# Petition for Writ of Certiorari — Davis v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386418_0348%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1956 - **Citation:** 350 U.S. 965 ## Text Page Opinions Below ............-.+eeeeeeeeeeeseeeeees 1 ci ns vanscbns ae nnesceesnseeseeeeeaan 1 Question Presented ...........-++eeeeeeeeeeeeereee 2 Statutes Involved .......... cece ccc ccccecsecccces 2 Ne acaccceasee eaunonnFNeneicseantpaee 4 Reasons for Granting the Writ .............++++++- 9 RR gc ook cas cans vnc cesnccesineessonceseses 33 Appendix ........ ee cece cece eee eee e eet e eee eens la CITATIONS CasEs: Alison v. United States, 344 U.S. 167 ............. 25 Anderson v. United States, 11 F. 2d 938 .......... 14 Anktell Lumber & Coal Co. v. United States, 1 F. Supp. 724 ........ cece cece este eee e tee eeeses 29 Beretta v. Commissioner, 141 F. 2d 452, cert. denied Es Srey ere ee 15 M. E. Blatt Co. v. United States, 305 U.S. 267...... 28 Byers v. Commissioner, 199 F. 2d 273 ............ 29 Capital Estates v. Commissioner, 138 F. 2d 156.... 12 Chettanooga Sav. Bank v. Brewer, 17 F. 2d 79, cert. denied, 274 U.S. 751 ....... 2... sees eee eee eee 29 Jack M. Chesbro, 21 T.C. 123, aff’d, 225 F. 2d 674.. 26 Choate v. Commissioner, 129 F. 2d 684 ........... 12 Christopher v. Burnet, 55 F. 2d 527 ..........---. 29 Clark v. United States, 211 F. 2d 100 ............ 14, 20 Commissioner v. Estate of Bedford, 325 U.S. 283... 13 Commissioner v. Court Holding Co., 324 U.S. 331... 14 Commissioner v. Glenshaw Glass Co., 348 U.S. 426 12 Commissioner v. Goldwyn, 175 F. 2d 641 .......... 12 Commissioner. v. Jacobson, 336 U.S. 28 ........... 12 Commissioner v. Munter, 331 U.S. 210 ........... 13, 28 Commissioner v. Wheeler, 324 U.S. 542 ........... 13 Commissioner v. Wilcox, 327 U.S. 404........ 17, 18, 24 ii Index Continued Page Currier v. United States, 166 F. 2d 346 11, 23, 24, 25, 26, 27 Davis v. United States, 160 U.S. 469 ............ a Ww D. W. Dawkins, 14 T.C.M. 684 ...............45. 30, 31 Doyle v. Mitchell Brothers Co., 247 U.S. 179 ....... 14 Edwards v. Douglas, 269 U.S. 204 ................ 15 Faris v. Helvering, 71 F. 2d 610, cert. denied, 293 ee ea ca beh ses hadscavenctescinass 15 Faweus Machine Co. v. United States, 282 U.S. 375 14 Freuler v. Helvering, 291 U.S. 35 .............45. 19 P. Garvan, Ine. v. Eaton, 20 F. 2d 422 ............ 29 Gleckman v. United States, 80 F. 2d 394 .......... 11, 20 Hadley v. Commissioner, 36 F. 2d 543 ............ 29 Healy v. Commissioner, 345 U.S. 278 ............. 17 Helvering v. Canfield, 291 U.S. 163 ............... 15 Helvering v. Griffiths, 318 U.S. 371 ............... 12 Helvering v. Horst, 311 U.S. 112 ..............45. 18 Helvering v. Mitchell, 303 U.S. 391 ............... 10 Holland v. United States, 348 U.S. 121 ......... 6, 10, 32 Jackson v. Commissioner, 172 F. 2d 605.......... 12, 15 Jones v. Dawson, 148 F. 2d 87 .............0008. 13, 15 Jordan v. DeGeorge, 341 U.S. 223 ................ 33 Kasper v. United States, 225 F. 2d 275............ 32 Klein v. Board of Supervisors, 282 U.S. 19........ 22 Lawrence v. Commissioner, 143 F. 2d 456......... 15 Leland v. Commissioner, 50 F. 2d 523, cert. denied EE Ce inc kin beck ukee wae bbandeceacesn Lincoln Nat. Bank v. Burnet, 63 F. 2d 131 ......... 23 Lynch v. Hornby, 247 U.S. 339 ..... 6... ee eee eee es 23 McCaughn v. MeCahan, 39 F. 2d 3 ............... 15 Bennett E. Meyers, 21 T.C. 331 .................- 30 Moline Properties v. Commissioner, 319 U.S. 436 11, 14, 21, 23 National Carbide Corp. v. Commissioner, 336 U.S. SR cia iwahanns hea deahestesce nus 11, 14, 21, 22, 23 National Investors Corp. v. Hoey, 144 F. 2d 466.... 22 Palmer v. Commissioner, 302 U.S. 63 ............ 12, 13 Paramount-Richards Theatres v. Commissioner, 8 RRS Serer eer eee ree Michael Potson, 22 T.C. 912 ................00055 30 Estate of Putnam v. Commissioner, 324 U.S. 393. .13, 23 Index Continued iii Page Regensburg v. Commissioner, 144 F. 2d 41, cert. denied, 323 U.S. 783 ........... ee esses eee eeees Estgte of Rogers v. Commissioner, 320 U.S. 410.... 18 Rutkin v. United States, 343 U.S. 130 11, 12, 15, 16, 18, 20, 21 13 Mbield Co., 3 TC. TER .n.n cn cancccccencscscessess Smith v. United States, 348 U.S. 147 ...........-- 10 Spies v. United States, 317 Se ca 04 tA cease A 10, 27 Texas v. Florida, 306 U.S. 398 ...........-0. ee ee 31 United Mercantile Agencies, Inc., 23 T.C. No. 139. .30, 31 United States v. Augustine, 185 F. 2d 407 11, 23, 25, 26, 27 10 United States v. Augustine, 189 F. 2d 587 ......... United States v. Bruswitz, 219 F. 2d 59, cert. denied, Re TE, GES ok kan ckcnenn6Gs ser abineessases exe United States v. Iozia, 104 F. Supp. 846 .......... 26 United States v. Johnson, 319 U.S. 503 ........... 10 United States v. Joliet & Chicago R. Co., 315 U.S. BR. Sle Ces OME EL A A KASS Kise pea 14, 22 United States v. Lewis, 340 U.S. 590 ............ 17, 19 United States v. E. Regensburg & Sons, 221 F. 2d 336, cert. denied, October 10, 1955 ............-: 29 United States v. Schenck, 126 F. 2d 702, cert. denied sub. nom. Moskowitz v. United States, 316 U.S. ON 6 os a FONG CAG AN hawt AOE ES ARR ONS R EO KERDND 11 United States v. Smith, 206 F. 2d 905............ 11, 27 Wiese v. Commissioner, 93 F. 2d 921, cert. denied, be ag reer eer yer tery ers Tt 29 F. A. Wilson, 5 T. C. M. 647, aff’d on another issue, 163 F. 2d 680, cert. denied, 332 U.S. 842......... 31 SratutsEs: Internal Revenue Code of 1939: iv Index Continued Page Internal Revenue Code of 1954: Sec. 316(a) ..... 2. cece eee cece eee tener ee eees 12 ie I in Ken kone ba sends ee et nnues oo cegge 10 MISCELLANEOUS: Rothwacks, Taxability of Corporate Receipts Di- verted by Officer-Stockholders, 7 N.Y.U. Ann. Tax Inst. 577 (1949) ......-- eee e eee eee eens 27 Rudick, ‘‘Dividends’’ and ‘‘Earnings or Profits”’ Unaer the Income Tax Law: Corporate Non- Liquidating Distributions, 89 U. of Pa. L. Rev. 865, 887 (1941) ...... cece cece rece eee eet eees 14 IN THE Supreme Court of the United States OctToBER TERM, 1955 Poncet Davis, Petitioner, - Unirep States oF AMERICA, Respondent. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT Petitioner prays that a writ of certiorari issue to review the judgment of the United States Court of Appeals for the Sixth Circuit. OPINIONS BELOW The memorandum opinion of the District Court (Appendix, infra, pp. 10a-13a) is not officially re- ported. The opinion of the Court of Appeals (Appen- dix, infra, pp. 1a-9a) is not yet officially reported. JURISDICTION The judgment of the Court of Appeals was entered on October 13, 1955. The time to petition for certio- rari was extended to December 12, 1955, by an order of Mr. Justice Reed dated November 5, 1955. The juris- diction of this Court is invoked under 28 U.S.C., Section 1254. 2 QUESTION PRESENTED Whether petitioner could be convicted of attempted evasion of income tax on distributions from his wholly owned corporation where the Government offered no evidence that the corporation had any current or accu- mulated earnings or profits in the years when the distributions occurred. STATUTES INVOLVED Internal Revenue Code of 1939: Sec. 22. Gross INCOME. (a) General Definition. —‘‘Gross income”’ includes gains, profits, and income derived from salaries, wages, or compensation for per- sonal service * * * of whatever kind and in what- ever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or deal- ings in property, whether real or personal, grow- ing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business car- ried on for gain or profit, or gains or profits and ineome derived from any source whatever. * * * * * * * * (e) Distributions by Corporations.—Distribu- tions by corporations shall be taxable to the share- holders as provided in section 115. * * * * * (26 U.S.C. 1946 ed., Sec. 22.) Sec. 115. DisTRIBUTIONS BY CORPORATIONS. (a) Definition of Dividend—The term **divi- dend’’ when used in this chapter * * * means any 3 distribution made by a corporation to its share- holders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the tax- able year), without regard to the amount of the earnings and profits at the time the distribution was made. * * * (b) Source of Distributions.—For the purposes of this chapter every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. * * * * * * * 7 (d) Other Distributions from Capital—If any distribution made by a corporation to its share- holders is not out of increase in value of property accrued before March 1, 1913, and is not a divi- dend, then the amount of such distribution shall be applied against and reduce the adjusted basis of the stock provided in section 113, and if in ex- cess of such basis, such excess shall be taxable in the same manner as a gain from the sale or ex- change of property. * * * *” * * > * (26 U.S.C. 1946 ed., See. 115.) Src. 145. PENALTIES. * * * * * (b) Failure to Collect and Pay Over Tax, or Attempt to Defeat or Evade Tax.—Any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter, who willfully fails to collect or truthfully account for 4 and pay over such tax, and any person who will- fully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties pro- vided by law, be guilty of a felony and, upon con- viction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with costs of prosecution. * * * * * (26 U.S.C, 1946 ed., See. 145.) STATEMENT On April 23, 1952, petitioner was indicted in four counts in the Northern District of Ohio for willfully attempting to evade his income taxes for the years 1945 through 1948. He was charged with having omitted an aggregate income of $867,864.26 on which taxes of $738,249.16 were allegedly due. The net income and resulting taxes, as reported by petitioner and as re- vised by respondent, were as follows: Reported Revised Year Net Income Tax Net Income Tax 1945 $53,037.58 $29,549.29 $240,601.72 $199,605.62 1946 53,312.63 26,770.50 665,194.62 549,842.99 1947 46,211.66 21,861.78 93,704.03 57,510.63 1948 10,403.85 1,885.47 31,329.61 11,356.96 After a jury trial petitioner was found guilty on all four counts. He was sentenced to imprisonment for five years on each count, the terms to run concurrently, and he was fined $10,000 on each count, or a total of $40,000. (R. 5a-Ta, 9a, 13a-14a, 223a-226a; 4b-9b, 222b-228b. )" —-— 1‘*R’? designates references to the Appendix filed in the court below by petitioner or respondent, as the case may be. oO The relevant evidence may be summarized as fol- lows: Robbins Tire & Rubber Company, Ine., is an Ala- bama corporation engaged in producing and selling rubber products. It files its returns on the accrual basis. During the years involved petitioner was presi- dent, treasurer, and sole stockholder of the corporation. Its plant was located in Tuscumbia, Alabama, and its head office in Akron, Ohio. That office was occupied by petitioner and several clerical employees, including a bookkeeper. The plant usually sent copies of in- voices and remittance statements to the Akron office, where sales and collections were entered on the books. In the years 1945 through 1948 six customers of the corporation sent their checks directly to the Akron office in accordance with instructions from that office. Neither the sales to these customers nor their checks were reflected in the corporate books. The checks totalled $187,564.14 in 1945, $611,881.99 in 1946, $47,492.37 in 1947, and $20,925.76 in 1948. They were all payable to the corporation and endorsed in the name of the corporation. Practically all these checks were cashed by employees of the corporation at two banks in Akron. The cash was either delivered to pe- titioner or placed in the office safe. Petitioner never instructed the employees to conceal any sales or re- ceipts. (R. 15a-16a, 21a-24a, 26a-27a, 29a-3la, 35a, 38a-39a, 49a-50a, 61a-68a, 72a-73a, 76a, 78a-79a, 81a-87a, 91a-92a, 95a-98a, 104a-105a, 120a, 123a-126a, 132a-134a, 136a-142a, 146a; 10b, 15b-16b, 19b-22b, 39b-63b, 69b- 124b, 129b-132b, 136b-138b, 142b-145b, 147b-149b, 151b- 154b, 156b-163b, 167b-169b, 176b-181b, 185b-207b, 214b-216b.) 6 Of the unrecorded checks aggregating $867,864.26, one check for $467.14 was deposited on May 16, 1945, in the bank account of petitioner’s wife. (R. 24b-25b.)