Court Opinion

ID: 9909620
Source: CourtListenerOpinion
Date Created: 2023-12-13 20:01:36.566495+00
Date Added: 2024-06-11T12:48:01.465840
License: Public Domain

United States Tax Court

                              T.C. Memo. 2023-149

                        JOHN THOMAS MINEMYER,
                               Petitioner

                                         v.

              COMMISSIONER OF INTERNAL REVENUE,
                         Respondent 1

                                    —————

Docket No. 22182-10.                                   Filed December 13, 2023.

                                    —————

John Thomas Minemyer, pro se.

Daniel Charles Brauweiler, Adrienne E. Griffin, and Audrey Marie
Morrie, for respondent.

                    SUPPLEMENTAL MEMORANDUM
                    FINDINGS OF FACT AND OPINION

      KERRIGAN, Chief Judge: This case is before the Court on
remand from the U.S. Court of Appeals for the Tenth Circuit for further
consideration consistent with its opinion in Minemyer v. Commissioner
(Minemyer II), No. 21-9006, 2023 WL 314832 (10th Cir. Jan. 19, 2023),
affirming in part, reversing in part, and remanding our decision in
Minemyer v. Commissioner (Minemyer I), T.C. Memo. 2020-99.

       Pursuant to the Court’s February 25, 2019, Order, we granted
respondent’s Motion for Partial Summary Judgment filed November 19,
2014, holding that petitioner is liable for the federal income tax
deficiencies determined for 2000 and 2001 and the section 6663 civil

         1 This opinion supplements Minemyer v. Commissioner, T.C. Memo. 2020-99,

aff’d in part, rev’d in part and remanded, No. 21-9006, 2023 WL 314832 (10th Cir. Jan.
19, 2023).

                                Served 12/13/23
                                            2

[*2] fraud penalty asserted for 2000. 2 In Minemyer I, we considered
whether petitioner was liable for a civil fraud penalty for 2001. We held
that respondent failed to meet the burden of production with respect to
the written supervisory approval requirement of section 6751 and that
petitioner was therefore not liable for the civil fraud penalty for 2001.

        In Minemyer II, the Tenth Circuit agreed that the Commissioner
correctly determined deficiencies in income tax for 2000 and 2001 and
correctly asserted the civil fraud penalty for 2000. With respect to the
civil fraud penalty for 2001, the Tenth Circuit held that respondent’s
burden was met with respect to the written supervisory approval
requirement of section 6751. Minemyer II, 2023 WL 314832, at *5.
Pursuant to Minemyer II, the issue for our consideration is whether
petitioner is liable for a civil fraud penalty for 2001. Id.

                               FINDINGS OF FACT

       Facts with respect to this case were found in our original opinion,
Minemyer I, and are incorporated by this reference. We clarify and add
to the facts to address the holding in Minemyer II. Some facts have been
stipulated and some facts have been deemed stipulated pursuant to Rule
91(f).

       Petitioner was incarcerated in Colorado when he timely filed his
Petition, and he claimed residency in Wyoming.

I.      Petitioner’s Business Activities

        In July 1998 petitioner and a business associate, John Breaker,
formed Lozon, LLC (Lozon), to provide a molded polymer coupler—a
device that connects pipes that hold underground fiber optic cables—to
the telecommunications industry. Lozon was organized as a limited
liability company (LLC) and taxed as a partnership, with petitioner as
a 50% member. Lozon quickly became successful until an economic
downturn hit the technology sector. During 2000 and 2001 petitioner
earned substantial income through the partnership.

