Petition for Writ of Certiorari — Michael Sang Han, Petitioner v. United States

No. 20-___

IN THE

Supreme Court of the United States

___________

MICHAEL SANG HAN,

Petitioner,

v.

UNITED STATES OF AMERICA,

Respondent.

_____________

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the District of Columbia Circuit

_____________

PETITION FOR A WRIT OF CERTIORARI

_____________

Wesline N. Manuelpillai

COVINGTON & BURLING LLP

The New York Times Bldg.

620 Eighth Avenue

New York, NY 10018-1405

November 13, 2020

Kevin F. King

Counsel of Record

Daniel Bernick

Ali Remick

COVINGTON & BURLING LLP

850 Tenth Street, NW

Washington, DC 20001

kking@cov.com

(202) 662-6000

Counsel for Petitioner

Michael Sang Han

QUESTION PRESENTED

This case concerns the proper test for distinguishing taxable income from non-taxable loan proceeds

under the Internal Revenue Code. In James v. United

States, 366 U.S. 213 (1961), the Court held that the

hallmark of a non-taxable loan is the “consensual

recognition . . . of an obligation to repay.” There is a

circuit split regarding implementation of that test,

and in particular the role of the parties’ intent in defining whether a transaction constitutes a loan. See

Busch v. Comm’r, 728 F.2d 945, 948 (7th Cir. 1984)

(acknowledging split). The First, Second, Fourth,

Sixth, and Seventh Circuits focus on the parties’ intent and consider other factors solely as indicia of

intent. In contrast, the Third, Fifth, Ninth, and Tenth

Circuits apply a multi-factor balancing test in which

intent is merely one of many co-equal considerations,

none of which is dispositive. In the decision below, the

D.C. Circuit applied the latter approach, considering

the parties’ intent and Petitioner’s ability to repay on

a co-equal basis. See Pet. App. 7a–8a.

The question presented is:

May a court consider factors other than the parties’

intent in determining whether a transfer of funds constitutes a non-taxable loan under the Internal

Revenue Code?

i

ii

PARTIES TO THE PROCEEDING AND

CERTIFICATE OF RELATED CASES

The parties to this criminal proceeding are Petitioner Michael Sang Han, who was the Defendant in

the district court and the Appellant in the court of appeals, and Respondent the United States of America,

which was the Plaintiff in the district court and Appellee in the court of appeals. Because there are no

nongovernmental corporate parties to this case, the

disclosure requirement of Rule 29.6 does not apply.

Pursuant to Rule 14(b)(iii), counsel is not aware of

any related case currently pending in this Court or

any other court.

iii

TABLE OF CONTENTS

Page

QUESTION PRESENTED.......................................... i

PARTIES TO THE PROCEEDING AND

CERTIFICATE OF RELATED CASES ............. ii

TABLE OF AUTHORITIES ........................................v

PETITION FOR A WRIT OF CERTIORARI .............1

INTRODUCTION ........................................................1

OPINIONS BELOW ....................................................2

JURISDICTION ..........................................................3

STATUTORY PROVISIONS INVOLVED .................3

STATEMENT OF THE CASE ....................................3

A. Statutory and Regulatory Framework ........3

B. Factual and Procedural Background ...........4

REASONS FOR GRANTING THE PETITION .......10

I.

The Decision Below Deepens a Circuit

Split Regarding the Definition of a Loan

for Tax Purposes................................................11

A. This Court Established the Test for

Distinguishing Taxable Income from

Non-Taxable Loans in James. ....................11

B. The Courts of Appeals Have Split

Regarding Implementation of the

James Test. .................................................13

iv

II.

Multifactor Tests that Consider Factors

Other than the Parties’ Intent Are

Incompatible with James and

Unworkable. ......................................................18

III. The Question Presented Has Practical

Importance in a Broad Range of

Circumstances. ..................................................21

IV. This Case Is an Excellent Vehicle to

Address the Proper Test for

Distinguishing Loans from Taxable

Income. ..............................................................22

CONCLUSION ..........................................................24

APPENDIX

Appendix A: Court of Appeals Decision

(June 19, 2020) ..................................................1a

Appendix B: District Court Judgment

(October 18, 2019) ...........................................15a

Appendix C: Excerpt of Trial Transcript

(May 8, 2018) ...................................................31a

Appendix D: Excerpt of Trial Transcript

(May 8, 2018) ...................................................40a

Appendix E: Convertible Promissory

Notes ................................................................47a

Appendix F: IRS Shareholder Loan

Evaluation Criteria .........................................94a

Appendix G: Relevant Statutory Provisions .........97a

v

TABLE OF AUTHORITIES

Page(s)

Cases

Alterman Foods, Inc. v. United States,

505 F.2d 873 (5th Cir. 1974) ................................ 21

Bergersen v. Comm’r,

109 F.3d 56 (1st Cir. 1997) .................................. 14

Buff v. Comm’r,

496 F.2d 847 (2d Cir. 1974) ................................. 15

Busch v. Comm’r,

728 F.2d 945 (7th Cir. 1984) ........................ passim

Collins v. Comm’r,

3 F.3d 625 (2d Cir. 1993) ............................... 12, 15

Colony, Inc. v. Comm’r,

357 U.S. 28 (1958) ................................................ 22

Comm’r v. Indianapolis Power & Light Co.,

493 U.S. 203 (1990) .......................................... 4, 12

Comm’r v. Schleier,

515 U.S. 323 (1995) ................................................ 3

Comm’r v. Sunnen,

333 U.S. 591 (1948) .............................................. 21

Comm’r v. Tufts,

461 U.S. 300 (1983) .............................................. 12

vi

Comm’r v. Wilcox,

327 U.S. 404 (1946) .............................................. 11

Crowley v. Comm’r,

962 F.2d 1077 (1st Cir. 1992) ........................ 13, 14

Engstrom, Lipscomb & Lack, APC v.