° Two other checks, making a total of $1,142.10, were deposited in petitioner’s personal account on January 24, 1945. (R. 64b-66b, 213b-214b.)* On March 31, 1945, petitioner made a gift of $100,000 to his wife. He duly filed a gift tax return on March 15, 1946, and paid a vift tax of $8,595. (R. 99a-100a; 154b-155b, 235b- 236b.)* On February 12, 1945, petitioner purchased a treasurer’s check in the amount of $40,000. On Sep- 2In its summary of the evidence the Court of Appeals broadly declared that ‘‘proceeds from the customers’’ of the corporation ‘‘were deposited’? in her account. (Appendix, infra, p. 3a.) This generality suggests much more than the evidence reveals. Apart from the one check for $467.14, the Government at most tried to establish that between August 13, 1945, and January 12, 1946, four other checks totalling $5,989.09 were deposited to the wife’s credit. The attempted proof turned out to be rather inadequate. (R. 25b-30b, 36b-38b.) 3The Court of Appeals erroneously intimated that large sums found their way into petitioner's personal account. (Appendix, infra, p. 3a.) ‘The Court of Appeals stated : ‘‘It appears also that during the tax years in question, appellant made a gift to his wife of $100,000 in cash, although at that time he had less than $1,200 in his bank account.’’ (Appendix, infra, p. 3a.) The gift was made in early 1945—at the outset of the four-year period for which petitioner was indicted. It does not shed the slightest light on petitioner’s income for nine months in 1945 or on his income for the years 1946-1948. Moreover, in so far as the first three months of 1945 are concerned, the Government made no effort to fix petitioner’s net worth as of the beginning of that period. In fact, no phase of the prosecution was based on the so-called | net worth method. Cf. Holland v. United States, 348 U. S. 121 (1954). 7 tember 8, 1945, he sent the check to one Charles U. Bay. The Government called an executive assistant of Bay to testify about the transaction to which the check related. The witness indicated that he knew nothing about it. (R. 67b-69b, 112b, 125b-127b, 229b- 230b.) On March 11, 1946, petitioner purchased a treasurer’s check in the amount of $70,000. On the following day he sent the check to American Trust Company in connection with a purchase of stock in Pacific Rubber & Tire Manufacturing Company. (R. 117b, 231b-235b.)° The Government treated all the unrecorded pro- ceeds of the corporation as unreported income of peti- tioner. In its bill of particulars the Government stated that the ‘‘additional income’”’ attributed to peti- tioner ‘‘represents proceeds of sales’’ by the corpora- tion ‘personally appropriated by him.’’ It did not offer any proof that the corporation had any current or accumulated earnings or profits during the vears 1945-1948. The Government also treated the same proceeds as additional gross receipts of the corpora- tion. Petitioner was indicted, as officer of the cor- ’ With respect to this transaction the Court of Appeals ex- pansively indicated that large amounts of customers’ checks ‘‘were used’? by petitioner ‘‘to purchase stock in his own name.”’ (Appendix, infra, p. 3a.) As noted above, petitioner made only one payment on such stock. It consisted of a check obtained toward the beginning of the second year involved in the ‘ndict- ment. There was no proof of stock purchases in 1945, 1947, and 1948. Nor was there any proof that petitioner’s net worth at the start of 1945 was insufficient to cover the one check obtained in early 1946. ®In the case of the corporation the Government reduced the unrecorded proceeds by amounts representing reimbursements for excise taxes paid by the corporation. 8 poration, in the Northern District of Alabama with respect to taxes of the corporation for its fiscal year 1945. The trial court, over the objection of petitioner, instructed the jury to disregard the testimony relating to the Alabama indictment and the Government’s in- clusion of the proceeds in the corporation’s receipts. (R. 9a, 122a-131a, 135a-142a, 146a, 169a-170a, 177a- 178a, 198a.) The trial court charged the jury that the proceeds in question were ‘‘received, in the first instance,”’’ by the corporation. ‘‘Money received by a corporation is not income to an individual unless the corporate funds are in some way transferred or diverted to an indi- vidual and become property over which he exercises dominion and control and treats as his own to the ex- clusion of any interest therein by the corporation.” The court further charged, ‘If you find that the De- fendant, as the sole owner of the Robbins Tire & Rub- ber Company, diverted funds of that corporation to himself personally and exercised control and dominion over the funds and treated them as his own, that would constitute taxable income that he was required by law to include in his tax return.’”’ The trial court then stated, ‘‘Income received from any source constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realiz- able economic value from it. That occurs when cash is received by an individual in a manner which allows him freedom to dispose of it or use it at will. Such in- come is taxable in the yearly period during which it is received.’’ (R. 208a-209a.) Petitioner urged that he ‘‘could not have taxable income as an individual unless and until the Govern- 9 ment proved that there were profits of the corpora- tion.’’