Opinion ID: 702150
Heading Depth: 1
Heading Rank: 2

Heading: Enhancements for Failure to Report Income

Text: 8 The district court added two points to each defendant's base offense level under Guideline Section 2T1.1. That section mandates a two-level enhancement [i]f the defendant failed to report or correctly identify the source of income exceeding $10,000 in any year from criminal activity. The district court found that on their 1988 returns, each defendant failed to report income in excess of $10,000 derived from the fraudulent land sales to the Retirement Fund. Bontrager and Fisher each contest the enhancement. They argue that: (1) they were not obligated to report proceeds from the land sales as income on their 1988 returns; and (2) the land sales were not criminal activities. Neither argument has merit.
9 Whether the district court properly determined that defendants had an obligation to report profits from the sales to the Retirement Fund is a question of law reviewed de novo. United States v. Buenrostro-Torres, 24 F.3d 1173, 1174 (9th Cir. 1994). Underlying factual determinations are reviewed for clear error. Id. 10 Bontrager and Fisher contend that because the sales agreements with the Retirement Fund granted them an option to repurchase the properties for a fixed sum, the transactions were essentially loans, not sales. We reject the argument. 11 Defendants correctly point out that real estate transactions that appear to be sales may actually constitute loans for income tax purposes. See Blake v. Commissioner, 8 T.C. 546 (1947) (acq.); 2 Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts, p 40.7.1 (2d ed. 1990). The substance of the transaction, not the form, determines whether it is a sale or a loan. Green v. Commissioner, 367 F.2d 823, 825 (7th Cir. 1966). Consequently, transactions memorialized by sales agreements or consummated by execution of deeds are not necessarily considered sales for tax purposes. 12 Several courts have treated sales coupled with options to repurchase as loans for tax reporting purposes. Green, 367 F.2d at 823-25 (sale of stock accompanied by repurchase option treated as loan); Patton v. Jonas, 249 F.2d 375 (7th Cir. 1957) (obligation to purchase coupled with option created indebtedness given business context); Blake, 8 T.C. at 552-55 (quitclaim with option to repurchase constituted mortgage). 2 A critical consideration, however, is the intent and understanding of the parties. 3 13 No record evidence indicates that any party, including defendants, viewed the land sales to the Retirement Fund as loans. In fact, the record supports the contrary conclusion. No loan documents were prepared. Each sales contract between VPI and the Retirement Fund stated that the parties agree[] that [the] repurchase option shall not constitute a financing device and Seller shall have no equity interest, rights of redemption, or other rights to the property after the closing ... other than solely as optionee. No record evidence suggests that the Retirement Fund or the defendants viewed the transactions as loans, not sales. The district court properly concluded that defendants had an obligation to report proceeds from the land sales to the Retirement Fund on their 1988 tax returns.
14 The district court's determination that defendants' conduct toward the Retirement Fund transactions was criminal activity is a question of law reviewed de novo. United States v. Ford, 989 F.2d 347 (9th Cir. 1993). Under Sec. 2T1.3(b)(1), criminal activity is any conduct constituting a criminal offense under federal, state, or local law. Id. at 350. 15 Defendants purchased the land from the original landowners for roughly $5.8 million and immediately sold it to the Retirement Fund for approximately $6.2 million. Defendants contend that the source of the $400,000 differential between the purchase price and sale price was the original landowners, not the Retirement Fund. They argue that because their purchases from the original landowners were indisputably legal, the $400,000 was not derived from criminal activity. The argument lacks merit. The Retirement Fund was the source of the $400,000 differential, not the original landowners. Defendants' fraudulent inducement to the Retirement Fund renders the $400,000 income derived from criminal activity. 4 The two-level enhancement under Guideline Sec. 2T1.1 was proper.