Petition — Miller v. United States

my

Supreme Court of the United States

melita 1976

NO, ....45.

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— oD

——e se TT ee eae

MARVIN MILLER,

Petitioner,

vs.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

RICHARD J. TRATTNER BURTON MARKS

rl of TRATTNER, PASTOR & PESOLA 8383 Wilshire Boulevard

t 9595 Wilshire Boulevard, Suite 900 Suite 510

Beverly Hills, California 90212 Beverly Hills, California 90211

Telephone - (213) 878-1577 Telephone - (213) 658-8484

Of Counsel Counsel for Petitioner

Dean Standefer, 326 Main St., Huntington Beach, Ca, 92648 - (714) 536-7161

i

TOPICAL INDEX

Petitioner prays that a writ of

certiorari issue to review the judgment

and opinion of the United States Court

of Appeals for the Ninth Circuit ...........055

Goleta BOW «ccc reccccsctccccccccccecs

P< ccieudans outa vewents dbeseteks

IIS ncccccccncccectcececct

Statutes and Constitutional

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Reasons for Granting the Writ... 6.6.6 ee

I There is a major conflict among the

Circuits whether, in a criminal tax

fraud case, diverted corporate receipts

should be taxed to an indicted shareholder

under the provisions of 26 U.S.C. 6 61(a)

or under 26 U.S.C. 68 301(c) and 316(a)

Il Where there are two equally applicable

~ §tatutes under which to tax diverted

corporate receipts, the government

cannot select that statute which pro-

duces a tax liability and then transfer

the burden of proof to the defendant

to demonstrate that under the other

statute, no tax liability exists .........45.

Ill An interpretation that Internal Revenue

Code 66 301(c) and 316(a) are operative

in a criminal tax proceeding only if a

shareholder intended a return of capital

is contrary to the express language of

ROE nc oteesctcoseeetseceeees

10

ii

TOPICAL INDEX

Reasons for Granting the Writ (cont'd)

IV An interpretation that Internal Revenue

Code 6 61(a) permits the government, in

a criminal tax proceeding, to prove a tax

liability to a shareholder by the mere pos-

session of unexplained corporate funds

which could be considered income, is

unconstitutionally vague ©... 6.6666 e eens

V _ Congress did not intend the mail fraud

statute (18 U.S.C. 6 1341) to be applied

to the prosecution of federal and state

income tax violations ©6666 eee

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TABLE OF AUTHORITIES CITED

Cases

Bernstein v. United States, 234 F.2d 475

CEArG ADEE) oc ccccccccccccccccccccens

C.LR. v. Riss, et al., 347 F.2d 161

(oS Oy) en

Currier v. United States, 166 F.2d 346

(7 ) eer eee

Davis v. United States, 226 F.2d 331

(CA-6 1955), cert. denied 350 U.S.965 .... 4,7,8,9

DiZenzo v. Commissioner of Internal Revenue,

348 F.2d 122 (CA-2 1965) oo ccc ne

brough v. Commissioner of Internal Revenue,

238 F.2d 735 (CAG 1956) oc cee

iii

TABLE OF AUTHORITIES CITED

Cases

Gendelman v. United States, 191 F.2d 993

(CA-9 1951), cert. denied, 342 U.S.

RN RI JO 2 ER a

Goldberg v. United States, 330 F.2d 30

(CA-3 1964), cert. denied 377 U.S. 953

Johnson v. Florida, 391 U.S. 596,

88 S. Ct. 1713, 20 L. Ed. 838 (1968) ......

Longsfield v. Commissioner, 241 F.2d 508

i Jhdin dé ba ewe iGieu ols ves cece

Mac Evoy v. United States, 322 U.S. 102,

64 S. Ct. 890, 88 L. Ed. 1163 (1944) ......

Noble v. C.1L.R., 368 F.2d 439

SUE She cccwrnsscccecctcccces

Rutkin v. United States, 343 U.S. 130,

72S. Ct. $71, 96 L. Ed. 8331951)...

United States v. Alpers, 338 U.S. 680,

PO Ge SUB ENOUED «cece ccccecccccciccs

United States v. Garcia, 412 F.2d 999

RE

United States v. Hartman, 245 F.2d 349

I i i

United States v. Henderson, 386 F. Supp. 1048

ee ae a

United States v. Jolly, 229 F.2d 180

RS

United States v. Leonard, 524 F.2d 1076

EU UUUED § ceecedetowcccenccevccess

iv

TABLE OF AUTHORITIES CITED

Cases Page

United States v. Spector, 343 U.S. 169,

72 S. Ct. 591, 96 L. Ed. 863,

rehearing denied, 343 U.S. 951,

72 §. Ct. 1040, 96 L. Ed, 1088 (1952) .... 12

United States Constitution

Amendment V ......s sce eee ee eeeeeeeeneeee 3

United States Statutes

18 U.S.C,

BORO. cckcchoccccceesesanueneunnee 3,4

§ 1341 3, 4, 13, 14

26 U.S.C. ;

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28 U.S.C. ,

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IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1976

No. ......

MARVIN MILLER,

Petitioner,

VS.

UNITED STATES OF AMERICA.

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

The petitioner, MARVIN MILLER, prays that a writ

of certiorari issue to review the judgment and opinion of the

United States Court of Appeals for the Ninth Circuit entered

in this proceeding on November 10, 1976.

OPINION BELOW

The opinion of the Court of Appeals, not yet reported,

<tins —3-

appears in the appendix hereto (Appendix A). No opinion IV. Is the Ninth Circuit rule, in criminal tax cases,

was rendered by the District Court for the Central District which defines the taxability of diverted corporate receipts

of California. to a shareholder under § 61(a), unconstitutionally vague

when it asserts:

JURISDICTION “The government establishes a prima facie

case (including a tax liability) when it dem-

The judgment of the Court of Appeals for the Ninth - onstrates that the taxpayer had unexplained

Circuit was entered on November 10, 1976. This Court’s funds which could be considered as income

”

jurisdiction is invoked under 28 U.S.C. § 1254(1).

QUESTIONS PRESENTED V. Is the mail fraud statute (18 U.S.C. § 1341)

properly applied when used to charge federal and state

I. Ina criminal tax prosecution, are diverted income tax violations?

corporate receipts to be taxed to the indicted shareholder

under 26 U.S.C. § 61(a) (Gross income - General definition), STATUTES AND CONSTITUTIONAL

or under 26 U.S.C. § 8 301(c) and 316(a) (Corporate distri- PROVISIONS INVOLVED

butions - Dividends defined)?

The relevant statutory and constitutional provisions

Il. Inacriminal tax prosecution, can the burden of are set forth in the appendix hereto (Appendix B); they

going forward with the evidence be transferred to the include:

indicted shareholder, requiring him to demonstrate that 18 U.S.C. § 287 False, fictitious or fraudu-

the application of § § 301(c) and 316(a) generated no liabil- lent claims.

ity? 18 U.S.C.81341 Frauds and swindles.

i 26 U.S.C. 861 Gross income defined.

Ill. Ina criminal tax prosecution where the burden 26 U.S.C. § 301 Distributions of Property.

has been transferred to the indicted shareholder to demon- 7 = 26 U.S.C.§316 Dividend Defined.

strate his right to the application of § § 301(c) and 316(a), 26 U.S.C.8317 Other Definitions.

have those sections been properly construed, when inter- 26 U.S.C.§87201 Attempt to evade or defeat

preted, to contain a new and implied provision that is tax.

inconsistent with the express provisions of those sections? 26 U.S.C. § 7206(1) Fraud and false statements.

U. S. Constitution, Amendment V.

<“

= Sa

STATEMENT OF THE CASE

Petitioner was charged in a twenty-four count indict-

ment with violations of 26 U.S.C. § 7201 (tax evasion),

§ 7206(1) (subscribing a false return), 18 U.S.C. § 287 (false

claim for refund). and § 1341 (mail fraud). On July 15, 1975,

following a court trial he was found guilty on twenty-two

counts.! Twenty of the twenty-two counts upon which the

petitioner was convicted were directly concerned with an

alleged under reporting of his personal income tax liability

‘as the result of corporate receipts which he diverted to him-

self during the years 1968, 1969 and 1970.”