? He requested the trial court to charge that the Government was obliged to establish ‘‘an earned sur- plus or profits available for distribution”’ to him; and that there had ‘‘been a failure of proof’’ in this respect. The trial court refused to so charge. Petitioner moved for a judgment of acquittal and for a new trial because of this failure of proof. The trial court denied both motions on the ground that such proof was unneces- sary. It ruled that under section 115(b) of the Inter- nal Revenue Code of 1939 the funds received by peti- tioner were presumed to derive from corporate earn- ings or profits, and hence they ‘‘eonstituted a con- structive dividend as a matter of law.”” “If proper entries,’’ the court said, ‘‘had been made upon the cor- poration’s books showing the sales to customers, the receipt of payments for those sales and the distribu- tion of $850,000 to the defendant, the court would be required to hold as a matter of law that the distribu- tions were from earnings and therefore taxable in- come.’’ The applicable principle is the same, the court concluded, ‘‘where the sole owner of the corporation conceals the distribution of corporate profits to him- self.” (R. 214a-216a, 219a-220a, 238a-247a; Appen- dix, infra, pp. 10a-13a.) The Court of Appeals disap- proved this ruling as a ‘“‘misconstruction of law,”’ but affirmed the judgment as nevertheless ‘‘sound.’’ (Ap- pendix, infra, p. 9a.) REASONS FOR GRANTING THE WRIT Petitioner was tried and convicted under section 145(b) of the Internal Revenue Code of 1939. Sec- ‘ tion 145(b) provides that ‘“‘any person who willfully attempts in any manner to evade or defeat’’ his income 10 tax is “guilty of a felony.’” Needless to say, this penal sanction is ‘“‘enforced by the criminal process in the familiar manner.’’ Spies v. United States, 317 U. S. 492, 495 (1943). The ‘‘settled standards of the erimi- nal law’ apply no less to prosecutions for attempted tax evasion than to “‘prosecutions for other crimes.” Holland v. United States, supra, at 138. ‘‘Unlike civil actions for the recovery of deficiencies, where the de- terminations of the Commissioner have prima facie validity, the prosecution must always prove the crimi- nal charge beyond a reasonable doubt.’” Id. at 126. And from beginning to end that burden of proof ex- tends to ‘‘every element of the offense’’ without ex- ception. Jd. at 138. See also Helvering v. Mitchell, 303 U. S. 391, 397 (1938) ; Davis v. United States, 160 U. S. 469, 487 (1895). As this Court has succinctly stated, the crime con- demned and punished in section 145(b) ‘‘is the wilful attempt to evade the payment of what was due to the revenue.”’ United States v. Johnson, 319 U_ 8S. 503, 515 (1943). In other words, ‘‘an underste ement of taxable income” is ‘‘one of the elements co« the crime of tax evasion.’’ Smith v. United States, 348 U.S. 147, 154 (1954). See also Holland v. United States, supra, at 137. The Government, therefore, ‘‘has the burden of proving that income tax was due from the accused for the year involved.’’? United States v. Augustine, 189 F. 2d 587, 589 (3d Cir. 1951). If it fails or refuses to carry this burden, it has not established the alleged erime. And so the Government must prove not only a T'The same criminal sanction is imposed by section 7201 of the | Internal Revenue Code of 1954. Hence the significant problem presented here involves the 1954 Code as well as the 1939 Code. 11 willful effort to defraud, but also an obligation to pay more tax than the tax returned. See further Gleckman v. United States, 80 F. 2d 394, 399 (8th Cir. 1935) ; United States v. Schenck, 126 F. 2d 702, 705 (2d Cir. 1942), cert. denied sub nom. Moskowitz v. United States, 316 U. S. 705 (1942) ; United States v. Smith, 206 F. 2d 905, 911 (3d Cir. 1953). Here the Court of Appeals plainly departed from this hornbook principle which governs prosecutions for attempted tax evasion. While the court agreed that the Government must show ‘‘the existence of a tax liability in excess of that reported’? (Appendix, infra, p. 5a), it proceeded to sustain the convic- tion though no such liability was shown. This grave and startling error warrants expeditious review by this Court for several reasons. The decision below derives from a serious misapplica- tion of this Court’s opinion in Rutkin v. United States, 343 U. S. 130 (1952). It is in conflict with this Court’s decisions in Moline Properties v. Commissioner, 319 U. S. 436 (1943), and National Carbide Corp. v. Com- missioner, 336 U. S. 422 (1949). It is equally at odds with the decisions of other Courts of Appeals in Cur- rier v. United States, 166 F. 2d 346 (1st Cir. 1948), and United States v. Augustine, 185 F. 2d 407 (3d Cir. 1950). And it raises a significant question in the en- forcement of section 145(b) which radiates far beyond this immediate case. 1. Section 22(a) of the 1939 Code defines ‘‘gross in- come” as including income from “dividends.” Sec- tion 22(e) significantly adds that ‘‘Distributions by corporations shall be taxable to the shareholders as provided in section 115.’’ As the courts have repeat- edly recognized, section 115 ‘‘qualifies the generality 12 of §22(a).’’ It defines the tax status of ‘‘distributions by corporations.’” Cf. Helvering v. Griffiths, 318 U. 8. 371, 394 (1943). See further Palmer v. Commissioner, 302 U. S. 63, 69 (1937) ; Choate v. Commissioner, 129 F. 2d 684, 689 (2d Cir. 1942) ; Capital Estates v. Com- missioner, 138 F. 2d 156, 157 (3d Cir. 1943). In short, while section 22(a) generally embraces ‘‘income de- rived from any source whatever,’” a distribution from a corporation to its shareholders is not income except as section 115 so provides. A corporate distribution is includible in gross income under section 22(a) only if it is income under section 115. See Commissioner V. Goldwyn, 175 F. 2d 641, 643 (9th Cir. 1949) ; Jackson v. Commissioner, 172 F. 2d 605, 606 (7th Cir. 1949). For present purposes we need only consider sub- sections (a), (b), and (d) of section 115.° Subsection (a) defines a dividend as ‘‘any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year.’’ Subsec- tion (b) states that ‘‘every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits.”’ Subsection (d) provides that if a distribution ‘‘is not a dividend,”’ then the amount of the distribution ‘‘shall be applied against and reduce the adjusted basis of the stock’’; and if the amount of the distribution ex- 8 See Commissioner v. Jacobson, 336 U. S. 28 (1949) ; Rutkin v. United States, supra; Commissioner v. Glenshaw Glass Co., 348 U. S. 426 (1955). ® These provisions are now contained in sections 301(c) (1) (2) (3) and 316(a) of the 1954 Code. 13 ceeds that basis, the excess is ‘‘taxable in the same manner as a gain from the sale or exchange of prop- erty.’”° Obviously, under section 115 a distribution from cor- poration to stockholder is a dividend, taxable as ordi- nary income, only if the distribution is out of earnings or profits. That is why the term ‘‘earnings or profits”’ has ‘‘long been in the revenue acts.”’ Commissioner v. Wheeler, 324 U. S. 542, 545 (1945). In the words of Mr. Justice Reed, dividend income is ‘‘the earnings of a corporation’’ which “‘pass into the earnings of its stockholder.”’ Estate of Putnam v. Commissioner, 324 U. S. 393, 400 (1945). See also Commissioner v. Estate of Bedford, 325 U. S. 283, 290-291 (1945) ; Commissioner v. Munter, 331 U. S. 210, 211, 214-215 (1947). If the corporation has no earned surplus, the stockholder has no dividend income. To borrow the apt language of Mr. Justice Stone, the “bare fact”’ that a transaction ‘‘has resulted in a distribution of some of the corporate assets to stockholders, gives rise to no inference that the distribution is a dividend within the meaning of § 115.’’ At the very least it must appear that ‘‘the transaction is in purpose or effect used as an implement for the distribution of corporate earnings to stockholders.”’ Palmer v. Com- missioner, supra, at 69-70. See further Jones v. Daw- son, 148 F. 2d 87, 91 (10th Cir. 1945). By the same token, if the Government seeks a conviction on the 10 Ag section 115(d) indicates, if there are no earnings or profits, a distribution is at most a capital gain after the stockholder re- covers the basis of his shares. See, e.g., Shield Co., 2 T.C. 763 (1943). Here the Government treated the distributions as ordinary income. 14 basis of an unreported distribution, it must prove be- yond a reasonable doubt that the corporation had earnings or profits in the year of distribution. For otherwise it fails to establish that the stockholder understated any income obtained from the corpora- tion. Here the Government made no effort to show that the corporation had an earned surplus for the years 1945-1948. It merely set out to prove that distribu- tions were made, and then it chose to rest. Hence the Government conspicuously failed to confirm its charge that the distributions were income to petitioner. Since the unrecorded proceeds derived from sales by the cor- poration, they were, of course, includible in its gross receipts. United States v. Joliet & Chicago R. Co., 315 U. S. 44 (1942); Moline Properties v. Commis- sioner, supra; Commissioner v. Court Holding Co., 324 U. S. 331 (1945) ; National Carbide Corp. v. Commis- sioner, supra. But it scarcely follows that the corpora- tion had earnings or profits in each of the years in- volved. Proof of gross receipts is quite different from proof of an earned surplus. See Doyle v. Mitchell Brothers Co., 247 U. S. 179, 184 (1918); Anderson v. United States, 11 F. 2d 938, 940 (7th Cir. 1926) ; Clark v. United States, 211 F. 2d 100, 102 (8th Cir. 1954).” 11 Even net income is considerably different from an earned surplus. For example, in computing the surplus for any year allowance must be made for income taxes, excess profits taxes, and other liabilities which are not deductible in computing net income. See, e.g., Faweus Machine Co. v. United States, 282 U.S. 375, 378 (1931); and see generally Rudick, ‘‘Dividends’’ and ‘‘ Earnings or Profits’? Under the Income Tax Law: Corporate Non-Liqui- dating Distributions, 89 U. of Pa. L. Rev. 865, 887 (1941). 15 In so far as the present record is concerned, the cor- poration may well have had a deficit in one or more years. The record reveals no more than certain gross receipts from certain customers. The trial court was not unaware of the Government’s complete lack of proof of earnings or profits. It bravely sought to pardon the deficiency on the basis of section 115(b) of the Code. (Appendix, infra, p. 10a.) However, as the Court of Appeals frankly confessed, this excuse is no excuse at all. (Appendix, infra, p. 9a.) Section 115(b) does not come into play unless a corporation has earnings or profits to dis- tribute. If earnings or profits are available, then sec- tion 115(b) attributes the distribution to that source “to the extent thereof.’’ See Helvering v. Canfield, 291 U. S. 163 (1934) ; McCaughn v. McCahan, 39 F. 2d 3 (3d Cir. 1930) ; Leland v. Commissioner, 50 F. 2d 523 (Ist Cir. 1931), cert. denied, 284 U. S. 656 (1931); Faris v. Helvering, 71 F. 2d 610 (9th Cir. 1934), cert. denied, 293 U. S. 544 (1934) ; Beretta v. Commissioner, 141 F. 2d 452 (5th Cir. 1944), cert. denied,323 U.S. 720 (1944) ; Lawrence Vv. Commissioner, 143 F. 2d 456 (9th Cir. 1944); Jones v. Dawson, supra; Jackson v. Com- missioner, supra. Cf. Edwards v. Douglas, 269 U.S. 204 (1925). Here, however, there was not the barest proof of earnings or profits to which section 115(b) might apply. Not even the corporate income tax re- turns were offered in evidence. 