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Erroneous Application of Facts: Capstone Releases Reserve Commentary

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January 09, 2019

Capstone Associated Services Ltd. recently released its fourth commentary, "The Tax Court's Erroneous Application of Avrahami to Reserve," surrounding the small insurance company Tax Court case Reserve Mech. Corp. v. Commissioner, 2018 Tax Ct. Memo LEXIS 87 (T.C. June 18, 2018).

The Houston-based captive service provider previously released three commentaries on the matter. The first, provided on June 27, 2018, focuses on insurable risksthe second commentary, provided on July 9, 2018, focuses on policy pricing; and the third commentary, released on December 19, 2018, examines the issues involving insurance policy selection and related issues raised in the case. In these pieces, Capstone raises questions about the Tax Court's decision and asserts that the court made a number of incorrect conclusions surrounding coverages, losses, pricing, and insurance policy selection.

In its fourth commentary, released on January 4, 2019, Capstone addresses the issues involving what Capstone says was the court's erroneous application of the facts to the law and the misapplication of Avrahami v. Comm'r and Feedback Ins. Co., Ltd. v. Comm'r, 149 T.C. 7 (2017), as authority for the court's findings in Reserve. Capstone's fourth commentary provides a detailed comparison/contrast of the issues considered in both cases, including the following observation.          

Despite the significantly different facts and jurisdictional posture of Reserve relative to Avrahami …, the Court erred in remaking the facts of Reserve to fit into the legal findings of Avrahami, while demonstrating a lack of understanding of how insurance works in the business community. In doing so, the Court cast aside long-standing statutory provisions designed to encourage the formation of captive insurers by small and mid-size businesses.

Throughout this commentary series, themed together as "Does Captive Insurance Exist after the Reserve Decision?," Capstone thoroughly constructs its own position refuting the court's decision.

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