962 F.2d 1077 (1st Cir. 1992), 91-1613, Crowley v. C.I.R.

Docket Nº:91-1613.
Citation:962 F.2d 1077
Party Name:Ralph D. CROWLEY and Frances A. Crowley, Petitioners, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.
Case Date:April 28, 1992
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

Page 1077

962 F.2d 1077 (1st Cir. 1992)

Ralph D. CROWLEY and Frances A. Crowley, Petitioners, Appellants,



No. 91-1613.

United States Court of Appeals, First Circuit

April 28, 1992

Heard Dec. 2, 1991.

Page 1078

James C. Donnelly, Jr. with whom Joan O. Vorster and Mirick, O'Connell, DeMallie & Lougee, Worcester, Mass., were on brief, for petitioners, appellants.

Janet A. Bradley with whom Gary R. Allen, Chief, Appellate Section Tax Div. and David I. Pincus, Tax Div., Washington, D.C., were on brief, for respondent, appellee.

Before SELYA, Circuit Judge, COFFIN, Senior Circuit Judge, and CYR, Circuit Judge.

CYR, Circuit Judge.

The Internal Revenue Service ("IRS") assessed a $206,935 deficiency against appellants Ralph and Frances Crowley based on their failure to declare, as taxable income in 1982, $443,769 in discretionary withdrawals by Ralph Crowley from Polar Corporation ("Polar"), a closely-held corporation of which Ralph and his three brothers were the only individual shareholders. The IRS determined that the alleged loans were taxable as "constructive dividends." The Tax Court upheld the deficiency assessment against appellants. We affirm.



In 1982, the four Crowley brothers 2 each held 20.43% of Polar's capital stock. The remaining 18.23% was held by the Polar Employee Profit Sharing Plan ("Polar Plan"). Appellant Ralph Crowley was Chairman of the Board of Directors, as well as an employee of Polar. The other Crowley brothers were corporate officers.

For many years, the Crowley brothers each maintained an "Officer Loan" account at Polar, which reflected their discretionary withdrawals of corporate funds for their own use. Each brother was permitted to withdraw whatever amount he deemed appropriate, without prior authorization from one another or anyone else. The amounts outstanding in each brother's account were reflected on Polar's certified financial statements as accounts receivable from corporate officers (current assets) and on Polar's federal income tax returns as loans

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to stockholders. The Crowley brothers executed no promissory notes, pledged no collateral, and undertook no loan repayment terms or interest obligations, though each brother annually submitted a confirmation letter to Polar's auditors, reflecting the amount "due" or "payable" to Polar. Throughout the period in question, Polar declared no dividends.

The exceptionally large amount of the Polar withdrawals made by Ralph Crowley in 1982, totalling $443,769, was used to fund an unsecured loan to a company which was developing a commercial ski area at Wachusett Mountain ("Wachusett"). During 1983, Denis Crowley, a Polar Plan trustee, expressed concern about Ralph Crowley's large withdrawals from Polar during 1982 and recommended that Ralph's withdrawal privileges be suspended. Although the Polar Board of Directors, comprised of the Crowley brothers, for the first time imposed interest charges on "officer loans" in 1983, Ralph Crowley's withdrawal privileges were unaffected. Ralph's account balance peaked at $590,083.57 in 1983, but declined during each succeeding year. 3 During 1988, the year in which IRS assessed the challenged 1982 tax deficiency, Ralph and Denis Crowley acquired all the Polar shares held by their brothers.



