                                  T.C. Memo. 2020-99



                            UNITED STATES TAX COURT



                 JOHN THOMAS MINEMYER, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 22182-10.                             Filed July 1, 2020.



      John Thomas Minemyer, pro se.

      Daniel Charles Brauweiler and Paul Cooperman Feinberg, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      KERRIGAN, Judge: Respondent determined deficiencies of $140,651 and

$56,944 and penalties of $105,421 and $42,708 under section 6663 for 2000 and

2001, respectively.1 Unless otherwise indicated, all section references are to the


      1
          Respondent also determined, in the alternative, that petitioner was liable for
                                                                          (continued...)
                                         -2-

[*2] Internal Revenue Code in effect at all relevant times, and all Rule references

are to the Tax Court Rules of Practice and Procedure. All monetary amounts are

rounded to the nearest dollar.

        Respondent moved for partial summary judgment on the 2000 and 2001

deficiencies and on the section 6663 penalty for 2000, and we granted

respondent’s motion. The issue remaining for our consideration is whether

petitioner is liable for a fraud penalty pursuant to section 6663(a) for tax year

2001.

                                 FINDINGS OF FACT

        Some facts have been stipulated and some facts have been deemed

stipulated pursuant to Rule 91(f). The stipulated facts and attached exhibits are

incorporated in our findings by this reference. When the petition was timely filed,

petitioner was incarcerated in Colorado and claimed residency in Wyoming.

        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




        1
       (...continued)
accuracy-related penalties under sec. 6662(a) for 2000 and 2001. Respondent has
conceded the accuracy-related penalty for 2001.
                                        -3-

[*3] industry. Lozon was organized as an LLC and taxed as a partnership, with

petitioner as a 50% member.

      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, alleging that he had substantially

understated his income by knowingly omitting passthrough income from Lozon.

On February 4, 2009, petitioner pleaded guilty to income tax evasion for 2000.

Pursuant to the plea agreement, petitioner pleaded guilty to count 1 for 2000 and

the United States dismissed count 2 of the indictment for 2001. Petitioner paid

respondent $200,918 in restitution consistent with the plea agreement at the time

he was sentenced to prison.

      On March 4, 2010, a revenue agent visited petitioner in prison and provided

him a Form 4549, Income Tax Examination Changes, for 2000 and 2001. No

letter from respondent was attached to the report. Petitioner signed the Form 4549

agreeing to deficiencies and penalties but later requested that the agreement be

withdrawn.
                                       -4-

[*4] Upon petitioner’s request, respondent withdrew and disregarded the Form

4549 that petitioner signed on March 4, 2010. On May 17, 2010, a Letter 950,

commonly referred to as a 30-day letter, was sent to petitioner. Leland Deering,

the immediate supervisor of the revenue agent, signed the 30-day letter as group

manager. A Form 4549-A, in which respondent asserted that petitioner was liable

for a section 6663 fraud penalty of $42,708 for 2001, was included with the 30-

day letter. The Form 4549-A included the words “corrected report” at the top of

both pages of the form. The revenue agent signed the Form 4549-A, dated May 7,

2010. Above the revenue agent’s signature the following statement was included:

“This Report supersedes the report issued 3/4/2010.”

      Respondent issued petitioner a notice of deficiency on August 19, 2010,

determining deficiencies in income tax and section 6663 fraud penalties for tax

years 2000 and 2001. On August 11, 2010, the revenue agent’s immediate

supervisor, Mr. Deering, executed a Civil Penalty Approval Form which approved

the fraud penalty pursuant to section 6663.

                                    OPINION

      The Commissioner’s burden of production under section 7491(c) with

respect to the section 6663 fraud penalty includes introducing sufficient evidence

to establish compliance with the supervisory approval requirement of section
                                         -5-

[*5] 6751(b)(1). See Graev v. Commissioner, 149 T.C. 485, 493 (2017),

supplementing and overruling in part 147 T.C. 460 (2016). Section 6751(b)(1)

provides that “[n]o penalty under this title shall be assessed unless the initial

determination of such assessment is personally approved (in writing) by the

immediate supervisor of the individual making such determination or such higher

level official as the Secretary may designate.” We have interpreted this provision

to require approval before the penalty determination is communicated to the

taxpayer. Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. 75, 84, 89

(2019).

