Opinion
2210-20
08-16-2023
DARIUSZ J. NASIEK & SARA NASIEK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler, Judge.
Respondent has issued third-party subpoenas duces tecum to RSC Topco Inc., The Taft Companies LLC, Hackensack Surgery Center LLC, Lance Wallach and/or National Offices of Lance Wallach, Mark Murphy and/or Northeast Private Client Group LLC, The Guardian Life Insurance Company of America, Marc Radin and/or Marc M. Radin P.C., Sam Susser and/or Susser & Associates CPA Inc., Vincent D'Addona and/or Strategies for Wealth, Michael Ricca and/or Morgan Stanley, Celentano, Stadtmauer & Walentowicz LLP, Connell Foley LLP, and HDH Advisors LLC.
On January 31, 2023, RSC Topco Inc. filed a Motion to Quash or Modify Subpoena of Non-Party RSC Topco Inc., moving pursuant to Rule 147(b) that the Court enter an Order quashing respondent's subpoena duces tecum on the grounds that it is "unreasonable and oppressive." On March 3, 2023, respondent filed his Response to Motion to Quash or Modify Subpoena of Non-Party RSC Topco Inc. Lastly, On March 20, 2023, RSC Topco Inc. filed its Reply to Response to Motion to Quash or Modify Subpoena of Non-Party RSC Topco Inc.
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. Rule 147 was amended on March 20, 2023. Since the subpoenas duces tecum at issue here were issued prior to the effective date of the amendment, all references to Rule 147 are to the pre-2023 amended version.
On July 12, 2023, the Court held a third remote subpoena hearing for the return of third-party subpoenas duces tecum issued by respondent in this case. According to respondent, all but the subpoena duces tecum issued to RSC Topco Inc. are deemed complied with. During the July 12, 2023, remote subpoena hearing, RSC Topco Inc. appeared through counsel. For the reasons explained below, we will grant in part and deny in part RSC Topco Inc.'s Motion to Quash or Modify Subpoena of Non-Party RSC Topco Inc.
Background
The following facts are drawn from the parties' pleadings, motion papers, and exhibits attached thereto. These facts are stated solely for the purpose of deciding the pending motion before us and not as findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
This is a microcaptive insurance case in which respondent disallowed petitioner's claimed deductions for insurance premiums paid to a captive insurance company for tax years 2015, 2016, and 2017. As already mentioned, this Court has held two remote subpoena hearings-one on February 1, 2023, and another on April 5, 2023-for the return of the third-party subpoenas duces tecum issued by respondent.
On June 5, 2023, RSC Topco Inc. filed its First Supplement to Motion to Quash or Modify Subpoena of Non-Party RSC Topco Inc. In RSC Topco Inc.'s supplemental motion, it highlights respondent's "unwillingness to accept any modifications to the [s]ubpoena as suggested by RSC [Topco Inc.]" and that "no compromise has been reached . . . regarding a mutual modification of the [s]ubpoena." On June 14, 2023, RSC Topco Inc. filed its Second Supplement to Motion to Quash or Modify Subpoena of Non-Party RSC Topco Inc., to include and incorporate Exhibit F into the previously filed supplemental motion as it was inadvertently not included with the prior filing. On June 30, 2023, respondent filed his Response to First Supplement to Motion to Quash or Modify Subpoena. On July 12, 2023, the parties and RSC Topco Inc. attended a special remote hearing of the Court regarding the return of third-party subpoenas duces tecum. During the remote subpoena hearing, respondent and RSC Topco Inc. expressed interest in the Court ruling on RSC Topco Inc.'s Motion to Quash or Modify Subpoena of Non-Party RSC Topco Inc so that the parties may begin working toward an agreed to sampling method.
Discussion
I. Motion to Quash or Modify Subpoena
A. General Standards
In the Tax Court, a party generally may move to quash (1) a subpoena duces tecum pursuant to Rule 147(b), see Stern v. Commissioner, 74 T.C. 1075, 1084 (1980); or (2) a subpoena ad testificandum pursuant to Fed.R.Civ.P. 45(b) (or through a motion for protective order under Rule 103(a)), see also Amazon.com, Inc. & Subs. v. Commissioner, T.C. Memo. 2014-245, at *7 n.3; Rule 1(b). Rule 147(b) provides that this Court may grant a motion to quash a subpoena that is "unreasonable and oppressive," while Fed.R.Civ.P. 45(d)(3)(A)(iv) speaks in terms of quashing a subpoena that "subjects a person to undue burden." The decision whether to grant a motion to quash is at our discretion, with the moving party bearing the burden of persuasion. See Amazon.com, T.C. Memo. 2014-245, at *8.