At trial the petitioner did not contest his personal

receipt of the corporate funds. He maintained, however,

that under the applicable Internal Revenue Code provisions

(26 U.S.C. 88 301(c) and 316(a) ), those funds were nontax-

able returns of capital and/or capital gains against which he

had uncontested capital losses. In short, he claimed to have

owed no additional taxes.

To establish a personal tax liability, the government

seemingly relied upon Davis v. United States,’ 226 F.2d

331 (CA-6 1955), cert. denied, 350 U.S. 965, which holds

that diverted corporate receipts are to be taxed to the

4

: dismissed on motion of the government before final argu-

Pate be = was found not guilty as to one other count

2The aining two counts on which the petitioner was convicted charged

him with false subscription of his corporate returns. He maintains that the

court’s gross the

i , error with respect to the ble law concerning

pen rods ee counts tainted the court’s on the two corporate

counts.

3See the opinion of the Court of Appeals for the Ninth Circuit (Appendix A,

page 9).

od

siden ro eS eynewen ene I _—

.

ili.

offending shareholder under the general gross income pro-

visions of 26 U.S.C. § 61(a), and without regard to the

otherwise applicable corporate distribution requirements of

88 301(c) and 316(a).

The trial court rejected the petitioner’s asserted

defense under § § 301(c) and 316(a) despite the uncon-

troverted evidence which showed the petitioner’s corpora-

tion had no earnings and profits from which to pay a divi-

dend during 1968, 1969 and 1970.

At trial, the petitioner did not rest upon his then

asserted belief that it was the government’s burden of

proof to demonstrate under & § 301(c) and 316(a) that

the petitioner’s corporation had sufficient earnings and

profits from which to pay a dividend and consequently

establish an additional personal tax liability due from him.

As indicated above, the petitioner demonstrated at trial,

without a shred of contradictory evidence offered by the

governmenté, that his corporation had no earnings and

profits. Thus, the petitioner showed that his receipt of

the corporate funds in question produced no material

tax consequence to him personally.

The government never contended that the facts

which gave rise to the petitioner’s diversion of corporate

receipts produced an additional corporate tax liability in

the second of the two corporate years in question. The

trial court acquitted the petitioner as to the count which

charged an additional corporate tax liability in the first

of the two corporate years.

‘The Court of Appeals’ oblique reference to the contrary at footnote 14

(Appendix testy 4) is in error. The government expert witness did not

at any time te there were te earnings and profits to support a

constructive dividend for criminal tax purposes.

-

The opinion of the Court of Appeals for the Ninth

Circuit acknowledged the petitioner’s right to demonstrate

that under the provisions of § § 301(c) and 316(a) he owed

no additional tax liability. However, in interpreting those

provisions, the Ninth Circuit made novel rulings of law

which resulted in affirming the District Court’s judgment.

It is the validity of those newly announced rules that consti-

tutes the principal issue being challenged in this petition.

The Circuit Court’s approval of the “salary” designa-

tion to classify the petitioner’s receipt of diverted corporate

funds was predicated upon a threshold determination that

the petitioner could not sustain his burden of proof under

8 8 301(c) and 316(a). It is that threshold determination which

lies at the very heart of this appeal.

REASONS FOR GRANTING THE WRIT

I

There Is A Major Conflict Among The Circuits

Whether, In A Criminal Tax Fraud Case, Diverted

Corporate Receipts Should Be Taxed To An Indict-

ed Shareholder Under The Provisions Of 26 U.S.C.

§ 61(a) Or Under 26 U.S.C. § 8 301(c) and 316(a).

The Fifth Circuit, in Bernstein v. United States, 234 F.2d

475, 482 (1956), holds that in a criminal tax fraud proceeding,

diverted corporate receipts are taxed, if at all, to the offending

shareholder under the provisions of § 8 301(c) and 316(a). The

First Circuit holds likewise, Currier v. United States, 166 F.2d 346,

348 (1948). The Second Circuit, in United States v. Leonard,

524 F.2d 1076, 1083 (1975), petition for certiorari filed Jan-

=

uary 16, 1976 and pending, clearly adheres to the appli-

cation of § § 301(c) and 3i6(a) in the context of a crim-

inal tax fraud proceeding. Leonard, however, imposes a

rather minimal burden upon the government to bring its

proof within those provisions.

On the other side of the conflict, the Sixth Circuit,

in Davis v. United States, 226 F.2d 331, 335 (1955), cert.

denied, 350 U.S. 965, unequivocably asserts § 61(a) is the

only applicable code section under which diverted corporate

receipis are taxed to a shareholder in a criminal tax fraud

proceeding. The Eighth Circuit, in United States v. Hartman,

245 F.2d 349, 353 (1957), expressly follows Davis, and,

presumably, so does the Third Circuit in Goldberg v. United

States, 330 F.2d 30, 38 (1964), cert. denied, 377 U.S. 953.

The Ninth Circuit in the instant case has seemingly

invoked yet a third side to the conflict. It holds that both

§ 61(a) as well as 88 301(c) and 316(a) are applicable. Novel-

ly, it permits the government to establish a prima facie case

under § 61(a) and then transfers the burden to the indicted

shareholder to make a showing that the mandates of 8 & 301(c)

and 316(a) should supercede the application of § 61(a). The

Ninth Circuit’s unusual treatment will be discussed further

below.°

ail,

“It is also worthy of note that the Ninth Circuit, in part, bottomed its approach

of taxing diverted corporate receipts to a shareholder under § 6 1(a), upon an

unsupported Joye first enunciated in Drybrough v. Commissioner of Internal

a 23 oa hablidhine sto Pees ~ pb mm de me a that the

app. e ru esta a tax ty tax fraud proceedings

(e.g., §61(a) ) could be different from the rules applied in a civil tax fraud pro

ceeding (og, § 301(c) and 316(a). The Circuits are split widely over the viat J-

ity of this doctrine. See DiZenzo v. Commissioner of Internal Revenue, 348 F.2d

122, 126 (CA-2 1965), and the cases cited therein. dichotomous approach

obviously can produce a different income tax liability for the same shareholder

under the same set of facts but differing only because of the forum in which he

- 7 himself called to litigate his tax liability. Such a rule is manifestly a denial

of due process,

Patently, the application of the § 61(a) shotgun

provision to the taxation of diverted corporate receipts

ignores the time honored rule of statutory construction

which holds that the general language of a statute will not

apply to a matter specifically dealt with in another part of

the same enactment. Mac Evoy v. United States, 322 U.S.

102, 64 S. Ct, 890, 894, 88 L. Ed. 1163 (1944),

Additionally, the Sixth Circuit in Davis, supra, which

was the first Circuit to hold § 61(a) as the appropriate sec-

tion under which to tax diverted corporate receipts, relied

upon Rutkin v, United States, 343 U.S. 130, 72 S. Ct. 571,

96 L. Ed. 833 (1951), in support of its position. That

reliance was misplaced. Rutkin had nothing to do with

diverted corporate receipts, shareholders, or §# 301(c) and

316(a).°

ll

Where There Are Two Equally Applicable

Statutes Under Which To Tax Diverted

Corporate Receipts, The Government Cannot

Select That Statute Which Produces A Tax

Liability And Then Transfer The Burden Of

Proof To The Defendant To Demonstrate That

Under The Other Statute, No Tax Liability

Exists.

The burden of proof in a criminal case is never on the

defendant, Johnson v. Florida, 391 U.S, 596, 598, 88 S. Ct.

decisions by the Third, th and Ninth Circuits, all of which

Cin none of the decisions e Davis “ies hans bata on @oominntion of

Davis court's reasoning to devine the ra for its refusal to follow the express

age of Internal Revenue Code $4 301(c) and 316(a). Hopefully, this Court

do 90,

ae

1713, 20 L. Ed. 838 (1968). Nevertheless, the Ninth

Circuit holding in the instant case has, in fact, shifted

the government's burden of proof to the petitioner.

