Hardee v. U.S.

Decision Date11 May 1983
Docket NumberNo. 84-79,84-79
Citation708 F.2d 661
Parties83-1 USTC P 9353 W.L. HARDEE and Elnora L. Hardee, Appellants, v. The UNITED STATES, Appellee. Appeal
CourtU.S. Court of Appeals — Federal Circuit

Michael W. Fisher, Jacksonville, Fla., argued for appellant. With him on the brief was John S. Ball, Jacksonville, Fla.

Theodore D. Peyser, Jr., Washington, D.C., argued for appellee. With him on the brief were Glenn L. Archer, Jr., Asst. Atty. Gen., Donald H. Olson and Kevin B. Shea, Washington, D.C.

Before MARKEY, Chief Judge, and NICHOLS, BALDWIN, KASHIWA and NIES, Circuit Judges.

NICHOLS, Circuit Judge.

This case is before the court on appeal from a judgment * of the United States Claims Court in which the trial judge held that an interest-free loan from a closely-held corporation to its majority shareholder and president results in taxable income to this borrower. The trial judge thus refused to follow the well-entrenched principle of tax law that such loans do not result in taxable gain to the borrower. First articulated by the United States Tax Court in Dean v. Commissioner, 35 T.C. 1083 (1961), this principle has since been accepted by five federal courts of appeal (the First, Second, Fourth, Fifth, and Sixth Circuit Courts). In a somewhat different factual context, the Ninth Circuit has also affirmed the holding in Dean. No circuit court has held that such a loan results in a taxable economic benefit. For the reasons set forth below, we decline to deviate from the long-standing precedent against treating such loans as a taxable event, and, consequently, we hold that the taxpayer here did not realize income from the receipt of his interest-free loans. Accordingly, we reverse.

I FACTS

This is a suit under the Internal Revenue laws of the United States seeking refund of income taxes assessed against and collected from appellants, W.L. Hardee and Elnora L. Hardee, husband and wife, for the calendar years 1973 and 1974. Appellants are the principal shareholders of Sea Garden Sales Company, Inc. ("Sea Garden"), a closely-held corporation engaged in several business activities, including marine, industrial, and municipal supplies, farming and ranching, and the operation of a fleet of deep-sea shrimp trawlers. W.L. Hardee, the majority shareholder, was and is the president of Sea Garden and has served as director on the company's four-member board of directors. He owns approximately 52 percent of Sea Garden's stock, his wife owns approximately 42 percent, and his daughter and son-in-law own the remainder, roughly 6 percent. Since Elnora L. Hardee appears as a party solely because she filed a joint income tax return with her husband for the years in question, all references to taxpayer or appellant are to W.L. Hardee.

During the calendar years 1973 and 1974, appellant was indebted to Sea Garden, yet he was not obligated to pay, nor did he pay, any interest to Sea Garden on this indebtedness. Appellant's indebtedness during these years was the result of a company practice dating back to Sea Garden's inception in the mid-1950's whereby appellant deferred receipt of his salary until the end of the company's fiscal year (June 30th) and instead borrowed money, interest-free, from it from time to time. Appellant explained that he instituted this practice in order to enhance the company's asset posture during the year. Appellant maintained a running account with his company against which any loans would be charged and to which any repayments would be credited. At the end of its fiscal year, Sea Garden would credit appellant's salary to this account, and appellant would execute a bona fide promissory note (interest-free) for the balance still due the company. While Sea Garden occasionally By the end of 1972, appellant owed Sea Garden approximately $503,000. At the close of 1973, the first year in question, appellant's indebtedness to Sea Garden increased to about $595,000. The second year at issue ended with appellant owing about $474,000. During this 2-year period, Sea Garden was indebted to the First National Bank of Brownsville, Texas, for monies borrowed from time to time pursuant to a line of credit with the bank. Sea Garden's indebtedness ranged from $105,000 to $765,000, and while the loans were unsecured, appellant personally guaranteed them. The record, however, does not disclose the existence of any pattern or substantial connection between Sea Garden's borrowings from the Brownsville bank and appellant's own borrowings from Sea Garden, nor does the record enable the court to identify any certain relationship between Sea Garden's and appellant's borrowing needs. During 1973 and 1974, appellant also acted as the personal guarantor for more than $347,000 of outstanding indebtedness Sea Garden had incurred with the First National Bank of Harlingen, Texas, to finance the purchase of trawlers used in the company's shrimp operations, and which indebtedness was secured by collateral in the trawlers purchased with the loan proceeds.

made interest-free loans to other corporate employees, these loans were for much smaller amounts (e.g., $100) than those obtained by appellant.

Appellant's approximate net worth during the period in question was as follows:

                December 31, 1972--$1,198,000
                December 31, 1973--$1,223,000
                December 31, 1974--$1,301,000
                

Before this period, appellant had invested a substantial amount of money in tax-exempt municipal bonds. By December 31, 1972, appellant held such bonds with a cost basis of about $534,000. By the end of 1973, he increased his holdings to a cost basis of about $600,000, yet by the end of 1974 he had decreased these holdings to about $546,000.