Comm’r,

674 F. App’x 617 (9th Cir. 2016) ......................... 16

Faist v. Comm’r,

40 T.C.M. (CCH) 1128 (T.C. 1980) ...................... 15

Fin Hay Realty Co. v. United States,

398 F.2d 694 (3d Cir. 1968) ................................. 17

Frierdich v. Comm’r,

925 F.2d 180 (7th Cir. 1991) ................................ 14

James v. United States,

366 U.S. 213 (1961) ...................................... passim

Jaques v. Comm’r,

935 F.2d 104 (6th Cir. 1991) ................................ 15

Koufman v. Comm’r,

35 T.C.M. (CCH) 1509 (T.C. 1976) ...................... 15

M.J. Byorick, Inc. v. Comm’r,

55 T.C.M. (CCH) 1037 (T.C. 1988) ...................... 15

Merck & Co. v. United States,

652 F.3d 475 (3d Cir. 2011) ........................... 17, 20

Estate of Mixon v. United States,

464 F.2d 394 (5th Cir. 1972) ................................ 16

vii

MoneyGram Int’l, Inc. v. Comm’r,

153 T.C. Rep. (CCH) 185 (T.C. 2019) .................. 16

N. Am. Oil Consol. v. Burnet,

286 U.S. 417 (1932) .............................................. 16

Pizzarelli v. Comm’r,

40 T.C.M. (CCH) 156 (T.C. 1980) ........................ 15

Rudolph v. United States,

370 U.S. 269 (1962) .............................................. 21

Rutkin v. United States,

343 U.S. 130 (1952) .............................................. 11

Sansone v. United States,

380 U.S. 343 (1965) .......................................... 4, 22

Estate of Taschler v. United States,

440 F.2d 72 (3d Cir. 1971) ................................... 17

Todd v. Comm’r,

486 F. App’x 423 (5th Cir. 2012) ......................... 17

United States v. Amick,

2000 WL 1566351 (4th Cir. 2000) ....................... 15

United States v. Beavers,

756 F.3d 1044 (7th Cir. 2014) .............................. 13

United States v. Han,

962 F.3d 568 (D.C. Cir. 2020) ............................ 2, 9

United States v. Pomponio,

563 F.2d 659 (4th Cir. 1977) .............. 12, 13, 15, 18

viii

United States v. Swallow,

511 F.2d 514 (10th Cir. 1975) .............................. 18

VHC, Inc. v. Comm’r,

968 F.3d 839 (7th Cir. 2020) ................................ 14

Welch v. Comm’r,

204 F.3d 1228 (9th Cir. 2000) ................ 2, 9, 16, 18

Williams v. Comm’r,

627 F.2d 1032 (10th Cir. 1980) ............................ 17

Statutes

26 U.S.C. § 1 ................................................................ 3

26 U.S.C. § 63 .............................................................. 3

26 U.S.C. § 7201 ...................................................... 4, 6

28 U.S.C. § 1254 .......................................................... 3

Regulations

26 C.F.R. § 1.61-1 ........................................................ 3

Other Authorities

Steven L. Gleitman & Anatole Klebanow,

How To Establish That An Advance To A

Shareholder Was A Loan, 40 Tax’n for

Acct. 100 (1988) .................................................... 21

PETITION FOR A WRIT OF CERTIORARI

Petitioner Michael Sang Han respectfully petitions

for a writ of certiorari to review the judgment of the

United States Court of Appeals for the District of Columbia Circuit in this case.

INTRODUCTION

The decision below deepens a longstanding circuit

split regarding the proper test for distinguishing taxable income from non-taxable loan proceeds. The

Seventh Circuit acknowledged this split in Busch v.

Comm’r, 728 F.2d 945, 948–49 (7th Cir. 1984), indicating that “[s]ome courts have viewed intent as

merely one factor, and then have balanced that intent

against various objective factors,” whereas other

courts have held that “intent is the only factor” and

consider “objective factors [solely] as indications of intent.”

That split has deepened and expanded since Busch

identified it in 1984. Today, the Third, Fifth, Ninth,

and Tenth Circuits take the former approach by applying a multi-factor balancing test in which intent is

merely one of many non-dispositive considerations.

The First, Second, Fourth, Sixth, and Seventh Circuits, in contrast, have held that the proper test

focuses on the parties’ intent at the time of the transaction and that courts may look to other factors only

as a means of ascertaining intent.

In the decision below, the D.C. Circuit adopted a

test in line with that of the Third, Fifth, Ninth, and

1

2

Tenth Circuits by weighing the parties’ intent and Petitioner’s ability to repay as co-equal factors. See Pet.

App. 7a–8a. In particular, the court relied on Welch

v. Comm’r, 204 F.3d 1228, 1230 (9th Cir. 2000), which

calls for a balancing test that “consider[s] a number of

other factors” beyond intent and in which “no single

factor” is dispositive.