Those Circuits which follow the Davis rule sub-

scribe to but a single applicable theory under which to

tax diverted corporate receipts in a criminal proceeding,

i.e., the provisions of §61(a). They would admit no

proof by an indicted shareholder that his corporation

lacked the earnings and profits necessary under § # 301(c)

and 316(a) to support a finding of a constructive dividend.

Similarly, those Circuits which are in conflict with the

Davis rule, and which require the government to follow

the express language of § 8 301(c) and 316(a), also sub-

scribe to but a single applicable theory under which to

tax diverted corporate receipts. It is only the novel

Ninth Circuit holding which admits that both § 61(a) as

well as #6 301(c) and 316(a) may be applicable.’ By

acknowledging that either of the above sections may be

applicable and then permitting the government to establish

a tax liability solely under § 61(a) where the proof is less

complicated,® the burden of proof has been impermissively

transferred to the defendant. The latter must now prove

his innocence by demonstrating that under 66 301(c) and

316(a) his distribution was nontaxable. This can work to

an anomalous result as the facts showed in the petitioner's

7

The §61( tion is found in the of the (A A,

13) py Rs anew 13. The $8 301(c) 31 S eee belteonde

Follows:

“In that the constructive distribution rules should not

au be it is not herein asserted that diverted

funds could never be a return of capital. However, to constitute the

latter, there must be some demonstration .. . “ (Emphasis sp

plied). (Appendix A page 13).

“. . . unexplained funds which could be considered as income

.«« ™ At note 13 (Appendix A, page 13).

~10~

case. Under § 61(a) the government proved a tax liability

while under #8 301(c) and 316(a) the petitioner proved

there was no tax liability. When the government is requir

ed to address its proof to all of the applicable sections of

the Code, not only will the defendant be spared from

carrying a burden that is not properly his own, but, further,

conflicting results as evidenced in the petitioner's case will

be avoided.

il

An Interpretation That Internal Revenue Code

#88 301(c) And 316(a) Are Operative In A Crim-

inal Tax Proceeding Only If A Shareholder

Intended A Return Of Capital Is Contrary To

The Express Language Of Those Sections.

Internal Revenue Code § 301(c)(2) states in pertinent

part:

“ . . . That portion of the distribution

which is not a dividend shall be applied

against and reduce the adjusted basis of the

stock.”” (Emphasis supplied).

The cases are legion which demonstrate that 68 301(c)

and 316(a) operate totally without regard to the disclosed

or undisclosed intentions of the shareholder. C./.R. v. Riss,

et al., 347 F.2d 161, 167 (CA-8 1967); Noble v. C.R., 368

F.2d 439, 442-443 (CA-9 1966); Longsfield v. Commissioner,

241 F.2d 508, 511 (CA-5 1957); United States v. Jolly, 229

F.2d 180 (CA-6 1956), affirming the District Court case re-

ported at 55-2 USTC 9725. The Ninth Circuit rule in the

instant case’, that #8 301(c) and 316(a) are not oper

ative unless:

“ . . , [there is] some demonstration on

the part of the taxpayer and/or the corpora-

tion that such distributions were intended

to be a return [of capital] (emphasis

supplied),

is clearly contrary to the express provisions of those

sections and every and all interpretations thereof.

The petitioner's conviction under § 7201, ef cetera,

for allegedly evading his tax responsibilities, necessarily

incorporates within those penal statutes other provisions

of the Internal Revenue Code that define income. It is

improper in the context of a criminal tax proceeding that

the Ninth Circuit should seek to expand the meaning of

88 301(c) and 316(a) to catch the unwary. Criminal

statutes must be strictly construed. No offense may be

created except by the words of Congress used in their

usual or ordinary sense. United States v. Alpers, 338

U.S. 680, 70 S. Ct. 352, 353 (1950).

IV

An Interpretation That Internal Revenue Code

§ 61(a) Permits The Government, In A Crimin-

al Tax Proceeding, To Prove A Tax Liability To

A Shareholder By The Mere Possession of Unex-

plained Corporate Funds Which Could Be Consid-

ered Income, Is Unconstitutionally Vague.

"See te opinion of he Court of Appeat forthe Ninth Circuit (Appendix A,

=|=

A statute, though plain and unambiguous on its face,

may, when applied, violate due process of law, United States

v. Spector, 343 U.S. 169, 171, 72 S. Ct. 591, 96 L. Ed. 863,

rehearing denied, 343 U.S. 951, 72 S. Ct. 1040, 96 L. Ed.

1088 (1952).

The Ninth Circuit has concluded: '®

* . . , the government establishes a prima

facie case (here) when it demonstrates that

the taxpayer had unexplained funds which

could be considered as income which the tax-

payer fails to report in his return.” (Emphasis

supplied). Citing: United States v, Garcia,

412 F.2d 999, 1001 (CA-10 1969); Gendelman

vy. United States, 191 F.2d 993, 996 (CA-9 1951),

cert. denied, 342 U.S. 909 (1952).

Such an interpretation of § 61(a) is offensive for several

reasons. First of all, literally thousands of shareholders in

closely held corporations will, from time to time, be found

in possession of “unexplained funds which could be considered

income.” Are they all to be criminally indicted? In the alter-

native, should the government be permitted to pick and choose

among this vast population of target shareholders, selecting

that member which it deems uniquely deserving to defend

himself against an indictment?

Additionally, the aforesaid prima facie rule is perplexing

because of the peculiar reference to “unexplained funds.”

Clearly, the facts in the instant case showed the funds in the

petitioner's possession were corporate receipts; hence, they

were not “unexplained.” An analysis, however, of Garcia,

1006 opinion at note 13 (Appendix A, page 13).

bl

~ _—— ae ee 8

=13—

supra, and Gendelman, supra, will Jemonstrate they were

net worth cases which dealt with the customary unexplain-

ed bulge in the taxpayer's net worth. There is no logic in

permitting the importation of net worth concepts into

specific item cases (i.¢., corporate diversions) without

making a shambles of the significant distinctions that

underlie those unrelated methods of proof.

Vv

Congress Did Not Intend The Mail Fraud

Statute (18 U.S.C, § 1341) To Be Applied

To The Prosecution Of Federal And State

Income Tax Violations.

The Ninth Circuit rule to the contrary'! now opens

the door for the Postal authorities to usurp the functions

of the Internal Revenue Service in policing the tax laws.

Pursuant to written instructions by the Internal Revenue

Service and state taxing authorities, almost all tax returns are

mailed to their appropriate Service Centers. Consequently,

almost every tax return will fall within the jurisdiction of

the Post Office Department.

More significantly, the comprehensive Internal Revenue

Code statutory scheme, under Chapter 75, 1954 Code, which

sets forth a hierarchial system of criminal sanctions can now

be flatly ignored in the prosecution of income tax violations.

The government can conveniently opt for the broader lan-

guage of 18 U.S.C. § 1341 which permits a conviction of

anyone who“ . . . devised or intend[ed) to devise any

1106 opinion at note 17 (Appendix A, page 16).

~14—

scheme to defraud . . .”!*. Since, presently, there is

a conspicuous absence of case law applying § 1341 to

federal income tax violations, a spate of litigation must

be assumed to follow shortly unless this Court limits such

prosecutions to the traditional penal statutes. See United

States v. Henderson, 386 F. Supp. 1048, 1050-1055 (DC

SDNY 1974), for an enlightened discussion on this issue.

CONCLUSION

For the reasons set forth above, it is respectfully

suggested that a Writ of Certiorari should issue to review

the judgment and opinion of the United States Court of

Appeals for the Ninth Circuit in this matter.

Respectfully submitted,

BURTON MARKS

Counsel for Petitioner

RICHARD J, TRATTNER

of TRATTNER, PASTOR & PESOLA

Of Counsel

12g ee 18 U.S.C. 11341 (Appendix B, page 17).

—— ee ee eT en ow

INDEX TO APPENDIX

A Opinion of the United States Court of

Appeals for the Ninth Circuit ............

EEE SE SE eo

United States Constitution

EE

17

17

17

18

19

20

21

21

21

22

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Unrrep States or AMERICA, }

Appellee,

vs. No. 75-3016

Marvin )ULLER, OPINION

Appellant. ;

[November 10, 1976]

Appeal from the United States District Court

for the Central District of California

Before: BARNES and ELY, Circuit Judges,

and VAN PELT,® District Judge.

BARNES, Senior Circuit Judge:

This is an appeal from appellant's conviction on 22 counts of

a 24-count indictment charging tax evasion (26 U.S.C. § 7201),

making and subscribing false tax returns (26 U.S.C. § 7206(1)),

mail fraud (18 U.S.C. § 1341), and filing false claims against

the United States (18 U.S.C. § 287).!

*The Honorable Robert Van Pelt, Senior Judge, District of Nebraska,

sitting by designation.

I1The twenty-four counts were:

Count Code Section Offense

A. 18 U.S.C. $1341 The use of the U.S. Postal Service

(Mail Fraud) to send and deliver the following

false returns.

1 @ Miller's personal U.S. Tax return

for 1969. |

2 e Mrs. Miller’s personal U.S. ‘tax

' return for 1969.

3 @ Covina’s corporate U.S. Tax return

for the fiscal year ending May 31,

APPENDIX A

United States of Americe vs.

During the period of January 1, 1968, through June 1, 1970,

Miller operated Covina Publications, Inc. (“Covina”) and two

related companies. The primary business of Covina was the sale

So

Count

4

&

18

14

Code Section

18 U.S.C. § 1341

(Mail Fraud)

26 U.S.C. § 7201

(Tax Evasion)

26 U.S.C. § 7206(1)

Subscribing a False

Tax Return

Offense

Millers’ joint U.S. tax return for

1970.

Miller's personal California state

tax return for 1970.

Mrs. Miller’s personal California

state tax return for 1970.

Millers’ amended joint personal

U.S. tax return for 1970.

Pursuant to a willful attempt to

evade taxes, the preparation and

filing of the following false returns:

Covina’s corporate tax return for

the fiscal year ending May 31,

1969.

Miller’s personal U.S. tax return

for 1968.

Mrs. Miller’s personal U.S. tax

return for 1968.

Miller’s personal U.S. return for

1969.

Nrs. Miller’s personal U.S. tax

return for 1969.

Millers’ joint U.S. tax return for

1970.

Signing and/or preparing a fraud-

ulent return for:

Covina for the fiscal year ending

May 31, 1970.

Covina’s tax return for fiscal year

ending May 31, 1970.

Miller’s personal U.S. tax return

for 1968.

Mrs. Miller’s personal U.S. tax

return for 1968.

Marvin Miller 3

of adult books, films and devices to the general public by mail

order and to wholesale distributors. Miller dominated and con-

trolled Covina, for which he received a set salary. He pur-

chased all issued stock of the corporation for $128,000.00, which

stock was held in the names of his four children, and (perhaps)

his wife.?

In the course of the trial, it was not disputed that for the fiscal

year ending May 31, 1969, approximately $562,000.00 of mail

order and distributors receipts were not recorded as sales on the

corporate books, or reported in the corporate tax returns filed

Count Code Section Offense

16 26 U.S.C. § 7206(1) Miller's personal U.S. tax return

Subscribing a False for 1969.

Tax Return

22 9 Miller’s joint U.S. tax return for

1970. me

24 a Millers’ amended joint U.S. tax

return for 1970.

D. 18 U.S.C. § 287 The claim for a refund for over-

Filing a False Claim payment of taxes incorporated in:

against the United

States

17 » Miller’s personal U.S. tax return

for 1969.

20 @ Mrs. Miller’s personal U.S. tax

return for 1969 which included a

claim for a refund.

23 » Millers’ joint U.S. tax return for

1970 which included a claim for a

. . refund. ,

25 » Millers’ amended joint U.S. tax

return for 1970 which included an

additional claim for refund.

E. No Count 19 was ever listed

The government dismissed count 3. The defendant was found not

guilty on count 8.

2At the trial, appellant stated his four children and William Miller

were the stockholders, but that he was the real owner and operator of

the business. (R.T., p. 1120) In his brief, appellant alleges “the

nominal ownership of his corporations was in the name of his wife

and children.” (Appellant’s Brief, pp. 11-12).

4 United States of America vs.

by Miller. About $295,000.00 was likewise. omitted as sales from

the books and tax returns for the fiscal year ending May 31,

1970. Such sums were instead recorded either as loans from the

defendant and from banks to the corporations, as payments on

account from various wholesale customers, or as “exchanges”

(intercompany transfers). Evidence submitted by the govern-

ment indicated that most of the money was deposited in various

business and personal bank and savings accounts established by

Miller under various names including those of his wife and

children.

During the same period (5/31/68 to 5/31/70) Miller received,

in addition to his salary, other economic benefits from Covina,

the latter making periodic checks to Miller and paying virtually

all of his personal bills (from the mortgage on his home to his

“Book-of-the-Month” Club obligations). The total of such pay-

ments was in excess of $197,000.00 which was recorded on

Covina’s books as repayments of loans, Miller did not report any

of the money on his own, or his wife’s, two years of separate,

and one year of joint, returns. (Calendar years 1968, 1969, and

1970).

For the fiscal vears consideved herein, Miller asserted that

Covina had been a losing venture. In the year ending May 31,

1969, Covina reported a net loss of approximately $216,000.00.

At trial, an expert witness for the defendant argued that due

to an erroneous entry into the books of a sale of a mailing list

for $500,000.00, which was never consummated, the loss for the

year should have been reported as $681,000.00. Likewise, for the

fiscal year ending May 31, 1970, Covina reported a loss of

$697,000.00. The Internal Revenue Service commenced an audit

of the books of the defendant's companies in 1971.

At trial, Miller admitted that he had instructed his accountant

to “scramble” the corporate books. However (for what such a self-

serving statement is worth), he later testified that the sole pur-

pose of all of his concealment activities was to hide his income

from his creditors and not to cheat the government.? Miller

Covina was subject to a series of prejudgment attachments which

culminated in 1971 when the attaching creditor obtained a judgment,

with costs, in excess of one million dollars. See in this regard, Western

Bd. of Adjustors, Inc. rv. Covina Pub. Inc., 9 Cal. App. 3d 659, 8S

Cal. Rptr. 293 (1970).

Marvin Miller 5

stated that he had instructed his accountant to keep track of

the real figures and file proper returns. Miller also asserted

(for what it is worth) that he signed and filed the returns

without really studying them, relying instead on his account-

ant’s alleged assurances that “everything is okay.”

At the close of the trial, one count of mail fraud (count 3) was

dismissed upon the motion of the government. The trial judge

found Miller not guilty of count 8 (tax evasion based on

Covina’s 1969 tax return). While there was evidence that

Covina’s tax return for the 1969 fiscal year was fraudulent, there

was insufficient evidence to prove beyond a reasonable doubt

that there would have been any tax due for that year (even if

the $562,000.00 was added to Covina’s income), due to the fact

that the $500,000.00 sale was never shown to have ogcurred dur-

ing the year.* Miller was found guilty on all the remaining

counts.

On appeal, Miller raises an extremely technical argument. He

asserts that the $197,000.00 he received from Covina must be

treated as a constructive corporate distribution to a shareholder

and be governed by §§ 301(c) and 316(a) of the Internal Rev-

enue Code (“I.R.C.”).5 As Covina was not shown to have had

any earnings and profits during the period under consideration,

Miller argues that the $197.000.00 represented primarily a return

of capital* and hence the distribution had no substantial tax

4]t was demonstrated at trial that even if the $298,000.00 of diverted

income were actually added to Covina’s 1970 tax return, no tax liability

would have resulted due to corporate losses of over $516,000.00 for

that year.

SAccording to I.R.C. §316(a), a distribution of property by a cor-

poration to its shareholders constitutes a dividend to the extent it is

made out of earnings and profits of the corporation. I.R.C. § 301(c)

provides that any distribution of property made by a corporation to a

shareholder with respect to its stock shall be treated as a dividend if the

distribution comports with the definition set ovt in I.R.C. § 316(a), and

shall be included in gross income. Insofar as a portion of the distribu-

tion is not covered by earnings and profits, it is to be treated as a

return of capital and the basis for the stock is reduced accordingly.

