Court Opinion

ID: 2641811
Source: CourtListenerOpinion
Date Created: 2013-11-09 06:05:14.993403+00
Date Added: 2024-06-11T12:52:40.571253
License: Public Domain

Case: 13-60289      Document: 00512435929         Page: 1    Date Filed: 11/08/2013

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT
                                                                            United States Court of Appeals
                                                                                     Fifth Circuit

                                     13-60289                                      FILED
                                  Summary Calendar                          November 8, 2013
                                                                              Lyle W. Cayce
                                                                                   Clerk
JOHN MICHAEL GASSAWAY,

                                                 Petitioner - Appellant
v.

COMMISSIONER OF INTERNAL REVENUE,

                                                 Respondent - Appellee

                               Appeal from the Decision
                           of the United States Tax Court
                                  Case No. 17745-10

Before DAVIS, SOUTHWICK, and HIGGINSON, Circuit Judges.
PER CURIAM:*
       John Michael Gassaway appeals the decision of the Tax Court that held
certain funds Gassaway received in 2006 should have been declared as taxable
income on his 2006 tax return. Gassaway contends the Tax Court ignored
unrefuted evidence that the funds were a bona fide loan and erred in admitting
evidence of Gassaway’s seventeen-year-old conviction and disciplinary history
with the Oklahoma bar. We AFFIRM.

       * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
    Case: 13-60289   Document: 00512435929     Page: 2   Date Filed: 11/08/2013

                                No. 13-60289
                            FACTUAL BACKGROUND
      In November 2006 Gassaway, a practicing lawyer in Oklahoma at the
time, received $392,355 in cash from a client, Sanchez. This cash is what the
IRS asserts was taxable income while Gassaway claims it was a loan. Sanchez
was a client of Gassaway’s who had been charged with felony drug trafficking
in 2005. Sanchez posted bail, subsequently failed to appear in court, and a
bench warrant for his arrest was issued in March 2005. Gassaway filed and
reported $170,000 as income from his 2005 representation of Sanchez.
Gassaway last spoke to Sanchez in November 2006, at which time Sanchez was
a fugitive. At this last November meeting, Gassaway received the $392,355 he
claims was a loan. Consequently, he argues there was no requirement to report
the sum on his federal income tax return for 2006.
      No security or collateral was provided to Sanchez for the $392,355. The
transaction was evidenced by a promissory note that was signed only by
Gassaway and never seen by Sanchez. The note recited a promise to repay
Sanchez with a four-percent interest rate, due five years from the date of the
note. Gassaway alleged the funds were for a joint investment in property in
Austin, Texas.   After receiving the funds from Sanchez, Gassaway wired
$400,991.91 to Land America Commonwealth Title of Austin as partial
payment for a house located in Austin. Gassaway paid a total of $1,057,350
for the house, the balance of which was paid with a mortgage loan. On the loan
application, he represented that no part of the down payment was borrowed
and that he intended to occupy the house as his primary residence. In 2008,
Gassaway moved into the Austin home and continued to occupy the house
through the time of the trial of this case. On February 17, 2011, Gassaway
mailed a letter and check for $432,000 to Sanchez at an address in Chicago.
The account on which the check was written did not have sufficient funds to

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                                  No. 13-60289
pay the check and the envelope in which the check was sent was returned
marked “Attempted-Not Known, Unable to Forward.”
        In 2010 the IRS issued notice to Gassaway asserting a $138,355
deficiency in tax based on its determination that the $392,355 received from
Sanchez in 2006 was includable in Gassaway’s gross income for that year.
Gassaway, asserting the funds from Sanchez were a loan, petitioned the Tax
Court for redetermination of the deficiency.      After a trial, the Tax Court
concluded the funds received from Sanchez were not a loan and thus properly
treated by the IRS as taxable income. Gassaway timely appealed, and we have
jurisdiction pursuant to 26 U.S.C. § 7482(a).

                                    DISCUSSION
        “We apply the same standard of review to decisions of the Tax Court that
we apply to district court decisions.” Green v. Commissioner, 507 F.3d 857, 866
(5th Cir. 2007). “Findings of fact are reviewed for clear error and issues of law
are reviewed de novo.” Id.