The Court should grant the petition to resolve this

split of authority. First, the question presented implicates a recognized circuit split on a recurring question

of federal law, and the disagreement between the

courts of appeals shows no signs of abating. Second,

the amorphous, multi-factor balancing test applied by

the Third, Fifth, Ninth, Tenth, and D.C. Circuits is incompatible with this Court’s decision in James v.

United States, 366 U.S. 213, 219 (1961), which identifies intent—i.e., the “consensual recognition, express

or implied, of an obligation to repay”—as the focus of

the loan-versus-income analysis. Third, the question

presented has widespread practical significance, and

the split on that issue creates uncertainty regarding

the tax liability of both individuals and corporations.

Fourth, and finally, this case presents an excellent vehicle to resolve the issue. Petitioner pressed the issue

below, and the D.C. Circuit passed upon it by holding

that the transactions in question resulted in income

despite significant evidence that the parties intended

the transactions to be loans.

OPINIONS BELOW

The court of appeals’ decision in this case (Pet.

App. 1a–12a) is reported at 962 F.3d 568. The district

court’s judgment in this case (Pet. App. 15a–30a) is

unreported.

3

JURISDICTION

The judgment of the court of appeals was entered

on June 19, 2020. This Court has jurisdiction under

28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

Relevant provisions of Title 26, United States

Code, are reproduced in the appendix to the petition.

See Pet. App. 97a–98a.

STATEMENT OF THE CASE

A.

Statutory and Regulatory Framework

An individual’s income tax liability is determined

based on the amount of “taxable income” earned in a

given year. See 26 U.S.C. § 1. The Internal Revenue

Code defines “taxable income” as “gross income” less

any allowed deductions. Id. § 63(a). “Gross income,”

in turn, means “all income from whatever source derived.” Id. § 61(a); see also Comm’r v. Schleier, 515

U.S. 323, 327–28 (1995) (describing broad sweep of

this definition); 26 C.F.R. § 1.61-1(a) (gross income

consists of “income realized in any form, whether in

money, property, or services”).

Although the statute and implementing regulations provide examples of gross income, they do not

directly address whether loans constitute income.

This Court’s decision in James v. United States, 366

U.S. 213 (1961), resolved that issue. James considered the question whether embezzled funds are “gross

income.” In the course of answering that question, the

Court adopted an overarching test for identifying taxable income: “[w]hen a taxpayer acquires earnings,

4

lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and

without restriction as to their disposition, ‘he has received income which he is required to return.’” Id. at

219 (emphasis added) (quoting N. Am. Oil Consol. v.

Burnet, 286 U.S. 417, 424 (1932)). Critically, although

“[t]his standard brings wrongful appropriations

within the broad sweep of ‘gross income,’” it also “excludes loans.” Id. The Court has since confirmed that

James stands for the proposition that “receipt of a

loan is not [taxable] income to the borrower.” Comm’r

v. Indianapolis Power & Light Co., 493 U.S. 203, 207–

08 (1990).

Failure to report taxable income can have criminal

consequences. Under 26 U.S.C. § 7201—the statute

Petitioner was convicted of violating here—“any person who willfully attempts in any manner to evade or

defeat any tax imposed by [Title 26] or the payment

thereof” is guilty of a felony. The Government’s burden in a prosecution under section 7201 is to

demonstrate three elements: (1) the existence of a tax

deficiency; (2) an affirmative act constituting an evasion or attempted evasion of the tax; and (3)

willfulness on the part of the defendant. See Sansone

v. United States, 380 U.S. 343, 351 (1965). This case

concerns the proper test for determining whether a

transfer of funds constitutes taxable income or a nontaxable loan—an issue relevant to all three of those

elements.

B.

Factual and Procedural Background

This case arises from Petitioner Michael Sang

Han’s activities as the owner and chief executive of

Envion, a startup recycling technology company Han

5

founded in 2004. See Pet. App. 2a. Envion sought to

develop and commercialize a process to convert plastic

waste into transportation fuel. Although Envion was

not successful in its efforts to bring that process to

market, it did demonstrate the process on at least two

occasions, leading one observer to conclude that the

process was “the real deal.”1

Between 2004 and 2009, Han obtained financing

for Envion from investors, including Frank Carlucci

and James Russell. Pet. App. 2a. Carlucci and Russell made these initial investments in Envion in the

form of convertible loans to the company. The documentation for these loans identified Envion as the

borrower, and each was signed by Han in his corporate capacity, on behalf of Envion. Pet. App. 43a, 54a,

78a, 86a.

Han used a portion of the funds that Carlucci and

Russell invested in Envion for personal expenditures

that ranged from groceries to vehicles. Pet. App. 2a.

Han treated these expenditures as shareholder loans

from Envion to himself that he would be personally

responsible for repaying to the company. Pet. App. 3a.

In 2010, Han sought and obtained additional funds

from Carlucci and Russell, totaling $22.3 million. Pet.

App. 3a. This time, however, the loan documents

identified Han as the borrower, not Envion. Pet. App.

47a, 71a. Furthermore, Han signed the documents in

1 See Tr. of Trial Proceedings, United States v. Han, No. 1:15-cv142, ECF No. 174, at 83 (D.D.C. May 2, 2018); see also id. ECF

No. 173, at 17–18 (D.D.C. May 1, 2018) (trial testimony describing “demonstration project” that left observers “enthusiastic”

about the technology); id. ECF No. 174, at 81 (D.D.C. May 2,

2018) (trial testimony indicating that the technology was believed to have a valuation “in the billions of dollars”).

6

his personal capacity, Pet. App. 54a, 78a, and the

funds were wired to Han’s personal bank account rather than Envion’s corporate account, Pet. App. 45a.

