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United States v. Lamotte

United States District Court, D. Massachusetts

April 19, 2016

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

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

          KATHERINE A. ROBERTSON, Magistrate Judge.

         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 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 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, ...


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