Frierdich v. C.I.R.
| Decision Date | 12 February 1991 |
| Docket Number | No. 89-3794,89-3794 |
| Parties | -555, 91-1 USTC P 50,074 Michael V. FRIERDICH and Connie J. Frierdich, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Michael V. Frierdich and Connie J. Frierdich, Columbia, Ill., pro se.
Arthur W. Morris, Frierdich, Lopinot & Morris, Columbia, Ill., for petitioners-appellants.
Peter K. Scott, I.R.S., Gary R. Allen, Jordan L. Glickstein, William S. Estabrook, Dept. of Justice, Tax Div., Appellate Section, and Charles S. Casazza, U.S. Tax Court, Washington, D.C., for respondent-appellee.
Before POSNER, MANION, and KANNE, Circuit Judges.
Petitioner-appellant Michael V. Frierdich and his wife Connie ("Frierdich") petitioned the United States Tax Court for a redetermination of a federal income tax deficiency assessed against them by the Internal Revenue Service ("IRS"). The IRS claimed unpaid taxes on $100,000 that Frierdich should have included in his taxable gross income for the year 1980. Frierdich (an attorney) insists that the $100,000 in question was a loan from a client who had also hired him to handle the estate of her recently deceased husband. The IRS claimed that the $100,000 was actually an advance payment for legal services simply disguised as a loan in order to defer taxes.
The Tax Court, after a trial and reconsideration, held that Frierdich had not met his burden of proof in establishing that the arrangement between him and his client was a loan. Rather, it concluded that the transaction was an advancement of legal fees for services to be rendered in the future. For the following reasons, we do not find the Tax Court's holding to be clearly erroneous and affirm the Tax Court's decision.
Frierdich has been an attorney living and practicing law in Columbia, Illinois since 1970. Sometime in his career Frierdich met George F. Reeves, Jr., an Illinois businessman. George was at first a client of Frierdich's, but beginning about 1973 or 1974 they also became partners in real estate transactions and business enterprises. George's wife Ruth was a principal in some of her husband's business ventures and dealings with Frierdich.
On August 1, 1979, when George died, Ruth was designated as his estate's executor. At the time of George's death, Ruth asked Frierdich to be her attorney and the attorney for the estate. Frierdich agreed.
On January 1, 1980, five months after George's death, Frierdich prepared and signed a document entitled "Promissory Note" in the face amount of $100,000. In apparent consideration for the note, Frierdich received the sum of $100,000 from Ruth. The note called for Frierdich to pay Ruth the principal sum of $100,000 together with interest at the rate of eight percent per year until paid. The document provided in part: "Said principal interest [sic] shall be due and payable at the time of payment of attorney's fees due [Frierdich] subject to closing of the estate of George S. Reeves, Jr." The note further stated: "In the event of default, the undersigned further authorizes Ruth S. Reeves to reduce from any amounts owed [Frierdich], as attorney for the executor and estate of George F. Reeves, Jr., amounts due here entered plus accrued interest." The note did not provide for any schedule or time frame for the repayment of the $100,000, nor did it specify a definite date whereby the estate must be closed and the loan paid. 1
On November 6, 1986, the IRS issued a statutory notice of deficiency to Frierdich and his wife asserting that the $100,000 was really an advance of estate attorney fees that was not reported on Frierdich's 1980 income tax return. Frierdich and his wife petitioned the Tax Court to review the asserted deficiencies.
The Tax Court considered certain objective factors to determine the taxpayer's intent and whether a bona fide loan occurred. The factors derived from case law and applied by the Tax Court included: (1) the existence or non-existence of a debt instrument; (2) provisions for security, interest payments, and a fixed payment date; (3) whether or not repayments of the loan were made; (4) the taxpayer's ability to repay the loan; (5) the borrower's receipt of compensation; and (6) the testimony of the taxpayer. See Matter of Uneco, Inc., 532 F.2d 1204, 1208 (8th Cir.1976); In the Matter of Indian Lake Estates, Inc., 448 F.2d 574, 578-79 (5th Cir.1971); Haber v. Commissioner, 52 T.C. 255 (1969), aff'd 422 F.2d 198 (5th Cir.1970).
