatory Contracts, Individuals, Business Deductions, Insurance, Insurance Law, C Corporations, Insurance Companies, Nonlife Insurance Companies, Taxable Income, Insurance Law, Types of Insurance, Alternative Risk Transfers, Reinsurance, Industry Practices, Insurance Company Operations, Conducting Business, Insurance Companies, Federal Income Tax Computation, Unearned Income, Dividends, Bilateral Contracts, Interest Income, Standards of Performance, Creditors & Debtors, Tax Credits & Liabilities, Civil Penalties, Accuracy Related Penalty, Federal Tax Administration & Procedures, Tax Court, Burdens of Proof

Tax Law, Federal Taxpayer Groups, S Corporations, Election of S Status, Shareholders, Business & Corporate Compliance, Contracts Law, Types of Contracts, Aleatory Contracts, Individuals, Business Deductions, Insurance, Insurance Law, C Corporations, Insurance Companies, Nonlife Insurance Companies, Taxable Income, Insurance Law, Types of Insurance, Alternative Risk Transfers, Reinsurance, Industry Practices, Insurance Company Operations, Conducting Business, Insurance Companies, Federal Income Tax Computation, Unearned Income, Dividends, Bilateral Contracts, Interest Income, Standards of Performance, Creditors & Debtors, Tax Credits & Liabilities, Civil Penalties, Accuracy Related Penalty, Federal Tax Administration & Procedures, Tax Court, Burdens of Proof