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.
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.
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.
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.
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.
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.
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