By Sean King, JD, CPA, MAcc
Principal, CIC Services, LLC
On his Forbes.com blog and elsewhere, captive insurance attorney Jay Adkisson often writes condescendingly about the supposedly poor and tax-motivated work of other captive insurance professionals. Here is but one recent example:
By attempting to taint them as “tax shelter promoters”, he implicitly positions himself as lily-white, IRS-endorsed and tax-disinterested. If Mr. Adkisson’s writings are to be believed, the country is presently overrun by unethical tax scammers and he’s on a one-man mission to stop them.
However, documents reviewed by our firm over many years show that Jay Adkisson’s private activities differ markedly from his public posturing. Truth be told, Adkisson is, or has been, a tax shelter promoter extraordinaire. The public and the captive insurance industry have a right to know the details.
Mr. Adkisson’s Modus Operandi—Subterfuge
Before chronicling some of the stunning inconsistencies between Mr. Adkisson’s private practices and his public punditry, it’s important to consider the possibility that the hypocrisy is not merely accidental or pathological but rather intentional and strategic. In that regard it’s relevant to consider whether Mr. Adkisson has admitted to, or recommended, strategic deceit in the past. The short answer? He has.
A Summer 2006 newsletter published by his law firm, and from its tone likely penned by Mr. Adkisson himself, discusses a then-recent court case (US v. Townley) in which an individual’s gift of property into a trust was set aside as “fraudulent” after the court concluded that the transfer was made with an intent to defeat the claims of future creditors. While there is nothing particularly surprising about this decision, the Adkisson law firm’s response to it is truly shocking. To prevent similar future outcomes , Adkisson’s firm advises clients and other attorneys to engage in subterfuge:
[Y]ou should not conduct asset protection in its own name.
As this case shows, the very fact that the clients engaged in transfers to protect assets from unforeseen future creditors had the practical effect of a sworn confession that they had the intent to fraudulently transfer assets as to all creditors who came later. You cannot allow your clients to make this confession, which means that you cannot allow them to admit that they engaged in planning for the purpose of defeating ANY creditors of any kind.
This has significant practice implications:
- You should not have an engagement letter that says that a purpose for your planning is asset protection.
- You should not give your clients a memorandum that discusses the asset protective effects of what they are about to do.
- And you can’t let your clients give affidavits or testify at depositions that the reason that they engaged in their planning was because of concerns of unknown future creditors. That doesn’t work. [emphasis added]
If a client can’t stand up and give a straight-faced reason why the planning was done for legitimate purposes (other than to lessen the rights of creditors), that planning will be in grave danger until the UFTA statute of limitations has run. [bolded emphasis added]
In short, Mr. Adkisson’s firm proposes to create a paper trail, or at least ensure an absence of one, that gives clients and their counsel plausible deniability in court as to the real motives behind the asset transfer.
Such deceit isn’t just immoral, it’s actually illegal in some contexts. Taken literally and to its logical conclusion, the deceit outlined in Adkisson’s Summer 2006 newsletter would constitute nothing less than the subornation of perjury, a felony in many jurisdictions. At a minimum, any lawyer proceeding as Adkisson’s firm recommends would be acting unethically by anticipating, and preparing for, the perpetuation of a future fraud upon a court of law. As a lawyer, I️ must recommend against taking Adkisson’s advice.
In light of the calculated callousness with which Adkisson advises the use of deceit to disguise activities and motives, we might also wonder whether his frequent and relentless condemnation of “tax shelter promoters” is a similar subterfuge. Might his protests simply be intended to obscure his own past activities? Based on the documents that we have reviewed, the answer is yes.
Mr. Adkisson’s Whipping Boys
Mr. Adkisson rarely mentions by name those who he so contemptuously condemns as “shady tax shelter promoters.” Regardless, the resulting uncertainty works to his advantage—vagueness permits him to taint an entire industry of competitors via innuendo.
His often unnamed targets do have some fairly consistent characteristics. For instance Jay rarely misses an opportunity to heap scorn on those who:
- Emphasize the tax benefits of captive insurance companies, especially as a year-end tax planning tool. For instance, in a Forbes blog post titled, “’Tis The Season For Tax Shelters, Fa La La La La And Grab Your Wallet”, he warns the public that “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”.
