'Tis The Season For Tax Shelters, Fa La La La La And Grab Your Wallet on Astini News

Welcome, Dear Friends, to the 2011 Tax Shelter Season.

While demand is down this year owing to fewer people having profits to shelter, a veritable army of promoters of tax shelters and hinky tax strategies are armed and ready to assist you in your quest to wade into hot water or stick your financial neck into a loophole.

This year's star tax shelter involves the so-called "group captive insurance company", which goes by various names, such as "cell captives" and "incorporated cell captives", etc.

Like most tax shelters, there are actually real and bona fide group captives and cell captives, etc., that are legitimately used by businesses as property-casualty risk management tools, but we're not talking about those. Instead, we are talking about the proliferation of those types of entities to be misused as something other than a real risk management tool, and instead primarily as a tax shelter. With the bad deals we are discussing, the main reason that people get interested in them and use them is to save taxes, not for insurance. That's the first bright red flag too.

By whatever name the promoter calls the deal, whether "group captive" or "cell captive" or "ICC", etc., the base shelter concept is the same:

Your business will pay a large insurance premium (which, amazingly, will be the same amount as the deduction that you desire) for some sort of insurance against a risk that is probably never to occur, such as terrorism insurance for a business in Tennessee. Would you normally buy that insurance or pay premiums at the amount they want you to pay? Of course not — that's why it is a shelter and not a real insurance deal.

Your business will then take a deduction in 2011, but the idea will be that in some later year either your business or you will get your money back either by what is known as a "premium refund" (or maybe a "dividend" if the particular arrangement you have chosen is a cell captive arrangement).

In the meantime, what happens to your money will largely depend on who sold you into the deal. If it was a money manager, then of course they get to manage the money. If it was a life insurance salesman, then your money will end up in life insurance.

Note to file: If somebody ever uses the terms "captive" and "life insurance" in the same sentence, run! Unless you have a burning desire for the IRS to act as your proctologist, that is.

There are myriad problems with these arrangements and easy reasons why they will blow up in your face:

• The purpose of the arrangement was not truly insurance, but instead tax savings, and thus there is no true economic purpose.
• The premiums paid bear no relationship to the true cost of the insurance (even if some actuary signs off on it — one can find an actuary to sign off on pretty much anything, including tidal-wave insurance for a Nebraska business in one actual deal).
• The arrangement is pre-designed so that the premiums are returned somehow to the participant, meaning that the entire arrangement was a sham from the get-go.
• The arrangement violates all sorts of IRS rules relating to risk-shifting and risk-distribution, even if the promoters swear on a stack of IRS Code Books that the deal is compliant.
• Some arrangements for getting the money back on a tax-favored basis pass the line beyond a mere shelter and are just criminal tax fraud.

So what do you do if you are considering such an arrangement? After all, the promoters are going to snow you under with all sorts of purported research and opinion letters from large law firms that purport to validate their deal as real.

First, realize the limitations of tax law opinion letters, which are (1) only good for you if specifically addressed to you and you particular situation; and (2) only as good as the actual facts match up to the facts stated in the opinion letter, and they rarely do.

Second, get a second- and third-opinion from a disinterested tax attorney. Don't go to somebody else that the promoter recommends or your advisor finds for you since they will probably just be shills. Instead, find the best tax attorney you can and let them take a look at it — this will be some of the best money you ever spent.

Third, inquire as to whether you can get a Private Letter Ruling (PLR) from the IRS, which is essentially a pre-approval of the transaction. If the promoter balks at getting a PLR, then you'll know the deal is bogus. You will note that getting second opinions and asking for a PLR are things that you should be doing with any allegedly tax-advantaged transaction, and not just the tax shelters du jour, which are group captive tax shelters we are discussing here.

Fourth, don't lose control of your money. Tax shelter promoters have been known to embezzle funds or unilaterally change the terms of the deal after you are in it, so that you may or may not get your deduction, but you will not be getting you money back. Deals that involve offshore entities, such as offshore insurance companies, are probably about as often frauds as they are legitimate. The old adage "sunny climes are for shady people" should not be forgotten.