Busch v. C.I.R., 83-1920

• Decision Date: 01 March 1984
• Docket Number: No. 83-1920,83-1920
• Parties: 84-1 USTC P 9266 Richard E. BUSCH Jr. & Jean N. Busch, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 945

728 F.2d 945

84-1 USTC P 9266

Richard E. BUSCH Jr. & Jean N. Busch, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 83-1920.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 11, 1984.

Decided March 1, 1984. ^*

Randall S. Goulding, Chicago, Ill., for petitioners-appellants.

Bruce R. Ellisen, Atty., Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellee.

Before ESCHBACH and FLAUM, Circuit Judges, and SWYGERT, Senior Circuit Judge.

FLAUM, Circuit Judge.

This appeal raises the issue of whether certain withdrawals made by a taxpayer from his wholly-owned corporation should be treated as loans or dividends in determining the taxpayer's income tax liability. The Tax Court determined that the amounts withdrawn were taxable as dividends. For the reasons stated below, we affirm the Tax Court.

I.

Appellant Richard E. Busch Jr. ¹ is the sole stockholder, the president, and a director of the Fort Wayne Chiropractic Clinic, Inc. (the corporation). He is also an employee of the corporation.

During the tax years 1973, 1974, and 1975, Busch made a series of withdrawals of money from the corporation. The corporation maintained an account in the corporate books and records titled "Notes Receivable--R.E. Busch." The outstanding balance in the account at the end of each year was as follows: for 1973, $11,358.70; for 1974, $28,260.87; for 1975, $40,358.29. The total amount of money withdrawn exceeded $300,000.

The sums withdrawn were used primarily to pay construction expenses and mortgage expenses for a new building to house the corporation. Approximately $265,000 was used for this purpose. Busch and his wife held title to the building. They reported rent from other tenants in the building as income on their personal income tax return. Busch used some of the balance of the withdrawn sums for personal purposes.

Busch executed a series of promissory demand notes to the corporation during the years in question. The notes were noninterest-bearing and none contained a repayment schedule. At some point, Busch executed a note incorporating the old notes; this new note did provide for interest. The notes did not cover the entire amount withdrawn.

Busch gave the corporation no collateral for the withdrawn amounts. The corporate record book did not contain a corporate resolution authorizing the loans. In 1980, Busch prepared such a resolution, backdated it to 1973, and inserted it into the records.

During the tax years in question, the corporation's retained earnings grew from $19,277.38 for the fiscal year ending September 30, 1973, to $74,427.75 for the fiscal year ending September 30, 1976. The corporation did not declare or pay any dividends during this period.

Busch repaid some of the withdrawn sums prior to being contacted by the IRS for an audit. Some of the repayments were bookkeeping entries involving no transfer of cash. For example, some repayments were set-offs against Busch's salary from the corporation. Similarly, Busch borrowed $6,000 from the corporation's profitsharing trust and used this to repay part of the sums.

The IRS initially contacted Busch regarding an audit in April 1976. He fully repaid the withdrawn funds by the end of 1980.

The Tax Court found that the net amounts withdrawn by Busch each year were constructive dividends and thus includible in his taxable income. ² The court held that the character of the withdrawn sums depends on whether, at the time of the withdrawal, the taxpayer intended to repay the sums. The court found that the withdrawals were not intended to be repaid and thus were not loans.

On appeal, Busch argues that the Tax Court erred in determining that the withdrawn sums were not loans. He argues that the government did not prove that he did not intend to repay. Busch maintains that the fact that the loans were fully repaid, with substantial repayments prior to audit, is controlling.

The Commissioner of Internal Revenue argues that the Tax Court correctly determined that the withdrawals were constructive dividends and not loans. The IRS argues that the courts look to a number of factors to determine intent; no single factor is controlling. Here, the IRS maintains, the facts and circumstances do not demonstrate intent to repay at the time the sums were withdrawn.

II.