Han used a portion of this money in 2010 and 2011

to make additional personal purchases and to pay

down the shareholder loan balance he accrued between 2004 and 2009. Pet. App. 3a. Consistent with

the understanding that the 2010 transfers were personal loans that would have to be repaid, Han did not

declare his use of those funds on his 2010 or 2011 tax

returns.

The Government initially charged Han with fraud

based on alleged misrepresentations he had made to

Carlucci and Russell in order to induce their investments in Envion.

However, the Government

subsequently dismissed the fraud charges and instead

filed a superseding indictment charging Han with two

counts of tax fraud under 26 U.S.C. § 7201. Han went

to trial on those tax-fraud charges. See Pet. App. 15a–

16a.

At trial, the Government’s theory was that the

2010 transfers from Carlucci and Russell to Han were

investments in Envion that Han diverted to personal

use. As such, Han should have reported the portion of

those investments used for personal expenses as income on his tax returns for 2010 and 2011. Pet. App.

2a, 9a. Han’s defense focused on the argument that

the 2010 transfers were personal loans that he had

the responsibility to repay, such that there was no corresponding duty to report them as income on his tax

returns. See Pet. App. 3a, 42a–45a.

Although there was evidence to support the prosecution’s theory, Pet. App. 9a–10a, there was also

7

evidence that these transfers were in fact loans. As

noted, Han was personally named on the loan documents as the borrower, he signed the loans in his

personal capacity, and the funds were wired to his

personal bank account. See Pet. App. 45a, 47a, 54a,

71a, 78a. Expert testimony provided further support

for Han’s loan defense. Specifically, Robert Hersh, a

certified public account with twelve years of experience at the IRS and thirty years of experience at a

private accounting firm, explained that the funds in

question constituted personal loans, not taxable income, because the transfer documents showed the

borrower was Han personally and the funds were

wired directly into Han’s personal bank account. Pet.

App. 45a.

Even though Han’s primary defense was that the

2010 transfers were non-taxable personal loans, the

District Court rejected Han’s request to issue a theory-of-defense jury instruction on that issue. Pet.

App. 9a. As a result, the jury received no instructions

from the District Court indicating that personal loans

are not taxable income or explaining how to determine

whether the transfers constituted personal loans.2

Nevertheless, the jury heard witness testimony

and attorney argument regarding the tax treatment

of loan proceeds. In particular, IRS Agent Laura Manion, an expert witness for the Government, testified

Throughout Han’s trial, the Government repeatedly highlighted the lavish nature of Han’s spending, for example by

introducing evidence that Han spent the allegedly misappropriated funds on beach house renovations, expensive cars, and other

luxury items. See Pet. App. 8a–9a. This evidence exacerbated

the prejudicial effect of the District Court’s failure to instruct the

jury regarding the non-taxable nature of loan proceeds.

2

8

that “legitimate” loans are not taxable and listed several factors relevant to that inquiry, including the

existence of a loan document, repayment terms, repayments made, interest, ability to repay the loan,

and the recipient’s intent to repay the loan. Pet. App.

34a–36a.3 On cross-examination, Agent Manion conceded that on its face, the 2010 transfer from Carlucci

to Han was a personal loan. Pet. App. 38a.

The jury found Han guilty on both counts of tax

evasion. Pet. App. 15a. The District Court sentenced

Han to 48 months’ imprisonment and ordered

$4,954,027 in restitution. Pet. App. 17a, 24a.

Han timely appealed both convictions.4 Among

other things, Han argued on appeal that the District

Court erred by (1) admitting evidence that he made

misrepresentations to Carlucci and Russell regarding

Envion’s business prospects, and (2) refusing to instruct the jury that loan proceeds are not taxable

income. The latter error was prejudicial and required

reversal, Han argued, because the trial testimony and

argument on that issue improperly departed from the

Agent Manion also addressed the factors for determining

whether a transfer of funds from a business to a shareholder is a

loan, including the extent of control the person receiving the

funds has over the company. Pet. App. 36a–38a. In connection

with this testimony, the Government introduced an exhibit listing twelve factors used by the IRS in evaluating the legitimacy

of shareholder loans. Pet. App. 94a–96a.

3

4 The D.C. Circuit granted Han’s motion for appointment of sub-

stitute counsel and appointed undersigned counsel to represent

him pursuant to the Criminal Justice Act.

9

James test by addressing factors other than the parties’ intent at the time of the transaction.5

The D.C. Circuit affirmed Han’s convictions in a

published opinion dated June 19, 2020. See United

States v. Han, 962 F.3d 568 (D.C. Cir. 2020), reprinted

at Pet. App. 1a–12a. Two parts of that decision are

relevant here.

First, regarding Han’s evidentiary challenge, the

court of appeals reasoned that “[w]hether a borrower

has the intent and ability to repay a purported loan is

a factor in judging whether the transaction is in fact a

loan for tax purposes.” Pet. App. 7a. The court based

that conclusion in part on Welch v. Comm’r, 204 F.3d

1228, 1230 (9th Cir. 2000), which directs courts to look

beyond whether “the parties actually intended repayment” and “conside[r] a number of other factors,” such

as “whether the borrower had a reasonable prospect

of repaying the loan,” “in assessing whether a transaction is a true loan.” These factors are “nonexclusive, and no single factor”—not even the parties’

intent—“is dispositive.” Id. Applying a similarly

open-ended approach, the D.C. Circuit held that testimony regarding the viability of Envion’s business

prospects was admissible because it indicated that

Han “had no intent or ability to repay” the funds he

received in 2010. Pet. App. 7a (emphasis added).