        2 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. We round all monetary amounts to the nearest
dollar.
                                     3

[*3]   A.    Financial Structuring

       In 1999 petitioner and Mr. Breaker met Terry Neal, who operated
Offshore Corporate Services (OCS) and had published a book, The
Offshore Solution: Privacy, Asset Protection, Tax Shelters, Offshore
Investing and Banking. On or about June 10, 1999, petitioner and Mr.
Breaker engaged OCS to assist with the organization of two nominee
corporations and to structure “nominee banking services.” In October
1999 petitioner directed Mr. Neal to form Mountain West Financial, Inc.
(Mountain West), a nominee corporation organized in Nevada. Mr.
Neal, through OCS, formed Lozon Solutions, Inc. (Lozon Solutions), a
nominee corporation organized in Nevada, under Malaysian Special
Situations, Inc., an offshore company, and opened a bank account for
Lozon Solutions with Wells Fargo & Co. OCS then hired Nevis
American Trust Co. (Nevis Trust) to set up Lozon International, Inc.,
Lijon, Ltd, Vista Capital Resources, Ltd. (Vista Capital), and Ziastar,
Ltd. as legal entities in Nevis, West Indies, on behalf of petitioner and
Sara and John Breaker.

        Morgan, Carter, and Young, Inc., a corporation registered in
Nevada, acted as the initial registered agents for Lozon Solutions and
Mountain West. Lee Morgan of Morgan, Carter, and Young, Inc.,
initially served as president and secretary of Lozon Solutions until
petitioner became president, secretary, and treasurer in around 2001.
During 2000–01 petitioner sent checks to Mr. Morgan, instructing him
to first deposit the funds in the Lozon Solutions account, and then to
move the funds abroad to the Malaysian Special Situations account.
Once the funds were abroad, petitioner instructed Mr. Morgan, Gillian
Hobson, of Nevis Trust, and Christina Cook of Morgan, Carter, and
Young, Inc., to transfer funds between the foreign entities they had set
up. Petitioner made multiple transfers to Lozon Solutions, Malaysian
Special Situations, Vista Capital, and Lijon in excess of $100,000. At
the beginning of 2000 petitioner estimated the combined account
balances of Lijon and Vista Capital to be in excess of $1 million.

       Petitioner instructed Mr. Morgan and Mr. Hobson to use the
money to acquire sham insurance policies from Sovereign Life and
Casualty, Ltd. The sham life insurance policies were investment
vehicles with no-risk life insurance face values equal to the investments.

      Petitioner’s transfers between the multiple offshore accounts
created a convoluted money trail. From the Malaysian Special
Situations account, petitioner instructed Mr. Morgan and Mr. Hobson to
                                  4

[*4] move funds to Mountain West’s account or his personal bank
account. Once the funds were transferred to Mountain West’s account,
petitioner instructed Mr. Morgan to have some funds rolled over into
short-term certificates of deposit and to have some funds deposited in
petitioner’s personal bank account. In 2000–02 petitioner continued to
instruct both Mr. Morgan and Mr. Hobson to transfer funds between the
entities, as well as back to the Nevada corporations. By 2003 much of
petitioner’s diverted partnership income was brought back to the United
States through Mountain West.

      B.    Payment of Personal Expenses

      Petitioner used Lozon’s corporate bank accounts to pay personal
expenses that he and his family incurred in 2001. Petitioner, his wife,
Linda Minemyer, and other family members used Lozon’s funds to pay
for travel to various locations including Hawaii, Australia, and
Singapore, among others, in 2000 and 2001. In 2001 petitioner used
Lozon’s business credit card to pay for personal travel to his mother’s
home in Springfield, Missouri.

       Between July 11, 2000, and October 5, 2002, Lozon spent $69,570
to have petitioner’s 1932 Ford Roadster restored. On April 30, 2001,
petitioner paid Grizzly Auto Center $32,229 for a 2001 Dodge Durango
titled in the name of his son, Nathan Minemyer. He paid for the car
with a check written from the Lozon checking account, signed by
petitioner, with “Nate’s Car” written in the memo line. In May 2001
petitioner and his wife joined the Country Club of Colorado, for which
Lozon paid the $22,500 family membership fee. In 2001 Lozon paid
$31,980 for petitioner’s individual income tax liability for 2000.

II.   Tax Returns and Reporting

      Mr. Neal connected petitioner and Mr. Breaker with Kevin
Andersen, a certified public accountant (CPA), with whom petitioner
met in November 1999. Mr. Andersen prepared petitioner’s individual
federal income tax returns for 1999, 2000, and 2001.