The Tax Court, in holding for the IRS, found that the transaction between Frierdich and Ruth Reeves was not a loan, but instead amounted to an impermissible sheltering of part of the legal fees owed by the estate. The holding was partly based upon the "Promissory Note's" terms which linked repayment with the closing of George Reeves' estate. The Tax Court also noted a lack of arm's-length bargaining between Frierdich and Mrs. Reeves, further diminishing the likelihood that it was a true loan. Holding that the $100,000 should have been reported on Frierdich's 1980 taxable gross income, the Tax Court ordered due the tax deficiencies assessed by the IRS. Frierdich appeals.
The question on appeal is whether the $100,000 Reeves transferred to Frierdich was intended as a loan or as a prepayment for legal services. The Tax Court found Frierdich had no intent to repay the "loan." Since the determination of a taxpayer's intent is a question of fact, Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960), and Comdisco, Inc. v. United States, 756 F.2d 569, 575 (7th Cir.1985), we confine our review to the clearly erroneous standard of Rule 52(a). Thus we will reverse only if, on the basis of all the evidence, we are convinced that a mistake has been made. See United States v. LaSalle National Bank, 437 U.S. 298, 305, 98 S.Ct. 2357, 2361, 57 L.Ed.2d 221 (1978). Since much of the evidence consisted of Frierdich's own testimony, the Tax Court had to determine his credibility. The "clearly erroneous" standard is particularly appropriate where the Tax Court must make determinations as to the credibility of witnesses. Busch v. Commissioner, 728 F.2d 945, 950 (7th Cir.1984).
Frierdich had the burden of proving to the Tax Court that the $100,000 he received was non-taxable proceeds of a bona fide loan and not an advance payment for legal services to be rendered in the future. Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933); Lerch v. Commissioner, 877 F.2d 624, 631 (7th Cir.1989). Frierdich's explanation concerning the intention and operation of the "Promissory Note" is not implausible. If Frierdich had satisfied his burden of proof, the proceeds of the loan would not constitute taxable income to him. The Tax Court, however, determined that the transaction did not result from arm's-length bargaining and that the "Promissory Note" did not contain typical loan formalities which would indicate that Frierdich intended to repay the money. Our review of the case is not one which attempts to determine the greater probability of competing theories explaining certain factual events. We are instead charged with determining whether the Tax Court's decision is one which leaves us "with the definite and firm conviction that a mistake has been made." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). Based upon the authority cited by the Tax Court as applied to the facts of this case, we cannot say that the Tax Court's legal conclusion was "clearly erroneous."
For Frierdich to enjoy the $100,000 transfer as a loan he must clearly demonstrate some intent to repay. Such intent is demonstrated by the objective facts of each case from which the court has to determine Frierdich's actual intent or motive. Busch v. Commissioner, supra; Haag v. Commissioner, 88 T.C. 604, 615-16 (1987). The Tax Court, in rejecting Frierdich's claim, referred to many factual circumstances surrounding the $100,000 transfer which are uncharacteristic of a bona fide loan. The Court noted that the transfer of the money (which was incidentally used for a legitimate business purpose) was not a transaction bargained for at arm's length between the parties. To support this point, the Tax Court noted that the interest rate on the "loan" provided for in the "Promissory Note" was set at a constant 8% per annum. This rate, in comparison to the prevailing market interest rates in the early 1980's, was peculiarly low. For example, the prime rate of interest (the rate charged by commercial banks to their best customers) for each of the first five years of the loan period was 15.27, 18.87, 14.86, 10.71, 12.04, and 9.93. Obviously, this transaction viewed strictly from the relatively low rate of return was a loser for the "lender" Ruth Reeves. The Tax Court recognized that an informed and capable party when considering only the interest rate would have no incentive to participate in this transaction. But a loan providing for a below-market interest rate does not, by itself, suggest a diminished intent to repay. Frierdich in his brief and at oral argument explained that the 8% rate was set to approximate the parties' impression of what an average market rate of interest would be over the anticipated life of the loan. Indeed, we see that in later years there was a pronounced reduction in the prevailing market rates (approaching the rate stipulated in the loan document). Although Frierdich's prediction for interest rates was not precise, to say the least, few others predicted the upsurge of rates in 1980 and 1981. Thus Frierdich's interest rate provision has arguable business validity.