Second, the D.C. Circuit held that the District

Court’s refusal to issue Han’s requested theory-of-defense jury instruction was harmless error because the

jury heard witness testimony and attorney argument

5 See Opening Br. of Appellant, United States v. Han, No. 18-

3081, ECF No. 1808727, at 40–47 (D.C. Cir. Sept. 30, 2019) (citing, among other authorities, James, 366 U.S. at 219).

10

regarding tax treatment of personal loans. Pet. App.

10a. The court relied in particular on testimony from

Agent Manion, “[t]he government’s expert witness,”

that “personal loans are not taxable.” Id. As noted

above, that testimony identified several factors other

than the parties’ intent as bearing on whether a transaction constitutes a loan. See Pet. App. 35a–37a, 94a–

96a.

REASONS FOR GRANTING THE PETITION

This case presents an ideal opportunity for this

Court to resolve a longstanding circuit split regarding

the proper test for distinguishing taxable income from

non-taxable loans.

Whereas the First, Second,

Fourth, Sixth, and Seventh Circuits focus on the intent of the transacting parties, the Third, Fifth,

Ninth, and Tenth Circuits consider intent as one of

several co-equal inputs to a multi-factor balancing

test in which no factor is dispositive. The decision below deepened that split by taking the latter approach.

This Court’s review is warranted in light of the recurring nature of this issue, the conflict between the

multifactor balancing test and the rule adopted by

this Court in James, and the significant practical importance of the loan-income distinction across a wide

range of circumstances.

11

I.

The Decision Below Deepens a Circuit

Split Regarding the Definition of a Loan

for Tax Purposes.

A.

This Court Established the Test for Distinguishing Taxable Income from NonTaxable Loans in James.

The distinction between loans and taxable income

traces its roots back to Commissioner v. Wilcox, 327

U.S. 404, 408–09 (1946), which held that illegally obtained funds do not constitute “gross income” under

the Internal Revenue Code. Specifically, the Court

held that embezzled funds are not taxable gains to the

embezzler in the years in which the funds were misappropriated because “a taxable gain is conditioned

upon (1) the presence of a claim of right to the alleged

gain and (2) the absence of a definite, unconditional

obligation to repay or return that which would otherwise constitute a gain.” Id. at 408.

Six years later, however, the Court altered course

in Rutkin v. United States, 343 U.S. 130, 138–39

(1952), and held that an extortionist, unlike an embezzler, was obligated to pay tax on his ill-gotten gains

because he was unlikely to be asked to repay those

funds. While the Rutkin decision called Wilcox into

question, the Court did not explicitly abandon its definition of “income” until eight years later in James v.

United States, 366 U.S. 213 (1961).

James involved a union official who embezzled

funds from his union and a related insurance company. See id. at 214. The James Court determined

that Wilcox was wrongly decided, and that embezzled

12

funds do qualify as taxable income. See id. at 218–19.

In particular, the Court reasoned that:

When a taxpayer acquires earnings, lawfully or

unlawfully, without the consensual recognition,

express or implied, of an obligation to repay and

without restriction as to their disposition, he

has received income which he is required to return, even though it may still be claimed that

he is not entitled to retain the money, and even

though he may still be adjudged liable to restore its equivalent.

Id. at 219 (quotation marks omitted, emphasis added).

“This standard brings wrongful appropriations within

the broad sweep of ‘gross income,’” but also “excludes

loans.” Id.

Since James, this Court has consistently held that

bona fide loan proceeds are not gross income to the

borrower, see Indianapolis Power & Light Co., 493

U.S. at 207–08, because the receipt of the loan is offset

by a corresponding future obligation to repay, see

Comm’r v. Tufts, 461 U.S. 300, 308 (1983).

Critically, the James Court also established the

principle that “the consensual recognition, express or

implied, of an obligation to repay” is the hallmark of a

true loan. James, 366 U.S. at 219; see United States v.

Pomponio, 563 F.2d 659, 662 (4th Cir. 1977) (“[C]onsensual recognition” or “the taxpayer’s own intention

to repay” is the “sine qua non of a bona fide non-reportable loan.”) (collecting cases). In other words,

“[l]oans are identified by the mutual understanding

between the borrower and lender of the obligation to

repay and a bona fide intent on the borrower’s part to

repay the acquired funds.” Collins v. Comm’r, 3 F.3d

13

625, 631 (2d Cir. 1993); see also United States v. Beavers, 756 F.3d 1044, 1057 (7th Cir. 2014) (explaining

that “loan proceeds are not income because the taxpayer has incurred a genuine obligation to repay the

loan” and that “the recipient must actually intend to

repay” for a transaction to qualify as a loan).

B.

The Courts of Appeals Have Split Regarding Implementation of the James

Test.

The courts of appeals have split regarding whether

factors other than intent bear on whether a transaction constitutes a non-taxable loan under James. As

the Seventh Circuit observed in Busch, “[s]ome courts

have viewed intent as merely one factor, and then

have balanced that intent against various objective

factors” while other courts have focused on intent

alone and look to “objective factors” solely “as indications of intent.” 728 F.2d at 948.