If the distribution exceeds the adjusted basis of the stock, the excess

is normally considered as capital gain. I.R.C. § 301(c) (3).

*Dividends are classified os. gross income. I.R.C. $$ 301(¢c)(1) and

61(a)(7). A return of capital is normally not a taxable event. Capital

gains treatment may produce tax obligations. See, I.R.C. § 1201.

6 United States of America vs.

consequences? Consequently, he suggests that his signing and

filing of his own and his wife's separate and joint tax returns

and his use of the United States Postal Service to deliver them

do not violate any statutory provisions. Because the trial court

did not specifically find that Covina owed any additional taxes,

even if the omitted income were added to the calculations for

the years in question, and because the $197,000.00 is alleged to

be not taxable to him, Miller further argues that there is insuffi-

cient evidence to establish that he intentionally filed false cor-

porate returns for Covina.*

THowever, Miller's expert witness testified that the basis for Miller's

stock in Covina was ouly $125,200.00 (R.T., p. 1196). Consequently,

$68,800.00 of the $197,000.00 would have been subject to capital gains

treatment. According to Miller's calculations, given his claims of

eapital losses, he concluded that ultimately he owed taxes only for a

long tern capital gain of $1,099.00 for 1970.

It is voted berein that even if Miller's constructive distribution theory

were accepted, Miller could nevertheless be convicted on several of ‘the

counts so long os bis intent to falsify his return is found, See dis-

eussion of 26 U.S.C. § 7206(1) in footnote 8, infra, As an example,

Miller’s own conclusion was that he had tax liability for a long term

capital gain of $1,099.00 for 1970. That amount is substantial enough

to constitute a viviation of 26 U.S.C. § 7201, especially when con-

sidered in light of the claim for a tax refund of more than $4,000.00

which he made that year and which was later increased by an additional

$210.00 when he filed an amended 1970 return. See, Marks v. United

States, 391 F.2d 210, 211 (9th Cir, 1068) (where the taxpayer was

convicted for cheating on bis tax return for failure to report a total

net taxable income of @1,577.43 for which the tax would have been

$375.49). As Miller's willful and intentional efforts to evade his taxes

. is well documented in the record (an aspect which the defendant's

briefs do not adequately attempt to dispel), Miller’s technical arguments

are not persuasive.

®Miller contends that because the trial court found no tax obligation

for Covina for 1969 and none was asserted for 1970 even if the

diverted receipts were added to the calculations for those years (see

footnote 3 and concomitant text), he therefore had no motive to file

false corporate returns for Covina. However, two theories refute that

contention. First, the concealment of the corporate receipts was a

necessary element to their diversion for his own personal use. It

follows that in order to bide their withdrawal by him, Miller bad

concealed their reol nature as income to the corporation, Secondly, it

is well established that under 26 U.S.C. §7200(1) it is not the

evasion of taxes which is the prohibited offense but the falsification

of tax statements, Cnited States v. Bishop, 412 U.S. S46 (1073);

Marvin Miller 7

ISSUES:

(1) Was the $197,000.00 diverted by Miller gross income to

him or a form of constructive corporate distribution?

(2) Is there substantial evidence to support Miller's convic-

tion on the various counts?

This case raises the primary problem of characterizing, for

the purposes of criminal tax proceedings, the nature of funds

diverted by a taxpayer from his close corporation. Normally,

such categorization is relatively unimportant in criminal cases’

since the primary question is not the amount of the evasion but

whether the tuxpayer intended to evade and defeat his taxes.

Goldberg v. United States, 330 F.2d 30, 40 (3rd Cir.), cert.

denied, 377 U.S. 953 (1954); Simon v. CLR, U8 F.2d 869,

876 (8th Cir. 1957); Drybrough v. CUR, 238 F.2d 735, 737

(6th Cir, 1956). See also, Gardner, The Tax Consequences of

Shareholder Diversions in Close Corporations, 21 Tax L.Rev. 223,

226-27 (1966). Such diverted funds are typically considered as

constructive corporate distributions and classified as dividends

pursuant to LR.C. §§ 301(¢) and 316(a). See, eg., O'Rourke v.

United States, 347 F.2d 124, 127 (9th Cir, 1965). Because divi-

dends are includable in gross income, I.R.C. § 61(a)(7), the end

result is a conclusion that the diverted funds constitute income

to the taxpayer which he must report or be held to have evaded

his tax obligations. O'Rourke, supra, S47 F.2d at 127-28; Hart-

man v. United States, 245 Pd 349, 352-58 (Sth Cir, 1957).

However, where, as here, there are no corporate carnings and

profits from which a dividend could be paid, the classification

of the diverted funds becomes more ecritical.® If the corporation

Edwards v. United States, 375 F.2d 862, 865 (9th Cir, 1967). That

the falsity may not relate to the computation of the correct tax

liability is not a determining factor. Siravo v. United States, 377 F.2d

469, 472 (lst Cir. 1972); Cf. United States v. Abbas, 504 F.2d 123,

126 (9th Cir. 1974), cert. denied, 421 U.S, 988 (1975). Here, Miller

knew that he had diverted over $750,000.00 in corporate income. Even

if such diversion bed no immediate tax consequences, Miller was

nevertheless obligated to report such receipts to the government.

It was argued by Miller that because Covina’s losses for its 1969

and 1970 fiscal years so far exceeded its income (even if the diverted

funds are included in the calculations), such losses uded the possi-

bility of any earnings ond protits for those years. However, due to the

fact that Miller ordered the corporate books to be “scrambled,” the

United States of America vs.

8

has no earnings and profits and if the taxpayer's cost basis of

the stock exceeds the amount of the diverted funds, the applica-

tion of the constructive distribution rules as urged by appellant

would permit the taxpayer to escape conviction by enabling him

to assert that the diverted funds were a constructive return of

capital and hence non-taxable as income.

Defendant Miller contends that the trial court has committed

reversible error as to all of the counts due to its initial char-

acterization of the $197,000.00 in direct and indirect payments

to him as salary rather than constructive corporate distribu-

tions. While Miller's contention raises some interesting questions

as to the extent of wrongdoing required to sustain convictions

for tax evasion (26 U.S.C. § 7201), subseribing false tax

returns (26 U.S.C. §7206(1)), filing false claims against

the United States (18 U.S.C, § 287) and mail fraud (18 U.S.C.

§ 1341), such questions need not be considered if the conclusion

is reached that the trial court was not in error in its initial

characterization.’° Consequently, those issues are not dealt with

herein because the trial court's characterization is not in error.

trial concluded that no showing of an absence of earnings and

— ht be obtuined by an examination of the books. As to Miller's

arguments as to the adequacy of the books, see footnote 13, infra.

8°To sustain a conviction for tax evasion, 26 U.S.C, § 7201, it must

be shown that the defendant willfully attempted to evade the tax, that

there was a tax deficiency, and that the defendant committed some

affirmative act to that end, Sansone v. United States, 380 US. 343,

351 (1965), O'Rourke v. United States, S47 F.2d 124, 126 (9th Cir.

1965). A violation of 26 U.S.C, § 7206(1) is complete when the tax-

payer files a return “which he does not believe to be true and correct

as to every material matter.” Cnited States v. Bishop, 412 U.S. 346,

350 (1973). That the falsity does not directly relate to the calculation

of the correct tax liability does not necessarily affect its materiality.

United States v. Abbas, 504 F.2d 123, 126 (9th Cir. 1974), cert. denied,

421 U.S. OSS (1975); Cnited States v. Edwards, 375 F.2d 862, 865

Cir, 1967). Mail fraud, 18 U.S.C. § 1541, necessitates a scheme to

ud and the mailing of a letter for the purpose of executing the

scheme. Percira v. Cnited States, 347 U.S. 1, 8 (1054). The filing of a

false tax return pursuant to a scheme to obtain an unjustified tax

is sufficient to establish a violation of presenting a false claim

the United States under 18 U.S.C. § 287. United States vo.

Toy 420 F.2d 313 (2nd Cir. 1969); Kercher v. United States, 409

814 (Sth Cir. 1909).