9. Aside from its erroneous theory of a ‘‘construc- tive dividend’”’ under section 115(b), the trial court re- lied on this Court’s decision in Rutkin v. United States, supra. Indeed, its charge to the jury on the alleged omission of income was essentially a mere echo of this 16 Court’s language in that case. Compare 343 U.S. at 137, with R. 208a-209a." See also R. 168a-169a. The Court of Appeals regarded section 115 as irrelevant and fully relied on the Rutkin decision. It held that, whether or not the corporation ‘‘had sufficient surplus to cover a dividend distribution,” the withdrawn cash was taxable to petitioner under section 22(a). In be- half of this conclusion the court quoted the Rutkin opinion and borrowed a good deal of its language. The cash was income to petitioner, said the court, be- cause “he exercised command, control, and dominion”’ over it. He obtained the cash ‘‘as his own”’ and treated it “‘as his own.” (Appendix, supra, pp. 5a-Ta.) This conclusion, we submit, reflects an egregious misconcep- tion of the Rutkin case. The Rutkin opinion dealt with a prosecution for attempted evasion of income tax on $250,000. At the trial the defendant contended that he had been one of several stockholders of a corporation; that the stock- holders had sold their shares; that the $250,000 repre- sented his portion of the sales proceeds; and that the capital gains tax had been paid. The jury, however, found that the defendant ‘‘was neither a stockholder of record nor a beneficial owner of any of the stock of the company at any time.’’ His alleged claim to the eash was ‘‘false and fraudulent”, and it was illegally gotten ‘‘by extortion.”? 343 U. S. at 132-136. In the context of these findings the issue before the Court was whether money unlawfully obtained by extortion was taxable income within section 22(a) of the 1939 Code. 12 See p. 8, supra. 17 This question inevitably focused on Commissioner V. Wilcox, 327 U. S. 404 (1946), where the Court decided that embezzled money was not a taxable gain. On that oceasion the Court declared that ‘‘a taxable gain’’ re- quires the co-existence of two factors: (1) ‘the pres- ence of a claim of right to the alleged gain,’’ and (2) “the absence of a definite, unconditional obligation to repay or return that which would otherwise constitute a gain.”? Unless there is ‘‘some bona fide legal or equitable claim,’’ the Court stated, ‘‘even though it be contingent or contested in nature, the taxpayer cannot be said to have received any gain or profit within the reach of (22(a).’’ Hence the embezzled funds were not income, for an embezzler obtains possession ‘‘with- out any semblance of a bona fide claim of right.”’ In terms of tax liability, the Court particularly indicated, it is unimportant that the embezzler controls and en- joys his loot. Id. at 408-409. Cf. United States v. Lewis, 340 U. S. 590 (1951); Healy v. Commissioner, 345 U. S. 278 (1953). In the Rutkin case the Court took a different ap- proach to the same problem. While it apparently re- garded embezzlers and extortioners as birds of a feather, it held that proceeds of extortion, unlike pro- ceeds of embezzlement, are taxable gain. Under the Rutkin decision the governing consideration in apply- ing section 22(a) is not whether the taxpayer asserts a bona fide claim of right to what he receives, but whether he exercises beneficial dominion and control over what he receives as if he had a claim of right. In the words of Mr. Justice Burton, ‘‘An unlawful gain, as well as a lawful one, constitutes taxable income when its recipient has such control over it that, as a 18 practical matter, he derives readily realizable economic value from it.’”’ ‘‘That occurs when cash, as here, is delivered by its owner to the taxpayer in a manner which allows the recipient freedom to dispose of it at will, even though it may have been obtained by fraud and his freedom to use it may be assailable by someone with a better title to it.” 343 U. S. at 187. See further Mr. Justice Burton’s dissenting opinion in Commis- sioner v. Wilcox, supra, at 413. We need not pause to consider whether the Wilcox and Rutkin decisions are adequately reconcilable. Cf. United States v. Bruswitz, 219 F. 2d 59, 61 (2d Cir. 1955), cert. denied, 349 U.S. 9138 (1955). The core of the matter is that nothing in the Ruthin opinion justi- fies the decision below. To apply it here is to misapply it. The essence of the Rutkin opinion is that it equates dominion and control with a claim of right if what is received is otherwise a gain. Just as a gain may be realized under a claim of right, so may it be realized by exercising dominion and control without a claim of right. See generally Helvering v. Horst, 311 U.S. 112, 115 (1940). But this is not to say that whenever eash is received—with or without a claim of right—it necessarily constitutes a gain, regardless of the source from which it derives and the context of its acquisition. “Tn law also the right answer usually depends on putting the rigat question.’’ Estate of Rogers v. Com- missioner, 320 U. 8. 410, 413 (1943). Here the ques- tion is not whether the taxpayer exercised dominion and control over cash which was otherwise income under section 22(a). The question, rather, is whether the Government has shown that the withdrawals from 19 the corporation were income to begin with. And ‘‘the right answer’’ to ‘‘the right question’’ is given by section 115, which the Court of Appeals wholly ig- nored," and not by section 22(a), which it erroneously invoked." Any distribution of cash from a corporation to a stockholder affords him ‘‘ecommand, control, and dominion’? over the cash. But under section 115(a) the distribution is ordinary income to him only if the corporation has commensurate earnings or profits. Or to put the matter somewhat differently, section 115(a) excludes from ordinary income under section 22(a) any corporate distribution which is not covered by earnings or profits. See p. 12, supra. Otherwise section 115(a) is quite meaningless; and so is section 92(e), which declares that ‘distributions by corpora- tions” are ‘‘taxable to the shareholders as provided in section 115.’ Here, of course, the Government meticu- lously refrained from showing any earnings or profits.” 13 Tn its charge to the jury the trial court did pretty much the same. It quoted section 22(a), but omitted to mention the word ‘‘dividends”’ contained in that provision. (R. 208a.) 14 Compare Freuler v. Helvering, 291 U.S. 35 (1934), where the Government similarly tried to tax receipts, acquired under a mistaken claim of right, as income under section 22(a), though the status of the receipts was governed by other provisions. See United States v. Lewis, supra, at 591. 