       Lozon did not issue petitioner a Schedule K–1, Shareholder’s
Share of Income, Deductions, Credits, etc., for 2001. Lozon filed Form
8736, Application for Automatic Extension of Time to File U.S. Return
for a Partnership, REMIC, or for Certain Trusts, for 2001. Lozon did
not file a Federal income tax return for 2001.
                                    5

[*5] On his federal income tax return for 2001 petitioner reported
$71,959 in total income and a total tax of $10,634. Petitioner’s 2001
income tax return did not report any passthrough tax items from Lozon.
Petitioner’s income tax return for 2001 failed to report income diverted
abroad through Lozon Solutions and Malaysian Special Situations, as
well as funds used to pay personal expenses.

       In 2003 petitioner became aware of investigations into Mr.
Breaker’s tax returns. He hired Ruth Ahopelto, a CPA with Ahopelto &
Associates, to amend his tax returns for 2000 and 2001. Ms. Ahopelto
prepared Forms 1040X, Amended U.S. Individual Income Tax Return,
for both 2000 and 2001, but ultimately petitioner neither signed nor filed
either return despite his assurances to the Court that he did in fact file
the returns. The return prepared by Ms. Ahopelto for 2001 stated that
petitioner’s original return had likewise omitted $174,087 in
passthrough income from Lozon and that he owed $60,989 in additional
income tax. The $174,087 in omitted passthrough income consisted of
$167,065 in profits and $7,022 in interest.

III.   Criminal Tax Fraud Charges

        On April 8, 2008, the United States filed an indictment against
petitioner in the U.S. District Court for the District of Colorado charging
him with two counts of income tax evasion under section 7201, the first
count for 2000 and the second count for 2001. The indictment accused
petitioner of filing false and fraudulent income tax returns for 2000 and
2001 and substantially understating his income by knowingly omitting
passthrough income from Lozon. On February 4, 2009, petitioner
reached a settlement with the United States and pleaded guilty to tax
evasion (Plea Agreement). In exchange for his pleading guilty to the
first count of income tax evasion for 2000, the United States dismissed
the second count for 2001.

       As part of the Plea Agreement petitioner agreed that there was
no dispute as to the material elements which establish a factual basis
for the offense of income tax evasion.

       The Plea Agreement states:

             During the tax years 2000 and 2001, the defendant
       earned substantial partnership income from Lozon, but the
       defendant intentionally and willfully did not report that
       partnership income on his Forms 1040 for those tax years.
       Instead the defendant hid this partnership income by using
                                    6

[*6]   the Lozon partnership bank account to pay for the
       defendant’s personal expenses and by using a series of
       offshore financial transactions as described below.

              With respect to the partnership profits earned in the
       tax years 2000 and 2001, the defendant diverted a
       substantial amount of the partnership’s gross receipts
       directly to an account in the name of a nominee Nevada
       corporation called Lozon Solutions, Inc. (“Lozon
       Solutions”). Lozon Solutions then sent the defendant’s
       partnership income offshore, through an organization
       operated by T.N., where the money was used in part to
       purchase sham life insurance policies. Eventually by the
       end of 2003, much of the defendant’s partnership income
       from the year 2000 and 2001 was brought back into the
       United States through another nominee Nevada
       corporation called Mountain West Financial, Inc.

       As part of the Plea Agreement petitioner and the Government
also agreed that, for purposes of sentencing and restitution, the conduct
involved for both counts of the indictment should be included as relevant
conduct. Petitioner and the Government further agreed that the
Government’s evidence would be that (1) petitioner intentionally and
willfully filed false Federal income tax returns for 2000 and 2001;
(2) petitioner was a 50% partner in Lozon; (3) petitioner received
substantial partnership income from Lozon that he intentionally and
willfully did not report on his 2000 and 2001 Federal income tax returns;
(4) petitioner hid his share of partnership income by using Lozon’s bank
account to pay his personal expenses and by using a series of offshore
financial transactions; (5) petitioner diverted a substantial amount of
Lozon’s gross receipts directly to an account in the name of Lozon
Solutions; (6) Lozon Solutions sent petitioner’s partnership income
offshore, where the money was used in part to purchase sham life
insurance policies; (7) by the end of 2003 much of petitioner’s
partnership income was brought back into the United States through
Mountain West Financial; (8) in 2000 and 2001 petitioner paid his
personal expenses directly out of the Lozon bank account and did not
report this money as income on his 2000 and 2001 federal income tax
returns; (9) petitioner failed to report his share of partnership income of
$355,176 on his 2000 federal income tax return, which resulted in an
underreported Federal income tax liability of $140,561; (10) petitioner
failed to report his share of partnership income of $174,087 on his 2001
federal income tax return, which resulted in an underreported federal
                                    7

[*7] income tax liability of $60,357; and (11) the combined tax loss for
the years at issue was $200,918.

