Opposition — Miller v. United States

, Supreme Court, Uv. &

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| MAR 1977

No. 76-790

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In the Supreme Court of tie United States

OCTOBER TERM, 1976

MARVIN MILLER, PETITIONER

V.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

DANIEL M. FRIEDMAN,

Acting Solicitor General,

Myron C. BAM,

Acting Assistant Attorney General,

CHARLES E. BROOKHART,

MICHAEL J. ROACH,

Attorneys,

Department of Justice,

Washington, D.C. 20530.

Iu the Supreme Court of the Hnited States

OCTOBER TERM, 1976

No. 76-790

MARVIN MILLER, PETITIONER

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The district court did not issue a written opinion.

The opinion of the court of appeals (Pet. App. A) is

reported at 545 F. 2d 1294.

JURISDICTION

The judgment of the court of appeals was entered

on November 10, 1976. The petition for a writ of certiorari

was filed on December 10, 1976. The jurisdiction of this

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

- QUESTIONS PRESENTED

1. Whether proof that petitioner diverted to his own

use $860,000 of the gross receipts of his wholly-owned

corporation, that he did not report such sums on his

tax returns, that his basis in the stock of the corporation had

(1)

2

been only $128,000, and that his stated salary was low in

relation to his management responsibilities, was sufficient

to support his conviction for income tax evasion and filing

of a false return, even though there was no evidence that

the corporation had any earnings and profits.

2. Whether the mailing of a false federal or state

income tax return constitutes mail fraud in violation of

18 U.S.C. 1341.

STATEMENT

After a trial in the United States District Court

for the Central District of California, petitioner was

found guilty of six counts of mail fraud, in violation of

18 U.S.C. 1341; five counts of income tax evasion, in

violation of 26 U.S.C. 7201; seven counts of filing a false

income tax return, in violation of 26 U.S.C. 7206(1);

and four counts of filing a false claim against the United

States, in violation of 18 U.S.C. 287 (Pet. App. A 1-3,

5). The trial court sentenced him to concurrent three-

year prison terms on each of 11 counts, and concurrent

three-year prison terms on the remaining ||! counts,

with the term in the second group of counts to run

consecutively with the term in the first group of counts.

The court also specified, in accordance with 18 U.S.C.

4208(a)(2), that petitioner could become eligible for parole

at such time as the parole board might determine (R.T.

1301).!

The pertinent facts are as follows: During the period

January 1, 1968, to June 1, 1970, petitioner operated

Covina Publications, Inc., the business of which was the

sale of “adult”. books, films and devices to the general

public by mail order and to wholesale distributors.

'“R.T.” refers to the reporter's transcript.

3

Petitioner dominated and controlled Covina. He pur-

chased all of Covina’s issued stock for $128,000, and the

stock was held in the names of his wife and four children

(Pet. App. A 2-3).

The evidence at trial showed that for Covina's taxable

year ended May 31, 1969, approximately $562,000 of

receipts were not recorded as sales on its corporate books or

reported on the corporate tax returns filed by petitioner.

For Covina’s taxable year ended May 31, 1970, ap-

proximately $298,000 likewise was omitted. The evidence

further showed that most of the omitted receipts were

deposited in various business and personal bank and savings

accounts established by petitioner under various names,

including those of his wife and children. The receipts

diverted by petitioner were recorded on Covina’s books

either as loans from petitioner or from banks, or as inter-

company transfers (Pet. App. A 3-4).

During the period May 31, 1968 to May 31, 1970,

petitioner received, in addition to his salary, various

economic benefits from Covina. For example, Covina paid

virtualiy all of petitioner’s personal obligations. The total of

such payments was in excess of $197,000, and was recorded

on Covina’s books as repayment of loans. Petitioner did not

report any of these payments on his tax returns (Pet. App. A

4).

At trial, petitioner admitted that he had instructed his

accountant to “scramble” the corporate books. However, he

later testified that his sole purpose in distorting the

corporate books was to conceal his income from his

creditors and not to cheat the government (Pet. App. A 4).

For its taxable year ended May 31, 1969, Covina reported

a net loss of $216,000. At trial, an expert witness testified on

behalf of petitioner that the loss for that year should have

4

been $681,000. For its taxable year ended May 31, 1970,

Covina reported a net loss of $697,000 (Pet. App. A 4).

ARGUMENT

|. Petitioner argues (Pet. 6-13) that he was improperly

convicted of tax evasion and filing false income tax returns

because the amounts of ‘Covina’s gross receipts that he

diverted to his own use could not be taxed to him as

dividends in the absence of any evidence that Covina had

“earnings and profits” within the meaning of Section 316 of

the Internal Revenue Code of 1954 (26 U.S.C.). But the

existence of earnings and profits was not an indispensable

element of proof of petitioner’s offenses. The court of

appeals agreed with “the trial court’s holding that the

$197,000.00 of diverted funds constituted additional salary

to the [petitioner]” (Pet. App. A 15). Since additional salary

was taxable to petitioner even if Covina had no earnings and

profits, petitioner was properly convicted of tax evasion and

filing false income tax returns.

In support of the conclusion that petitioner received

$197,000 of additional salary, the court of appeals noted

that the trial judge found petitioner's set salary to be too

small given his responsibilities and the volume of the

business he directed (Pet. App. A 15). Moreover, the

amounts were not recorded on the corporate books as

returns of capital, as petitioner contended, but as

repayments of loans which were shown to be non-existent.

Since petitioner admitted that he ordered the “scrambling”

of the corporate books, the trial judge was amply justified in

rejecting petitioner’s claimed defense that the payments

were returns of capital.