- Offer or recommend group or cell captive arrangements. “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.”, he says. He continues:
Very importantly, the scam deals involve situations where a bunch of people who have absolutely no relation to one another, except for the desire to save taxes, are thrown together into the same deal. The promoter needs to do this to try to save administrative fees and keep the costs of the shelter down. Thus, this is one way to distinguish the scam deals from the completely legitimate deals; the legitimate arrangements are known as “pure captives” and occur where businesses form their own captive insurance companies that they alone own and control and which underwrites only the insurance risks of their own businesses (and which follow the established IRS guidelines for such companies).
By whatever name the promoter calls the deal, whether “group captive” or “cell captive” or “ICC”, etc., the base shelter concept is the same.
- Advise that captives be formed in foreign domiciles or assist clients in doing so.
- Advocate or offer risk distribution pools. He writes again on his Forbes blog:
“I’ve also long said that ‘pools are for fools’. It’s 100 folks standing in a tank of gasoline during a thunderstorm, each holding a lightening rod, and each praying that nobody gets hit.”
In another place he writes:
To create the appearance of third-party risk, a shady captive promoter may establish a “risk pool.” Each client of the promoter makes premiums payments for some questionable risk to an insurance company that is owned or controlled by the promoter. The risk pool then buys reinsurance room each client’s captive, this giving the appearance that each captive is deriving at least 50% of its premiums from third-party risk.
These sort of risk pools are a sham on several levels.
- Advocate or mention the purchase of life insurance within or related to a captive insurance company. For instance, he advises the public to “run” if someone “ever uses the word ‘captive’ and ‘life Insurance’ in the same sentence”. That is, “unless you have a burning desire for the IRS to act as your proctologist”.
- Determine total captive insurance premiums by reference to a business’s budget, or based in part upon tax considerations, rather than merely risk management considerations.
- Place captive assets under the direct control of the business owner or advocate using them for the business owner’s personal planning purposes.
- Advocate or propose the use of captive insurance companies for estate planning or wealth transfer purposes.
- Disclaim liability for the tax consequences of the transaction they propose or insist that the client sign a release to that effect.
Jay saves some of his most hyperbolic criticisms for arrangements where the “promoter” of the captive is conflicted. “Keep in mind that the behind-the-scenes commissions paid on these deals are often very significant, and the advisor will not want to give that commission back — so they will tell you pretty much anything to try to hold you in the deal.” If you work with such any advisor, you just might find yourself “eating with a spork” from prison “on Christmas morning”, he warns on this Forbes blog.
Given such vicious condemnations, readers of Adkisson’s blog assume that he would never be involved with such “schemes”. They would be wrong.
Mr. Adkisson’s Hypocrisy and the First Telling Document
We have reviewed three separate documents demonstrating Mr. Adkisson’s abject hypocrisy in the matters described above and in others not mentioned. The first document is the Summer 2006 private newsletter previously referenced in which Adkisson’s firm appears to advocate subornation of perjury.
Titled “Developments in Asset Protection and Wealth Preservation”, that newsletter contains a section headed “PLAN NOW FOR YEAR-END TAXES”. There it warns clients not to wait till year end to do their tax planning—“the time to do that is now, and not on December 31”, it says.
Immediately thereafter appears a positive discussion of both section 831(b) captive insurance companies and section 419 welfare benefit plans as tax planning tools. The discussion of 831(b) captive insurance companies mentions their risk management purpose only in passing and instead focuses mostly upon their tax effects:
The 831(b) provision allows an insurance company to take in up to $1.2 million in premium income every year without the company being taxed on that income. Taking into account IRS requirements under Rev.Ruling 2005-40 and otherwise, this means that an 831(b) captive has the potential to transfer up to $1.2 million in premiums out of the operating companies (giving it a deduction for the premiums paid) and into the insurance company without any corresponding tax being paid.
A good captive arrangement can keep other businesses appearing as only a “break even” enterprise on paper, because the profits have been effectively shifted to the captive.
Forming an 831(b) insurance company and getting it licensed is the easiest part. The real difficulty is in running the insurance company and internally managing taxes on the investment income, while also creating a game plan for later winding the insurance company down on a tax efficient basis if that need arises because of unforeseen economic problems, sale of the operating business, death of the owner, or changes in the Internal Revenue Code.
As a captive insurance company typically takes 60 to 90 days to get up and running, it is not a last-minute strategy where you can make a decision on December 31 and get a deduction for premiums paid. Typically, the steps to form a captive need to begin no later than October 15 for the company to be formed and licensed in time for premium payments to be made to it before year’s end.