       The district court sentenced petitioner to one year in prison and
three years of supervised release, fined petitioner $25,000, and ordered
restitution of $200,918, which petitioner paid at the time of his
sentencing. Petitioner began serving his prison sentence in December
2009. Petitioner did not file the Form 1040X for 2001 showing income
from Lozon.

                                OPINION

I.    Section 6663 Civil Fraud Penalties

       Fraud is an intentional wrongdoing on the part of the taxpayer
with the specific purpose to evade a tax believed to be owed. Sadler v.
Commissioner, 113 T.C. 99, 102 (1999). Section 6663 imposes a penalty
of 75% of an underpayment of tax which is attributable to fraud.
§ 6663(a).   Once the Commissioner establishes that part of an
underpayment is due to fraud, the entire underpayment is treated as
attributable to fraud, except to the extent the taxpayer establishes
otherwise. § 6663(b).

       If the Commissioner alleges fraud, he bears the burden of showing
by clear and convincing evidence that the taxpayer fraudulently
underpaid his tax. § 7454(a); Rule 142(b). The Commissioner must
show that the taxpayer intended to conceal, mislead, or otherwise
prevent the collection of taxes. Katz v. Commissioner, 90 T.C. 1130, 1143
(1988). The Commissioner must show for each relevant year that (1) the
taxpayer underpaid his tax and (2) the underpayment was attributable
to fraud. Parks v. Commissioner, 94 T.C. 654, 660–61 (1990).

      A.     Underpayment

       An underpayment is the amount by which the tax imposed by
title 26 exceeds the amounts shown as the tax by the taxpayer on his
return. § 6664(a). Petitioner conceded in the Plea Agreement that he
understated his federal income tax liability for 2001. Pursuant to the
Court’s February 25, 2019, Order, we granted respondent’s Motion for
Partial Summary Judgment filed November 19, 2014, holding that
petitioner is liable for the federal income tax deficiency determined for
2001. Accordingly, respondent has proven by clear and convincing
evidence that petitioner underpaid his tax liability for the year at issue.
                                    8

[*8]   B.    Fraudulent Intent

       The existence of fraud is a question of fact to be resolved by
considering the entire record. Rowlee v. Commissioner, 80 T.C. 1111,
1123 (1983). Fraud may be proven by circumstantial evidence and
reasonable inferences drawn from the facts because direct proof of intent
is rarely available. Id.

        Fraudulent intent may be inferred from various kinds of
circumstantial evidence, or “badges of fraud,” including, but not limited
to (1) understatement of income; (2) inadequate records; (3) failure to
file tax returns; (4) implausible or inconsistent explanations of behavior;
(5) concealment of assets; (6) failure to cooperate with tax authorities;
(7) filing false documents; (8) failure to make estimated tax payments;
(9) dealing in cash; (10) engaging in illegal activity; and (11) attempting
to conceal illegal activity. Niedringhaus v. Commissioner, 99 T.C. 202,
211 (1992). The existence of any one badge is not dispositive, but
multiple badges together are strong circumstantial evidence of
fraudulent intent. Id. Multiple badges of fraud are evident in this case.

      Petitioner pleaded guilty to criminal income tax evasion. The
Plea Agreement is specific, clear and convincing evidence of petitioner’s
fraudulent course of conduct with respect to 2001, and he at no point
produced evidence showing that the facts admitted are inaccurate.
Although the United States dismissed the count for 2001, petitioner’s
admissions show a fraudulent course of conduct that spanned 2000 and
2001.