1. Under the majority approach, applied by the

First, Second, Fourth, Sixth, and Seventh Circuits,

the transacting parties’ intent to adopt a repayment

obligation is the “sine qua non of a bona fide non-reportable loan,” Pomponio, 563 F.2d at 662–63, and

objective factors serve only as “indications of intent,”

Busch, 728 F.2d at 948.

For example, in Crowley v. Comm’r, 962 F.2d 1077,

1079 (1st Cir. 1992), the First Circuit, applying

James, held that “[a] shareholder distribution is a

loan, rather than a constructive dividend, if at the

time of its disbursement the parties intended that it be

repaid.” Id. (emphasis added). Crowley involved discretionary

withdrawals

from

a

closely-held

14

corporation of which the taxpayer and his three brothers were the only individual shareholders.

Addressing a Tax Court finding that the taxpayer had

failed to declare these withdrawals as taxable income,

the First Circuit explained that the “inquiry concerns

itself with the parties’ subjective intent, rather than

objective intent, although recourse to objective evidence is required to ferret out and corroborate actual

intent.” Id. (emphasis added). Thus, courts “determine whether the requisite intent to repay was

present by examining available objective evidence of

the parties’ intention.” See id.; see also Bergersen v.

Comm’r, 109 F.3d 56, 59 (1st Cir. 1997) (applying

Crowley test).

The Seventh Circuit likewise explained in Busch

that “intent is the only factor” in “determining the

character” of a transaction, such that the “better view

is to treat such objective factors as indications of intent.” 728 F.2d at 948–49 (cleaned up). Although “[a]

court may look to various facts to determine intent, . .

. once the taxpayer’s intent is found, that finding is

conclusive of the legal issue of loans versus dividends.” Id. at 949; see also VHC, Inc. v. Comm’r, 968

F.3d 839, 842 (7th Cir. 2020) (holing that “[t]o determine whether [a debtor-creditor] relationship exists,

we look to ‘a number of factors’ as ‘indications of intent’”); Frierdich v. Comm’r, 925 F.2d 180, 183 (7th

Cir. 1991) (“Such intent is demonstrated by the objective facts of each case from which the court has to

determine Frierdich’s actual intent or motive.”).

Likewise, the Second, Fourth, and Sixth Circuits

have maintained that consensual recognition of the

obligation to repay sets a loan apart from taxable income, and that courts may look to objective criteria as

15

indicia of intent. See Collins v. Comm’r, 3 F.3d 625,

631 (2d Cir. 1993) (citing James, 366 U.S. at 219)

(“Loans are identified by the mutual understanding

between the borrower and lender of the obligation to

repay and a bona fide intent on the borrower’s part to

repay the acquired funds.”); Buff v. Comm’r, 496 F.2d

847, 848 (2d Cir. 1974) (explaining that “the lack of

consensual recognition of an obligation to repay” element of James “distinguish[es] embezzlement from a

loan”); United States v. Amick, No. 99-4557, 2000 WL

1566351, at *4 (4th Cir. 2000) (rejecting taxpayer’s

proposed jury instructions which “would have permitted the jury to discount intention to repay and place

more emphasis on other factors”); Pomponio, 563 F.2d

at 662–63 (reciting “sine qua non” rule quoted above);

Jaques v. Comm’r, 935 F.2d 104, 107 (6th Cir. 1991)

(“To determine whether the taxpayer intended to repay the withdrawals, courts have looked to a number

of objective factors . . . .”).6

2. In contrast, other circuits have transformed the

James analysis into an amorphous multifactor test in

which a variety of non-exclusive factors going beyond

intent to repay are weighed to determine if a transfer

6 Tax Court rulings have repeatedly applied similar reasoning.

See, e.g., M.J. Byorick, Inc. v. Comm’r, 55 T.C.M. (CCH) 1037,

1047 (T.C. 1988) (inquiring into subjective intent, as borne out

by objective factors); Faist v. Comm’r, 40 T.C.M. (CCH) 1128,

1132 (T.C. 1980) (same); Pizzarelli v. Comm’r, 40 T.C.M. (CCH)

156, 159 (T.C. 1980) (same); Koufman v. Comm’r, 35 T.C.M.

(CCH) 1509, 1523 (T.C. 1976) (objective indicia provide “helpful

guideposts” in determining “whether repayment was actually intended”).

16

constitutes a loan. See Busch, 728 F.2d at 948 (collecting cases). The Third, Fifth, Ninth, and Tenth

Circuits fall into this camp.

The Ninth Circuit’s decision in Welch—which the

D.C. Circuit cited and relied upon here—illustrates

this intent-plus approach. The Welch court acknowledged that “[t]he conventional test is to ask whether,

when the funds were advanced, the parties actually

intended repayment.” 204 F.3d at 1230 (citing the

First Circuit’s decision in Bergersen, 109 F.3d at 59,

as one example). “However, courts have considered a

number of other factors as relevant in assessing

whether a transaction is a true loan,” including

“whether the promise to repay is evidenced by a note

or other instrument” and “whether the borrower had

a reasonable prospect of repaying the loan.” Id. Under this more flexible test, “the factors are nonexclusive and no single factor is dispositive.” Id. Subsequent authority reaffirms the Ninth Circuit’s view

that, “in addition to ‘ask[ing] whether . . . the parties

actually intended repayment,’ courts are to employ [a]

non-exhaustive, seven-factor test when determining

whether a transaction constitutes a ‘true loan.’” Engstrom, Lipscomb & Lack, APC v. Comm’r, 674 F. App’x

617, 619 (9th Cir. 2016) (citing Welch, 204 F.3d at

1230).