[emphasis in the above quotes was added]
These statements, made to his law firm’s clients and centers of influence in his private newsletter, speak for themselves, and they stand in stark contrast to Mr. Adkisson’s more public lambasting of those who promote 831(b) captive insurance companies as “year-end tax planning” tools.
The Second Telling Document
The second document evidencing Mr. Adkisson’s duplicity on these matters is a presentation that he (along with another) gave to the Association for Advanced Life Underwriting, a life insurance industry group comprised of the nation’s top life insurance professionals, in 2009. The presentation consists of approximately 62 slides. Of those, less than 20 percent (and that’s being very generous) discuss how to use captive insurance companies to insure business risks. The remainder of the slides, more than 40 in total, focus on the income and estate tax savings opportunities of 831(b) captives, the benefits of group captives, and how to layer in life insurance to supercharge outcomes for prospective clients.
Listed in that presentation among the “primary” benefits of a captive insurance company (not merely secondary or tangential benefits) are “Income Tax Savings” and “Estate/Gift Tax Savings”. The presentation extensively discusses the tax planning benefits of a captive making the Section 831(b) tax election noting that “the captive can receive up to $1.2 million in premiums per year but pay no taxes on that money.” It describes step by step various methods by which captives can be combined with life insurance to achieve tax-free “intergenerational wealth transfer”.
On a slide titled “Captives and Life Insurance”, the presentation describes life insurance as a “permissible investment within a captive”. It states that “the advantage to life insurance is that it internally grows tax-free to the captive.”
Another slide titled “Key Benefits” notes that captives have the potential to “create business tax deductions for the insured company”, “provide an attractive environment for tax-advantaged investment portfolio management”, “create family wealth transfer opportunities”, and “use some of its surplus to invest in life insurance on the owner.”
I invite the reader to attempt to reconcile Mr. Adkisson’s private presentation to the AALU with his more public statements, a few of which were highlighted above.
The Third and Most Telling Document
The third document, which is by far the most incriminating, is an offering memorandum created by an 831(b) group captive promoter who shall remain nameless. Per the memorandum, the promoter expected to hire Mr. Adkisson’s captive management firm, then named Trafford, to form and manage a captive insurance company to be operated as described in the memorandum.
The memorandum was intended to be distributed discretely to prospective clients—the promoter’s attorney informed me that the documents were subject to a nondisclosure agreement (NDA) intended to preserve their strict privacy. However, because I never signed the NDA and my source didn’t either, I’m free to disclose its contents.
The memo describes an elaborate arrangement where unrelated prospective clients would be solicited by an admittedly conflicted and incompetent promoter to participate as owners in a shared foreignly-domiciled (Nevis or the BVI) group captive insurance arrangement. The memo mentions the risk management benefits of the arrangement only in passing and instead focuses largely upon tax effects. Despite its emphasis on intended tax outcomes, subscribing clients were required to represent and warrant that they entered into the transaction only for insurance and risk management reasons and not for tax reasons.
Risk distribution was to be achieved by pooling the risks of the various unrelated clients solicited by the promoter.
Rather than premiums being purely a function of risk, participation in the arrangement was sold in $100,000 premium increments:
For each 100 shares that you purchase, your business would be entitled to purchase insurance from the [captive], with premiums of up to $100,000 per year.
And nearly 90% of each client’s premium payment was then to be invested into a separate subsidiary LLC under the direct control of that client. For every $100,000 in premium:
$89,500 will be paid by the captive to the limited liability company in which [the prospective client] is the sole manger.
As the sole manager of the limited liability companies, [each prospect client] will choose how to invest the funds in [his/her] limited liability companies; provided that such funds may only be invested in cash value life insurance policies and other approved investments. In most cases [the prospective client] will be the insured under the life insurance and the managers of any particular limited liability company may designate the beneficiary thereof.
That’s right, the captive’s assets were explicitly intended from the beginning to be invested in cash value life insurance policies and other investments sold by the inexperienced but commissioned promoter:
As a result of these transactions, you will own shares of preferred stock in the [captive insurance company]; your business will obtain one or more types of insurance; and you will manage the LLC through which you will acquire cash value life insurance on your life and other approved investment products.
[Promoter] is in the process of obtaining licenses for securities, life insurance and mutual funds as it is contemplated that he will receive fees and commissions from…asset management of the company, placement of third party insurance, and the placement of life insurance products.
The tax motivation of the transaction is evident throughout. To quote one small section of relevant material on this point:
The formation and operation of the [captive] are intended to provide the following US federal income tax benefits:
- Your purchase of the…stock will not result in a taxable transaction
- The…premium income will be exempt from US federal income tax. Other income would generally be taxable to the [captive]
- Investment income on reserves…will be tax-deferred if the proceeds are invested in cash value life insurance and other approved investment products
To be fair, the offering memorandum and stock subscription agreement were not nominally written by Jay Adkisson nor his firm, but it’s quite clear that Adkisson’s company, Trafford, was more than just tangentially involved in the scheme. If we follow the money (qui bono?), Trafford stood to benefit most from the arrangement (at least if we exclude the promoter’s life insurance commissions from the analysis):
The [captive] will pay [Trafford] a one-time formation fee that we estimate to be between $50,000 and $66,000, and an annual management fee that we estimate to be $55,000.
And Trafford was directly compensating the promoter for his services:
[Promoter] will receive a commission from Trafford for the formation of the [captive], and will receive a payment from Trafford, which is based upon the total fees received by Trafford from the [captive].
And finally, Trafford assumed nearly complete responsibility for the insurance operations of the relevant captive. The memorandum states that the Promoter will “rely extensively on the advice of its management company [Trafford] in all aspects of the insurance business”, including those designed to ensure the intended tax benefits. For instance, Trafford would have been primarily responsible for assisting in (if not determining) domicile selection, for pricing the policies, for ensuring sufficient risk distribution, and presumably for ensuring adoption of a suitable investment policy statement.
The promoter was so dependent upon Trafford because, per the memo itself, all of the captive’s owners and officers, including by his own admission the promoter himself, had “extremely limited” insurance experience. By contrast, “we believe that Trafford has sufficient experience and expertise to provide this advice”. To reinforce client confidence in this fact, the document identifies by name the three involved principal owners of Trafford—two attorneys and one CPA. Listed first and foremost among those principals is one Jay Adkisson.
Trafford’s role in this scheme was essential from both an operational and marketing perspective. The promoter admittedly had no idea how to run an insurance company, and therefore few sane clients would participate without assurance of Trafford’s (or at least some other experienced manager’s) involvement. Given the importance of Trafford’s role in ensuring operation of the captive in compliance with the offering memorandum, and the explicit mention of Trafford’s principals by name, it is inconceivable that Trafford and Adkisson were unfamiliar with its details.
That being the case, and given Jay’s supposedly hostile views toward group captives, foreign jurisdictions, risk pools, arbitrarily calculated premium amounts, segregation of captive assets under the control of the business owner, etc., why did Trafford consent to a group captive structure? Why did it consent to a foreign jurisdiction? Why did it consent to a “pool for fools”? Why did it permit premium capacity to be sold in $100,000 blocks? Why did it consent to the use of segregated subsidiary LLCs (which place captive assets under the control of each participant client)? Why did it consent to the promoter selling cash value life insurance and other investments and receiving “obscene” commissions for doing so? Why did it align itself with a clearly incompetent and conflicted promoter and agree to pay him commissions? And why did it hide behind an NDA? (Oh wait, the answer to that last question is easy).
I could go on and on asking such questions, but the reader gets the point.
The truth is, as Jay Adkisson well knows, that properly structured arrangements exactly like those described in the offering memorandum—the very type that Jay publicly lambastes with such disdain—can in fact be perfectly legitimate. Not only will those who participate in properly structured arrangements not go to jail, they will probably receive the intended tax benefits, at least if they are willing to resist IRS attempts to misapply the law. The offering memorandum itself makes this clear:
[I]f challenged by the IRS, we believe the Intended Tax Treatment would be sustained. If the IRS were to be successful in any such challenge, we believe it is likely that no penalties would attach as a result of such assertions.
Conclusion—The Smeller is the Feller
As we have shown conclusively above, Jay Adkisson’s private practices stand in direct contradiction to his public prognostications. His hypocrisy is both strategic and abject.
But…why? Why bend over backwards to publicly lambaste the very activities in which one secretly engages?
One of my favorite southern colloquialisms explains why: “The smeller is the feller.” It refers to the all-too-common tendency of humans to distract attention from their own activities by condemning others for the very same. That guy who is so quick to exclaim, “Gross, someone farted!”? Yah, he “doth protest too much”. You can bet he’s the one who actually did.