Jenkins v. Comm'r
| Decision Date | 10 May 2021 |
| Docket Number | Docket No. 27139-11,Docket No. 28712-11.,T.C. Memo. 2021-54 |
| Parties | RANDY JENKINS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent IRA W. GENTRY, JR., AND LYNN M. GENTRY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Randy Jenkins, pro se in docket No. 27139-11.
Ira W. Gentry, Jr., and Lynn M. Gentry, pro sese in docket No. 28712-11.
Michael W. Lloyd and Doreen Marie Susi, for respondent.
HOLMES, Judge: In 1772 Yves-Joseph de Kerguelen-Trémarec was commissioned by King Louis XVI to sail into the Southern Ocean in search of Terra Australis. He found instead a small archipelago almost three thousand miles off the southern tip of Africa, inhabited only by wildlife and battered by some of the worst weather in the world. In English, these small patches of rock are named the Desolation Islands. This is apt, for they are an awful place--thousands of miles from the nearest inhabited territory, windswept, bereft of useful resources; and home only to weather researchers, scientists of the extreme, and a very large number of penguins.1 They are still a part of France, but so insignificant a part that the French have grouped them with several rocks collectively called "Îles Éparses de l'océan Indien" (Scattered Islands of the Indian Ocean) into a district within the French Southern and Antarctic Lands--itself one of France's overseas territories, but a territory with no civilian population at all.2
In April 2006 federal agents in Arizona, acting under the authority of a search warrant and looking for evidence of insider trading and money laundering discovered several license plates for the Kingdom of Kerguelen in the personal office of Ira Gentry. They also found a Quebecois birth certificate in the name ofDon Williams and a passport from Kerguelen. The photo in this passport was of Mr. Gentry. Across town, other agents were looking for Randy Jenkins. They found him in possession of not just an ordinary Kerguelenois passport, but a Kerguelenois diplomatic passport, an ID card from the Kingdom of Kerguelen's Ministry of Transportation, and several more of the Kingdom's license plates. This is all quite odd--for the Kerguelen Islands have never been a sovereign nation. And they have certainly never been a kingdom.
If the penguins of those islands could speak, they would say: "Something's fishy" (or perhaps "C'est chelou").
Let us now introduce Messrs. Gentry and Jenkins.
FINDINGS OF FACT
Mr. Gentry is a well-educated man. He earned a bachelor's degree in mechanical and electrical engineering from Arizona State University. He then earned a Masters of Engineering degree and took several courses toward an MBA from the University of Cincinnati and Arizona State University.
In the 1990s Mr. Gentry owned a company called Universal Dynamics, whose primary product was a software program called Northstar. Northstar was used in quality-assurance shaker systems. These systems test the durability of electronic components and finished products by applying ever greater force to figure out their "breaking points"--i.e. the amount of force needed to wreck them. A common durability test is dropping a product from higher and higher distances to see at what point it breaks. Such tests can cost a lot of money since they require breaking a lot of valuable products.
While some electronics can be tested by dropping, others (like car headlights) can't--they must instead be shaken. A headlight, for example, needs to withstand a substantial amount of road vibration to be useful. To test its durability, a "shaker system" simulates road vibrations. A shaker system has three parts. The first is the shaker itself, and the second is an amplifier that runs the shaker. The third is software that can program the other two parts to simulate different road conditions. The Northstar software that Universal Dynamics sold was aimed at the market for this third part. Universal Dynamics would sell Northstar to companies that would then combine the software with the shaker and the amplifier to complete a quality-assurance shaker system.
In the late 1990s there was a Nevada corporation called Macaw Capital, Inc. By the end of 1997 Macaw Capital had changed its name to UniDyn Corp. and became publicly traded. In late 1997 a reverse merger3 took place between UniDyn Corp. (the public corporation) and Universal Dynamics (the private corporation). UniDyn acquired many of Universal Dynamics' assets, including Northstar, in exchange for 180,000 shares of stock.
After this merger, Mr. Gentry became the president, CEO, and director of UniDyn. Universal Dynamics became the owner of more than 70% of UniDyn's outstanding stock.
Mr. Jenkins is also well educated. He graduated from Brigham Young University and then earned a law degree in California. After that, he moved to Arizona and began a legal practice that taught him how to form overseas business entities. Life did not go smoothly and sometime in the 1990s he was disbarred.