The Fifth Circuit likewise has applied multi-factor

tests that reach beyond intent, under which “no one

factor is controlling.” Estate of Mixon v. United States,

464 F.2d 394, 402 (5th Cir. 1972); see also MoneyGram

Int’l, Inc. v. Comm’r, 153 T.C. Rep. (CCH) 185, 215

(T.C. 2019) (collecting Fifth Circuit decisions

“adopt[ing] . . . multi-factor (and partially overlapping) tests” to determine whether a transaction is a

17

loan for tax purposes). Consistent with this view, the

Fifth Circuit upheld a Tax Court decision that relied

on application of Welch’s seven-factor test in Todd v.

Comm’r, 486 F. App’x 423, 426 (5th Cir. 2012).

Third Circuit precedent follows a similar path. For

example, in Merck & Co. v. United States, 652 F.3d

475, 484–85 (3d Cir. 2011), the court, having evaluated both direct and indirect evidence of the

taxpayer’s intent to repay, went on to consider evidence of a novel third factor—“third-party

involvement.” In contrast to the Seventh Circuit’s

warning that the loan analysis begins and ends with

intent, see Busch, 728 F.2d at 948, the Merck court

went on to consider third party involvement even after

determining that “consensual recognition” or “intent

to repay” had been established, see 652 F.3d at 484;

see also Fin Hay Realty Co. v. United States, 398 F.2d

694, 697 (3d Cir. 1968) (“neither any single criterion

nor any series of criteria can provide a conclusive answer” for whether a transaction constitutes a loan).7

Rulings from the Tenth Circuit follow the same

general approach. See, e.g., Williams v. Comm’r, 627

F.2d 1032, 1034–1035 (10th Cir. 1980) (holding, based

in part on Third and Fifth Circuit precedent, that objective circumstances must be balanced against

shareholders’ declarations of subjective intent to repay).

7 Although some Third Circuit cases recognize that “intent to re-

pay” is the “one essential [factor] without which a transaction

cannot be recognized as a loan,” these cases also state that “various factors” beyond intent “must be weighed in determining for

income tax purposes the true character of a purported loan.” Estate of Taschler v. United States, 440 F.2d 72, 75 (3d Cir. 1971)

(quoting Comm’r v. Makransky, 321 F.2d 598, 600 (3d Cir. 1963)).

18

The D.C. Circuit’s decision in this case deepens the

split. In the decision below, the D.C. Circuit held

based on Welch and United States v. Swallow, 511

F.2d 514, 519 (10th Cir. 1975), that “[w]hether a borrower has the intent and ability to repay a purported

loan is a factor in judging whether the transaction is

in fact a loan for tax purposes.” Pet. App. 7a. That

test replaces the “consensual recognition” standard

with an open-ended analysis in which the intent of the

parties is simply one co-equal, non-dispositive factor.

Indeed, the D.C. Circuit addressed intent to repay and

ability to repay on equal footing, rather than treating

ability to repay as a factor bearing on the ultimate

question of intent, as in Busch and the other cases applying the majority rule. Although the D.C. Circuit

considered intent, it concluded that the 2010 transfers

between Han, Carlucci, and Russell were taxable income based in part on ability to repay, a separate

issue. See Pet. App. 7a–8a.

II.

Multifactor Tests that Consider Factors

Other than the Parties’ Intent Are Incompatible with James and Unworkable.

The test adopted in James turns on intent—i.e.,

whether there is a “consensual recognition, express or

implied,” that the transferee has “an obligation to repay” the transferor. 366 U.S. at 219. As a result,

considerations other than the parties’ intent have no

independent legal relevance.8 Tests that look to additional factors only as means of discerning intent are

8 Although James also refers to whether a transfer is “without

restriction as to [the funds’] disposition,” 366 U.S. at 219, that

consideration is often not implicated, making “the taxpayer’s

19

consistent with that framework, whereas tests that

treat intent as a non-dispositive factor to be balanced

against other considerations are not. See Busch, 728

F.2d at 948–49.

The latter, intent-plus approach invites error in

two interrelated ways.

First, it encourages factfinders to determine that

a transaction is (or is not) a bona fide, non-taxable

loan without ever considering the parties’ intent. For

example, when a court treats factors such as whether

repayment is evidenced by a note, or whether there is

an ability to repay on the part of the borrower, as coequal to the parties’ intent, a factfinder may find that

a party who intended to take out a loan, but did not

memorialize it in a note, or whose ability to repay is

contested, did not enter into a valid loan and therefore

must pay tax on the proceeds without reaching the issue of intent. This risk is most acute when the

factfinder lacks proper instruction regarding how to

weigh each factor in the analysis. If no one factor is

dispositive, the factfinder may choose any one factor

and make a decision solely based on that factor, or a

variety of factors, none of which include the intent of

the parties at the time of the transaction.

Second, the intent-plus approach makes it possible to find that the parties genuinely intended a

transaction to be a loan, but that the transaction nevertheless resulted in taxable income based on other

factors. Alternatively, the intent-plus approach also

own intention to repay” the only relevant factor in most cases.

Pomponio, 563 F.2d at 662. Even when a use restriction is relevant, it constitutes the only other factor that may be considered

under James.

20

makes it possible to find that a transaction is a loan

based on other factors, despite the parties’ intent that

the transaction not be classified as such. The Third

Circuit’s decision in Merck illustrates this risk.

In Merck, the parties argued that their transaction was not, and was never intended to be, a loan.

