Michael Sang Han v. United States

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?