             1.     Understatement of Income

       Petitioner significantly underreported his income. A consistent
and substantial understatement of income for several years is, by itself,
strong evidence of fraud. Marcus v. Commissioner, 70 T.C. 562, 577
(1978), aff’d, 621 F.2d 439 (5th Cir. 1980) (unpublished table decision).
As the Plea Agreement in the criminal case conclusively established,
petitioner generated $355,176 and $174,087 in partnership income in
2000 and 2001, respectively, significantly more than the zero reported
on his return for each year. Respondent has shown that petitioner
substantially underreported his income for 2001.

             2.     Concealing Income or Assets

      Fraudulent intent to evade tax may be inferred from the
“concealment of assets or covering up sources of income.” Spies v. United
                                    9

[*9] States, 317 U.S. 492, 499 (1943). A taxpayer’s use of a business
entity to cloak the personal nature of expenses evinces fraud. See Romer
v. Commissioner, T.C. Memo. 2001-168, slip op. at 45–46.

        Petitioner, as a 50% partner in Lozon, used Lozon funds to pay
personal expenses including family travel, the restoration of an antique
car, and the purchase of a new car for his son. Petitioner also used Lozon
funds to join a local country club and to pay his individual income tax
liability. Lozon did not report the amounts on Form W–2, Wage and Tax
Statement, on Form 1099‒MISC, Miscellaneous Income, or on its
partnership return. Likewise, petitioner did not report as income Lozon
funds used to pay personal expenses. As part of the Plea Agreement,
petitioner agreed that he willfully concealed partnership income by
using the Lozon bank account to pay personal expenses. This badge
supplies evidence of fraud for 2001.

             3.     Giving Implausible or Inconsistent Explanations of
                    Behavior

        A taxpayer’s implausible or inconsistent explanations for his
actions may constitute circumstantial evidence of fraudulent intent.
Vanover v. Commissioner, T.C. Memo. 2012-79, slip op. at 22. Petitioner
testified that he understood the funds he was moving abroad and then
back to the United States to have already been taxed, and to be the
personal funds of Mr. Breaker, his business partner. Petitioner also
testified that the multiple transfers of money abroad were conducted to
make the money “hard to trace.” We find it implausible that petitioner
actually believed he was in possession of, and transferring abroad or to
his own personal bank account, the “hard to trace” personal funds of his
business partner.

      We are also unconvinced that petitioner believed the Lozon funds
to be posttax money. Petitioner made multiple transfers to Lozon
Solutions, Malaysian Special Situations, Vista Capital, and Lijon in
excess of $100,000. At the beginning of 2000, petitioner estimated the
combined account balances of Lijon and Vista Capital to be in excess of
$1 million. Petitioner continued making funds transfer payments in
excess of $100,000 through 2001. Meanwhile, petitioner had not
reported any taxable income attributable to Lozon for 1999, 2000, or
2001. Petitioner gave no explanations as to when or how the Lozon
funds transferred abroad were taxed.          Petitioner’s implausible
explanation provides evidence of fraudulent intent.
                                    10

[*10]        4.     Filing False Documents

       Fraudulent intent may be inferred when a taxpayer files a
document intending to conceal, mislead, or prevent the collection of tax.
Spies, 317 U.S. at 499. Filing false documents with the IRS is “an
‘affirmative act’ of misrepresentation sufficient to justify the fraud
penalty.” Zell v. Commissioner, 763 F.2d 1139, 1146 (10th Cir. 1985),
aff’g T.C. Memo. 1984-152. Filing false documents includes filing a
return that omits income or contains a false response. See Harrington
v. Commissioner, T.C. Memo. 2021-95, at *39–40, aff’d, No. 22-9000,
2022 WL 17333080 (10th Cir. Nov. 30, 2022). Petitioner filed a false
Federal income tax return for 2001 by knowingly and intentionally
omitting significant amounts of income from Lozon. This badge provides
evidence of fraudulent intent for the year at issue.