Despite the linguistic differences between the governing rules, this "Court has applied essentially the same balancing test when deciding whether to quash or modify" either type of subpoena. See Amazon.com, T.C. Memo. 2014-245, at *8. Generally, this test focuses on the "reasonableness of the subpoena," see Wright & Miller, supra, § 2463.1, which requires the court to "balance the burden upon the subpoenaed party against the value of the information to the serving party," Amazon.com, T.C. Memo. 2014-245, at *8. We have previously considered factors including "the relevance of the information sought, the serving party's 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." Id. "The status of the subpoena recipient as a non-party is also a factor that can weigh against disclosure in the undue burden inquiry." Jordan v. Comm'r, Miss. Dep't of Corr., 947 F.3d 1322, 1337 (11th Cir. 2020) (citing Wiwa v. Royal Dutch Petroleum Co., 392 F.3d 812, 818 (5th Cir. 2004)); see also Va. Dep't of Corrections v. Jordan, 921 F.3d 180, 189 (4th Cir. 2019) ("Bystanders should not be drawn into the parties' dispute without some good reason, even if they have information that falls within the scope of party discovery."); In re: Modern Plastics Corp., 890 F.3d 244, 251 (6th Cir. 2018). A non-party that has substantial interest or involvement in the outcome of the litigation is an interested non-party. See Behrend v. Comcast Corp., 248 F.R.D. 84, 87 (D. Mass. 2008); see also In re Exxon Valdez, 142 F.R.D. 380, 383 (D. D.C. 1992).
Rule 147(b) was modeled on the pre-1991 version of Fed.R.Civ.P. 45(b), see Amazon.com, T.C. Memo. 2014-245, at *7 n.3, and we "look for guidance" from cases interpreting it, see Stern, 74 T.C. at 1084); see also Grandbouche v. Commissioner, 99 T.C. 604, 615 (1992). Although Fed.R.Civ.P. 45(b) received a facelift in 1991, "[t]his modification was purely semantic and not intended to change existing law" and we accordingly are not restricted to pre-1991 caselaw. See Amazon.com, T.C. Memo. 2014-45, at *7 n.4; see also 9A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2463.1 (3d ed. 2008). We likewise consider cases decided under Rule 147(b) when determining whether to quash a subpoena ad testificandum. See Amazon.com, T.C. Memo. 2014-45, at *7 n.4.
This Court has previously quashed subpoenas that would have resulted in "great inconvenience for many persons for little or no gain," declining attempts to use subpoenas as "an all-encompassing net in the search for information with which to build a case." Hunt v. Commissioner, T.C. Memo. 1990-248, 1990 WL 66551, at *27; see Durkin v. Commissioner, 87 T.C. 1329, 1403 (1986) ("The processes of this Court are simply not designed to be used to conduct a thorough investigation of a complex tax case."), aff'd, 872 F.2d 1271 (7th Cir. 1989). Thus, when "the Commissioner merely sought to have the persons subpoenaed produce all of its books and records so that the attorney for the Commissioner could examine them to find out whether they contained any helpful records, and when such person was not a party to the case but was only indirectly involved in some of the transactions, the Court refused to support the subpoena on the ground that the request was too burdensome when weighed against its probative value." Durkin, 87 T.C. at 1402 (explaining a decision at an earlier point in the case to quash third-party subpoenas).
With these principles in mind, we now turn to the balancing test considered in Amazon.com, T.C. Memo. 2014-245, at *8, to determine whether it is appropriate to quash or modify the subpoena duces tecum issued to RSC Topco Inc.
B. The Balancing Test
1. Party vs. Non-Party
At the outset, respondent contends that RSC Topco Inc. is an interested non-party to the current litigation. Respondent avers that RSC Topco Inc. likely has a financial or reputational interest since the outcome would either benefit or harm RSC Topco Inc.'s business. We tend to agree with respondent that even if RSC Topco Inc. lacked a financial or reputational stake, RSC Topco Inc. would still not be a classic disinterested non-party because it designed, promoted, and then operated petitioners' microcaptive arrangement. Respondent contends that RSC Topco Inc.'s involvement in the transactions at issue gave rise to this litigation in the first place. See Behrend, 248 F.R.D. at 87 (holding that non-party should have anticipated litigation or discovery because of its involvement in the underlying transaction) (citing Tutor-Saliba Corp. v. United States, 32 Fed.Cl. 609, 610 n. 5 (1995); In re First Am. Corp., 184 F.R.D. 234, 242 (S.D.N.Y. 1998)). Accordingly, this factor favors respondent.