   I.      Were the funds from Sanchez a loan?

        A loan does not constitute income for tax purposes because “whatever
temporary economic benefit [the taxpayer] derives . . . is offset by the
corresponding obligation to repay [the loan].” United States v. Rochelle, 384
F.2d 748, 751 (5th Cir. 1967). Critical features of a loan are an existing,
unconditional, and legally-enforceable obligation to pay and the intention of
the parties that the money advanced be repaid. Tomlinson v. 1661 Corp., 377
F.2d 291, 295 (5th Cir. 1967); Moore v. United States, 412 F.2d 974, 979 (5th
Cir. 1969). A taxpayer seeking to exclude an amount from gross income as a
loan bears the burden of proving that he intended to repay the amount and
that the supposed lender intended to collect it. See Frierdich v. Commissioner,
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                                 No. 13-60289
925 F.2d 180, 182 (7th Cir. 1991).         The substance of the transaction is
controlling and “a formalized attempt to achieve the desired tax result while
lacking in necessary substance” is insufficient to establish the existence of a
loan. Tomlinson, 377 F.2d at 295.
      Gassaway argues that the unrebutted evidence shows the funds he
received from Sanchez were a loan for the purposes of a joint investment in
property in Austin. He relies on the promissory note, his purchase of the
Austin property, and his attempt to repay Sanchez as unrefuted evidence of a
bona fide loan. The Tax Court concluded that the loan agreement neither
signed nor seen by Sanchez was “suspect” and “incomplete.”
      We agree with the court’s conclusion that Sanchez’s lack of security or
collateral, coupled with Gassaway’s attempt at repayment from an account
with insufficient funds, undermine Gassaway’s claim that the parties intended
repayment of the money.      See Moore, 412 F.2d at 978.       The court found
Gassaway’s testimony lacked indicia of reliability and the scenario he
presented — that Sanchez loaned money for an unsecured investment and then
disappeared making no attempt to collect — was implausible.              Finally,
Gassaway’s assertion that the property in Austin was a joint investment was
contradicted by his representations on the mortgage loan application
indicating his intent to occupy the property as his primary residence. We find
no error with the court’s characterization of the evidence and credibility
findings and thus agree with the court’s conclusion that the $392,355 from
Sanchez was not a loan.

         II. Admission of evidence of a remote prior conviction

      Gassaway contends the Tax Court erred in admitting evidence of his
seventeen-year-old criminal conviction and 2008 disbarment. “Evidentiary
decisions as to the admissibility of evidence should not be disturbed except for
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                                   No. 13-60289
abuse of discretion.” United States v. Brown, 547 F.2d 1264, 1266 (5th Cir.
1977). Relevant to the analysis of this evidentiary dispute is Gassaway’s
disciplinary history with the Oklahoma bar.
      Gassaway was disbarred in Oklahoma in June 2008 as a result of years
of disciplinary actions beginning in 1987. In 1995 Gassaway was convicted of
making a false statement on a federal income tax return. He resigned from
the Oklahoma Bar but was readmitted in 2002. In 2004, the Oklahoma Bar
Association filed a complaint alleging three counts of misconduct, which they
later amended in 2007 to add twelve additional counts.               Disciplinary
proceedings against Gassaway were therefore pending at the time of the 2006
transfer of funds at issue here.
      Gassaway objected at trial to the admission of his conviction and
disbarment. The court reserved ruling on the objection. In its opinion, the Tax
Court concluded that the time limitations of Rule 609 — the basis of
Gassaway’s objection to the evidence — do not apply if a conviction is admitted
for a purpose other than impeachment. See United States v. Lopez, 979 F.2d
1024, 1033-34 (5th Cir. 1992); FED. R. EVID. 609. The court then evaluated the
admissibility of Gassaway’s disciplinary history and prior conviction under the
general standards of Rules 402 and 403. FED. R. EVID. 402, 403. It concluded
that Gassaway’s status with the Oklahoma Bar in 2006 was probative of
whether his receipt of the funds was income or a loan. The court further
concluded that Gassaway must have known disbarment was likely and
intended to relocate to Texas. His troubles with the Oklahoma Bar were
relevant because they contradicted his testimony that purchase of the home
was a joint investment. Finally, the court determined that the danger of unfair
prejudice in a trial without a jury was minimal. See FED. R. EVID. 403.
      Gassaway urges on appeal that, under Lopez, admission of his
seventeen-year-old conviction was improper, creating reversible error. See
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                                     No. 13-60289
Lopez, 979 F.2d at 1033-34. 1         We conclude the Tax Court did not err in
admitting evidence of Gassaway’s disciplinary history with the Oklahoma bar
and his prior conviction. The pending disciplinary actions against Gassaway
at the time he received the funds from Sanchez are probative of his intentions
in purchasing the house in Texas. The court did not abuse its discretion in
concluding any risk of unfair prejudice did not outweigh the probative value of
the evidence. See Brown, 547 F.2d at 1266.
       AFFIRMED.

      1  We note that admissibility of Gassaway’s prior conviction and disciplinary history
with the Oklahoma bar might also be analyzed under Rule 404(b) as a “crime, wrong, or other
act” probative of Gassaway’s intent in purchasing property in Texas. See FED. R. EVID.
404(b). Because the Tax Court analyzed admissibility under the standards of Rule 402 and
403, we will consider whether admission was proper under those rules.
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