Court Opinion

ID: 9498854
Source: CourtListenerOpinion
Date Created: 2023-08-05 17:29:40.727492+00
Date Added: 2024-06-11T17:59:06.469952
License: Public Domain

ROGERS, Circuit Judge,
concurring.
I concur fully in the majority opinion. I write separately to explain why the legal, non-factual components of the tax court’s analysis are properly examined on appeal without deference to the tax court, notwithstanding the overall “clearly erroneous” standard that our court has stated to be applicable to the determination of whether a particular transaction is debt or equity.
Whether an issue to be determined by the courts is one of fact or law is sometimes pretty simple. But often, especially when the issue can be stated in the form of “Does the item before us fit within the *785legal definition of x?”, the factual-versus-legal nature of the issue can be perplexing. This is because the seemingly single question really has two different components: “What is the nature of this item?” and “What is the legal meaning of x?” In a case where there is total agreement between the parties as to the nature of the item, the question whether the item is an x is a legal one. In a case where there is total agreement between the parties as to the meaning of x, but a dispute as to the nature of the item, the issue of whether the item is an * is totally factual. Where there is some dispute on each of the two issues, the issue of whether the item is an a; is a mixed question of law and fact.
For instance, assume an ordinance taxes the keeping of pet dogs. Jo is assessed a tax for keeping Fido, and Jo appeals. The question “Is Fido a dog?” may be factual or it may be legal. If Jo claims only that Fido is a really a cat, then the issue is factual. No one argues that the legal definition of dog includes cats; the only dispute is regarding the actual nature of Fido. On the other hand, if both parties agree that Fido is a prairie dog, the question “Is Fido a dog?” is a purely legal one. There is no dispute about the nature of Fido; the only dispute involves what the legal meaning of “dog” is. Of course if the city says Fido is a schnauzer while Jo says that Fido is actually a prairie dog, the question “Is Fido a dog” is mixed if both legal and factual aspects of the seemingly single question are in dispute.
We must be careful of the following type of error in the application of the doctrine of stare decisis to scopes of review for fact or law. Assume that in one case the issue is whether Rover is a dog or a cat. The appellate court in its opinion states that “under the ordinance the issue of whether an animal is a dog is subject to clearly erroneous review.” This is true for the reason, perhaps unstated, that there is no dispute as to the meaning of “dog” in the particular case. Now in a second case the issue is whether a prairie dog Daisy is a “dog” under the ordinance. The appellate panel, feeling bound by the statement in case one that “whether an animal is a dog is subject to clearly erroneous review,” applies clearly erroneous review, i.e., deference to the trial court, on the purely legal issue of whether a prairie dog is taxable under the ordinance. It should be obvious that such analysis is fallacious.
One way to express the fallacy is to say that the first case is distinguishable: the first holding applies only to the extent that the issue in the first case was actually a fact issue. Neither the reasoning nor the underlying facts of the first case lead to the conclusion that clearly erroneous review should apply in the second case.
The danger of applying clearly erroneous review in this scenario is not purely formal. If deference is given to trial court determinations of law by a misapplication of stare decisis, this may lead quickly to the very types of inconsistencies that stare decisis doctrine seeks to avoid. If one trial court thinks prairie dogs are taxable and another does not, and both decisions are given deference under a clearly erroneous standard, inconsistent law may be applied to similarly situated persons, even after appeal to a single appellate court. This contravenes the most fundamental of legal precepts: the law should apply the same to everybody.
Similarly, if in a mixed fact-law case the first appellate panel had said the issue was subject to clearly erroneous review, this statement has to be interpreted to mean that where fact issues predominate, and a single scope of review rubric is useful, that rubric will be “clearly erroneous.” But subissues of law will be reviewed independently. In other words, a holding in a *786mixed-question case that the scope of review is “clearly erroneous” is best interpreted to mean that where factual issues predominate, the predominant scope of review is “clearly erroneous.” But to the extent that application of that overall scope of review requires some legal determinations, those legal determinations will be made de novo. Otherwise the appellate court will be in the despicable position of permitting the law to apply differently to indistinguishable facts.