             5.     Engaging in Illegal Activity

       A taxpayer’s participation in illegal activity, its concealment, and
criminal prosecution for such crimes related to the understatement of
tax for the year at issue is strong evidence of fraudulent intent. Petzoldt
v. Commissioner, 92 T.C. 661, 700 (1989). Petitioner was indicted on
two counts of tax evasion pursuant to section 7201 for 2000 and 2001.
Petitioner engaged in criminal activity as conclusively determined by
his guilty plea to committing tax evasion in violation of section 7201 for
2000. The conviction for 2000 is circumstantial evidence of fraud for the
years for which petitioner did not plead guilty.              See Moore v.
Commissioner, T.C. Memo. 2001-77, slip op. at 16. As part of the Plea
Agreement for dropping the criminal fraud charge against him for 2001,
petitioner agreed that there was no dispute that he engaged in the same
behavior for both 2000 and 2001, namely diverting partnership funds
abroad, intentionally and willfully not reporting income, and paying
personal expenses out of the Lozon bank account.

       Petitioner testified that he was motivated to plead guilty to
“preserve my patent case and [pleading guilty] was the only method to
do it.” We do not find convincing the argument that petitioner needed
to accept a prison sentence in order to continue with patent litigation.
Furthermore, petitioner’s motivation for entering into the Plea
Agreement is irrelevant and does not undermine the reliability of the
admissions he made therein. See Evans v. Commissioner, T.C. Memo.
2010-199, slip op. at 14. Petitioner’s illegal activity relates to the
understatements for both 2000 and 2001, and his conviction for tax
evasion is therefore evidence of fraud for 2001.
                                            11

[*11] C.        Reasonable Cause

        Section 6664(c)(1) provides that “[n]o penalty shall be imposed
under [section 6663] with respect to any portion of an underpayment if
it is shown that there was a reasonable cause for such portion and that
the taxpayer acted in good faith with respect to such portion.”
Reasonable cause may exist where the taxpayer relies on professional
advice if the taxpayer proves by a preponderance of the evidence that
(1) the adviser was a competent professional who had sufficient
expertise to justify the taxpayer’s reliance on him or her; (2) the
taxpayer provided necessary and accurate information to the adviser;
and (3) the taxpayer actually relied in good faith on the adviser’s
judgment. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99
(2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

       Petitioner contends that his retaining Mr. Andersen, a CPA,
qualifies him for the reasonable cause defense. This contention lacks
merit. Our review of the record shows petitioner personally involved at
each step of the fraudulent activity. Petitioner hired agents to create
foreign entities and sent handwritten notes ordering the transfer of
funds abroad. In the district court petitioner acknowledged willfully
diverting and concealing income and ultimately, with respect to 2000,
pleaded guilty to tax fraud. In contrast his accountant only prepared
his individual tax returns for 2000 and 2001.

      We find that petitioner did not rely on Mr. Andersen’s “judgment,”
nor did he act in good faith. 3 Petitioner has failed to prove that he had
reasonable cause within the meaning of section 6664(c). Accordingly,
we sustain respondent’s determination regarding the section 6663(a)
fraud penalties.

II.     Conclusion

      Numerous badges of fraud are present in this case. We conclude
that respondent has proven by clear and convincing evidence that

         3 Petitioner asserts that his hiring of a new CPA in 2003 to amend his returns

for 2000 and 2001 is evidence of his efforts to correct the fraudulent activity of his prior
CPA, Mr. Andersen. However, as the time of his attempt to amend his 2000 and 2001
returns falls shortly after petitioner was made aware of investigations into his
business partner, we find it more likely that these amendments were made out of an
effort to avoid a similar investigation into himself. See Vanover, T.C. Memo. 2012-79,
slip op. at *9. In either event, as we find here that petitioner’s fraud is not attributable
to reliance on professional advice, seeking a new CPA would not undercut evidence of
fraud committed by petitioner.
                                    12

[*12] petitioner underpaid his tax liability for the year at issue and that
the underpayment was due to fraud. The fraud penalty applies to the
entire underpayment as petitioner failed to establish that any portion of
the underpayment was not attributable to fraud. The section 6663 fraud
penalty for 2001 applies to the extent respondent determined.

       We have considered all of the arguments made by the parties and,
to the extent they are not addressed herein, we find them to be moot,
irrelevant, or without merit.

      To reflect the foregoing,

      An appropriate decision will be entered.