2. Relevance of the Information Sought
The relevance of the information the Commissioner seeks does not appear to be disputed by RSC Topco Inc. However, RSC Topco Inc. does contend that the documentation sought (or portions thereof) is already in respondent's possession. Specifically, RSC Topco Inc. maintains that the requested information was previously provided in 2016, when its subsidiary, Oxford Insurance Company, produced 1.4 million pages of documents during respondent's investigation of the Oxford Insurance Company LLC. RSC Topco Inc. supports this assertion with a certified declaration of Charles Ruchelman, counsel for Oxford Insurance Company LLC. Additionally, RSC Topco Inc. argues that the documentation requested by respondent (or portions thereof) is duplicative of the documentation requested and provided in the I.R.C. § 6700 Investigation and the Puglisi cases, Dkt. Nos. 4796-20, et al. RSC Topco Inc. also notes that some of the requests extend beyond the years at issue.
RSC Topco Inc. contends that in April 2016, respondent began an investigation of Oxford Insurance Company LLC under I.R.C. §§ 6694, 6695, 66700, and 6701. RSC Topco Inc. further contends that throughout the I.R.C. § 6700 Investigation, respondent issued requests to Oxford Insurance Company LLC and its managing directors which resulted in the production of over 1.4 million documents, collectively containing over 9.4 million pages.
RSC Topco Inc. posits that if the Court were to enforce the subpoena duces tecum, respondent's requests should be limited to the information that is not arguably (already) in his possession. Additionally, respondent has provided an appendix in which he describes the relevance of each request contained in the subpoena. Considering RSC Topco Inc.'s contentions, we find that it has failed to show to our satisfaction that the requested information is irrelevant; therefore, this factor favors respondent.
3. The Serving Party's Need for the Information
Respondent contends that his requests are necessary because they seek information to establish whether the Oxford Insurers' pools were bona fide insurance companies and if so, whether risk was distributed. While respondent recognizes that the requests sought are comprehensive, and some even deeply comprehensive; he maintains that the requested information is vital because, in other microcaptive cases, documents "appeared [responsive] on the surface, [but] did not survive close scrutiny." Consequently, we find that this factor favors respondent.
4. The Breadth and Particularity of the Requests
RSC Topco Inc. contends that the breadth and particularity of the subpoena requests are overly broad and that many of respondent's requests seek "all documents," "all drafts," and "all agreements" that "show, mention, or discuss" the various items or subject matters being requested. Further, various requests contain the same type of description for those documents that "directly or indirectly" relate to various subject matters. Moreover, RSC Topco Inc. argues that it does not have the capacity to review all information in its possession, including information related to the thousands of captive insurance companies that it has formed or have been in existence since 2012, to determine whether such information relates "indirectly" to the items being requested by respondent. We are not persuaded by RSC Topco Inc.'s argument that the breadth and particularity of the subpoena requests are overly broad. RSC Topco Inc. seems to contradict itself given that it admits that it produced millions of documents in a prior case and it appears that RSC Topco Inc. has reviewed those prior productions to some degree, especially since it made the statement, through a signed declaration by its counsel, Mr. Ruchelman, that producing the requested documents would essentially be duplicative. Therefore, this factor tends to favor respondent.
5. The Time Period Covered by the Subpoena
RSC Topco Inc. argues that the time period covered by the subpoena is unreasonable. RSC Topco Inc. states that despite the limited years at issue, respondent's requests seek information from January 1, 2012, through December 31, 2018, and that the reason for such expansive requests is to harass and unduly burden RSC Topco Inc. With respect to the time period RSC Topco Inc. must search, respondent contends that "RSC [Topco Inc.]'s knowledge of its own operations operates as an implicit limit" on all of respondent's requests. If RSC Topco Inc. has cause to believe that no responsive documents could possibly exist before a certain date, e.g., because a first draft was not created until after that date, respondent states that he is not aware of any authority that compels RSC Topco Inc. to still search the preceding time period.
Respondent makes a less than compelling argument for each document request covered in the subpoena that ranges from 2012 to 2018. Respondent details specific reasoning employed as to why the years in the subpoena are both relevant and necessary. While the Court recognizes that the years preceding the tax periods at issue are relevant with respect to the changes to the composition of the pools, we do not think that requests dating back as early as 2012 are an appropriate starting point. Further, in his Response to Motion to Quash or Modify Subpoena of Non-Party RSC Topco Inc., respondent notes several of our cases where the extent of the time period was limited to one preceding year to the tax period at issue. Accordingly, we find that this factor is neutral or tends to favor RSC Topco Inc.
