USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 93-1684
FREDERICK L. WEBB,
Plaintiff, Appellant,
v.
INTERNAL REVENUE SERVICE OF THE
UNITED STATES OF AMERICA,
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
___________________
____________________
Before
Selya, Circuit Judge,
_____________
Bownes, Senior Circuit Judge,
____________________
and Cyr, Circuit Judge.
_____________
____________________
Brendan J. Shea, with whom Joseph J. Brodigan and Langan, Dempsey
_______________ __________________ _______________
& Brodigan were on brief for appellant.
__________
Teresa T. Milton, with whom Michael L. Paup, Acting Assistant
_________________ ________________
Attorney General, A. John Pappalardo, Acting United States Attorney,
___________________
Gary R. Allen and David I. Pincus were on brief for appellee.
_____________ _______________
____________________
February 3, 1994
____________________
CYR, Circuit Judge. We must decide whether government
CYR, Circuit Judge.
_____________
loan proceeds embezzled with intent to repay are taxable in the
year of the embezzlement.
I.
I.
Ronald and Sharon Pomella established River Realty
Trust ("Trust"), a qualified Massachusetts business trust, as the
entity which would operate the South River Marina in Scituate,
Massachusetts. Under the trust agreement, Sharon was designated
sole trustee and Ronald received title to all transferable Trust
stock. In April 1978, Ronald sold his Trust stock to appellant
Frederick L. Webb, who also became sole trustee. As sole trust-
ee, Webb applied for a United States Small Business Administra-
tion (SBA) storm disaster loan, representing to SBA that the
marina had sustained serious damage during the blizzard of
February 1978. Under SBA loan eligibility rules, applicants must
have owned (or contracted to buy) the property before the proper-
ty damage occurred. Appellant Webb therefore backdated the
marina purchase and sale agreement to January 3, 1978.
On July 15, 1978, SBA and the Trust executed a loan
agreement and promissory note which provided that the Trust would
use the loan proceeds ($376,900) to repair the marina ($196,900),
to replace marina inventory ($2,000), and to amortize two out-
standing Trust mortgages ($178,000). Webb signed the note as
2
"trustee."1 As a condition of the loan, Webb was required to
_______
submit receipts evidencing payments for marina repairs. Instead,
in September and October 1978 Webb diverted part of the SBA loan
proceeds ($64,730) toward the purchase of a garage and inventory
on a lot adjacent to the marina, and to acquire land for the Webb
Cranberry Company, his personal business. The diverted funds
were not reported on Webb's 1978 federal income tax return.
Webb was indicted by a federal grand jury on three
counts of making false statements on an SBA loan application, 15
U.S.C. 645 (1993), five counts of "embezzling" or "converting"
United States government funds, 18 U.S.C. 641 (1993), and two
counts of obstructing justice, 18 U.S.C. 1503, 1510 (1993).
Webb pled guilty to one "false statement" count, relating to the
backdated purchase and sale agreement, and to all five embezzle-
ment counts, which encompassed the unauthorized diversion of the
$64,730 to his personal use. Ultimately, the SBA called the
loan, and Webb repaid the entire balance.
In 1986, the Internal Revenue Service (IRS) assessed a
$37,369 deficiency against Webb for the tax year 1978, based in
part on the unreported $64,730. After Webb paid the deficiency,
he filed a timely claim for refund with the IRS, asserting that
the $64,730 represented bona fide loan proceeds not includable in
____ ____
gross income. After the IRS rejected the refund claim, Webb
brought the present action to recover a refund. See 26 U.S.C.
___
____________________
1The loan was personally guaranteed by Webb and one John
McNamara.
3
7422(a). The district court granted summary judgment to IRS.
The court concluded, in reliance on James v. United States, 366
_____ _____________
U.S. 213 (1961), that evidence of Webb's intent to repay the
embezzled SBA loan proceeds was immaterial as a matter of law.
Webb v. Internal Revenue Serv., 823 F. Supp. 29, 31-33 (D. Mass.
____ ______________________
1993). We affirm.
II.
II.
We review the grant of summary judgment de novo,
__ ____
employing the same standards incumbent on the district court.
"Summary judgment is appropriate where 'the pleadings, deposi-
tions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to judgment as a matter of law.'" Gaskell v. The
_______ ___
Harvard Coop. Soc'y, 3 F.3d 495, 497 (1st Cir. 1993) (quoting
____________________
Fed. R. Civ. P. 56(c)); Vanhaaren v. State Farm Mut. Auto. Ins.