In reviewing appellant's tax liability for 1973 and 1974, the Commissioner asserted that as a result of the interest-free loans from his corporation, appellant had realized an economic benefit measured by the interest he would have been required to pay had he obtained the loans in an arm's-length transaction. Setting the interest rate at 7 percent (a figure appellant does not contest), the Commissioner increased appellant's gross income accordingly and assessed a deficiency of $24,926.61 for 1973 and $24,675.02 for 1974. Appellant paid the assessed deficiencies and sued for their recovery. The trial judge concluded that the value of the loans was properly includable in appellant's gross income for the years in question, but reserved judgment on quantum for later proceedings because the record did not establish the amounts and timing of the off-setting salary payments, and thus did not show the precise value of the loans.

II OPINION

From the inception of our modern income tax laws in 1913 until Dean in 1961, the treasury never took the position that an interest-free loan by a corporation to its shareholder-officers resulted in the realization of income. During this period, the Internal Revenue Code has defined taxable income in broad and sweeping terms, yet the government did not see fit, either in litigation or by rule, regulation, or administrative practice, to treat such loans as a taxable event.

The first break in the government's stance occurred in Dean, where the Commissioner attempted to tax the value of the taxpayers' use of over $2 million dollars they borrowed interest-free from the corporation they controlled. The Tax Court held that those taxpayers realized no taxable income attributable to their receipt of the interest-free loans. The Commissioner did not pursue an appeal of this decision, nor did he announce his "nonacquiescence." For 12 years thereafter, the government reverted to the status quo, making no move to tax such recipients of interest-free loans.

At the end of 1973, after appellant here had completed the first of the two calendar In sum, it took the government nearly 50 years before it thought to treat the receipt of an interest-free loan as a taxable event, and over 20 years of case law has since held to the opposite view. In the case at bar, the trial judge recognized the long-standing precedent against the government's position, yet "with much hesitation" and "reluctance" he rejected the view of Dean and its progeny. Op. at 8. In reversing the decision of the trial judge, we do not disparage his economic analysis of the transaction. Rather, we follow the Dean holding because it represents a well-entrenched interpretation that has logical support. Even if logically assailable, such an interpretation should be changed by Congress, not the courts. In United States v. Byrum, 408 U.S. 125, 135, 92 S.Ct. 2382, 2389, 33 L.Ed.2d 238 (1972), the Supreme Court stated the approach courts should take when faced with an established principle of tax law:

                years in question, the Commissioner finally stated his "nonacquiescence" to the 1961 Dean decision.  1973-2 C.B. 4.   What then ensued can best be described as a losing campaign by the government in the federal courts to overrule or modify Dean.   To date, the five United States courts of appeal considering this issue have rejected the government's position that interest-free loans by a corporation to its controlling shareholder result in a taxable gain.   Parks v. Commissioner, 686 F.2d 408 (6th Cir.1982);   Baker v. Commissioner, 677 F.2d 11 (2d Cir.1982);   Beaton v. Commissioner, 664 F.2d 315 (1st Cir.1981);   Martin v. Commissioner, 649 F.2d 1133 (5th Cir.1981);   Suttle v. Commissioner, 625 F.2d 1127 (4th Cir.1980).   In addition, the Ninth Circuit expressly affirmed Dean in order to hold that a preferential interest rate on a loan given by a lender in consideration for favorable news coverage in the borrower's newspaper, did not result in the realization of taxable income on the part of the borrower.   Commissioner v. Greenspun, 670 F.2d 123 (1982)
                

* * * Courts properly have been reluctant to depart from an interpretation of tax law which has been generally accepted when the departure could have potentially far-reaching consequences. When a principle...

To continue reading

Request your trial
9 cases
  • Dickman v. Commissioner of Internal Revenue
    • United States
    • United States Supreme Court
    • February 22, 1984
    ...federal income tax consequences to interest-free loans in the absence of congressional action on the subject. See Hardee v. United States, 708 F.2d 661 (CA Fed.1983); Parks v. Commissioner, 686 F.2d 408 (CA6 1982); Baker v. Commissioner, 677 F.2d 11 (CA2 1982); Commissioner v. Grenspun, 670......
  • Roe v. Commissioner
    • United States
    • United States Tax Court
    • October 8, 1986
    ...Dec. 34,331, 67 T.C. 1060 (1977), affd. 78-2 USTC s 13,260 585 F.2d 234 (7th Cir. 1978) (grantor to trust); Hardee v. United States 83-1 USTC s 9353, 708 F.2d 661 (Fed. Cir. 1983); Parks v. Commissioner 82-2 USTC s 9584, 686 F.2d 408 (6th Cir. 1982), affg. a Memorandum Opinion of this Court......
  • Donahoe v. Arpaio
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Arizona
    • December 5, 2013
    ...that MCSO knew were not required to be reported by law. See Doc. 1073–3 at 47; Doc. 1112–11 at 109; see generally Hardee v. United States, 708 F.2d 661 (Fed.Cir.1983). The subsequent Stapley II indictment included the mortgage fraud charges. It did not include the tax fraud charges. See Doc......
  • Donahoe v. Arpaio, CV-10-02756-PHX-NVW
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Arizona
    • December 5, 2013
    ...44MCSO knew were not required to be reported by law. See Doc. 1073-3 at 47; Doc. 1112-11 at 109; see generally Hardee v. United States, 708 F.2d 661 (Fed. Cir. 1983). The subsequent Stapley II indictment included the mortgage fraud charges. It did not include the tax fraud charges. See Doc.......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT