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, Demp

_______________
__________________
____________
& Brodigan were on brief for appellant.
__________
Teresa T. Milton, with whom Michael L. Paup, Acting Assist
_________________
________________
Attorney General, A. John Pappalardo, Acting United States Attorn
___________________
Gary R. Allen and David I. Pincus were on brief for appellee.
_____________
_______________
____________________
February 3, 1994
____________________

CYR,
CYR,

Circuit Judge.
Circuit Judge.
_____________

loan proceeds embezzled

We must decide whether government

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

Massachusetts.

South River Marina

Under the trust agreement, Sharon was designated

sole trustee and Ronald received

stock.

In April 1978, Ronald

Frederick L.

marina

title to all transferable Trust

sold his Trust stock to appellant

Webb, who also became sole trustee.

ee, Webb applied for a

tion (SBA)

had sustained

As sole trust-

United States Small Business

storm disaster

February 1978.

in Scituate,

loan, representing

serious

damage

during

to
the

AdministraSBA that
blizzard

the

of

Under SBA loan eligibility rules, applicants must

have owned (or contracted to buy) the property before the property

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),

standing Trust mortgages

($178,000).

and to amortize
Webb signed

two out-

the note

as

"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

counts of making false statements

U.S.C.

federal grand

jury on

three

on an SBA loan application, 15

645 (1993), five counts of "embezzling" or "converting"

United

States government funds, 18 U.S.C.

641 (1993), and two

counts

of obstructing justice,

1503,

Webb pled guilty to one

backdated purchase
ment

18 U.S.C.

1510 (1993).

"false statement" count, relating to the

and sale agreement, and to all five embezzle-

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

part on the unreported $64,730.

he filed a

1978, based in

After Webb paid the deficiency,

timely claim for refund with the

IRS, asserting that

the $64,730 represented bona fide loan proceeds not includable in

____ ____
gross

income.

brought the

After the

IRS rejected

present action to recover

the refund
a refund.

See
___

claim, Webb

26 U.S.C.

____________________
1The loan
McNamara.

was personally

guaranteed by

Webb and

one John

7422(a).

The

district court granted summary

The court concluded,

U.S.

213 (1961),

embezzled SBA

in reliance on James v.
_____

that evidence

of Webb's

loan proceeds was

United States, 366

_____________
intent to

repay the

immaterial as a matter

Webb v. Internal Revenue Serv., 823 F.

____
______________________
1993).

judgment to IRS.

of law.

Supp. 29, 31-33 (D. Mass.

We affirm.
II.
II.
We

review the

employing the

same standards

"Summary judgment is
tions,
together

answers

to

with the

genuine issue
is entitled to

grant

of

summary

incumbent on

appropriate where
interrogatories,
affidavits, if

judgment as a

de
__

the district

'the pleadings,
and

any,

as to any material fact

judgment

admissions
show that

novo,
____

court.

deposion

file,

there is

no

and that the moving party

matter of law.'"

Gaskell v.

The

_______
Harvard Coop. Soc'y, 3
____________________
Fed. R. Civ.
Co., 989 F.2d
___

F.3d 495, 497

(1st Cir.

___

1993) (quoting

P. 56(c)); Vanhaaren v. State Farm Mut. Auto. Ins.

_________
___________________________
1, 3 (1st Cir.

section 7422(a),

the taxpayer

that the challenged

Reynolds, 284 U.S.
________

1993).

In

must bear

a refund action
the burden

under

of proving

IRS tax assessment was erroneous.

Lewis v.
_____

281, 283 (1932); see Bonilla-Aviles v. South___ ______________

______

mark San Juan, Inc.,

_____________________

992 F.2d

nonmoving party bears ultimate

391,

393 (1st

Cir. 1993)

burden of proof, he must

(if

present

"definite" and "competent" evidence to survive summary judgment).

Webb's

principal protest is

that the district

concluded that it is immaterial

court mistakenly

whether he intended to repay the

4

SBA loan.
III.
III.

The

issue presented is

centered at the

two fundamental principles of federal tax law.

On

confluence of

the one hand,

bona fide loan proceeds are not gross income to the borrower, see
____ ____
___
Commissioner v.
____________

Indianapolis Power & Light Co., 493 U.S.

________________________________

207-08

because

(1990),

realized upon

the

contemporaneous

economic

v. Commissioner, 50 T.C. 478, 491 (1968).

____________

on whether

intention
Crowley v.
_______

there are sufficient

that the

monies

advanced

Commissioner, 962 F.2d

____________

the

same time,

monies

a line

of

and other property

reported as income

is a bona fide loan

____ ____

indicia of
were to

1077, 1079

Moore v. United States, 412 F.2d 974,

_____
______________

See McSpadden
___ _________

The factual determina-

as to whether a particular transaction

turns

benefit

receipt of the loan proceeds is counterbalanced by

the borrower's legal obligation to repay the loan.

tion

203,

be

the parties'
repaid.

(1st Cir.

1992);

978 (5th Cir. 1969).

Supreme Court

cases indicates

acquired by misappropriation

in the year of

See
___

their receipt.

See
___

At

that

must be

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

held the

monies were not income because the embezzler

___

monies "without any semblance

of a bona fide

claim of

and obligation

to repay

right" and

"under an

unqualified duty

. . . ."

Id. at 408.
___

context,

the Court held

ings.

Later,

closely analogous

that extortion generates

Rutkin, 343 U.S. at 138-39

______

Wilcox "to its facts").

______

however, in a

taxable earn-

(without explanation, limiting

The James Court, confronting the seeming

_____

anomaly created by Wilcox and Rutkin, overruled Wilcox and flatly

______
______
______
rejected the
[e.g.,
____

taxpayer's

extortion earnings]

from embezzlement
added).

contention

. . . ."

that

are taxable
James,
_____

"all
except
______

366 U.S.

unlawful

those resulting
at 219

The Court explicated its holding as follows:

Whenever a taxpayer acquires
fully or unlawfully, without

gains

earnings, lawthe consensual

___ __________
recognition, express or implied, of an obli___________
__ __ _____
gation to repay and without restriction as to
______ __ _____
their disposition, "he has received income

(emphasis

which he is required to return, even though

it may still be claimed that he is not entitled 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 appropriations within the broad sweep of "gross income"; 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

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

of an

obligation to repay"

disposition.
meaning

Since

or subject to restrictions

the James
_____

Court did

not elaborate

on their

on the

of "consensual recognition," however, see id. at 221-22,

___ ___

some

post-James case law

_____

ropriates

monies, yet

suggests that

casts the

a taxpayer

transaction in

who misapp-

the form
____

of a

"loan" obligation, may foreclose summary judgment by establishing

a genuine issue as
e.g., United States
____ _____________
1972)

to his subjective intention

to repay.

v. Rosenthal, 470 F.2d 837,

_________

(reviewing factual

findings of

intent

See,
___

841-42 (2d Cir.

to repay),

cert.
_____

that the last three

words

denied, 412 U.S. 909 (1973).

______
IV.
IV.
Webb's argument seems to be

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

1978 as follows:

to tax year

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
repay

SBA.2

his continuing and binding

Therefore, he

obligation to

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

repay," James, 366 U.S. at 219,

_____
July 1978.

Moreover,

October 1978
funds in

an obligation

to

and no taxable event occurred in

no taxable

because either

of

event occurred in

(1) he did

September-

not "acquire"

any loan

September-October 1978 (but merely applied funds he had

previously acquired
__________
agreement),3

to a use

or (2)

September-October

if he

not authorized under the

first "acquired"

1978, either

from the

the loan

Trust or

SBA loan

funds in

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 foreclose 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

these events.

Contrary to

reflects that the

Webb's expedient characterization of

his implicit assumption,

Trust, not Webb, was the

___ ____

the record

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,

_____
Trust

as

the

828 n.8 (1st Cir. 1992), we

separate juridical

entity

which

entire loan proceeds ($376,900) in July 1978.

ties, Inc. v.
___________

Commissioner, 319
____________

cases, corporate form will not

ment of corporate

U.S. 436,

must treat the

"acquired" the

Cf. Moline Proper___ ______________

439 (1943)

(in tax

be disregarded to allow reassign-

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,

_________________
_______

221 n.4 (1st Cir. 1982) ("It is

purposes of

the Internal

corporation and its

the Code provides
the

existence

. . . .").4

In

almost black-letter law that for

Revenue Code,

distinctions between

shareholders will be observed

both benefits and burdens

of

at

least

667 F.2d 215,

formally

. . . because

based explicitly on

independent corporations

September-October 1978, Webb breached

ciary duty and "acquired" the

his fidu-

$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

entity. See Burnet, 287 U.S. at 419.
___ ______

discrete taxable

it to

his personal use.

________

Under James, Webb's

_____

fiduciary duty as

sole trustee, see Terrydale Liquidating Trust v. Barness,

___ ___________________________
_______
Supp. 917, 919
ness

trust"

States, 80
______
alone,
_____

produce

acts

under

F. Supp.

a fiduciary

781, 785 (D.

would be inadequate,

trialworthy
Trust.

(S.D.N.Y. 1986) (trustee of

issue respecting

Webb, who bears

any

$64,730, or
relevant
obligation

that the Trust,

analysis,

to repay

Mass. 1948)

his alleged

the

as

distinguished

v. United
______

(same), standing
________

of law, to
intent

Trust formally

generate a

to repay

"consensually

the funds to

from

loaned

as the putative "lender"

taxable

the

to

him the

under the

recogni[zed]"

the Trust.

F.2d at 1079 (listing indicia of nontaxable

er,

Loring
______

the ultimate burden of proof, failed

evidence that

James
_____

Massachusetts "busi-

duty);

as a matter

642 F.

Webb's

Cf. Crowley, 962

___ _______

"loan" to sharehold-

"constructive

dividend,"

including, inter alia, taxpayer's

_____ ____
of customary loan documents).
repay

SBA is
___

immaterial

to the

1978 "acquisitions."5

of

James
_____

failed

"consensual

to demonstrate

use

Thus, Webb's alleged obligation to

October
the

control over corporation,

taxability

of the

Regardless of the

recognition"
genuine issue

September-

precise reach

test, therefore,
of

material fact

Webb

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 effectively conceded that he "acquired" the $64,730 in September-

October 1978, at the earliest.

__ ___ ________
11