Mr. Gentry's and Mr. Jenkins's paths eventually crossed, and the two became friends and colleagues. Mr. Jenkins set up many overseas entities related to UniDyn. He also helped implement an employee-leasing scheme that was used by UniDyn in an effort to save on (or perhaps avoid) employment tax.
After the merger of UniDyn and Universal Dynamics, Mr. Gentry was the controlling shareholder of a publicly traded corporation. This can make raising money easier, and Mr. Gentry wanted to raise money to pursue two avenues of development. The first was a textbook example of vertical integration. UniDyn produced only one of the three parts needed for a quality-assurance system, the shaker software. So Mr. Gentry set out to buy a U.K. company called Derritron--a company that produced both shakers and amplifiers. After it acquired Derritron, UniDyn would be on its way to being a single source for quality-assurance shaker systems. Since UniDyn was by now a public company, this plan was disclosed in its SEC filings.4
The second avenue of development for UniDyn was a revolutionary product that had a chance to change the quality-assurance industry forever--the Sterling. As Mr. Gentry described it to investors and in SEC filings, the Sterling would use infrared technology to take pictures of all the circuitry in an electronic componentand immediately determine its lifespan with 100% accuracy. It promised to be a major advance in nondestructive testing and would save "literally billions of dollars" in the market. This breakthrough technology, Mr. Gentry stated, was all based on a thesis that he wrote during his student days. Though the vertical integration of more traditional shaker systems was a nice appetizer, the Sterling would be UniDyn's main course. If the product worked, it would bring enormous success to this small company and propel it away from penny-stock status forever.
Mr. Gentry described all this to one of the more credible witnesses, John Provazek. Mr. Provazek was a UPS employee in the late 1990s--and he was sold by Mr. Gentry's pitch; primarily by the Sterling but also by the plan of vertical integration. He was so impressed that he organized some presentations in the Seattle area to help find new investors for UniDyn. And it worked--he helped raise $470,000 from himself and 18 others. Mr. Gentry must have appreciated Mr. Provazek's efforts because in early 1998 Mr. Provazek joined the UniDyn board.5
Mr. Gentry and Mr. Jenkins continued to promote the Sterling to individual investors as the turn of the millennium neared. Mr. Gentry revealed to Mr. Provazek that the Sterling had been tested by IBM in England. But Mr. Provazekwasn't the only audience for Mr. Gentry's touts. In 1998 UniDyn stated in its SEC filings that the company was in the process of patenting the Sterling. It also disclosed that a large Japanese company had made a firm commitment to buy at least 20 Sterling units. In 1999 Mr. Gentry told investors that the large Japanese company was TechNet, Inc., and that it had committed to buying those 20 units at $190,000 a piece--a $3.8 million contract. Then, at the very end of 1999, UniDyn disclosed that it had completed a stock acquisition of Avalon Manufacturing Co. so that it could begin manufacturing the Sterling in house.
In April 2000 momentum continued to build as Mr. Gentry wrote in a press release that UniDyn had secured a contract for 35 shaker units--a million-dollar contract and a major event for the company. Then came the biggest deal of all--a press release announced that the company had reached another agreement with TechNet, this time for $250 million of Sterling units. Mr. Gentry disclosed that the contract was signed by Hiroshi Tsuriya.6 This was the biggest contract of all for UniDyn and it drove up the stock price like never before.
UniDyn, however, never did become the leader in its industry that it looked likely to become.
The reason is simple.
It was all a lie.
Let's start with the million-dollar shaker contract. What the press release failed to disclose was that this contract was with Avalon--by now a subsidiary of UniDyn. Failing to mention in a press release that an important contract was between a parent and a subsidiary is an important detail that Mr. Gentry should not have omitted.
But that was a small matter. It also turned out that IBM had never actually tested the Sterling. United States v. Jenkins, 633 F.3d 788, 795 (9th Cir. 2011). UniDyn's disclosure in its 1998 SEC filings--that it was in the process of obtaining a patent on the Sterling--was not entirely true either, unless one counts Mr. Gentry's decision to keep the design of the Sterling "in his head" for protection as a very, very preliminary part of the patenting process. The supposed contracts UniDyn had entered into for the Sterling? Not ever really signed. The 1999 disclosure that...
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