Anyone who knows anything about Jay Adkisson (who is self-admittedly not a tax attorney, by the way) knows that he loves disparaging the work of tax professionals in order to drive business to his firm. His most recent example is a posting on Forbes' blog that I extensively critiqued here and here.
Importantly, at least for purposes of this post, Jay (who is not a tax attorney) warns the public in the Forbes posting to avoid at all costs group captive arrangements that are organized with an eye towards tax planning, and any captive arrangement involving life insurance, especially when captive comes to your attention via a life insurance agent. Such arrangements are "scams", "tax shelters" and "red flags", Jay self-righteously insists.
Well, I have already demonstrated how these public comments fly in the face of what Jay (who is not a tax attorney) actually says privately to life insurance agents behind the public's back, and now I will show that it also contradicts what he sometimes does in practice.
Consider, for instance, this marketing piece. It is unquestionably a solicitation for participation in a group captive arrangement between unrelated parties. The first page says "the opportunity enables you and a business for which you are a related party to purchase different types of insurance in a tax-advantaged manner." Page two says, "as a result of these transactions, you will own shares of preferred stock in the [captive], your business will obtain one or more types of insurance [note that the types and amounts haven't even been determined yet]; and you will manage the LLC through which you will acquire cash value life insurance on your life and other approved investment products." Page three says, "the business opportunity provided by the [captive] offers you a unique method of obtaining various types of insurance for your business that otherwise would be difficult to obtain. Simultaneously, the [captive] may provide you with an immediate tax deduction for premiums paid that constitute ordinary and necessary business expense (sic), and the ability to defer taxes on any gains...".
The described deal works as follows: For every $100,000 in premiums a participating business pays to the group captive (yes, the deal is being offered in $100,000 premium units that, according to Jay Adkisson's usual logic, must have everything to do with the level of desired tax deduction and nothing to do with the actual insurance needs of the business), approximately $5,500 is paid to a captive management firm and $5,000 is retained by the captive. The remaining $89,500 is invested by the captive into a subsidiary LLC managed exclusively by the participating business owner. From there it ultimately gets invested into...you'll never guess...life insurance on the business owner's life or such other investments the business owner, as manager of the LLC, may choose. Thus, ninety percent of the assets of the captive are more or less under the direct control of the business owner participant where, if the promoter has his way, it will end up invested into life insurance.
And, who is going to sell this life insurance and other investments to the LLC? The captive's promoter, as noted on page 10 of the memo. It reads: "[Promoter] is in the process of obtaining licenses for securities, life insurance and mutual fund sales, as it is contemplated that he will receive fees and commissions from the formation of the [captive]..the management of the insurance company..asset management of the companies..and the placement of life insurance products."
Okay, so far this is starting to look like a deal that Jay Adkisson (who is not a tax attorney) would ordinarily lambaste publicly, right? Let's count they ways that Jay (who is not a tax attorney) might puke all over such an arrangement: First, we have a group captive being created by a "promoter" who will solicit participation from unrelated persons for the purpose of obtaining "tax-advantaged" insurance. Second, the promoter will apparently receive a portion of the fees charged by the captive manager that will form and manage the captive--so it seems the promoter and captive manager are in cahoots and are not totally independent of each other in this transaction. Fourth, most all of the premiums paid to the group captive will be immediately placed under the business owner's direct control via a subsidiary LLC arrangement. And finally, the promoter intends from the get-go to convince (or even require?) each LLC to place its assets under his management where the money will likely (or maybe definitely?) be invested into life insurance.
You'd think Jay Adkisson (who is not a tax attorney) would be rolling over in his...desk chair, right?
Well, it gets worse. The guy who wrote the solicitation memo (i.e., the "promoter" in Adkisson terms) admits over and over that neither he nor the captive itself have any experience managing an insurance business in general or captive insurance companies in particular. But never fear, dear business owner, for he tells you explicitly that the captive "will rely extensively on the advice of its management company in all aspects of the insurance business" including but not limited to, we are assured, formation of the company, development of the captive's business plan (which I assume would include the plan to invest into subsidiary LLCs), managing the underwriting and pricing of policies, determining the types of polices to be issued and their terms, etc. Ignore for a moment the fact that the captive manager is apparently compensating the promoter for hiring him since the promoter will "receive fees and commissions from the formation of the [captive and]..the management of the insurance company."
So, one doesn't even have to read between the lines to conclude that this whole deal is actually being organized, facilitated and managed by the management company, right? Or, at the very least, it's a joint effort between the management company and the promoter? After all, if the memo is to be believed, the promoter is ignorant about the formation and operation of captives and the management company will thus do all the actual work. Well, if it's true that the promoter is ignorant as to the formation and operation of captives, there's little chance that the promoter could have dreamed up this whole business structure in the first place, nor could he have written the solicitation memo by himself. So...who is helping him? Who will help him? Well, the trusty management company, he insists time and again in the memo. And who is behind the trusty management company--the only party to this deal that seems to actually know how captives work and should be operated? Well, that's where it starts to get really, really interesting:
You see, page 8 tells us that the management company is "Trafford". Okay, but how can you, dear business owner, know that Trafford is competent and legit as you read this memo? I mean, why should you be comfortable paying hundreds of thousands of dollars in premiums to a captive controlled by a stranger, with other strangers as partners, which is managed by yet another party, where you've not yet been told what types of insurance it will provide or in what amounts, where it will supposedly invest ninety percent of its premiums into an LLC that you control (which will subsequently invest most of it into life insurance)? Well, because, as noted on page 9, Trafford is "owned and managed" by three very trustworthy and reliable people--people with lots of credentials and who certainly would know a scam if they saw one. You know the type of scam I'm talking about here, right? One's where, as Jay (who is not a tax attorney) notes in the Forbes article, unrelated people are brought together by an unrelated promoter, especially a life insurance salesperson, to share the costs of operating a group captive with an eye towards reducing taxes and with little regard to the types and amount of captive insurance to be provided, where the money is placed under the business owner's control in short order, and especially where the money ends up in life insurance?!
So, the reader will be astounded to learn, as I was, that the first-listed among these esteemed three "owners and managers" of Trafford noted on page 9 of the memo, the firm that is responsible for "all aspects" of the captive's insurance business, is none other than (yes...squint your eyes and look for yourself) that group-captive-denoucing, life-insurance-hating, purveyor of promoter paranoia, the man we've all come to know and (dis)respect--the "melanoma from Oklahoma" himself--Jay Akdisson (who, I might add, is not a tax attorney).
I rest my case (for now).
DISCLOSURE: IRS regulations require me to inform you that this post is not intended or written by me to be used (and cannot be used by you) for the purpose of avoiding penalties that may be imposed with regard to the tax consequences arising from any matters discussed in this message or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed in this message.