      In Clay v. Commissioner, 152 T.C. 223, 249 (2019), we held that the “initial

determination” occurs no later than “when those proposed adjustments are

communicated to the taxpayer formally as part of a communication that advises

the taxpayer that penalties will be proposed and giving the taxpayer the right to

appeal them with Appeals”. Recently, in Belair Woods, LLC v. Commissioner,

154 T.C. ___, ___ (slip op. at 24-25) (Jan. 6, 2020), we concluded that the “initial

determination” of the penalty assessment “is embodied in the document by which

the Examination Division formally notifies the taxpayer, in writing, that it has

completed its work and made an unequivocal decision to assert penalties.”
                                        -6-

[*6] Section 6751(b) does not require approval by a specific person or in a

particular manner. See Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. at

85-86. Rather, the statute provides that the initial determination of a penalty

assessment must be approved in writing “by the immediate supervisor of the

individual making such determination”. Sec. 6751(b)(1); see also Belair Woods,

LLC v. Commissioner, 154 T.C. at __ (slip op. at 25). In Carter v. Commissioner,

T.C. Memo. 2020-21, at *31, we concluded that an examination report and

accompanying Letter 5153 instructing the taxpayers to respond to the report by

either paying the tax, calling to discuss payment options, or agreeing to extend the

period of limitations on assessment communicated to the taxpayers an “initial

determination” of a penalty.

      Respondent contends that section 6751(b) requires supervisory approval for

the “initial determination” of a penalty and not a preliminary determination.

Respondent further contends that the 30-day letter satisfies respondent’s burden of

production. However, we cannot conclude from the evidence that the 30-day letter

was the “document by which the Examination Division formally notifie[d] the

taxpayer, in writing, that it ha[d] completed its work and made an unequivocal

decision to assert penalties”. Belair Woods, LLC v. Commissioner, 154 T.C. at __

(slip op. at 24-25).
                                         -7-

[*7] In Frost v. Commissioner, 154 T.C. ___, ___ (slip op. at 21-22) (Jan. 7,

2020), we held that “the Commissioner’s introduction of evidence of written

approval of a penalty before a formal communication of the penalty to the

taxpayer is sufficient to carry his initial burden of production under section

7491(c) to show that he complied with the procedural requirement of section

6751(b)(1).” As in Frost, respondent here introduced evidence of written approval

of the penalty before a formal communication (i.e., the 30-day letter). Also as in

Frost, petitioner has not claimed that there was a prior initial penalty

determination. Unlike Frost, our record does support the conclusion that

respondent may have formally communicated his initial penalty determination to

petitioner before the 30-day letter. Cf. Frost v. Commissioner, 154 T.C. at ___

(slip op. at 23) (“[P]etitioner has not claimed, nor does the record support a

conclusion, that respondent formally communicated his initial penalty

determination to petitioner before the date that the examining agent’s manager

signed the Civil Penalty Approval Form.” (Emphasis added.)).

      When the revenue agent visited petitioner in prison, he provided petitioner a

Form 4549, which petitioner signed. Petitioner contends that he was under duress

to sign the Form 4549 and for that reason he withdrew his consent. During

respondent’s counsel’s opening statement at trial he contended that petitioner
                                         -8-

[*8] received a preliminary form before the formal communication in the 30-day

letter and that petitioner signed it, agreeing to the fraud penalty for 2001. This

statement is an acknowledgment that the Form 4549 communicated an intention to

impose a penalty.

      Respondent did not offer this Form 4549 into evidence. Therefore, we

cannot determine whether the Form 4549 or the 30-day letter was the initial

determination for the purpose of section 6751(b). Without the Form 4549 we

cannot determine whether that form clearly reflected the revenue agent’s

conclusion that petitioner should be subject to a penalty. See Carter v.

Commissioner, at *30. If the Form 4549 was the initial determination of the fraud

penalty for 2001, there is no evidence of its timely written approval.

      Accordingly, we conclude respondent has not met the burden of production

for the determination of the section 6663(a) fraud penalty for 2001. Therefore,

petitioner is not liable for the fraud penalty for 2001.

      To reflect the foregoing,


                                                      An appropriate decision will

                                               be entered.
