In the motion, the Avrahamis argued: "There should be no reasonable dispute [that] the policies at issue were claims made policies, not occurrence policies.”
Judge Holmes explained that there was “sloppy drafting” of policy language and actuarial calculations that “did not reflect in all cases the actual policy language that then buttressed the finding of fact that Feedback was not operating like an insurance company”.
In his original ruling on 21 August, Judge Holmes confirmed that payments made to the Avrahamis by their micro captive, Feedback, fell outside of the scope of certain tax elections, including 831(b) for investment income up to $1.2 million.
In particular, the judge held that the pooling entity was not a bona fide insurance company, and that the captive did not operate like an insurance company because it issued policies with unclear and contradictory terms, and charged wholly unreasonable premiums.
In the petition against the ruling, the Avrahamis also argued that Feedback “must have operated like an insurance company because it reasonably relied upon its advisors to operate it”.
However, Judge Holmes stated that the question of whether an arrangement looks like insurance “doesn't depend on whether those appearances flowed from professional advice, but what actually happened”.
He added: “Some of the key facts were the extreme illiquidity of Feedback's investment portfolio—so skewed toward flowing funds back to the Avrahamis that it had no other significant investments—and the very telling pattern of receiving claims only after the Internal Revenue Service (IRS) started an audit.”
“Petitioners cite to no law that says there's a reasonable-reliance defence on the natural consequence of such activities.”
The judge ordered that, on or before 12 January 2018, the parties are to submit the computations under Rule 155, or file a status report describing their process.