_________ ___________________________
Co., 989 F.2d 1, 3 (1st Cir. 1993). In a refund action under
___
section 7422(a), the taxpayer must bear the burden of proving
that the challenged IRS tax assessment was erroneous. Lewis v.
_____
Reynolds, 284 U.S. 281, 283 (1932); see Bonilla-Aviles v. South-
________ ___ ______________ ______
mark San Juan, Inc., 992 F.2d 391, 393 (1st Cir. 1993) (if
_____________________
nonmoving party bears ultimate burden of proof, he must present
"definite" and "competent" evidence to survive summary judgment).
Webb's principal protest is that the district court mistakenly
concluded that it is immaterial whether he intended to repay the
4
SBA loan.
III.
III.
The issue presented is centered at the confluence of
two fundamental principles of federal tax law. On the one hand,
bona fide loan proceeds are not gross income to the borrower, see
____ ____ ___
Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203,
____________ ________________________________
207-08 (1990), because the contemporaneous economic benefit
realized upon receipt of the loan proceeds is counterbalanced by
the borrower's legal obligation to repay the loan. See McSpadden
___ _________
v. Commissioner, 50 T.C. 478, 491 (1968). The factual determina-
____________
tion as to whether a particular transaction is a bona fide loan
____ ____
turns on whether there are sufficient indicia of the parties'
intention that the monies advanced were to be repaid. See
___
Crowley v. Commissioner, 962 F.2d 1077, 1079 (1st Cir. 1992);
_______ ____________
Moore v. United States, 412 F.2d 974, 978 (5th Cir. 1969). At
_____ ______________
the same time, a line of Supreme Court cases indicates that
monies and other property acquired by misappropriation must be
reported as income in the year of their receipt. See James v.
___ _____
United States, 366 U.S. 213, 221 (1961) (embezzlement proceeds);
______________
Rutkin v. United States, 343 U.S. 130, 137-38 (1952) (extortion
______ ______________
proceeds).
The lot of the embezzler was not always so bleak.
Rather, in Commissioner v. Wilcox, 327 U.S. 404 (1945), the Court
____________ ______
held that embezzled monies were not income because the embezzler
___
held the monies "without any semblance of a bona fide claim of
5
right" and "under an unqualified duty and obligation to repay
. . . ." Id. at 408. Later, however, in a closely analogous
___
context, the Court held that extortion generates taxable earn-
ings. Rutkin, 343 U.S. at 138-39 (without explanation, limiting
______
Wilcox "to its facts"). The James Court, confronting the seeming
______ _____
anomaly created by Wilcox and Rutkin, overruled Wilcox and flatly
______ ______ ______
rejected the taxpayer's contention that "all unlawful gains
[e.g., extortion earnings] are taxable except those resulting
____ ______
from embezzlement . . . ." James, 366 U.S. at 219 (emphasis
_____
added). The Court explicated its holding as follows:
Whenever a taxpayer acquires earnings, law-
fully or unlawfully, without the consensual
___ __________
recognition, express or implied, of an obli-
___________ __ __ _____
gation to repay and without restriction as to
______ __ _____
their disposition, "he has received income
which he is required to return, even though
it may still be claimed that he is not enti-
tled to retain the money, and even though he
may still be adjudged liable to restore its
equivalent." In such case, the taxpayer has
"actual command over the property taxed
the actual benefit for which tax is paid . .
. ." This standard brings wrongful appropri-
ations within the broad sweep of "gross in-
come"; it excludes loans.
__ ________ _____
Id. at 219-20 (citations omitted) (emphasis added). Since James,
___ _____
the mere fact that an embezzler originally acquired lawful access
to monies in a fiduciary capacity does not foreclose their
taxation in the year of the embezzlement.
In a refund action under section 7422(a), therefore,
James presumably requires that the taxpayer prove either (i) that
_____ ______
he did not "acquire" earnings or (ii) that any such earnings were
__
"acquired" in one of two ways: under a "consensual recognition
6
of an obligation to repay" or subject to restrictions on their
disposition. Since the James Court did not elaborate on the
_____
meaning of "consensual recognition," however, see id. at 221-22,
___ ___
some post-James case law suggests that a taxpayer who misapp-
_____
ropriates monies, yet casts the transaction in the form of a
____
"loan" obligation, may foreclose summary judgment by establishing
a genuine issue as to his subjective intention to repay. See,
___
e.g., United States v. Rosenthal, 470 F.2d 837, 841-42 (2d Cir.
