United States v. Timothy Lamotte, Treasurer of N. Tree Serv., Inc.

• Decision Date: 19 April 2016
• Docket Number: Case No. 15-mc-93017-MGM
• Parties: UNITED STATES OF AMERICA, Petitioner, v. TIMOTHY LAMOTTE, Treasurer of Northern Tree Service, Inc., Respondent.
• Court: U.S. District Court — District of Massachusetts

UNITED STATES OF AMERICA, Petitioner, v. TIMOTHY LAMOTTE, Treasurer of Northern Tree Service, Inc., Respondent.

Case No. 15-mc-93017-MGM

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

April 19, 2016

REPORT AND RECOMMENDATION REGARDING PETITION TO ENFORCE INTERNAL REVENUE SERVICE SUMMONSES (Dkt. No. 1)

ROBERTSON, U.S.M.J.

I. Introduction

The United States filed a petition pursuant to 26 U.S.C. § 7604 to judicially enforce two Internal Revenue Service ("IRS") summonses issued to Respondent Timothy LaMotte ("Respondent"), as Treasurer of Northern Tree Service, Inc. ("Northern") (Dkt. No. 1). The petition to enforce was referred to the undersigned for report and recommendation (Dkt. No. 3). For the reasons set forth below, the court recommends that the petition be DISMISSED.

II. Background

The IRS is investigating Northern's tax liability for the 2012 and 2013 tax years, including an examination of Northern's utilization of a captive insurance tax structure. As explained by the IRS:

Tax law allows businesses to create 'captive' insurance companies to enable those businesses to protect against certain risks. The insured claims deductions under the tax code for premiums paid for the insurance policies while the premiums end up with the captive insurance company owned by the same owners of the insured or family members.

The captive insurance company, in turn, can elect under a separate section of the tax code to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net written premiums.

I.R.S. News Release IR-2015-19 (Feb. 3, 2015). While the captive insurance structure can be used legitimately, the IRS has included abuse by "small or 'micro' captive insurance companies" on its annual list of tax scams known as the "Dirty Dozen" for the 2015 filing season. Id. Again, as explained by the IRS:

In an abusive structure, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organizational documents and preparing initial filings to state insurance authorities and the IRS. The promoters assist with creating and "selling" to the entities often times poorly drafted "insurance" binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant "premiums," while maintaining their economical commercial coverage with traditional insurers.

Total amounts of annual premiums often equal the amount of deductions business entities need to reduce income for the year; or, for a wealthy entity, total premiums amount to $1.2 million annually to take full advantage of the Code provision. The promoters mange the entities' captive insurance companies year after year for hefty fees, assisting taxpayers unsophisticated in insurance to continue the charade.

Id.

Respondent is the Treasurer of Northern and a director of the two captive insurance companies, CJA Insurance ("CJA") and PTK Insurance ("PTK"), that provided insurance to Northern in 2012 and 2013. In income tax returns for the 2012 and 2013 tax years, Northern deducted the costs of the premiums it paid to CJA and PTK, while CJA and PTK excluded the premiums from their income. Artex Risk Solutions, Inc., ("Artex") is the exclusive manager ofboth CJA and PTK, serving as their custodian of records and handling all of their day-to-day activities, including underwriting, claims adjustment and processing, and administering all regulatory requirements.

The IRS considers Northern to have been a participant in an "abusive captive insurance program" (Dkt. 1 at p. 2). Simultaneous to its investigation of Northern, the IRS is investigating CJA's and PTK's tax liabilities for the same tax years and is conducting a promoter investigation of Artex under 26 U.S.C. § 6700, which establishes penalties for promoting abusive tax shelters. Defined broadly, promoters of abusive tax shelters are persons who "organize, promote or sell .... '... an illegal method by which to avoid paying taxes.'" United States v. Stover, 650 F.3d 1099, 1107-08 (8th Cir. 2011) (quoting United States v. Benson, 561 F.3d 718, 722 (7th Cir. 2009)).