All of the above offenses require an intent to evade taxes (which

im this caso is equivalent to an intent to defraud the government,

Marvin Miller 9

As support for his argument that funds diverted by a tax-

payer from his close corporation must be treated as constructive

distributions, Miller basically argucs that most courts have tra-

ditionally applied such a rule and to do otherwise in the present

situation would lead to various inconsistencies in the tax law.

Several civil tax decisions are cited. E.g., Noble v. CLR, 368

F.2d 439, 442 (9th Cir. 1966); DiZenzo v. CUR, 348 F.2d 122,

126 (2nd Cir, 1965); Clark v. CLR, 260 F.2d 698, 707 (9th Cir.

1959); Simon, supra.

Conversely, the government argues that the diverted funds

must be treated as income to the taxpayers without regard to

any tangential factors such os earnings and profits of the cor-

poration. The government primarily relies on Davis v. United

States, 226 F.2d 331 (6th Cir. 1955), cert. denied, 350 U.S. 965

(1956). In Davis, a criminal tax proceeding, it was held that

where the taxpayer diverted for his own use the income of a

wholly-owned corporation, such income was taxable to him irre-

spective of whether the corporation had sufficient surplus to

make the distribution as a dividend. In so holding, the court

stated that: |

Appellant contends in this case that, whether the cash

which he took from his wholly owned corporation was a

“taxable gain,” depends upon whether the corporation had

when Miller is faced by his claims for tax refunds). That

requisite element is suficiently demonstrated in the record. However,

insofar as those offenses require additional elements, the problem

arises. If Miller's argument as to constructive corporate distributions

were adopted, the situation would arise where Miller would be found:

(1) to bave willfully attempted to evade his tax obligations by hiding

the diverted funds as non-taxable repayments of loans, (2) to have

engeged in activitics necessary to complete his scheme, ¢g., signing

mailing his presumed false returns, (3) but, due to the after-the-

categorization of the diverted funds os returns of capital, not to

had taxable income for at least some of the years in question.

$197,000.00 payments were spread over the three yoar period

1968 to 1970. To the extent that they would have execeded Miller's

00 basis in the stock, such excess payments would have

in the latter part of 1969 and in 1970.) Conse-

Tic Ti tad es tes Sas

S.C. $7201, interpreted as requiring a

deficiency to be present, or of 18 U.S.C. §§ 287 and 1341.

per

ei

10 United States of America vs.

sufficient surplus to cover a dividend distribution, as other-

wise there would be no way in which he could receive such

a gain taxable to him and, since there is no proof

a surplus, he is only a holder of the cash for the

of the corporation. Tlowever, it does not make any

orence whether he received it as a legal distribution of

cash as the result of a dividend, or whether he took it fraud-

ulently, using his wholly owned corporation with its false

to hide the fact that he was secretly acquiring from this

source of cash, over which he exercised command, control,

and dominion, and from which he realized economic gain and

benefit. For “taxation is not so much concerned with the re

finements of title as it is with actual command over the

property taxed—the actual benefit for which the tax is paid.”

Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed.

916. It is the command over property and the enjoyment

of its economic benefit which are recognized as a proper

basis for taxation. Burnet v. Wells, 289 U.S. 670, 53 S.Ct.

761, 77 L.Ed. 1439; Melvering v. Horst, 311 US, 112, 61

S.Ct. 144, 85 L.Ed. 75. It is not necessary to go into the

legality of the so-called distribution by appellant's wholly

owned corporation to himself, or his extraction of the cash

from the corporation, as it clearly appears that through the

fraudulent transactions in which he was engaged, he re-

ceived the cash over which hc had complete control, which

he took as his own, treated as his own, which resulted in

economic value to him, and for which he probably never

would have been required to account, had it not been for

the discovery of the fraud on the revenue which he was

perpetrating. Briggs v. United States, 4 Cir., 214 F.2d 699.

226 F.2d at 334-35,

Davis has been generally followed in the review of criminal

tax proceedings by the circuit courts. Goldberg, supra, 330 F.2d

at 40 (3rd Cir.); Hartman, supra, 245 F.2d at 352-53 (8th Cir.),

and see also Lofts end Lofts, 285 T.M., Tax Crimes—Evasion of

Another's Tax and Defenses, p. A-5 (1973). But see, Bernstein

wv. United States, 234 F.2d 475 (5th Cir.), cert. denied, 352 U.S.

915 (1956). And, at least two circuits have refused to follow

Davis in the context of civil tax proceedings. DiZenzo, supra,

Marvin Miller 11

348 F.2d at 126 (2nd Cir.); Simon, supra, 248 F.2d at 876 (8th

Cir.).""

Appellant ee aoe on SS Se ee © anne

cited the case of United States ¢. Leonard, 524 F.2d 1076 (2nd Cir.

1975), cert. den, 44 USLW 3624, May 4, 1976 to demonstrate that

the Second Circuit has rejected the hokling of United States v. Davis,

oupra, and is nuw willing to apply the standard set out in the civil

tex fraud cnse of DiZenzo rv. C.1.R., supro, which requires that funds

diverted by a sbarcholder from his wholly-owned corporation should

be treated as corporate distributions rather than as ordinary income.

The support which Leonard provides the appellant's contention is

difficult to determine, and is most certainly a weak reed. In Leonard,

the defendont had formed a corporation to which he transferred the

business of his scle proprietorship. He continued to eash several of the

checks received by him ofter the formation of the corporation to his

own account even though ther belonged to the corporation at that

t. The government contended that the funds were embezzled income.

defendant argued that under DiZenzo the funds were to be

treated as constructive dividends. The court stated that: “Acceptance of

this (defendant's argument) still does Leonard no good unless, as he

asserts, Leonard, Inc. had no earnings and profits, . . .” Leonard,

supra, 524 F.2d at 1083. The court went on to hold that once the

ment has established that the defendant had received unreported

unds the burden of proof demonstrate that the funds were con-

structive dividends rather then embezzled funds shifted to the

defendant.

In prosecutions for income tax violations, production of a rather

slight amount of evidence by the Government, here the proof of

receipt of what are charitably characterized as constructive divi-

dends rather than ewhbezzled funds, may transfer the burden of

going forward to the defendant. . . . Id. citing Holland v. United

States, 34S U.S, 121, 137-139 (1954).

It was concluded that the defendant failed to introduce sufficient

evidence of an absence of earnings and profits to even warrant con-

sideration by the jury of the defendant's contention that the diverted

funds were returns of capital and hence non-taxable. Defendant's con-

vietion was afiirmed on two counts of violating § 7206(1) of 26 U.S.C.

(LR.C. 1954), “Subscribing a False Tax Return”; which counts are

— Ny gene 9, 12, 14, 16, 22 and 24 in this ense.

no not particularly helpful to appellant herein. Fi the

Seeond Cireuit in Leonurd relied on a civil tax fraud ease for ro ee

of the propesition that the diverted checks were to be treated as

constructive distributions. As discussed in this opinion, such reliance

in a criminal tax fraud case is not well founded. Second, the court in

Leonard did not categorically accept the defendant's proposition that

DiZenzo bad to be applied bat rather noted that even if it were to

accept the defendant's contention, the defendant nevertheless failed to

12 United Statcs of America vs.

This court must decide whether the rules of constructive dis-

tribution are to be automatically applied in the present situa

tion, a review of ao criminal tax proceeding. In civil tax cases

the purpose is tax collection and the key issue is the establish-

ment of the amount of tax owed by the taxpayer. In a criminal

tax proceeding the concern is not over the type or the specific

amount of the tax which the defendant has evaded, but whether

he has willfully attempted to evade the payment or assessment

of a tax. Goldberg, supra, 330 F.2d at 40; Simon, supra, 248

F.2d at 576.

The difficulty in automutically applying the constructive dis-

tribution rules to this case is that it completely ignores one

essential element of the crime charged: the willful intent to

evade taxes, and concentrates solely on the issue of the nature

of the funds diverted. That latter aspect is not the important

element. Where the taxpayer has sought to conceal income by

filing a false return, he has violated the tax evasion statutes.