See 652 F.3d at 478–80. The Third Circuit came to a

different conclusion after analyzing the parties’ intent, whether there was an obligation to repay, and if

the presence of a third party affected the nature of the

transaction. See id. at 482–88. In this case, the intent-plus approach led to the transaction being

considered a loan, contrary to the parties’ stated intent. See id. at 481.

In addition, open-ended multi-factor tests often

make it impossible to know what role “consensual

recognition . . . of an obligation to repay” played in the

factfinder’s analysis. Here, for example, one cannot

know whether the jury found that Han, Carlucci, and

Russell intended the 2010 transfers to constitute

loans at the time of the transactions because the only

instruction the jury received on the issue—Agent

Manion’s testimony—referred to several other factors

on a co-equal basis. See Pet. App. 35a–36a (referring

to whether there was a loan document, whether there

were repayment terms or actual repayments made on

the loan, whether interest was imputed on the loan,

whether there was an ability to repay the loan, and

whether the recipient intended to repay the amount

received). Similarly, because the D.C. Circuit looked

to intent and ability to repay, it is unclear whether the

court would have come to the same conclusion had intent served as the sole consideration, as under Busch

and other cases employing the majority rule. A test

21

that prevents appellate courts from knowing what the

factfinder concluded about the first (and often only)

valid consideration identified in this Court’s precedent is not workable, particularly in the context of

criminal proceedings.

III.

The Question Presented Has Practical Importance

in

a

Broad

Range

of

Circumstances.

The question presented also warrants this Court’s

review because it recurs frequently across a wide spectrum of circumstances. As the Fifth Circuit has

observed, the “problem of recognizing genuine debt

from spurious ones . . . arises in many contexts.” Alterman Foods, Inc. v. United States, 505 F.2d 873, 876

(5th Cir. 1974); see also Steven L. Gleitman & Anatole

Klebanow, How To Establish That An Advance To A

Shareholder Was A Loan, 40 Tax’n for Acct. 100

(1988), available at 1988 WL 294292 (“One of the most

common problems facing a closely held corporation is

an IRS contention that an advance made to a shareholder was a dividend, not a loan.”). Indeed, the split

of authority described above has implications that go

well beyond tax fraud prosecutions and has the potentiality to affect every taxpayer who borrows money

from a third party.

Taxpayers, accountants, tax lawyers, the Internal

Revenue Service, and courts alike, depend on certainty in the Tax Code. This Court has thus

recognized the need to avoid inconsistent treatment of

taxpayers and to prevent “inequalities in the administration of the revenue laws.” Comm’r v. Sunnen, 333

U.S. 591, 599 (1948); see also Rudolph v. United

States, 370 U.S. 269 (1962) (granting certiorari where

22

case presented important questions concerning the

definition of terms under the Internal Revenue Code);

Colony, Inc. v. Comm’r, 357 U.S. 28, 32 (1958) (granting certiorari where issue presented was “one of

substantial importance in the administration of the

income tax law”). With the courts of appeals applying

diverging tests to identify loans, stakeholders cannot

know with confidence how their transactions will be

classified for tax purposes. As a result, taxpayers with

even modest loans from friends or family may be adversely affected by the confusion regarding

application of the James test.

IV.

This Case Is an Excellent Vehicle to Address the Proper Test for Distinguishing

Loans from Taxable Income.

Review is also warranted because this case

squarely presents the issue that has divided the

courts of appeals. Han pressed the issue below, arguing that the test outlined by Agent Manion’s

testimony did not comport with James. See note 5,

supra. The D.C. Circuit then passed upon the issue,

holding that a transferee’s “intent and ability to repay” bear on “whether [a] transaction is in fact a loan

for tax purposes.” Pet. App. 7a (emphasis added). Indeed, the sole fact recited in the D.C. Circuit’s

opinion—that Han “did not have any independent

money,” Pet. App. 8a—focuses on ability to repay.

Further, the issue is potentially dispositive in this

case, because it bears on a core element of the charged

offense—whether the funds Han received in 2010

were non-taxable loan proceeds as opposed to unreported taxable income. See Sansone, 380 U.S. at 351.

Although the Government presented evidence that

23

the funds were not loan proceeds, see Pet. App. 7a–8a,

there was also considerable evidence (including expert

testimony) that the transactions were valid loans, see

Pet. App. 42a–46a. There is thus a reasonable probability that, had the jury been correctly instructed, it

would have found Han not guilty on the ground that

the 2010 transfers were non-taxable loans.

Finally, the shapeless multi-factor test applied by

the D.C. Circuit opened the door to inflammatory and

otherwise irrelevant evidence of alleged fraud, such as

Han’s expenditures on luxury items, on the theory

that this evidence showed Han’s knowledge, motive,

and state of mind. See Pet. App. 6a–7a. This evidence

tended to paint Han as guilty of fraud charges that

were dismissed before trial and should not have

played any role in the case.

24

CONCLUSION

For all of the reasons given above, the petition for

a writ of certiorari should be granted.

Respectfully submitted,

Wesline N. Manuelpillai

Kevin F. King

COVINGTON & BURLING LLP

Counsel of Record

The New York Times Bldg. Daniel Bernick

Ali Remick

620 Eighth Avenue

New York, NY 10018-1405 COVINGTON & BURLING LLP

One CityCenter

850 Tenth Street, NW

Washington, DC 20001

kking@cov.com

(202) 662-6000

November 13, 2020

Counsel for Petitioner

Michael Sang Han