Opinion
25669-16 25670-16 25671-16 25672-16 22292-17 22293-17 22294-17 22295-17 19183-18 19184-18 19185-18 19186-18 19535-19 19536-19 21965-19 21966-19 13152-20 13153-20 13154-20 13155-20 31590-21 31591-21 31593-21 25718-22 25720-22.
10-31-2024
SKYLAB SERIES OF FORTRESS INSURANCE, LLC, ET AL., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch Judge
These consolidated cases are currently set for trial at the special session of the Court scheduled to commence on February 10, 2025, in Phoenix, Arizona. Pending before us is the Commissioner's Motion to Enforce Subpoena to nonparty Artex Risk Solutions, Inc. (Artex). We will grant in part the Commissioner's Motion to Enforce Subpoena as modified by the Commissioner's Status Report filed October 25, 2024.
Background
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding the motions and not as findings of fact in these cases. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
At issue in these consolidated cases is a micro-captive insurance arrangement among petitioners. Petitioners Javier and Fernando Scalini owned 6S, Inc. (6S), an S corporation, during taxable years 2012 through 2018. 6S indirectly or directly owned or controlled petitioners Skylab Series, Inc. (Skylab) and Maverick Series, Inc. (Maverick), captive insurance companies, during those years. Artex was the purported organizer of the of the micro-captive arrangement and the captive manager of Skylab and Maverick.
Skylab Series, Inc. was formerly known as Skylab Series of Fortress Insurance, LLC and Maverick Series, Inc. was formerly known as Maverick Series of Fortress Insurance, LLC.
The Commissioner filed a motion requesting a remote hearing to set a return date for a subpoena that sought to issue to Artex. We granted the Commissioner's motion and scheduled a remote hearing for September 18, 2024. The Commissioner issued subpoena duces tecum to Artex returnable on that date. The subpoena contained 51 requests seeking documents over eight tax years relating to petitioners' and other nonparties' participation in the captive insurance arrangement organized by Artex.
These cases were called at the remote document subpoena hearing. The parties and counsel representing Artex appeared. Counsel for Artex stated that Artex would need three weeks to complete its production and that it intended to do a rolling production.
On September 27, 2024, the Commissioner filed a Motion to Enforce Subpoena. Artex intervened to oppose the Commissioner's Motion. Artex requested the Court deny the Commissioner's Motion stating the subpoena was overbroad and that there was an undue burden in light of Artex's understanding that the parties were "near settlement" or that there was an "imminent settlement." We held a hearing on the Commissioner's Motion. Artex filed a statement under Rule 50(c), arguing that the subpoena was overbroad, the documents requested were unrelated to parties in this case, and that the information requested contained confidential information.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
The Court held a hearing on October 16, 2024, giving the parties and Artex the opportunity to address the pending Motion. The parties stated that settlement does not seem imminent and that the documents requested are relevant for the upcoming trial. Artex reiterated the burdensome nature of the subpoena, specifically requests 40 and 41 which sought production of all insurance claims files of two insurance risk pools for taxable years 2011 through 2018. The Commissioner stated the insurance claim files are necessary to determine whether Skylab and Maverick were insurance companies. We requested that the Commissioner and Artex meet to discuss narrowing the subpoena requests and to provide the Court with a status report.
On October 25, 2024, the Commissioner filed a status report. The Commissioner and Artex came to an agreement regarding requests 1 through 39 and 42 through 51, with modifications detailed in paragraphs 8 and 9 of the October 25, 2024, status report. The Commissioner narrowed requests 40 and 41 from all insurance claim files for years 2011 through 2018 to 114 specific claim files listed in Exhibit B of the October 25, 2024 status report. The Commissioner requested the Court to compel the production of documents on a rolling basis starting November 6, 2024, with final production by November 15, 2024.
The Commissioner and Artex agreed to strike requests 30, 31, 38, 39, 42, 43 and 49 and to modify requests 7, 24, 25, 27, 28, 32, and 33.
Discussion
Per Rule 147, the Commissioner seeks an order enforcing the subpoena served on Artex on August 19, 2024. Rule 147 states that a party may use a subpoena to direct a third party to "produce the books, papers, documents, electronically stored information, or tangible things designated therein." Rule 147(b). Individuals served with such a subpoena must comply with its commands. Est. of Nail v. Commissioner, 59 T.C. 187, 189 (1972) (citing Blair v. Oesterlein Co., 275 U.S. 220 (1927)).
But there are limits on what can be sought by subpoena. Rule 147(d)(1) instructs, "A party or attorney responsible for issuing and serving a subpoena must take reasonable steps to avoid imposing undue burden or expense on a person subject to the subpoena." And the same Rule authorizes the Court to enforce this duty. For this purpose, the limits on discovery, generally are instructive.
Under Rule 70, we may limit discovery if the information requested is irrelevant, not reasonably calculated to lead to admissible evidence, or unreasonably cumulative or duplicative. Rule 70(b), (c). Additionally, we may limit discovery if obtaining the information would be unduly burdensome or expensive, considering the importance of the issue, amount in controversy, and resources of the parties. Rule 70(c). The Court may, upon motion, quash or modify a subpoena if it imposes an "undue burden," meaning a burden that outweighs the value of the subpoenaed information to the serving party. See Amazon.com, Inc. v. Commissioner, T.C. Memo. 2014-245, at *8-9; Rule 147(b). This power is left up to the discretion of the Court. Amazon.com, Inc., T.C. Memo. 2014-245, at *8; Grandbouche v. Commissioner, 99 T.C. 604, 617 (1992).
To determine whether a subpoena imposes an undue burden, the Court undertakes a balancing test, weighing the value of the information to the requesting party against the burden imposed on the responding party. See Durkin v. Commissioner, 87 T.C. 1329, 1401-03 (1986), aff'd 872 F.2d 1271 (7th Cir. 1989); Amazon.com, Inc. v. Commissioner, T.C. Memo. 2014-245, at *8-9. This balancing test considers the relevance of the information sought, the need for that information, the breadth of the request, the time period covered by the subpoena, the particularity of the request, and the burden imposed. Amazon.com, Inc. , T.C. Memo. 2014-245, at *8; Durkin v. Commissioner, 87 T.C. at 1401-03.
In relation to a subpoena, evidence is relevant when it is likely to be useful in the case. Bane v. Commissioner, T.C. Memo. 1971-31. The information requested by Commissioner goes to the question of whether Skylab and Maverick were insurance companies for purposes of section 831(b). The insurance claims accepted or denied by the insurance risk pools that the petitioners participated in is relevant to determine if petitioners were insurance companies. Further, the breadth, scope, and time period of requests 40 and 41 has been narrowed to 114 specific claim files identified in Exhibit B of the October 25, 2024, status report. The burden on Artex to produce these case files, therefore, does not outweigh the Commissioner's need for the information.
As for the time period to comply with the subpoena, the Commissioner requests production to be completed by November 15, 2024. We will, however, allow Artex additional time by ordering document production to be complete by November 27, 2024.
To reflect the foregoing, it is
ORDERED that the Commissioner's Motion to Enforce Subpoena filed September 27, 2024 is granted as modified by paragraphs 8 and 9 of the Commissioner's status report filed October 25, 2024. It is further
ORDERED that Artex Risk Solutions, LLC shall respond to the subpoena and complete production by November 27, 2024.