  1. Loan or Constructive Dividend

    A shareholder distribution is a loan, rather than a constructive dividend, if at the time of its disbursement the parties intended that it be repaid. Alterman Foods, Inc. v. United States, 611 F.2d 866, 869 (Ct.Cl.1979) [hereinafter Alterman Foods II ]; M.J. Byorick, Inc. v. Commissioner, 55 T.C.M. (CCH) 1037, 1047 (1988); Paul W. Thielking, O.D., P.C. v. Commissioner, 53 T.C.M. (CCH) 746, 749 (1987); Miele v. Commissioner, 56 T.C. 556, 567 (1971), aff'd mem., 474 F.2d 1338 (3d Cir.), cert. denied, 414 U.S. 982, 94 S.Ct. 279, 38 L.Ed.2d 225 (1973). Courts typically determine whether the requisite intent to repay was present by examining available objective evidence of the parties' intentions, including the degree of corporate control enjoyed by the taxpayer; the corporate earnings and dividend history; the use of customary loan documentation, such as promissory notes, security agreements or mortgages; the creation of legal obligations attendant to customary lending transactions, such as payment of interest, repayment schedules and maturity dates; the manner of treatment accorded the disbursements, as reflected in corporate records and financial statements; the existence of restrictions on the amounts of the disbursements; the magnitude of the disbursements; the ability of the shareholder to repay; whether the corporation undertook to enforce repayment; the repayment history; and the taxpayer's disposition of the corporate funds disbursed. See, e.g., Busch v. Commissioner, 728 F.2d 945, 948 (7th Cir.1984); Alterman Foods II, 611 F.2d at 869; Alterman Foods, Inc. v. United States, 505 F.2d 873, 877 n. 7 (5th Cir.1974) [hereinafter Alterman Foods I ]. The constructive dividend inquiry concerns itself with the parties' subjective intent, rather than objective intent, although recourse to objective evidence is required to ferret out and corroborate actual intent. Busch, 728 F.2d at 949 (the parties' intent is not determined on the basis of a legal presumption formed from the objective evidence); M.J. Byorick, Inc., 55 T.C.M. (CCH) at 1047 (court inquires into subjective intent, as borne out by objective factors); Faist v. Commissioner, 40 T.C.M. (CCH) 1128, 1132 (1980) (same); Pizzarelli v. Commissioner, 40 T.C.M. (CCH) 156, 159 (1980) (same); Koufman v. Commissioner, 35 T.C.M. (CCH) 1509, 1523 (1976) (objective indicia provide "helpful guideposts" en route to determination "whether repayment was actually intended.").

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    The determination whether the parties to the transaction actually intended a loan or a dividend presents an issue of fact. Jaques v. Commissioner, 935 F.2d 104, 106-07 (6th Cir.1991); 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). See Ogden Co. v. Commissioner, 412 F.2d 223, 225 (1st Cir.1969) ("clearly erroneous" standard). Cf. Cumpiano v. Banco Santander Puerto Rico, 902 F.2d 148, 152 (1st Cir.1990) ("Findings concerning an actor's intent fit neatly within the integument of the 'clearly erroneous' rule.").

  2. Standard of Review

    We review the Tax Court's ultimate "constructive dividend" finding for "clear error," Ogden, 412 F.2d at 225, like any other fact found by the Tax Court, I.R.C., § 7482(a); Fed.R.Civ.P. 52(a); Commissioner v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 1200, 4 L.Ed.2d 1218 (1960); Manzoli v. Commissioner, 904 F.2d 101, 103 (1st Cir.1990). A finding of fact is not clearly erroneous unless " 'the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.' " Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948)); Lundquist v. Precision Valley Aviation, Inc., 946 F.2d 8, 11 (1st Cir.1991) (per curiam).

    "Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." Anderson, 470 U.S. at 574, 105 S.Ct. at 1511 (emphasis added); Rodriguez-Morales v. Veterans Admin., 931 F.2d 980, 982 (1st Cir.1991). The inferences drawn from undisputed facts are entitled to the same deferential standard of review, Duberstein, 363 U.S. at 291, 80 S.Ct. at 1200; Anderson v. Beatrice Foods Co., 900 F.2d 388, 392 (1st Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 233, 112 L.Ed.2d 193 (1990), as are all credibility determinations undergirding the ultimate finding of fact, DesRosiers v. Moran, 949 F.2d 15, 19 (1st Cir.1991) (citing cases). The determination whether to credit the testimony of the taxpayer as to his actual intent requires just such a finding, which may be set aside only if clearly erroneous. 4

  3. Subsidiary Findings

    The ultimate Tax Court finding that appellant's withdrawals were constructive dividends was based principally on seven subsidiary findings. 5 Weighing all the evidence,

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    the Tax Court held that appellant had not met the burden of proving that the parties intended that his Polar fund withdrawals in 1982 were to be repaid. See Rule 142(a), Rules of Practice and Procedure of the United States Tax Court (petitioner bears burden of proof); Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933); Whitcomb v. Commissioner, 733 F.2d 191, 194 (1st Cir.1984). Following an exhaustive review, we conclude that the ultimate "constructive dividend" determination must be affirmed.

    1. Unrestricted Withdrawal Privilege

    Although appellant concedes that he enjoyed the privilege of withdrawing Polar funds without prior approval from anyone, he contends that significant restraints resulted from his limited control of Polar's corporate affairs, since he was not a majority shareholder. Not only was appellant the Chairman of the Board of Directors, however, but the record deprives his contention of any significance, since the alleged constraints on appellant's withdrawal privileges in no sense inhibited his disproportionately large withdrawals, leaving him free to withdraw far more funds in 1982 than the aggregate amount withdrawn by the three brothers who held majority control.

    Appellant emphasizes in particular the reactions by Denis and Edward Crowley, during 1983, to appellant's extraordinarily large withdrawals in 1982, as well as his "repayments" on his Polar account balance beginning in...

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