Opinion ID: 476321
Heading Depth: 2
Heading Rank: 3

Heading: The Tax Consequences

Text: 19 While Barnette's corporation, Old Dominion, featured prominently in J.E.T.S.' scheme to inflate supply costs, the corporation also played a substantial role in Barnette's plot to willfully evade [and] defeat his income tax liability. 26 U.S.C. Sec. 7201 (1982). 20 As discussed previously, the German laundry contract awarded to J.E.T.S. commenced on January 1, 1977. J.E.T.S., part of the Allied conglomerate, had a tax or fiscal year ending May 31. Every June, Allied's independent accountants audited Allied's books and records and prepared financial statements and income tax returns. 21 In June, 1977, Allied's accountants were prepared to audit the German laundry contract records. Instead of disclosing the laundry contract records, Barnette presented a contract for the sale of JETS Waescherei GmbH by J.E.T.S. to Old Dominion. The contract, dated August 30, 1976, reflected a purchase price of $100,000. Barnette told the accountants that he sold JETS Waescherei GmbH because of the risks associated with the German laundry contract and because Allied was undercapitalized. Barnette did not tell the accountants that he owned Old Dominion. He merely told them that the contract had been executed on December 31, 1976 and that receipts from the German laundry contract should not be listed on Allied's financial statements and income tax returns. One of the accountants testified that he was surprised J.E.T.S. sold a very large Government contract for a small amount of money. 22 The evidence showed, however, that J.E.T.S. did not sell the contract. The government presented sufficient evidence to establish that the sale of JETS Waescherei GmbH was a sham, carried out solely to evade federal income taxes on the laundry contract profits. 6 23 The contract, dated August 30, 1976, was signed by Barnette for J.E.T.S. and Peter Garner for Old Dominion. A J.E.T.S.' employee testified that he first introduced Peter Garner to Barnette in February, 1977. 24 Other testimony also established that J.E.T.S. did not enter into a contract for the sale of JETS Waescherei GmbH in August 1976. Barnette's banker testified that soon after executing the German laundry contract, Barnette became interested in tax planning and looked for methods of sheltering his profits. Through Barnette's attorney, the government introduced documents, including billing records, to show that Barnette did not confer with his attorney until February 16, 1977. In the files subpoenaed from the attorney, there was a draft of the contract for the sale of JETS Waescherei GmbH to Old Dominion. On the draft were the attorney's handwritten notations. The contract Barnette presented to his accountants, dated August 30, 1976, incorporated the attorney's changes. The August 30, 1976 contract could not, therefore, have been executed until after Barnette's attorney made the changes, presumably sometime after February 16, 1977. 25 In addition, public records from Panama indicated that Old Dominion was not activated until April 18, 1977. The supervisor of a Panamanian printing company testified that the paper used to make the Old Dominion stock certificates dated August, 1976, was not printed until 1977. The paper for the transfer of subscription of Old Dominion stock, dated August 30, 1976, was not printed until 1977. 26 As far as the Army was concerned, the sale of JETS Waescherei GmbH never took place. The Army never met or negotiated with any representative of Old Dominion. No contract, extension or modification ever mentioned Old Dominion. There was never any correspondence between the Army and Old Dominion. As late as September, 1980, Leo Barnette signed a DD 633 proposal on behalf of J.E.T.S.. In fact, long after the alleged sale of JETS Waescherei GmbH, Barnette, Gibbs, Allied and Leo Barnette continued to represent that J.E.T.S. had the German laundry contract. 27 According to the government, once it was demonstrated that the sale of JETS Waescherei GmbH was a sham, three consequences followed: First, Allied remained the recipient of the German laundry profits and should have, but did not, report them on its consolidated return. 7 Second, certain payments from JETS Waescherei GmbH to Old Dominion (and to Hamilton) constituted constructive dividends from Allied to Barnette, dividend income which Barnette failed to report or pay to the IRS. 8 Third, Allied, doing business as J.E.T.S., had to include JETS Waescherei GmbH's gross receipts in its gross receipts; if Allied had included these receipts in its gross receipts, Allied and its affiliated companies would have been large and thus ineligible to bid on certain set aside contracts administered by the SBA.