United States District Court, D. Massachusetts
REPORT AND RECOMMENDATION REGARDING PETITION TO
ENFORCE INTERNAL REVENUE SERVICE SUMMONSES (Dkt. No.
KATHERINE A. ROBERTSON, Magistrate Judge.
United States filed a petition pursuant to 26 U.S.C. Â§ 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
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
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
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 of both 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
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. Â§ 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)).
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, ...