As part of the IRS's investigation of Northern, IRS Revenue Agent Charles Britten issued two administrative summonses to Respondent as representative for Northern (Dkt. 1-2, 1-3). One is for documents related to Northern's "participation in an abusive captive insurance program" (Dkt. 1 at p. 2). The other is for testimony regarding Northern's tax liabilities for the 2012 and 2013 tax years. Respondent appeared in response to the summons for documents on February 4, 2015, but did not produce any documents at that time. Respondent also appeared in response to the summons for testimony on March 4, 2015. Revenue Agent Britten posed 103 questions to Respondent, all of which related to the captive insurance transactions under review. In response to each question, Respondent invoked his right under the Fifth Amendment not to answer.¹

III. Procedural History

Based on the government's petition and attached exhibits, including copies of the summonses (Dkt. No. 1-2 and 1-3) and a declaration from Revenue Agent Britten (Dkt. No. 1-1), the court found that the United States had established a prima facie case for enforcement (Dkt. No. 4). Specifically, the court found that the government's initial pleadings supported a good-faith presumption in favor of the IRS based on the government's representations that the examination of Northern is being conducted for a legitimate purpose, the information sought is or may be relevant to that purpose, the information is not already within the IRS's possession, and the administrative steps required by the Internal Revenue Code have been followed. United States v. Powell, 379 U.S. 48, 57-58 (1964) (setting forth the four elements of the government's prima facie case); Sugarloaf Funding, LLC v. U.S. Dep't of the Treasury, 584 F.3d 340, 345 (1st Cir. 2009) (noting that the burden on the IRS is "minimal" and that "[a]n affidavit of the investigating agent that the Powell requirements are satisfied is sufficient to make the prima facie case"). Accordingly, the court issued a briefing schedule and ordered Respondent to appear and show cause why he should not be compelled to obey the summonses (Dkt. No. 4). Respondent filed an answer and defenses to the petition (Dkt. No. 11), to which the United States replied (Dkt. No. 12), and, with leave of court (Dkt. No. 14), Respondent sur-replied (Dkt. No. 15). The court held an evidentiary hearing on the show cause order on November 16, 2015.

IV. Discussion

A. The Framework for Enforcement Proceedings

Section 7601 of the Internal Revenue Code (the "Code") gives the IRS "a broad mandate to investigate and audit 'persons who may be liable' for taxes." United States v. Bisceglia, 420 U.S. 141, 145 (1975). To enable it to fulfill its investigative and enforcement responsibilities,Congress has endowed the IRS with "expansive information gathering-authority." United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984). In particular, § 7602 of the Code confers on the IRS broad authority to examine records, to issue administrative summonses, and to take testimony "[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, determining liability of any person for any internal revenue tax ... or collecting any such liability." 26 U.S.C. § 7602(a). When an individual fails to obey an IRS summons, the government may petition a federal district court for an order of enforcement. 26 U.S.C. § 7604. The IRS may not issue a summons or commence an enforcement proceeding "with respect to any person if a Justice Department referral is in effect with respect to such person." 26 U.S.C. § 7602(d)(1).

"[A] proceeding to enforce an IRS summons is an adversary proceeding in which the defendant may contest the summons 'on any appropriate ground....'" United States v. Rylander, 460 U.S. 752, 757 (1983) (quoting Reisman v. Caplin, 375 U.S. 440, 449 (1964)). "The court's role is to ensure that the IRS is using its broad authority in good faith and in compliance with the law." Sugarloaf, 584 F.3d at 345 (quoting United States v. Gertner, 65 F.3d 963, 966 (1st Cir. 1995)). Once the IRS makes its prima facie showing that it is acting in good faith, as set forth above, "the burden shifts to the taxpayer to disprove one or more of the Powell requirements, or to show that enforcement would be 'an abuse of process ....'" Id. at 346 (quoting Sterling Trading, LLC v. United States, 553 F. Supp. 2d 1152, 1155-56 (C.D. Cal. 2008)). "If the taxpayer satisfies this burden .... the district judge weighs the facts, draws inferences, and decides the issue." Gertner, 65 F.3d at 967. To do this, a court may, but is not required to, hold an evidentiary hearing. Id.

B. The Document Summons

At the time the government filed its petition, the government maintained that it was not in possession of all of the records sought by the IRS document summons because Respondent had not produced all responsive documents, including, in particular, email communications between Northern and other parties "regarding the abusive captive insurance program." (Dkt. 1 at ¶¶ 10-11, 13; Dkt. 1-1 at ¶¶10-11). On this basis, the court found that the government had satisfied the non-possession element of Powell's prima facie case.

In response, Respondent maintained that he had produced (or caused to be produced) all required documents. In a declaration accompanying his answer and defenses, Respondent averred that he had conducted an "exhaustive search" and did not possess any responsive email communications (Dkt. No. 11-1 at ¶ 10). Accounting for the absence of responsive emails, Respondent described an historical routine practice of moving all email communications (of which he received hundreds on a daily or weekly basis) to his "d...