Accordingly, I interpret the previous statements by this court that debt-vs.-equity determinations are subject to clearly erroneous review as holding that, where factual issues predominate, the overall scope of review can be characterized as “clearly erroneous,” and that within such a generally applicable “clearly erroneous” scope of review, subissues of a clearly legal nature are reviewed de novo. To do otherwise would be to interpret our precedents as compelling us to decide differently on indistinguishable facts, merely because the lower courts read the law differently. Stated differently, I am fully persuaded that the words of Judge McCree in Livernois Trust v. Commissioner, 433 F.2d 879, 883 (6th Cir.1970), and quoted in the majority opinion in footnote 1, not only reflect wisdom and insight, but also represent good law.
The various holdings that the debt-vs.equity issue is subject to clearly erroneous review can be traced back to the Supreme Court’s holding in Commissioner v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960), a case involving whether each of two specific transfers— one between business associates and one by a church to a former employee — was a “gift” and therefore not subject to income tax. Id. at 280, 80 S.Ct. 1190. The Supreme Court held that the issue was “basically one of fact” and therefore subject to “clearly erroneous” review when a lower court had made the determination without a jury. Id. at 290-91, 80 S.Ct. 1190. The clearly erroneous rule applied as well “to factual inferences from undisputed basic facts, as will on many occasions be presented in this area.” Id. at 291, 80 S.Ct. 1190 (citation omitted). In Duberstein, however, the ultimate issue was whether or not the transfer was intended as “a recompense for past services, or an inducement for [taxpayer] to be of further service in the future.” Id. at 292, 80 S.Ct. 1190. In other words, there was little disagreement as to the legal standard (gift only if no intended recompense or inducement), but there was disagreement as to the ultimate fact of whether there was such intent. Considered this way, the issue was predominantly if not entirely one of fact. Transactions that look alike could have different tax consequences based on the underlying intent of the transferor. Almost always the issue will be predominantly factual. Thus, the Supreme Court logically deemed the gift-vs.-income issue in that case to be essentially factual. Cases following in the wake of Duberstein should not be interpreted, however, to require deference to lower court legal determinations, either where legal issues predominate, or where dispositive subissues are legal.
Moreover, a careful reading of our precedents does not compel deference to the legal aspects of the question whether an advance to a corporation is a loan or investment. In Smith v. Comissioner, we used the “clearly erroneous” rubric only in conjunction with the “sufficiency of evidence.” 370 F.2d 178, 180 (6th Cir.1966) (“Sufficient evidence existing in the record to form a basis for this determination, which is here found not to be clearly erroneous, it will not be disturbed by this court.”).
*787In Roth Steel v. Comissioner, we characterized the overall issue of whether Roth Steel’s unrepaid advances to a subsidiary corporation were loans, deductible as bad debts, or capital contributions, as one of fact subject to the clearly erroneous test. See 800 F.2d 625, 626, 629 (6th Cir.1986). Our conclusion was that the tax court did not err when determining that the contributions were capital because no interest was ever paid on the advances, the advances were not evidenced by notes, the debtor was undercapitalized, the source of repayment was contingent on the financial success of the debtor, and there was no fixed rate of interest. Id. at 630-32. In so concluding, we evaluated each of the relevant eleven factors independently, accepting the lower court’s factual determination but applying relevant case law (apparently independently) to evaluate the weight of each factor. See id. at 629-32. Even if the statement in our opinion that the clearly erroneous scope of review applied could be read to say that deference was required with respect to our legal analysis of the weight of each factor, and to our legal balancing of all the factors, such a statement must be interpreted in light of how we applied that scope of review. What we actually did was use case-law to weigh each of the relevant factors.