It is true that if Covina had no earnings and profits, the

$860,000 diverted to petitioner would not have been taxable

as a dividend. The payments instead would have been

te

5

treated as a return of capital. But the amount by which a

return of capital exceeds a taxpayer's basis is taxable at

capital gains rates..See Section 301(c)(3) of the Code.

Petitioner's basis in the Covina stock was only $128,000 (see

Pet. App. A 6, n. 7). Thus even under his theory he would

have recognized over $700,000 in capital gains. Since

petitioner failed to report any part of this amount, he was

guilty of tax evasion and of filing a false return once he filed

his tax return omitting the payment from income. See

Sansone v. United States, 380 U.S. 343, 354; United States

v. Swallow, 511 F. 2d 514, 521 (C.A. 10), certiorari denied,

423 U.S. 845.

2. Since petitioner's conviction stands even in the absence

of earnings and profits of Covina, a fortiori it was not

necessary for the prosecution to present evidence as to

whether such earnings and profits existed. In any event,

contrary to petitioner's claim (Pet. 6-8), there is no conflict

of decisions on the question of the burden of proof with

respect to earnings and profits. When the existence of

earnings and profits is a necessary element of the offense, the

ultimate burden of proof rests with the government. But

where, as here, a shareholder diverts corporate receipts to

his own use, the decision below correctly held that the

government established a prima facie case of income tax

evasion and that petitioner had the burden of coming

forward with the defense that the amounts were not taxable,

either because the corporation had no earnings and profits

or for some other reason. Accord: Davis v. United States,

226 F. 2d 331 (C.A. 6), certiorari denied, 350 U.S. 965;

Hartman v. United States, 245 F. 2d 349, 353 (C.A. 8);

United States v. Goldberg, 330 F. 2d 30, 38 (C.A. 3),

certiorari denied, 377 U.S. 953.

The burden of coming forward in such a case with

evidence that there were no earnings and profits is no

6

different than the burden of refuting the government's net

worth computation in a criminal tax prosecution. In that

connection, this Court in Holland v. United States, 348 U.S.

121, 138-139, observed:

Nor does this rule shift the burden of proof.

The Government must still prove every element of

the offense beyond a reasonable doubt though not

to a mathematical certainty. The settled standards

of criminal law are applicable to net worth cases

just as to prosecutions for other crimes. Once the

Government has established its case, the defendant

remains quiet at his peril.

None of the cases cited by petitioner (Pet. 6-7) are in

conflict with the decision below. As the court of appeals

correctly observed (Pet. App. A I1,n. 11), United States v.

Leonard, 524 F. 2d 1076(C.A. 2), certiorari denied, 425 U.S.

958, is in accord with its decision and does not adopt

petitioner’s contention that the government must prove the

existence of earnings and profits. Indeed, in upholding the

conviction in Leonard, the Second Circuit stated:

“Although the ultimate burden of persuasion remains with

the Government, Leonard did not introduce sufficient

evidence of an absence of earnings or profits to warrant

submission to the jury of a claim [to that effect]” (524 F. 2d

at 1083).?

2Neither Currier v. United States, 166 F. 2d 346 (C.A. 1), nor

Bernstein v. United States, 234 F. 2d 475(C.A. 5), certiorari denied, 352

U.S. 915, supports petitioner's argument that the government must

initially come forward with proof of the existence of earnings and

profits. In upholding a tax evasion conviction in similar circumstances,

the court in Currier did not address the question of the burden of coming

forward but simply recognized that dividends are taxable only if paid

out of earnings and profits (166 F. 2d at 348). Bernstein likewise is

inapposite. There, the court rejected the defendant's efforts to reduce the

corporate earnings and profits by the amount of a fraud penalty that the

Commissioner subsequently imposed (234 F. 2d at 482).

1

3. Petitioner also contends (Pet. 13-14) that the mailing of

false federal and state income tax returns does not constitute

mail fraud under 18 U.S.C. 1341. But as the court of appeals

pointed out (Pet. App. A 16, n. 17), other circuits also have

upheld convictions under 18 U.S.C. 1341 for mailing false

tax returns. United States v. Flaxman, 495 F. 2d 344(C.A.

7), certiorari denied, 419 U.S. 1031; United States v.

Mirabile, 503 F. 2d 1065 (C.A. 8), certiorari denied, 420

U.S. 973. See also United States v. Brewer, 528 F. 2d 492

(C.A. 4). Contra: United States v. Henderson, 386 F. Supp.

1048, 1050-1054 (S.D. N.Y.).

Moreover, the fact that a particular fraudulent scheme

involving use of the mails also violates another federal

statute has been held not to be a bar to prosecution under

the mail fraud statue. Pereira v. United States, 347 U.S. 1,8-

9 (National Stolen Property Act); Edwards v. United States,

312 U.S. 473, 483-484 (Securities Act of 1933); United States

v. Brewer, supra, 528 F. 2d at 497-498. Nothing in the broad

language of 18 U.S.C. 1341—“any scheme or artifice to

defraud”—suggests that Congress intended to exclude

mailing a false federal or state tax return from its coverage.

CONCLUSION

For the reasons stated, the petition for a writ of certiorari

should be denied.

Respectfully submitted.

DANIEL M. FRIEDMAN,

Acting Solicitor a

Myron C. BAuM,

Acting Assistant Attorney General.

CHARLES E. BROOKHART,

MICHAEL J. ROACH,

Attorneys.

Marcu 1977.

DOJ-1977 03