
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
