Opinion ID: 179430
Heading Depth: 4
Heading Rank: 1

Heading: Loans vs. Income

Text: Edkins first contends that the court misconstrued the $290,000 that he withdrew from Baby Bliss to purchase two homes as income when it should have viewed the withdrawals as loans for $110,000 and $180,000. Treating the withdrawals as loans rather than income, as Edkins urges, -5- No. 08-2605 United States v. Edkins would decrease the total tax loss attributed to him, which in turn would decrease Edkins’s base offense level. In determining whether a withdrawal from a business constitutes a loan, “the intention of the parties” controls the analysis. Berthold v. Comm’r, 404 F.2d 119, 122 (6th Cir. 1968). The parties must have “an actual intent that money advanced will be repaid.” Id. This court considers the taxpayer’s testimony that he intended to repay the money in question, but, especially when the alleged creditor and debtor are really one and the same, “such self-serving testimony ‘can appropriately be viewed with some diffidence unless supported by other facts which bring the transaction much closer to a normal arms-length loan.’” Jaques v. Comm’r, 935 F.2d 104, 107 (6th Cir. 1991) (quoting Berthold, 404 F.2d at 122). Objective factors to consider include “[n]ormal [s]ecurity, interest and repayment arrangements (or efforts to secure same).” Berthold, 404 F.2d at 122. In contrast, a withdrawal constitutes income when “‘its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it.’” United States v. Curtis, 782 F.2d 593, 595 (6th Cir. 1986) (quoting Davis v. United States, 226 F.2d 331, 334 (6th Cir. 1955)). We review the district court’s decision to treat the money as income for clear error. See Jaques, 935 F.2d at 107. Although Edkins testified that he always intended to repay the loans upon the sale of the homes, [R. 58, Nov. 20, 2008 Hr’g Tr. 102, 131], the district court explicitly found Edkins’s testimony not credible, [R. 57, Dec. 15, 2008 Hr’g Tr. 6–7, 10]. Moreover, because the creditor and debtor here are really one and the same, this court views Edkins’s testimony with more skepticism unless other objective factors bring this case closer to a normal arms-length transaction. See Jaques, -6- No. 08-2605 United States v. Edkins 935 F.2d at 107. Edkins points to such objective factors as his memorialization of the “loan” in two promissory notes, transfer of the mortgage to Baby Bliss, repayment of all but $15,000 of the money after the sale of the homes, and declaration of the unpaid interest as income on his 1996 and 1997 tax returns. Edkins’s use of the promissory notes executed between Baby Bliss and C.L.E., Inc. (a corporation Edkins created that had no income or expenses), undercuts rather than supports his argument. First, Edkins began transferring money from Baby Bliss to his personal account in 1995, but signed the promissory notes many months later, in April 1996 and August 1997. This time gap “militates against assigning much weight” to the promissory notes. Patrick v. Comm’r, 75 T.C.M. (CCH) 1629, 1633 (1998), aff’d, No. 98-1487, 1999 WL 282613 (6th Cir. Apr. 30, 1999). Second, though the promissory notes specified a monthly payment schedule, by interlineation Edkins edited the notes’ terms to allow him to waive any payment default. Furthermore, the form notes lacked a deadline for full repayment and required no security, undermining the legitimacy of his stance. See Dietrick v. Comm’r, 881 F.2d 336, 340 (6th Cir. 1989); Bergersen v. Comm’r, 70 T.C.M. (CCH) 568, 586 (1995), aff’d, 109 F.3d 56 (1st Cir. 1997). Edkins’s assertion that he repaid the funds to Baby Bliss similarly fails to support his claim. According to the PSR, after reviewing bank records and other information, an IRS agent determined that Edkins made it look as though he returned the funds to Baby Bliss when he had not actually done so. [PSR ¶ 35]. Even if Edkins did transfer the funds from the sale of the homes to Baby Bliss, -7- No. 08-2605 United States v. Edkins the manner in which he contends he did demonstrates he lacked “an actual intent that money advanced [would] be repaid.” Berthold, 404 F.2d at 122. With respect to the $110,000 alleged loan, Edkins claims he received $95,423.30 upon sale and returned only this amount to Baby Bliss. With respect to the $180,000 loan, he sold the property for $232,268.60 and supposedly returned $180,000 of that to Baby Bliss. Edkins claimed that he would report the approximately $15,000 shortfall as income on his 2000 tax returns, but he never filed these returns. These records, even taken at face value, suggest that Edkins had such control over the money that he “‘derive[d] readily realizable economic value from it.’” See Curtis, 782 F.2d at 595 (quoting Davis, 226 F.2d at 334). Edkins, moreover, admitted that he purchased the property in question for his own use. He borrowed the home-purchase funds from Baby Bliss, and arranged the transaction so that he could forgo making the loan payments. This arrangement precisely matches the situation this court cautioned against when explaining that, without evidence of the typical corporate formalities accompanying a loan, “a sole owner of a corporation could have his personal expenses paid by the corporation as a loan and postpone repayment indefinitely, thus escaping the double taxation which is normally incident to the corporate form.” Jaques, 935 F.2d at 109. In light of all the other evidence, we are unpersuaded by Edkins’s contention that, because he provided Baby Bliss with mortgage deeds to the properties and reported unpaid loan interest as income, the district court clearly erred in treating the loaned funds as income. -8- No. 08-2605 United States v. Edkins