It does not matter that that amount could have somehow

been made non-taxable if the taxpayer had proceeded on a dif-

ferent course.’? To apply the constructive distribution rules to

this situation would nullify all of the taxpayer's prior unlawful

acts.

demonstrate a lack of earnings and profits so as to fall within his

own theory. Third, in Leonard, the burden of going forward is said

to be transferred to the defendant once the government establishes that

he has received unreported funds. In the present case, the appellant

argued that the government must show that there were no earnings

and profits. According to Levnard, he is mistaken in that contention.

The trial court here found that the corporate books were so confused

that a determination as to the presence or absence of earnings and

profits could not be wade. Consequently, even if Leonard were applic-

able, it would not support a reversal of the appellant's conviction on

the false tax return counts.

43At the time the funds are initially diverted, it might well be argued

that they could constitute either income or a return of capital. However,

once the taxpayer has assumed control of the funds and then fails to

report such funds as income or to wake any adjustments in the cor-

porate books to reflect a return of capital, he has already violated the

tax evasion statutes. Accord, Spies vc. United States, 317 U.S.

495-99 (1943); United Stotes v. Swallow, 511 F.2d 514, 521 (10th Cir.),

cert. denied, 423 U.S. 545 (1075).

Marvin Miller 13

If constructive distributicn rules were automatically applied,

an anomalous situatic:: would result. A taxpayer who diverted

funds from his close corporation when it was in the midst of

financial difficulty and had no earnings and profits would be

immune frum punishment ito the exient of his basis in the

stock) for failure to report such sums as income; while that

very same taxpayer would be convicted if the corporation had

experienced a sucevssful year and had earnings and profits.

Such a result would constitute an extreme example of form

over substance. In addition, it would sanction the diversion and

non-reporting of cerpurate end personal funds, contrary to the

intent and express language of the statutes. We therefore con-

elude that whether diverted funds constitute constructive cor-

porate distributions depends on the factual circumstances in-

volved in cach case under consideration.

In holding that the constructive distribution rules should not

automatically be applicd, it is not herein asserted that diverted

funds could never be a return of capital. However, to consti-

tute the latter, there must be some demonstration on the part

of the taxpayer and/or the corporation that such distributions

were intended to be such a return.’? To hold otherwise would

be to permit the taxpayer to divert such funds and if not caught,

to later pay out another retwm of capital; or if caught, to

avoid conviction by raising the defense that the sums were a

return of capital and hence non-taxable.

In considering the trial judge's determination that the

$197,000.00 constituted additional so\ary, it is noted that, on

appeal of a conviction in a criminal case, the evidence must be

considered in a lizht most favorable to upholding the verdict

(in this case for the government) and the findings of a trial

judge cannot be set aside unless clearly erroneous. Glasser v.

United States, 315 U.S. 60, 80 (1942); United States v. Glover,

514 F.2d 390, 391 (9th Cir. 1975); United States rv. Hood, 493

F.2d 677, 680 (9th Cir.), cert. denied, 419 U.S. 852 (1974).

18The government establishes a prima facie case when it demon-

strates that the taxpaper had unexplained funds which could be con-

sidered as income which the taxpayer fails to report in his return.

United States vc. Garcia, 412 F.2d 999, 1001 (10th Cir. 1969);

Gendelman v. United States. 191 F.2d 993, 996 (9th Cir. 1951), cert.

denied, 342 U.S. 909 (1952).

14 United States of America vs.

Several factors were presented which support the conclusion

that the $197,000.00 can be considered as additional salary.

First, Miller admitted that he himself was not a sharcholder

but that the shares were in his children’s names. Consequently,

the only capacity in which Miller was entitled to receive the

diverted funds was as an employee-officer of the corporation.

While there are cases wherein the receipt of distributions from

the corporation by a relative of the shareholder is considered

to be.a constructive distribution, sce e.g., Harry L. Epstein, 53

T.C. 459 (1970), such cases are civil tax proceedings. As dis-

cussed above, the application of theories established in civil tax

eases to problems in criminal tax cases cannot always be made.

Where the taxpayer creates and uses a corporation, he cannot

readily expect a court to disregard the situation which he has

created when it becomes inconvenient for him. Cf. JTarrison

Property Manugement Co., Inc. v. United States, 475 F.2d 623,

626-27 (Ct. Cl. 1973), cert. denied, 414 U.S. 1130 (1974).

Second, Miller has admitted that he ordered the “scrambling”

of the corporate books so that one cannot tell from the records

exactly what the payments were intended to be. When the tax-

payer has by his own wrong/ul actions created a situation where

certain payments are open to several interpretations, he cannot

complain if the conclusion of the trier-of-fact differs from his

own, if there is a reasonable factual basis for the decision.'*

Third, at trial, Miller presented no concrete proof that the

amounts were considered, intended, or recorded on the corporate

records as a return of capital at the time they were made. In

14Miller argues that his expert witness had no difficulty in reading

the corporate books. However, the expert witness merely testified that

from his study of the books he concluded that Covina had no earnings

and profits. From that initial conclusion (which is contrary to that

of the government's witness), he made the quantum leap that the

distributions therefore had to be returus of capital. As discussed above,

that syllogism is not necessarily correct. Nowhere in his testumony does

the expert witness give examples that the payments were ever intended

to be, or recorded in the corporate books at the time they were made

as returns of capital. Alternatively, it is also noted that the trial court

need not have accepted the expert witness’s statements as being correct,

especially in light of contrary testimony by the government’s expert

witness.

~~ ~~ . - — - -_— oF.

Marvin Miller 15

fact, the payments were recorded as “repayments of loans,”

which were shown later to be non-existent and false. Such an

effort to disguise an allegedly non-taxable event (which a return

of capital would normally be) raises doubts as to any claim

by the defendant that he considered them to be a return of

capital.'5

Finally, the trial judge found Miller's set salary to be too

small for the ycars in question. The judge noted Miller’s respon-

sibilities and control of the corpceration and the amount and

volume of business which it did. The conclusion that Miller’s

set salary was too small, so that the $197,000.00 could be con-

sidered as additional salary, is not clearly erroneous.

Miller in his brief before this Court states that the “almost

exclusive issue on appeal” is the question of the treatment of

the diverted funds to him. Appellant's Reply Brief, p. 1. That

assessment is essentially correct.

We agree with the trial court's holding that the $197,000:00

of diverted funds constituted additional salary to the defendant.

As to the other counts, there was substantial evidence to dem-

onstrate (1) that Miller sought to evade the payment of taxes

in violation of 26 U.S.C. § 7201 on said funds, as well as on

the other sums which he diverted from Covina; (2) that pursu-

ant to such evasion, Miller caused to be prepared and subscribed

false returns for Covina, his wife and himseli, and the latter

45The trial judge noted defendant’s argument that the concealment

of the income (aud subsequent notation of the repayments as returns

of loans) was made solely to hide the sums from ereditors. However,

the government through its revenue statutes is also a creditor. There

was no evidence presented at trial, other than Miller’s self-serving

statements, that he distinguished between the government and his other

_ ereditors, or that he intended to fulfill his obligations to any of them.

» as observed by the trial judge, the recording of the pay-

ments as returns of loans ruther than either income (salary) or return of

capital really had ramifications only to one creditor, the government.

The other creditors could attach those sums despite their categorization.

However, the government cannot collect taxes, either from funds which

are gross income (salary) or capital gains (return of capital in excess

of the busis of the stock), if the ‘taxable income is successfully dis-

guised as non-taxable items.

16 United States of America vs.

two’s joint tax return as proscribed by 26 U.S.C. § 7206(1) ;**

(3) that he used the U.S. Postal Serviee to send and deliver

the false returns in violation of 18 U.S.C. § 1341;"7 and (4)

that he filed or caused to be filed claims for tax refunds know-

ing full well that such claims were fraudulent in violation of

18 U.S.C. § 287. Consequently, the defendant’s conviction on each

of the 22 counts is AFFIRMED.

46While not argued by the appellant, we note that count 14 (Mrs.

