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Microcaptive owners who alleged they were duped into breaching U.S. tax laws when they formed their captives can’t bring a class action lawsuit against their captive manager but must instead arbitrate their disputes individually with the Arthur J. Gallagher & Co. unit, a federal appeals court ruled Wednesday.
Affirming a lower court ruling in Dimitri Shivkov v. Artex Risk Solutions Inc., the 9th U.S. Circuit Court of Appeals in Seattle held that the arbitration agreements in the contracts were enforceable despite the captive owners’ allegation that the clauses in the “less than 10-page agreements” had not been fully explained to them.
In the original suit filed in December 2018, a group of Arizona-based individuals and their related businesses said they had to pay back taxes, penalties and interest to IRS investigations over their use of so-called 831(b) captives.
The plaintiffs alleged that Artex knew or should have known that the captive insurance strategies it promoted were abusive tax shelters.
In compelling arbitration, the appeals court ruling states that although the captive owners assert the captive manager “breached a fiduciary duty to point out and fully explain an arbitration clause, they identify no state law authority recognizing such a duty.”
In addition, the arbitration agreement in the contracts is enforceable after the termination of the contracts, the court ruled.
An attorney for the captive owners could not immediately be reached for comment.
Microcaptives continue to come under fire from tax authorities as the IRS aggressively audits captive insurers that take advantage of long-standing rules that allow captive owners to reduce their tax bills.