Court Opinion

ID: 9498855
Source: CourtListenerOpinion
Date Created: 2023-08-05 17:29:40.730778+00
Date Added: 2024-06-11T17:59:06.472420
License: Public Domain

MOORE, Circuit Judge,
dissenting.
I respectfully dissent because I believe that the Tax Court’s conclusion that the shareholder advances to taxpayer were equity contributions rather than genuine debt is not clearly erroneous. Far from being left “with the definite and firm con*789viction that a mistake has been committed,” Holmes v. Comm’r, 184 F.3d 536, 543 (6th Cir.1999) (internal quotation marks omitted), I believe that the record provides significant support for the Tax Court’s conclusion, and I would affirm.
The majority is of course correct when it states that in reviewing Tax Court decisions, we review factual findings for clear error and conduct a more searching de novo inquiry into legal conclusions of the lower court. See Dow Chemical Co. v. United States, 435 F.3d 594, 599 n. 8 (6th Cir.2006) (explaining that the employment of different standards of review for factual and legal conclusions is most consistent with Supreme Court precedent and concluding that the ultimate question of whether a transaction is an economic sham is a legal conclusion reviewed de novo); Holmes, 184 F.3d at 543. Similarly, I share the concern expressed by Judge Rogers that we must take care to avoid being unduly deferential to trial court determinations of law, particularly when we are considering questions like this “where factual issues predominate, [and thus] the predominant scope of review is ‘clearly erroneous.’ ” Concurrence at 787. However, we must not be so concerned about avoiding being overly deferential that we fail to afford due deference to a lower court’s determinations when our standard of review so requires. While other courts have concluded that the ultimate issue of whether a shareholder advance constitutes equity or debt is a question of law or a mixed question of law and fact that is reviewed de novo, we have repeatedly held that this specific question is a question of fact reviewed for clear error, and we remain bound by this precedent. See Jaques v. Comm’r, 935 F.2d 104, 106-07 (6th Cir.1991); Roth Steel Tube Co. v. Comm’r, 800 F.2d 625, 629 (6th Cir.1986), cert. denied, 481 U.S. 1014, 107 S.Ct. 1888, 95 L.Ed.2d 496 (1987); Smith v. Comm’r, 370 F.2d 178, 180 (6th Cir.1966). I am therefore troubled by the robustness of the majority opinion’s clear error review of several of the factual aspects of this case as well as the ultimate question of whether the payments were debt or equity, and I believe that the majority has “misapprehended and misapplied the clearly-erroneous standard.” Anderson v. City of Bessemer City, 470 U.S. 564, 566, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).
At the same time that the majority opinion acknowledges that we review for clear error the factual aspects of this case and the ultimate “debt versus equity” question, the majority’s analysis fails fully to embody this standard. The clear-error standard does not permit us as a reviewing court to ignore the relevant credibility determinations made and relied upon by the lower court. A lower court’s factual conclusions about the credibility of a witness must be treated with even greater deference, “for only the trial judge can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener’s understanding of and belief in what is said.” Id. at 575, 105 S.Ct. 1504. Richard Rowe was the primary witness to testify before the Tax Court, and Rowe provided much of the factual information to the court about the Roth Steel factors. To say that the Tax Court was unimpressed with Rowe’s testimony is an understatement. The court called Rowe’s testimony “contradictory, inconsistent, and unconvincing,” and concluded that the taxpayer, “along with the Rowes, manipulated facts to attempt to make the transfers appear as debt and avoid certain legal consequences.” Joint Appendix at 348 (Tax Court Op. at 11). Yet the majority appears largely to ignore the Tax Court’s negative credibility determinations about Mr. Rowe, as it repeatedly describes Rowe’s testimony as “uncontroverted” and *790credits his self-serving testimony over the contrary determinations of the Tax Court. The majority suggests in footnote five that the Tax Court’s negative credibility determinations were limited to what can only be called the legal gymnastics of the taxpayer simultaneously to classify the shareholder advances as both demand loans and long-term debt. This is a strained reading of the Tax Court’s opinion, which I believe presents Rowe’s credibility problems in more general terms, as part of the “particular circumstances of [the] case” that formed the factual backdrop for the Tax Court’s determination that the advances were equity rather than debt. Roth Steel, 800 F.2d at 630.
The minimal deference that the majority gives to the conclusions of the Tax Court and the license it takes in positing alternative interpretations of the trial evidence to those of the Tax Court are also inconsistent with clear-error review. While I certainly agree that our review for clear error is not nugatory, “this standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently.” Anderson, 470 U.S. at 573, 105 S.Ct. 1504. Yet this is exactly what the majority does in several instances. When considering whether the record contained written instruments of indebtedness, the majority explains that unlike the Tax Court, it was more persuaded by the eventual execution of formal notes than the initial failure to document the advances. Later the majority states there are “at least two plausible ways to read” Richard Rowe’s testimony about the source of repayments, and then opts for the opposite conclusion from that of the Tax Court. Majority Op. at 9. Thus while the majority’s opinion may take the form of a clear-error review, in substance the majority “improperly conduces] what amount[s] to a de novo weighing of the evidence in the record.” Anderson, 470 U.S. at 576, 105 S.Ct. 1504.
Here the shareholder advances to Ind-mar are subject to “particular scrutiny” because, like advances between a controlling corporation and its subsidiary, “the control element suggests the opportunity to contrive a fictional debt.” Roth Steel, 800 F.2d at 630 (internal quotation marks omitted). The taxpayer bears “the burden of establishing that the advances were loans rather than capital contributions.” Id. (citing Smith, 370 F.2d at 180). The Tax Court’s conclusion that Indmar failed to meet this burden was not clearly erroneous. While several of the Roth Steel factors support Indmar’s claim that the shareholder advances were bona fide debt, several others instead favor equity. The unsecured nature of the shareholder advances “is a strong indication that the advances were capital contributions rather than loans.” Id. at 631. Indmar’s failure to establish a sinking fund is further “evidence that the advances were capital contributions rather than loans.” Id. at 632. While the majority appears to view the absence of a sinking fund as redundant with the consideration that the transfers were unsecured, Roth Steel considers both as factors, and here both factors indicate equity. In addition, Indmar did not have any fixed maturity date or fixed obligation to repay the Rowes. This “indicates that the advances were capital contributions and not loans.” Id. at 631. Nor did the Tax Court err in viewing Mr. Rowe’s statement that repayment would have to come from corporate profits as a strong indicator of equity, because “[a]n expectation of repayment solely from corporate earnings is not indicative of bona fide debt regardless of its reasonableness.” Id.
The majority and concurrence make much of the fact that the taxpayer had to turn to its bank line of credit when Rowe *791demanded the repayment of $650,000 of his advanced funds on short notice in 1995 so that he could buy a home in Florida. This was an anomalous occurrence in the many years of shareholder advances and repayments, the outstanding balances of which ranged from $600,000 to over $1.7 million over the years, and does not negate Rowe’s statements that he made the advances with the expectation that he would be repaid from profits or the fact that all other repayments appear to have come from the taxpayer’s profits. While I agree with my colleagues that the Tax Court should have acknowledged that in this instance the funds to repay the advances came from additional debt rather than profits, I agree with the Tax Court that overall the evidence suggests that repayment was expected to and did come from the taxpayer’s profits, and therefore this factor favors equity.
In the particular circumstances of this case, which include the “contradictory, inconsistent, and unconvincing” testimony of the majority shareholder, I cannot conclude that it was clearly erroneous for the Tax Court to decide that the factors that favored equity were deserving of more weight than those that favored debt. Because I believe the record supports two permissible views of the evidence, I cannot join the majority’s conclusion that the Tax Court’s determination was clearly erroneous. Anderson, 470 U.S. at 574, 105 S.Ct. 1504. I would affirm the decision of the Tax Court.