Miller’s tax return for 1968) should have charged a violation of 26

U.S.C. §7206(2) (assisting in the preparation of a false return)

rather than 26 U.S.C. § 7206(1) (subscribing a false return). However,

such error is not fatal where the indictment, as here, contains the

elements of the offense intended to be charged, sufficiently apprises

the defendant of what he must be prepared to meet, and is detailed

enough to assure against double jeopardy. United States v. Miller, 491

F.2d 638 (5th Cir.), cert. denied, 419 U.S. 970 (1974). :

I7Again, after briefs had been filed but prior to oral argument,

appellant’s counsel cited to us the case of United States v. Henderson,

386 F. Supp. 1048, 1050-1054 (S.D.N.Y. 1974) for the proposition

that the mail fraud statute was not intended by Congress to apply

to a scheme to defraud the United States in an attempt to evade the

payment of taxes. Henderson is inconsistent with at least three other

circuit court cases which have held that the mailing of false state

tax returns constituted a violation of 18 U.S.C. $1341. See, United

States v. Brewer, 528 F.2d 492 (4th Cir. 1975); United States tv.

Mirable, 503 F.2d 1065, 1066-1067 (Sth Cir. 1974), cert. denied, 420

U.S. 973 (1975); United States r. Flarman, 495 F.2d 344, 348-349 (7th

Cir.) cert. denied, 419 U.S. 1031 (1974). We reject the holding in

Henderson.

PERNAU-WALSH PRINTING CO., SAN FRANCISCO 11-22-76—410

APPENDIX B 17.

STATUTES AND CONSTITUTIONAL

PROVISIONS INVOLVED

United States Code, Title 18:

Section 287 declares:

False, fictitious or fraudulent claims

Whoever makes or presents to any person

or officer in the civil, military, or naval service

of the United States, or to any department or

agency thereof, any claim upon or against the

United States, or any department or agency

thereof, knowing such claim to be false, ficti-

tious, or fraudulent, shall be fined not more

than $10,000 or imprisoned not more than

five years, or both.

Section 1341 declares:

Frauds and swindles

Whoever, having devised or intending to

devise any scheme or artifice to defraud, or for

obtaining money or property by means of false

or fraudulent pretenses, representations, or

promises, or to sell, dispose of, loan, exchange,

alter, give away, distribute, supply, or furnish

or procure for unlawful use any counterfeit or

spurious coin, obligation, security, or other

article, or anything represented to be or intim-

ated or held out to be such counterfeit or spur-

ious article, for the purpose of executing such

18. Statutes and Constitutional Provisions

scheme or artifice or attempting so to do,

places in any post office or authorized deposi-

tory for mail matter, any matter or thing what-

ever to be sent or delivered by the Post Office

Department, or takes or receives therefrom, any

such matter or thing, or knowingly causes to be

delivered by mail according to the direction

thereon, or at the place at which it is directed

to be delivered by the person to whom it is

addressed, any such matter or thing, shall be

fined not more than $1,000 or imprisoned not

more than five years, or both.

United States Code, Title 26:

Section 61 declares:

Gross income defined

(a) General definition.—Except as otherwise

provided in this subtitle, gross income means all

income from whatever source derived, including

(but not limited to) the following items:

(1)

Compensation for services, including

fees, commissions, and similar items;

(2)

Gross income derived from business;

Gains derived from dealings in prop-

Interest;

Rents;

Royalties;

Dividends;

Alimony and separate maintenance

Statutes and Constitutional Provisions 19,

payments;

(9) Annuities;

(10) Income from life insurance and

endowment contracts;

(11) Pensions;

(12) Income from discharge of indebt-

edness;

(13) Distributive share of partnership

gross income;

(14) Income in respect of a decedent;

and

(15) Income from an interest in an

estate or trust.

Section 301 declares:

Distribution of Property.

(a) IN GENERAL-- Except as otherwise pro-

vided in this chapter, a distribution of property

(as defined in section 317(a) ) made by a corpor-

ation to a shareholder with respect to its stock

shall be treated in the manner provided in sub-

section (C). Source: Sec. 22(e), 1939 Code.

(b) AMOUNT DISTRIBUTED.-

(1) GENERAL RULE- For purposes of

this section, the amount of any distribution shall

be—

(A) NONCORPORATE DISTRIBUTEES.-

If the shareholder is not a corporation, the

amount of money received, plus the fair

market value of the other property received.

20

Statutes and Constitutional Provisions

(c) AMOUNT TAXABLE.—In the case of a dis-

tribution to which subsection (a) applies—

(1) AMOUNT CONSTITUTING DIVIDEND.—

That portion of the distribution which is a divi-

dend (as defined in section 316) shall be included

in gross income.

(2) AMOUNT APPLIED AGAINST BASIS.—

That portion of the distribution which is not a

dividend shall be applied against and reduce the

adjusted basis of the stock.

(3) AMOUNT IN EXCESS OF BASIS.—

(A) IN GENERAL.—Except as pro-

vided in subparagraph (B), that portion of the dis-

tribution which is not a dividend, to the extent

that it exceeds the adjusted basis of the stock

shall be treated as gain from the sale or exchange

of property.

Section 316 declares:

Dividend Defined.

(a) GENERAL RULE.— For purposes of this

subtitle, the term “dividend”’ means any distri-

bution of property made by a corporation to its

shareholders—

(1) out of its earnings and profits

accumulated after February 28, 1913, or

(2) out of its earnings and profits

of the taxable year (computed as of the close

of the taxable year without diminution by

reason of any distributions made during the

Statutes and Constitutional Provisions 21

taxable year), without regard to the amount of

the earnings and profits at the time the distribu-

tion was made.

Section 317 declares:

Other Definitions.

(a) PROPERTY.—For purposes of this part,

the term “‘property”’ means money, securities,

and any other property; except that such term

does not include stock in the corporation making

the distribution (or rights to acquire such stock).

Section 7201 declares:

Attempt to evade or defeat tax

Any person who willfully attempts in any

manner to evade or defeat any tax imposed by

this title or the payment thereof shall, in addi-

tion to other penalties provided by law, be guilty

of a felony and, upon conviction thereof, shall be

fined not more than $10,000, or imprisoned not

more than 5 years, or both, together with the costs

of prosecution.

Section 7206 declares:

Fraud and false statements

Any person who—

(1) Declaration under penalties of

perjury.—Willfully makes and subscribes any

22

Statutes and Constitutional Provisions

return, statement, or other document, which

contains or is verified by a written declaration

that it is made under the penalties of perjury,

and which he does not believe to be true and

correct as to every material mater;or. .. .

United States Constitution

Amendment V declares:

No person shall be held to answer for a

capital, or otherwise infamous crime, unless

on a presentment or indictment of a Grand

Jury, except in cases arising in the land or naval

forces, or in the Militia, when in actual service

in time of War or public danger; nor shall any

person be subject for the same offence to be

twice put in jeopardy of life or limb; nor shall

be compelled in any criminal case to be a wit-

ness against himself, nor be deprived of life,

liberty, or property, without due process of

law; nor shall private property be taken for

public use, without just compensation.

STATE OF CALIFORNIA )

) ss

County of Orange )

I, the undersigned, say: I am and was at all times herein mentioned, a citizen

of the United States and employed in the County of Orange, State of California,

over the age of eighteen years and not a party to the within action or proceeding;

that

My business address is 3 Street, Huntington Beach, California 92648,

that on DECEMBER @ -; 1976, I served the within PETITION FOR WRIT OF

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE

NINTH CIRCUIT — Marvin Miller vs. United States of America — on the follow-

ing named party by depositing three copies thereof, enclosed in a sealed envelope

with postage thereon fully prepaid, in the United States Post Office in the City of

Huntington Beach, California, addressed to said party as follows:

Solicitor General of the United States

U. S. Department of Justice

Washington, D. C. 20530

I declare under penalty of perjury that the foregoing is true and correct.

aad

Executed on DECEMBER ¥f , 1976, at HUNTINGTON BEACH, CALIFORNIA.

41 COPIES TO THE UNITED STATES SUPREME COURT, U. S. SUPREME

COURT BUILDING, WASHINGTON, D. C. 20543

Dean-Standefer, 326% Main St., Huntington Beach, Ca. 92648

(714) 536-7161