____ _____________ _________
1972) (reviewing factual findings of intent to repay), cert.
_____
denied, 412 U.S. 909 (1973).
______
IV.
IV.
Webb's argument seems to be that the last three words
in the above-quoted passage from James ("it excludes loans"), see
_____ ___
supra at p. 6, required the district court to consider whether he
_____
had a bona fide intention to repay. Thus, Webb would character-
____ ____
ize the events relevant to tax year 1978 as follows: although
the Trust was the named borrower on the SBA note, Webb was the de
__
facto borrower, and his signature on the note, whether as trustee
_____
or guarantor, betokens his continuing and binding obligation to
repay SBA.2 Therefore, he acquired the $376,900 (including the
____________________
2The parties have generated considerable needless confusion
concerning the nature and timing of the taxable event at issue in
this case. In its appellate brief and at oral argument, IRS
suggested that Webb may have embezzled the SBA loan funds at the
time he submitted the false loan application and the backdated
purchase agreement to SBA, since the SBA would not have approved
the loan to the Trust "but for" those misrepresentations. In
other words, Webb was not qualified for the loan, hence he never
acquired lawful access to the loan proceeds.
7
$64,730) under a "consensual recognition of an obligation to
repay," James, 366 U.S. at 219, and no taxable event occurred in
_____
July 1978. Moreover, no taxable event occurred in September-
October 1978 because either (1) he did not "acquire" any loan
funds in September-October 1978 (but merely applied funds he had
previously acquired to a use not authorized under the SBA loan
__________
agreement),3 or (2) if he first "acquired" the loan funds in
September-October 1978, either from the Trust or the SBA, he
nonetheless had a preexisting contractual obligation to repay the
___________
$376,000, which SBA could have enforced at any time.
V.
V.
____________________
We do not address this broader contention for three reasons.
First, if the IRS's characterization were correct, the entire
loan proceeds of $376,900 would have been taxable to Webb, or at
least the disbursements of $170,350 to the Trust and $178,000 to
amortize the Trust mortgages. IRS has never asserted that these
portions of the loan proceeds were taxable to Webb upon receipt.
Second, the record is unclear whether Webb's false statement
(i.e., the backdating of the marina purchase-sale agreement) was
____
"material" to SBA's decision to grant the Trust loan, nor is it
clear that Webb's guilty plea under 15 U.S.C. 645 would fore-
close relitigation of this particular issue, see, e.g., United
___ ____ ______
States v. Carter, 526 F.2d 1276, 1278 (5th Cir. 1976) (any
______ ______ ___
"false" statement), especially given the record evidence that
Webb induced the SBA loan with the aid of unscrupulous SBA
insiders. Finally, the five "embezzling" counts charge that
Webb's unlawful "acquisition" of the loan funds occurred in
September-October 1978, months after Webb's loan application and
______________________
the ensuing loan approval.
3The support for Webb's implicit assumptions is unclear.
See, e.g., United States v. Kristofic, 847 F.2d 1295, 1296-97
___ ____ _____________ _________
(7th Cir. 1988) (reversing 641 "embezzlement" conviction of SBA
borrower who subsequently used funds for unauthorized purposes;
following their disbursement, SBA had "contract" rights, but no
"property" rights); see also United States v. Lawson, 925 F.2d
___ ____ _____________ ______
1207, 1209-10 (9th Cir. 1991) (auctioneer for SBA could not be
convicted under 641 for unauthorized use of sale proceeds).
