# Petition — Miller v. United States

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1977
- **Citation:** 430 U.S. 930

## Text

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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
IE: . veg knee decetesdseanec

PO OGEOD cw cccccccoccccoesoseene
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

Comcietinm ooccccctcctcceeeeetencecceeces

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. ;
Bae ceececebeeeukienen 3

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+1 eae anne YY Ye TT
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28 U.S.C. ,
SLAMMED ..ccocccccesccesosuseeseeens

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_0985%3A1. Public record. Not legal advice.