Additionally, the Tax Court disapproved of the parties' tying the due date on the loan to the estate's closing....
To continue reading
Request your trial
-
Pioneer Hi-Bred Intern. v. Holden Foundation Seeds, Inc.
... ... United States, 293 F. 1013, 1014 (D.C.Cir".1923), 11 and this court's application of Frye in United States v. Two Bulls, 918 F.2d 56, 60-61 (8th Cir.1990). 12 ... Page 1230 ... \xC2" ... ...
-
United States v. Beavers
...1826 (using the phrase “true loan”); Crowley v. C.I.R., 962 F.2d 1077, 1082 (1st Cir.1992) (using “bona fide loan”); Frierdich v. C.I.R., 925 F.2d 180, 185–86 (7th Cir.1991) (using both “true loan” and “ bona fide loan”); Moore v. United States, 412 F.2d 974, 978 (5th Cir.1969) (using “bona......
-
Teong-Chan Gaw v. Commissioner
...testimony can justify drawing an adverse inference from their absence. See Frierdich v. Commissioner [91-1 USTC ¶ 50,074], 925 F.2d 180, 185 (7th Cir. 1991), affg. [Dec. 45,530(M)] T.C. Memo. 1989-393; see also Stoumen v. Commissioner, supra. Petitioner's testimony was at times vague, evasi......
-
In re Repository Technologies, Inc.
...the terms are similar to a regular commercial loan. In re Kids Creek Partners, L.P., 212 B.R. at 931; see e.g., Frierdich v. C.I.R., 925 F.2d 180, 183 (7th Cir.1991). "No one factor is controlling or decisive, and the court must look to the particular circumstances of each case." Roth Steel......
-
A Small Question in the Big Statute: Does Section 402 of Sarbanes-oxley Prohibit Defense Advancements?
...Welch, 204 F.3d at 1230; Crowley, 962 F.2d at 1083. 123. Welch, 204 F.3d at 1230 (citing Crowley, 962 F.2d at 1079; Frierdich v. Comm'r, 925 F.2d 180, 182 (7th Cir. 1991); Piedmont Minerals Co. v. United States, 429 F.2d 560, 563 (4th Cir. 1970)). See In re AutoStyle Plastics, Inc., 238 B.R......
-
CHAPTER 2 CONFIDENTIALITY AND NON-DISCLOSURE AGREEMENTS FOR DUE DILIGENCE
...or the like, and not requiring all persons viewing the information to enter NDAs. Tax Track, 478 F.3d at 787. [11] Rockwell, 925 F.2d at 180. [12] See, e.g., Tax Track, 478 F.3d at 787 (Courts "will enforce [confidentiality] agreements only when the information sought to be protected is act......
-
Repeal the Defend Trade Secret Act: Why Congress Can't Rely on Trade Secret Law to Protect America's Trade Secrets
...925 F.2d 174 (7th Cir. 1991).244. Id. at 179.245. Id.246. Landes & Posner, supra note 37, at 369.247. Rockwell Graphic Systems, Inc., 925 F.2d at 180. 148 Landes & Posner, supra note 37, at 367 (emphasis added). 149. See generally Uri Gneezy & Aldo Rustichini, A Fine is a Price, 29 J. Legal......
-
Analysis of and reflections on recent cases and rulings.
...for this rule to apply, however, the obligation to repay "must be unconditional and not contingent upon some future event" (Frierdich, 925 F.2d 180, 185 (7th Cir. 1991), aff'g T.C. Memo. 1989-393). Where an obligation to pay arises only upon the occurrence of a future event, the Tax Court h......