Barnette v. Commissioner
| Decision Date | 29 June 1992 |
| Docket Number | Docket No. 355-88.,Docket No. 29224-85.,Docket No. 17821-88.,Docket No. 535-85.,Docket No. 22809-82.,Docket No. 3282-88.,Docket No. 620-85.,Docket No. 11681-88.,Docket No. 16906-82.,Docket No. 3283-88.,Docket No. 3285-88.,Docket No. 11682-88. |
| Citation | 63 T.C.M. 3201 |
| Parties | Larry D. Barnette and Kathleen C. Barnette, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
John Harllee, Jr., 1050 Connecticut Ave., N.W., Washington, D.C., for the petitioners Larry D. Barnette, Allied Management Corp., Janet L. Barnette, and Leo David Barnette. Trevor W. Swett III, Richard E. Timbie, and Jill R. Shellow, for the petitioner Kathleen C. Barnette. John F. Dean, Bobby D. Burns, and Eli J. Dicker, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases the Commissioner determined deficiencies in and additions to petitioners' Federal income taxes as follows:
Following concessions,2 the issues for decision are: (1) Whether, for Federal tax purposes, JETS Wascherei GmbH (JETS Wascherei) was a subsidiary or a branch of its parent; (2) whether profits from West German laundry contracts should have been reported on the consolidated returns of petitioner Allied Management Corp. (hereinafter Allied) for the fiscal years ending May 31, 1978, 1979, 1980, and 1981; (3) whether the transfer of JETS Wascherei from Job Employment Temporary Services, Inc. (J.E.T.S.), to Old Dominion Corp., S.A. (Old Dominion) should be recognized for tax purposes; (4) whether petitioners Larry D. Barnette (Barnette) and Kathleen C. Barnette (Ms. Barnette) failed to report subpart F income from a controlled foreign corporation on their joint returns for years 1977 through 1980; (5) whether petitioners Barnette and Ms. Barnette failed to report $51,825 in bonding fee income on their joint 1980 return; (6) whether Ms. Barnette should be relieved of her tax liability for years 1977 through 1980 pursuant to section 6013(e);3 (7) whether Old Dominion's foreign personal holding company income for 1983, 1984, and 1985 should be taxable to the holders of the common stock rather than the holder of the preferred stock; (8) whether a transfer of $3,625,000 from Old Dominion to Allied resulted in an actual dividend from Old Dominion to Barnette in 1985, or, alternatively, whether petitioners Ms. Barnette, Janet L. Barnette, and Leo D. Barnette failed to include as income on their respective 1985 returns their pro rata share of Old Dominion's increase in earnings invested in U.S. property pursuant to section 951; (9) whether Barnette failed to report a total of $5,930,378 as a dividend from Allied on his 1985 return as a result of Allied's making $7 million available to him to post bond so as to remain at liberty during the pendency of his criminal appeal; (10) whether the 1985 redemption of Old Dominion common and preferred stock held by Jets Services, Inc. (Jets Services), resulted in ordinary income rather than capital gain being reportable on Allied's 1985 return; (11) whether Barnette's underpayments of tax for years 1977, 1978, 1979, and 1980, and Allied's underpayments of tax for fiscal years ending May 31, 1975, 1978, 1979, 1980, 1981, and 1982, were due to fraud; (12) whether Barnette may credit the restitution that he allegedly paid, pursuant to a District Court criminal sentence, against his fraud additions to tax; (13) whether Barnette is entitled to a $7 million loss deduction for 1985; (14) whether Barnette and Ms. Barnette failed to report capital gain on their 1985 separate returns arising out of the disposition of Old Dominion Insurance Co. (Old Dominion of Florida) stock; and (15) whether respondent erred in determining that additions to tax for substantial understatement pursuant to section 6661 applied to Barnette and Ms. Barnette's 1983 and 1984 joint returns, Allied's fiscal year ended May 31, 1984 and 1985 returns, Barnette and Ms. Barnette's 1985 separate returns, and the separate 1984 and 1985 returns of Leo D. and Janet L. Barnette.
Some of the facts have been stipulated and are so found. A conclusion of law has been stipulated; it has been ignored. King v. United States [81-1 USTC ¶ 9307], 641 F.2d 253 (5th Cir. 1981); Godlewski v. Commissioner [Dec. 44,554], 90 T.C. 200 (1988). The stipulations of fact and accompanying exhibits are incorporated herein by this reference.
Petitioners Barnette and Ms. Barnette, husband and wife, resided in Jacksonville, Florida, at the time they filed all of their petitions herein.4 They timely filed joint Federal income tax returns for all years in issue except 1985, in which they each timely filed a separate return.
Petitioners Leo D. and Janet L. Barnette both resided in Jacksonville, Florida, at the time they filed their petitions. They are the children of Barnette and Ms. Barnette. Leo D. and Janet L. Barnette, as well as their parents, each filed their returns on the basis of the calendar year and used the cash method of accounting.
Petitioner Allied is a Delaware corporation and had its principal office in Jacksonville, Florida, at the time it filed its petitions. At all times during the calendar years 1976 through 1986, Barnette owned in excess of 95 percent, but less than all, of the capital stock of Allied and was its president. Barnette, Ms. Barnette, and one other person served as its directors.
J.E.T.S. and Jets Services, both incorporated in Florida, were wholly owned subsidiaries of Allied. For all the years at issue, J.E.T.S. and Jets Services were included in the consolidated income tax returns filed by Allied. Allied, as well as each of the subsidiaries included on its consolidated returns, filed its returns on the basis of a fiscal year ended May 31 and used the accrual method of accounting.
During the early 1970's, Allied entered the business of Government contracting, particularly those contracts that called for services of a simple and often menial nature. Thereafter, Government contracting constituted...
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