Tax Court In Brief | Barrington v. Commissioner | Guilty Plea To Determine Tax Liability And Constructive Divident Versus Compensation

Published date11 July 2022
Subject MatterCorporate/Commercial Law, Tax, Corporate and Company Law, Income Tax, Tax Authorities, Securities, Shareholders
Law FirmFreeman Law
AuthorFreeman Law

Barrington v. Commissioner, T.C. Memo. 2022-68 | July 6, 2022 | Buch, J.| Dkt. No. 1781-14


Summary: From October 2001 to July 2002, John Stewart Jakows served time in prison for a felony conviction for forgery and theft. After his release, he changed his name to John Edward Barrington joined with his wife, Deanna Barrington, in creating real estate development businesses'referred to here as Barrington Corp.' that were, in reality, a fraud. The Barringtons bilked over $6 million from investors and others. The Barringtons ran all their personal expenses through Barrington Corp. and received no salary. The Barringtons failed to file individual income tax returns, and only one of the three corporations filed an income tax return for 2003, reporting no income and no expenses. The FBI investigated the Barringtons and involved the IRS's Criminal Investigation Division (CI). A grand jury indicted the Barringtons on multiple counts. Ultimately, the Barringtons entered separate guilty pleas, but both pleaded guilty of tax evasion. Documents obtained by the government in pursuit of the Barringtons' cases consisted of more than 10,000 pages. In the pleas, the Barringtons each admitted to receiving unreported income totaling over $600,000 for 2003 through 2005. The plea agreements separated, in various amounts, the unreported income into six categories of personal expenses paid by Barrington Corp.: (1) home mortgage, (2) vehicle and boat, (3) household furnishings, (4) cash/check withdrawal, (5) legal fees, and (6) miscellaneous expenses labeled as "general ledger shareholders equity." The FBI's records were destroyed in 2009 in the ordinary course of its operations. The Barringtons had the opportunity to retrieve the records before their destruction but they did not do so. The IRS, in its civil examination, used the information and figures from the plea agreements as the basis for deficiency determinations and additions to tax for all three years. The Barringtons filed a joint petition challenging the IRS's deficiency determinations, mainly focused on the IRS's determinations of compensation from Barrington Corp. and Mrs. Barrington claimed she incurred expenses that offset her 2003 gross receipts. The case was tried to the Tax Court, and this opinion followed.

Key Issues:

  • Whether the Barringtons carried their burden and showed that the IRS's determinations of deficiencies were arbitrary or erroneous when they were based primarily on the Barringtons' guilty...

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