Our application of the clearly erroneous standard in Jacques v. Commissioner, moreover, is entirely distinguishable. That case did not involve whether an advance to a business was a loan or an equity investment, but rather whether a payment by the business was a dividend (i.e., not to be repaid) or a loan (to be repaid). See 935 F.2d 104, 107 (6th Cir.1991). We reviewed the issue for clear error, relying on several previous cases holding that the issue was ultimately one of whether repayment was intended. See Dietrick v. Comm’r, 881 F.2d 336, 340 (6th Cir.1989) (“The intention of the parties is the controlling factor in determining whether or not advances [from the business to the investor] should be termed as loans”) (citation omitted); Estate of DeNiro v. Comm’r, 746 F.2d 327, 330-31 (6th Cir.1984) (determination of whether corporate payment was a loan or a dividend depended on corporation’s intent whether it expected to be repaid); Wilkof v. Comm’r, 636 F.2d 1139, 1140 (6th Cir.1981) (per curiam) (issue was whether corporate payment was a dividend or a loan; Duberstein cited for “clearly erroneous” scope of review); Berthold v. Comm’r, 404 F.2d 119, 122 (6th Cir.1968) (“Established authority holds that the intention of the parties is the controlling factor in determining whether or not advances [by corporations to shareholders] should be termed loans.”). Such an intent issue, like the issue in Duberstein, is largely factual — the court knows what the standard is but needs to ascertain what is going on in someone’s mind. This contrasts with the issue in the present case, which is only in small part determined by the intent of the transacting parties. It is undisputed that repayment was intended in this case; the issue is the legal nature of the transaction that manifested the intent.
Thus, in cases like the present one where the objective characteristics of a transaction have significant importance, our treatment of those objective characteristics does not require deference to the lower court. As we said in Holmes v. Commissioner, 184 F.3d 536, 543 (6th Cir.1999) (emphasis added):
On review, the Tax Court’s factual findings, and inferences drawn from the facts, especially witness credibility determinations, are entitled to deference by the appellate court.... By contrast, the Tax Court’s application of legal standards, and its legal conclusions, are reviewed de novo.
*788In my view, these cases are perfectly consistent with not deferring to the legal aspects of the lower court’s reasoning, and avoidance of the fallacy described above requires us not to defer to such legal determinations. See Livernois Trust, 433 F.2d at 883 (McCree, J., concurring). Thus, while the majority opinion in this case cannot be faulted for stating that the overall scope of review in this ease is “clear error,” that conclusion must be interpreted to incorporate de novo review of legal questions necessary to our determination. Viewed in this way, the majority opinion’s analysis is compelling.,
In the instant case there is, to be sure, a limited factual aspect. One of the relevant Roth factors (the fourth) is whether repayment was intended to depend on company profit. 800 F.2d at 630. The tax court found that Indmar always intended to repay Mr. Rowe solely from profits because Mr. Rowe so testified. Clearly erroneous review requires substantial deference to this conclusion, but even applying such deference it is necessary to reject the factual conclusion: the undisputed facts show that it is not what happened. Indmar repaid advances on two occasions by tapping its line of credit (i.e., when there was not sufficient profits to cover the demand amount).
More importantly, however, the facts relevant to all the remaining factors are simply not in dispute. Even assuming that the payments were intended to be paid solely from profits, these other factors as a matter of law require the legal conclusion that the transactions represent debt rather than equity. There is no dispute as to the content of the transactions, form of the obligation, perfect repayment history, Indmar’s solid creditworthiness, Indmar’s equity-heavy capitalization, respective ownership interest of the parties, subordination of the notes, and applicable market interest rates. These undisputed facts make the tax court’s legal conclusion that Indmar’s obligation was equity erroneous. In other words, the extensive legal aspects of the question of whether these transactions amounted to debt are subject to our independent review, notwithstanding the applicability of a general “clearly erroneous” rubric to the overall question. Or stated differently, because the issue in dispute in this case is predominantly legal, cases requiring “clearly erroneous” review are pro tanto distinguishable. Either way, in a case like this one where a case that is largely factually indistinguishable could easily arise before a different lower court in the future, we must — to the extent that the facts are indeed objectively undisputed-rule in a way that insures consistent results. Applying “clearly erroneous” deference to lower court legal determinations, no matter how hidden or embedded such determinations are in overall determinations that are partly or even largely factual, is fundamentally at odds with the rule of law.1

. Indeed, commentators have expressed concern that there is no predictable legal distinction between loans to a business and equity investment, and that the unpredictability of this legal distinction is partially caused by the issue being "treated as one of fact to be resolved by applying vague standards ...." See Stephen A. Lind, Stephen Schwarz, Daniel J. Lathrope & Joshua D. Rosenberg, Fundamentals of Business Enterprise Taxation 474 (3d ed.2005). These authors note, "Exhaustive research leaves one with the firm conviction that the courts are applying an amorphous and highly unsatisfactory 'smell test.’ ” Id.