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United States v. Micro Cap KY Insurance Co., Inc.

United States District Court, E.D. Kentucky, Lexington

March 27, 2017

UNITED STATES OF AMERICA, Petitioner,
v.
MICRO CAP KY INSURANCE COMPANY, INC., Respondent. UNITED STATES OF AMERICA, Petitioner,
v.
CAVALLO NERO INSURANCE, INC., Respondent.

          MEMORANDUM OPINION & ORDER

          Joseph M. Hood Senior U.S. District Judge.

         I. Introduction

         This matter is before the Court upon the Recommended Disposition of United States Magistrate Judge Robert E. Wier [DE 26].[1] Petitioner having filed an Objection [DE 27] to the Recommended Disposition, and Respondents having failed to submit a Response within the allotted time period, this matter is now ripe for the Court's review. For the reasons stated herein, Judge Wier's Recommended Disposition is hereby ADOPTED IN FULL and the United States' Objection is hereby OVERRULED.

         II. Factual and Procedural Background

         Dr. Michael J. Crowe and Dr. Artis P. Truett are co-owners of Owensboro Dermatology Associates, PSC and Dermatology Property Management, LLC (collectively, “the Dermatology businesses”). [DE 10-1 at 3-4]. In 2008, Drs. Crowe and Truett established Beveled Edge Insurance Company “as a captive insurance company providing direct property and casualty insurance policies to [the Dermatology businesses] to cover risks of the business supplemental to those covered by their commercial policies.”[2][Id.]. They jointly operated Beveled Edge for three years, then decided to dissolve it and establish their own captive insurance companies to insure their respective portions of the aforementioned business risks. [Id.].

         Drs. Crowe and Truett sought advice from attorneys at Moore Ingram Johnson & Steele, LLP (“MIJS”), who assisted them in forming Micro Cap KY Insurance Company, Inc. and Cavallo Nero Insurance, Inc. (collectively, “Respondents”). [Id. at 12-13]. Respondents were organized as C corporations and elected tax treatment as Section 831(b) captive insurance companies. [Id. at 4]. MIJS Captive Management, LLC, a subsidiary of MIJS, currently manages Respondents under the terms of two Captive Management Agreements. [Id.; DE 10-9].

         In 2014, the Internal Revenue Service (“IRS”) began auditing Beveled Edge, as well as the Dermatology businesses. [DE 10-1 at 3-4]. The IRS later initiated an investigation into Respondents' income tax liabilities for the taxable years ending on December 31, 2012, December 31, 2013, and December 31, 2014. [DE 1, p. 2, § 4; DE 1-1]. As part of this inquiry, Internal Revenue Agent Thuy Luu issued an IRS summons to Respondents, directing them to produce several categories of documents for examination.[3] [Id.].

         Respondents produced all documents identified in the summons, except for a series of email communications exchanged by Dr. Crowe, Dr. Truett, and MISJ attorneys.[4] [Id.]. Respondents insisted that they should not be required to disclose these emails because they were subject to attorney-client privilege. [DE 10-1 at 13]. Petitioner, the United States, acting on behalf of the IRS, then initiated this action in an effort to secure full compliance with the summons.[5] [DE 1].

         Once the United States filed its Petition to Enforce IRS Summons [DE 1], the Court referred the matter to Judge Wier [DE 3] for the preparation of a recommended disposition. Judge Wier scheduled a Show Cause Hearing, at which counsel for Respondents tendered privilege logs to the Court and the United States. [DE 21]. Although Judge Wier permitted the United States to file a Response to the tendered privilege logs, and also allowed Respondents to submit a Reply thereto, he ultimately found it necessary to conduct an in camera review of the documents at issue. [Id.; DE 24].

         After reviewing these documents, Judge Wier issued his Recommended Disposition, in which he concluded that further summons enforcement was inappropriate. [DE 26]. Judge Wier found that Respondents had properly invoked the attorney-client privilege, as each document “predominately involve[d] legal advice within the retention of [] counsel.”[6] [Id. at 2]. Judge Wier also rejected the United States' argument that each Respondent had waived its attorney-client privilege by allowing the information at issue to be shared with the principal of the other Respondent, reasoning that Drs. Crowe and Truett “jointly retained the law firm for the purposes of captive formation, management and compliance” and had a “clear commonality of interests.” [Id. at 3]. The United States then filed the Objection presently before the Court.

         II. Standard of Review

         Pursuant to 28 U.S.C. § 636(b)(1)(B) and Federal Rule of Civil Procedure 72(b), a district court judge may refer dispositive matters to a magistrate judge for the preparation of a report and recommendation. The magistrate judge must conduct the necessary proceedings and enter a recommended disposition in a timely manner. Fed.R.Civ.P. 72(b)(1). If a party files objections to that recommended disposition, the district court judge must review the contested portions de novo and “accept, reject, or modify the recommended disposition; receive further evidence; or return the matter to the magistrate judge with instructions.” Fed.R.Civ.P. 72(c).

         “An ‘objection' that does nothing more than state a disagreement with a magistrate's suggested resolution, or simply summarizes what has been presented before, is not an ‘objection' as that term is used in this context.” VanDiver v. Martin, 304 F.Supp.2d 934, 937-38 (E.D. Mich. 2004). At the same time, many circuits have held that “arguments not made before a magistrate judge are normally waived.” See, e.g., United States v. Melgar, 227 F.3d 1038, 1040 (7th Cir. 2000). Although the Sixth Circuit has not squarely addressed this issue, it has “indicated that a party's failure to raise an argument before the magistrate judge constitutes a waiver.” The Glidden Co. v. Kinsella, 386 F. App'x 535, 544 n. 2 (6th Cir. 2010) (citing Murr v. United States, 200 F.3d 895, 902 n. 1 (6th Cir. 2000)).

         In this case, the United States argues, for the first time, that Respondents have waived their attorney-client privilege by filing a Petition against the Commissioner of Internal Revenue in the United States Tax Court. Specifically, Respondents, who are styled as Petitioners in that proceeding, placed their attorney-client communications at issue in that case by asserting in their Petition that they “relied solely on the advice of counsel for all positions taken on the income tax returns for the 2012, 2013 and 2014 tax years.” The United States acknowledges that its argument is untimely, but insists, ...


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