Whether withdrawals by a shareholder from a corporation are treated for tax purposes as loans or dividends turns on whether, at the time of the withdrawals, the taxpayer intended to repay them. Alterman Foods, Inc. v. United States, 505 F.2d 873, 875-76 (5th Cir.1975) [hereinafter cited as Alterman I ]; Livernois Trust v. Commissioner, 433 F.2d 879, 882 (6th Cir.1970); Spheeris v. Commissioner, 284 F.2d 928, 931 (7th Cir.1960), cert. denied, 366 U.S. 944, 81 S.Ct. 1673, 6 L.Ed.2d 855 (1961); Alterman Foods, Inc. v. United States, 611 F.2d 866, 869, 221 Ct.Cl. 218 (1979) [hereinafter cited as Alterman II ]. To determine whether the taxpayer intended to repay the withdrawals, courts have looked to a number of factors. Some courts have viewed intent as merely one factor, and then have balanced that intent against various objective factors. See, e.g., Williams v. Commissioner, 627 F.2d 1032, 1034 (10th Cir.1980); Commissioner v. Makransky, 321 F.2d 598, 600 (3d Cir.1963). We believe that the better view is to treat such objective factors as indications of intent. United States v. Pomponio, 563 F.2d 659, 663 (4th Cir.1977) (appeal of criminal conviction for tax evasion), cert. denied, 435 U.S. 942, 98 S.Ct. 1521, 55 L.Ed.2d 538 (1978); Tollefsen v. Commissioner, 431 F.2d 511, 513 (2d Cir.1970), cert. denied, 401 U.S. 908, 91 S.Ct. 867, 27 L.Ed.2d 806 (1971); Berthold v. Commissioner, 404 F.2d 119, 122 (4th Cir.1968); Alterman II, 611 F.2d at 869; see J. Mertens, The Law of Federal Income Taxation Sec. 9.21 (1981); Note, Stockholder Withdrawals--Loans or Dividends?, 10 Tax L.Rev. 569, 571-72 (1955). This court implicitly adopted that view in Spheeris v. Commissioner, 284 F.2d at 931.

Although the taxpayer's testimony that he intended to repay is one factor, it is not determinative, particularly where the objective facts of the transaction contradict the testimony. Williams v. Commissioner, 627 F.2d at 1034; Alterman I, 505 F.2d at 877; Berthold v. Commissioner, 404 F.2d at 121; cf. Glimco v. Commissioner, 397 F.2d 537, 540-41 (7th Cir.) (Tax Court need not accept taxpayer's uncontradicted testimony), cert. denied, 393 U.S. 981, 89 S.Ct. 452, 21 L.Ed.2d 442 (1968). Other factors include: the extent of shareholder control of the corporation; the retained earnings and dividend history of the corporation; the size of the withdrawals; the presence of conventional indicia of debt, such as promissory notes, collateral, and provision for interest; treatment of advances in corporate records; the history of repayment; and the taxpayer's use of the funds. Alterman I, 505 F.2d at 877 n. 7; Spheeris v. Commissioner, 284 F.2d at 931. The taxpayer has the burden of proving his intent. Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933).

The first issue is the scope of this court's review of the Tax Court's determination that the withdrawals in question were dividends. Although this court once held that such a determination presented a mixed question of law and fact, Spheeris v. Commissioner, 284 F.2d at 931, we are now persuaded that it is purely a question of fact.

In Spheeris, the court held that the intent of the taxpayer was a "major factor" in determining whether the withdrawals were loans or dividends. The court went on to examine various objective facts indicative of the parties' intent. The court, however, did not list any factors other than intent to be used in determining the character of the withdrawals. Thus, we construe the court's statement that intent was a major factor to mean that intent is the only factor. A court may look to various facts to determine intent, but once the taxpayer's intent is found, that finding is conclusive of the legal issue of loans versus dividends. United States v. Pomponio, 563 F.2d at 662; Alterman I, 505 F.2d at 875; Alterman II, 611 F.2d at 869.

In Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960), the Supreme Court held that the issue of a taxpayer's intent was a question of fact. Id. at 290-91, 80 S.Ct. at 1199-1200. This conclusion led a number of circuits to hold that the issue of taxpayer intent in the context of loan versus dividend is a question of fact. See Estate of Taschler v. United States, 440 F.2d 72, 75 (3d Cir.1971); Tollefsen v. Commissioner, 431 F.2d at 513; Berthold v. Commissioner, 404 F.2d at 121; Chism's Estate v. Commissioner, 322 F.2d 956, 960 (9th Cir.1963); cf. United States v. Pomponio, 563 F.2d at 662 (criminal appeal). Contra Williams v. Commissioner, 627 F.2d at 1034; Alterman I, 505 F.2d at 876. ³ More recently, in Pullman-Standard v. Swint, 456 U.S. 273, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982), the Supreme Court held that the issue of discriminatory intent in a Title VII case is a question of fact. The Court ruled that where "intent" means "actual motive," it is a question of fact; where intent is a legal presumption to be drawn from a factual showing of something less than actual motive, the issue may be a mixed question of law and fact. ⁴ Id. at 289-90, 102 S.Ct. at 1790-91. The Court defined a mixed question of law and fact as one involving "questions in which the historical facts are admitted or established, the rule of law is undisputed, and the issue is whether the facts satisfy the statutory standard ...." Id. at 289 n. 19, 102 S.Ct. at 1790 n. 19. The Court made it clear that the standard of review is the same for "ultimate" facts as it is for subsidiary facts. Id. at 287, 102 S.Ct. at 1789. Even where the legal result in a case turns on a factual finding, an appellate court is not free to make an independent review of the facts....