6. The Burden Imposed
RSC Topco Inc. contends that the burden and cost of complying with the subpoena would be enormous. RSC Topco Inc. estimates that it would cost between $990,000 and $1,485,000 to review and redact client documents for confidentiality as well as privilege. If the subpoena is enforced, RSC Topco Inc. asks that respondent bear some of the cost of compliance. Respondent did not address RSC Topco Inc.'s cost estimate since it was only provided in their reply. If RSC Topco Inc. has, as it alleges, previously produced documents that "substantially overlap" the requests, the cost of exporting those documents from an e-discovery database for a second time is de minimis, according to respondent. RSC Topco Inc. counters by arguing that even if substantial documentation was previously produced, it would still be overly burdensome on RSC Topco Inc. to review those documents to determine which ones are specifically responsive to the requests in the subpoena and then to review those documents for confidentiality and appropriate redactions. As noted above, RSC Topco Inc. appears to contradict itself. RSC Topco Inc. provided a signed declaration that there is "significant overlap between taxpayers' responses to the IDRs and the summons in the Examinations and the information requested in third-party subpoena[s] issued to RSC [Topco Inc.] in this case."] However, the total amount at issue (deficiencies and penalties) in this case is approximately $1,561,298. Assuming that RSC Topco Inc.'s cost of complying with the subpoena is as much as it claims, it does appear to the Court that it would be overly burdensome for RSC Topco Inc. to bear a cost that almost exceeds the amount at issue in this case. Accordingly, this factor appears to favor RSC Topco Inc.
After carefully considering the six factors above, the Court finds respondent's need for some of the requested information to outweigh the burden imposed against RSC Topco Inc. We also conclude that the factors favor RSC Topco Inc. in part and believe that parts of respondent's subpoena duces tecum are unreasonable or oppressive. Therefore, we will limit the temporal reach of the subpoenas to 2014, 2018, and the taxable years at issue.
Consequently, the Court deems it appropriate to modify respondent's subpoena duces tecum issued to RSC Topco Inc. We direct the parties' attention to Part III, wherein we address each subpoena request individually.
II. Protective Order
On June 7, 2023, the Court held a conference call with the parties and RSC Topco Inc. to discuss the progression of this case. RSC Topco Inc. represented that fully complying with respondent's subpoena duces tecum would not only raise issues of privilege but also impose a costly burden because the documents respondent requests will have to be reviewed for confidentiality. Respondent maintains his opposition, reasoning that confidentiality is not grounds for a protective order. Petitioner's counsel seemed indifferent to the discussion with respect to obtaining a protective order.
RSC Topco Inc. represented concern with respect to confidentiality and the need for costly review and redaction. However, as respondent notes in his Response to First Supplement to Motion to Quash or Modify Subpoena, RSC Topco Inc.'s arguments regarding a review for confidentiality would become mooted if the parties engaged in a protective order pursuant to Rule 103. The Court has broad and discretionary power to control and seal, if necessary, records and files in its possession, and the party seeking relief demonstrates good cause. See Willie Nelson Music Co. v. Commissioner, 85 T.C. 914, 918, 920 (1985). To determine whether the sealing of any documents is appropriate, "we must weigh the presumption, however gauged, in favor of public access to judicial records against the interests advanced by the parties." Anonymous v. Commissioner, 127 T.C. 89, 91 (2006); Willie Nelson Music Co., 85 T.C. at 919. The party seeking to seal the case must produce "appropriate testimony and factual data" to support claims of harm that would occur as a consequence of disclosure, Estate of Yaeger v. Commissioner, 92 T.C. 180, 189 (1989), and may not rely on conclusory or unsupported statements to establish good cause. Willie Nelson Music Co., 85 T.C. at 920.
We will permit RSC Topco Inc. and the parties to confer and propose such a protective order within 30 days.
III. Specific Requests
We are prepared to rule on the merits of respondent's subpoena and RSC Topco Inc.'s objections. Below is a spreadsheet of respondent's numbered requests, RSC Topco Inc.'s response and objection (if any), and our ruling:
IV. Conclusion
Pursuant to the discussions at the remote subpoena hearing, we will permit non-party RSC Topco Inc. and respondent to confer and propose such a protective order within 30 days.
As also discussed at the remote subpoena hearing, the Court is inclined to review a sample from the insureds within the same risk pool as Oxford Insurance Company LLC. A sample would alleviate the burden of producing all other insured's files by RSC Topco Inc. Respondent expressed concern with RSC Topco Inc. choosing the sample. We share respondent's concern. Therefore, the Court advises the parties to confer and propose a sampling method that is agreed upon together with RSC Topco Inc. As noted above, a protective order will remedy the confidentiality concerns RSC Topco Inc. represents with respect to the other insureds.
Considering the foregoing, it is
ORDERED that RSC Topco Inc.'s Motion to Quash or Modify Subpoena of Non-Party RSC Topco Inc., filed January 31, 2023, is granted in part, and denied in part, as detailed herein above. It is further
ORDERED that on or before September 12, 2023, RSC Topco Inc. may file a motion for a protective order regarding the documents under subpoena, and that respondent shall file a response thereto on or before September 26, 2023. It is further
ORDERED that on or before October 10, 2023, the parties and RSC Topco Inc. shall file a joint status report (or separate reports, if preferred) that includes a mutually agreed to sample as described above.