13 At one point the Court of Appeals utterly misconceives the nature of our-.contention, We are arguing, the court says, that ‘‘sinee there is no proof’’ of an earned surplus, petitioner ‘‘is only a holder of the cash for the benefit of the corporation.”’ (Appendix, infra, p. 5a.) It is difficult for us to understand how the court arrived at this view of our position. We are saying, rather, that even if distributions were made for petitioner ’s own benefit, they were not shown to be income because there was no evidence of an earned surplus. 20 The reason for the Court of Appeals’ confusion is not obscure. The court misread the Rutkin opinion as holding that any receipt of cash is ipso facto taxable income if the recipient controls the cash as his own. In this connection we cannot do better than quote what the Court of Appeals itself said. ‘If appellant had been doing business as an individual,” the court stated, ‘and retained a million dollars of receipts from his customers, as his own, using the cash for personal investments and expenditures, and concealing from the government, through false bookkeeping entries and fraudulent income tax returns, the fact that he had received and kept as his personal property such a huge sum, there is no doubt that he would be accountable for that money as income which is required to be reflected in his income tax return.’ (Appendix, infra, pp. 6a-Ta.) According to the Court of Appeals, then, even where a business is individually owned, the withdrawal of proceeds creates taxable income if the proprietor as- sumes dominion over them. The question whether the business has produced a profit is deemed entirely immaterial. We need not labor the point that this doctrine is as erroneous as it is novel. “Of course. gross income and not gross receipts is the foundation of income-tax liability, for it is only earnings, profits and gains which the statute subjects to tax.” Clark v. United States, supra, at 102. The mere acquisition of cash does not ‘‘in and of itself, suffice to establish that income tax was due on account of it.’ Gleckman v. United States, supra, at 399. Since the Court of Appeals was so seriously confused with resnect to with- drawals from an individual business, it easily erred a 21 with respect to withdrawals from a corporate enter- prise. In holding that the existence of earnings or profits was immaterial, the Court of Appeals plainly misapplied the Rutkin opinion. 3. The Court of Appeals sought to bolster its strange understanding of the Rutkin case by ignoring the cor- porate entity of Robbins Tire & Rubber Company, Ine. And so one error quickly led to another. ‘*What appellant did,’”’ the court said, ‘twas to take funds, individually, from his wholly owned corporation, which he completely dominated and controlled. In other words, he merely took the funds from himself under a different name.’’ (Appendix, infra, p. Ta.) In short, the court viewed the tax consequences as if the amounts withdrawn were proceeds of sales made by petitioner rather than distributions from the co pora- tion which made the sales. As a result, the decision below ineseapably conflicts with this Court’s decisions in Moline Properties v. Commissioner, supra, and National Carbide Corp. v. Commissioner, supra, In these familiar cases the Court held that ‘‘a cor- poration formed or operated for business purposes”’ is a taxpayer separate and apart from its stockholders. ‘‘“Complete ownership of the corporation, and the con- trol primarily dependent upon such ownership,’’ the Court emphasized, are irrelevant ‘“‘in determining taxabilitv.”’ 336 U.S. at 429. As long as the corpora- tion ‘‘earries on business activity,’’ it makes ‘‘no dif- ference taxwise’’ that ‘‘the owner retains direction of 16 Tmmediately before these observations the Court of Appeals appraised the case as if petitioner had been doing business as an individual. See quotation at p. 20, supra. an eS a oes Se 22 its affairs down to the minutest detail, provides all of its assets and takes all of its profits.’’ Jd. at 431-432. ‘‘Un- doubtedly the great majority of corporations owned by sole stockholders are ‘dummies’ in the sense that their policies and day-to-day activities are determined not as decisions of the corporation but by their owners acting individually.’”’ Nevertheless a wholly owned corporation which serves a business purpose must be recognized as a tax entity. Jd. at 433. Whatever interest the stockholder has in the assets of the corpora- tion is ‘‘strictly derivative in origin.’’ United States v. Joliet & Chicago R. Co., supra, at 48. As Mr. Justice Holmes so felicitously stated, ‘‘The corporation is a person and its ownership is a nonconductor that makes it impossible to attribute an interest in its propertv to its members.’’ Klein v. Board of Supervisors, 282 U. S. 19, 24 (1930). See also Learned Hand. J.. in National Investors Corp. v. Hoey, 144 F. 2d 466, 467- 468 (2d Cir. 1944). Here, needless to add, the corporation was ‘‘formed”’ and ‘‘operated for business purposes.’’ And, as even the trial judge conceded, the ‘‘income’’ represented by the checks ‘‘was received in the first instance’’ by the corporation. (R. 208a.) Nor does the Government contend otherwise, for it has included the proceeds in the gross receipts of the corporation. See p. 7, supra; and decisions cited at p. 14, supra. Of course, the Government had no choice in the matter, in view of the many decisions ‘‘requiring that income be taxed to those who earn it.’? National Carbide Corp. v. Commissioner, supra, at 436. Since the corporation was the taxpayer in regard to the proceeds, it is no less true that the amounts withdrawn by petitioner 23 him by reason of his status-as.stockholder.. See Lynch v. Hornby, 247 U. S. 339, 343 (1918) ; Estate of Put- nam v. Commissioner, supra, at 399-400. Hence once more they cannot be attributed to him as dividend in- come because there is no evidence that the corporation had earnings or profits. Unless the withdrawn amounts are treated as distributions from the corporation, this Court’s decisions in the Moline Properties and National Carbide cases are being quietly ignored. 