8
The record belies Webb's expedient characterization of
these events. Contrary to his implicit assumption, the record
reflects that the Trust, not Webb, was the borrower, and there-
___ ____ ________
fore, absent evidence or developed argumentation to the contrary,
see Rhode Island Hosp. Trust Nat'l Bank v. Howard Communications
___ ___________________________________ _____________________
Corp., 980 F.2d 823, 828 n.8 (1st Cir. 1992), we must treat the
_____
Trust as the separate juridical entity which "acquired" the
entire loan proceeds ($376,900) in July 1978. Cf. Moline Proper-
___ ______________
ties, Inc. v. Commissioner, 319 U.S. 436, 439 (1943) (in tax
___________ ____________
cases, corporate form will not be disregarded to allow reassign-
ment of corporate tax consequences to individual shareholder);
Burnet v. Commonwealth Improvement Co., 287 U.S. 415, 419 (1932)
______ _____________________________
(only in "unusual cases" will court disregard corporate form, and
rarely where that formality was previously wielded by taxpayer to
reap tax benefits); Town of Brookline v. Gorsuch, 667 F.2d 215,
_________________ _______
221 n.4 (1st Cir. 1982) ("It is almost black-letter law that for
purposes of the Internal Revenue Code, distinctions between a
corporation and its shareholders will be observed . . . because
the Code provides both benefits and burdens based explicitly on
the existence of at least formally independent corporations
. . . .").4 In September-October 1978, Webb breached his fidu-
ciary duty and "acquired" the $64,730 from the Trust by applying
____ ___ _____
____________________
4Massachusetts business trusts apparently possess many
essential attributes of corporations, see Mass. Gen. L. ch. 182,
___
1-14 (1993); Swartz v. Sher, 344 Mass. 636, 639 (1962).
______ ____
Moreover, the appellate record contains evidence (a copy of the
1979 Trust corporate income tax return) suggesting that Webb has
found it advantageous to treat the Trust as a discrete taxable
entity. See Burnet, 287 U.S. at 419.
___ ______
9
it to his personal use. Under James, Webb's fiduciary duty as
________ _____
sole trustee, see Terrydale Liquidating Trust v. Barness, 642 F.
___ ___________________________ _______
Supp. 917, 919 (S.D.N.Y. 1986) (trustee of Massachusetts "busi-
ness trust" acts under a fiduciary duty); Loring v. United
______ ______
States, 80 F. Supp. 781, 785 (D. Mass. 1948) (same), standing
______ ________
alone, would be inadequate, as a matter of law, to generate a
_____
trialworthy issue respecting his alleged intent to repay the
Trust. Webb, who bears the ultimate burden of proof, failed to
produce any evidence that the Trust formally loaned him the
$64,730, or that the Trust, as the putative "lender" under the
relevant James analysis, "consensually recogni[zed]" Webb's
_____
obligation to repay the funds to the Trust. Cf. Crowley, 962
___ _______
F.2d at 1079 (listing indicia of nontaxable "loan" to sharehold-
er, as distinguished from taxable "constructive dividend,"
including, inter alia, taxpayer's control over corporation, use
_____ ____
of customary loan documents). Thus, Webb's alleged obligation to
repay SBA is immaterial to the taxability of the September-
___
October 1978 "acquisitions."5 Regardless of the precise reach
of the James "consensual recognition" test, therefore, Webb
_____
failed to demonstrate a genuine issue of material fact with
respectto hisintentionto repaythe $64,730embezzledfrom theTrust.6
____________________
5Webb's potential liability as guarantor or trustee does not
alter the essential fact that the Trust was the SBA borrower to
which the loan proceeds were disbursed.
6Moreover, by his guilty plea Webb is collaterally estopped
from claiming that he personally "acquired" the $376,900 (inclu-
__
ding the $64,730) prior to September-October 1978. See 1B James
___
W. Moore, Jo D. Lucas, Thomas S. Currier, Moore's Federal Prac-
_____________________
tice 0.418[1], at 557 (2d ed. 1992) (guilty pleas are conclu-
____
10
Affirmed.
Affirmed.
________
____________________
sive against defendant in subsequent civil suit as to all facts
necessarily "decided" as predicate for criminal conviction);
Fontneau v. United States, 654 F.2d 8, 10 (1st Cir. 1981) ("Re-
________ _____________
litigation of such issues [in a civil tax proceeding] . . .
'simply because the [] court's decision [to accept the guilty
plea] may have been erroneous' is not . . . allowed.") (quoting
Allen v. McCurry, 449 U.S. 90, 101 (1980)). In order to have
_____ _______
been convicted of "embezzling" $64,730 in September-October 1978,
as alleged in the indictment, see supra note 2, Webb would have
___ _____
had to "acquire" monies of a third party at that time, either
__ ____ ____
directly from the SBA, or from the Trust. See United States v.
___ _____________
Lawson, 925 F.2d 1207, 1209 (9th Cir. 1991) (an essential element
______
under 18 U.S.C. 641 is misappropriation of property of the
United States ("money . . . or thing of value of the United
States")). One cannot embezzle from oneself. Thus, Webb effec-
tively conceded that he "acquired" the $64,730 in September-
October 1978, at the earliest.
__ ___ ________
11
