Opinion
3823-19 4421-19
01-12-2023
ROYALTY MANAGEMENT INSURANCE COMPANY, LTD., ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber, Judge
These consolidated cases involving petitioners' 2012 tax year are calendared for trial at a two-week special session in Oklahoma City, Oklahoma, beginning February 14, 2023. Petitioner in No. 3823-19 is Royalty Management Insurance Co., Ltd. (RMI), a "micro-captive" insurance company, and petitioners in No. 4421-19 are John and Andrea Sheperd. These cases involve purported insurance premiums paid by Mr. Sheperd's business, Sheperd Royalty, LLC (Sheperd Royalty), to CCFC Insurance Company, Ltd. (CCFCIC), and then paid in large part to RMI, Mr. Sheperd's captive insurance company.
In May 2015, during the examination conducted by the Internal Revenue Service (IRS or respondent), petitioners produced a copy of what they represented to be the operative insurance policy (Master Policy) between Sheperd Royalty and CCFCIC. By Order served August 24, 2022, we granted respondent's motion for a document subpoena hearing. On September 21, 2022, the IRS served subpoenas on Creditor's Captive Formation Corporation (CCFC), CCFCIC, and Cary Cope, the alleged promotor of the insurance arrangement, requesting copies of communications between and among those parties. See Rule 147. The subpoenas requested (among other things) the metadata and native files of any responsive documents.
Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure.
On October 4, 2022, Mr. Cope testified in a deposition under the penalties of perjury. During his deposition he produced six paper copies of policies that he alleged were the true Master Policies between Sheperd Royalty and CCFCIC. Respondent represents that Mr. Cope testified that he had "only recently discovered" the six new insurance policies in a computer folder in response to the IRS subpoena, which prompted him to review CCFC's electronic records to see what remained after an alleged ransomware attack. According to respondent, Mr. Cope testified that the computer file containing these six documents was mislabeled and that he "just hit print and printed it out." He further testified that the original Master Policy, produced by petitioners six years earlier in May 2015, was likely the result of an error made by Robert Ferguson, a former employee of CCFC. Neither CCFC, CCFCIC, nor Mr. Cope produced any native files or metadata in conjunction with the six paper documents produced during Mr. Cope's deposition.
On November 14, 2022, respondent issued formal discovery. In his second request for production of documents, respondent asked petitioners to produce the metadata and native files associated with the six new insurance documents and any other draft insurance policies related to the purported insurance arrangement. On December 15, 2022, petitioners responded by asserting that neither the metadata nor the native files were in their possession or control but rather in the possession of CCFC and/or CCFCIC. Despite the formal discovery request to petitioners and the subpoenas issued to CCFC, CCFCIC, and Mr. Cope on September 21, 2022, no metadata or native files related to these six documents have been produced.
On December 30, 2022, respondent filed in each case a Motion to Enforce Subpoenas and a Motion to Compel Production of Documents. In these Motions, which substantially overlap, respondent seeks essentially the same thing-the requested metadata and native files related to the six purported insurance policies produced during the October 4, 2022, deposition of Mr. Cope. Respondent represents that the metadata and native files could verify the date on which the purported insurance policies were created, which would be relevant in ascertaining their authenticity. We will grant the Motions.
I. Motion to Enforce Subpoenas
Pursuant to Rule 147 respondent seeks an Order enforcing the subpoenas duly issued to CCFC, CCFCIC, and Mr. Cope on September 28, 2022. Under Rule 147, a litigant may use a subpoena to direct a third party to give testimony at trial and to "command the person to whom it is directed to produce the books, papers, documents electronically stored information, or tangible things designated therein . . . ." Rule 147(a), (b). Individuals served with such a subpoena must comply with its commands. Estate of Nail v. Commissioner, 59 T.C. 187, 189-90 (1972) (citing Blair v. Oesterlein Co., 275 U.S. 220 (1927)). However, upon motion, the Court may quash or modify the 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, 108 T.C.M. (CCH) 588, 590; Rule 147(b).
None of the subpoenaed third parties have filed a motion to quash or modify respondent's subpoenas. Rather, Mr. Cope produced six new documents that he represents to be the true Master Policies between Sheperd Royalty and CCFCIC, but without providing the requested metadata and native files for those documents. The metadata and native files are relevant because they may assist respondent in ascertaining when those documents were created and/or modified. During his October 2022 deposition, Mr. Cope testified that he found these six new policies in a folder on his computer and was able to print them out. This suggests that the metadata and native files for these documents exist and can reasonably be produced.
II. Motion to Compel Production of Documents
Pursuant to Rules 72(b) and 104(b), respondent's Motion to Compel seeks directly from petitioners the metadata and native files discussed above, as well as any other purported insurance policies between Sheperd Royalty and CCFCIC. In their response to formal discovery, petitioners contended that they cannot produce any metadata or native files because that material is not in their custody, possession, or control, but solely in the possession of CCFC and/or CCFCIC. We find this contention meritless.
Rule 72(a)(1) requires a person to produce items that "are in the possession, custody, or control of the party on whom the request is served." Rule 72(a)(1); see Marsh v. Commissioner, 62 T.C. 256, 258 (1984). By its terms, this rule is not limited to actual possession. We have previously required parties to obtain information from advisors or entities that have actual possession when the party has sufficient control to be able to obtain the documents. See Rosenfeld v. Commissioner, 82 T.C. 105, 116- 18 (1984); see also Coventry Capital U.S. LLC v. EEA Life Settlement, Inc., 334 F.R.D. 68,72-73 (S.D.N.Y. 2020) (finding a party to have sufficient control over requested documents when it has demonstrated the ability to obtain them in the ordinary course of business).
Accepting petitioners' contention that the metadata and native files are not currently in their physical possession, we believe that petitioners have the ability to secure this material from CCFC and/or CCFCIC. Petitioners have already produced thousands of pages CCFC and CCFCIC documents to respondent. In any event, if the six new documents are authentic insurance policies issued by CCFCIC to Sheperd Royalty, Sheperd Royalty is entitled to this information. See In re Bankers Trust Co., 61 F.3d 465, 469 (6th Cir. 1995) (stating that documents are within a party's "possession, custody, or control" if the party has actual possession or control "or has the legal right to obtain the documents on demand").
Upon due consideration, it is
ORDERED that respondent's Motion to Compel Production of Documents, filed December 30, 2022, is granted in that petitioners shall produce to respondent's counsel, on or before January 30, 2023, for inspection and copying, the metadata and native files discussed in this Order as well as any other purported insurance policies between Sheperd Royalty and CCFCIC. It is further
ORDERED that respondent's Motion to Enforce Subpoenas to CCFC and CCFCIC, filed December 30, 2022, is granted in that the subpoenaed parties shall produce to respondent's counsel, on or before January 30, 2023, the metadata and native files discussed in this Order. It is further
ORDERED that, in addition to regular service, the Court shall serve a copy of this Order on Cary Cope, CCFC, and CCFCIC as follows:
Cary Cope, Creditor's Captive Formation Corp.
32996 Mockingbird Lane
Afton, Oklahoma 74331
Cary Cope, Creditor's Captive Formation Corp. Insurance Company
32996 Mockingbird Lane
Afton, Oklahoma 74331