4. In holding that proof of earnings or profits was unnecessary, the Court of Appeals came into further conflict with decisions of the First and Third Circuits in Currier v. United States, supra, and United States v. Augustine, supra. The Currier ease similarly involved a defendant who was sole stockholder, president, and treasurer of a corporation engaged in business.” The corporation received numerous checks which were not recorded on its books. All were endorsed in the name of the corporation and deposited in the stockholder’s per- sonal account. They totalled $83,496.11 in 1943 and $21,095.88 in 1944. The Government carefully estab- lished that the corporate earnings and profits were $26,017.00 in 1943 and $10,404.45 in 1944. Both the corporation and the stockholder were indicted for attempted income tax evasion with respect to the two vears. However, while the corporation was charged with deliberately excluding income equal to the unre- corded receipts, the stockholder was charged with 17 The defendant’s wife was record owner of 25 percent of the stock, but the District Court found that he was beneficial owner of all the shares. See 166 F. 2d at 348. 24 willfully omitting income equal to the earned surplus available for distribution." The indictment expressly described the lesser amounts imputed to the stock- holder as ‘‘ Dividends.’”” In its brief the Government carefully explained that the ‘‘diverted funds were properly treated as taxable dividends’’ to the stockholder ‘‘under Section 115 of the Code.’? The amounts designated as ‘‘ Dividends”’ were ‘‘arrived at by treating the diverted corporate sales receipts as constructive dividends to Currier, to the extent permitted by the amount of corporate sur- plus available for distribution as dividends.’’ This treatment, the Government stated, ‘‘is in accord with well recognized civil tax procedure, controlling here insofar as the determination of income is concerned.’”” The First Circuit approved the Government’s analysis, which was precisely the same as our own. It upheld the conviction on the ground that the stockholder ‘*received a constructive dividend which he was under no obligation to repay.’™ The court found ‘‘no incon- sistency’’ in treating the entire sales proceeds as in- come of the corporation and treating ‘‘only part of the money”’ as ‘‘a taxable dividend’’ to the stockholder, ‘*since dividends are only taxable if paid out of earn- ings and profits. Any further amounts he received 18 See Brief for the United States, pp. 2-6, Currier v. United States, supra. 19 Jd. at 5, 11-12. 20 Td. at 7, 12. 21 The stockholder argued that the withdrawals were not taxable because they were embezzled funds within the holding of Commis- sioner Vv. Wilcox, supra. The District Court rejected this argument (70 F. Supp. 219, 220-221 (D. Mass. 1947)), and the First Circuit briefly agreed. 166 F. 2d at 348. 25 in excess of the corporation’s earnings and profits can either be considered as return of capital or money wrongfully taken, and th *s not taxable as dividends.”’ 166 F. 2d at 348.” In United States v. Augustine, supra, withdrawals from a closely held corporation were again involved. The Government treated as omitted income not the full amount of the withdrawals, but a smaller sum covered by earnings and profits. In the Government ’s own words, ‘‘the theory”? of the prosecution was ‘‘hased on Section 115 of the Internal Revenue Code.” The smaller amount ‘‘constituted taxable income to the defendant on the basis that the defendant received these moneys in the form of an undeclared or con- structive dividend’’ from the corporation.* The con- viction was again sustained under section 115(a) in the light of the Government’s proof of an earned sur- plus. ‘There was evidence from which the jury was entitled to infer that the money received by the appel- lant was a dividend.” 185 F. 2d at 407. Although on rehearing the Third Circuit ‘‘reluctantly”’ reversed the conviction because of ‘‘an undue restriction” in eross-examination (189 F. 2d 587, 590-591), it spe- cifically noted the Government’s claim that the with- 22'The First Cirenit also applied its analysis to the corporate indictment and conviction. The corporation argued that the withdrawal of the corporate funds constituted an embezzlement loss deductible under section 23(f) of the 1939 Code. Cf. Alison v. United States, 344 U.S. 167 (1952). The court answered, inter alia, that ‘‘part of the money taken by Currier was a constructive dividend. Certainly the corporation is entitled to no deduction for dividends paid.’’ 166 F. 2d at 348. 28 Brief for the United States, pp. 2-3, 5-8, United States v. Augustine, supra. 26 drawals were ‘“a constructive dividend.’’ At the same time it approved the admission of testimony by a revenue agent on the corporation’s earnings and profits for the year off indictment. Jd. at 589-590. See also United States v. Iozia, 104 F. Supp. 846 (S.D. N.Y. 1952).** We respectfully submit that the decision below can- not be reconciled with the decisions in the Currier and Augustine cases. Unlike the Sixth Circuit in this case, the First and Third Circuits considered it critically significant ‘‘whether the corporation had sufficient surplus to cover a dividend distribution.’’ See p. 16, supra. In each case the conviction was sustained because a surplus was shown to be available. If, how- ever, the decision below is correct, then the First and Third Cireuits. were sensitively concerned with irrele- vancies. In pointing to the Currier and Augustine decisions we are doing what the Government has al- ready done. At the trial it stoutly maintained that this case was akin to both those cases, ‘‘where you had similar facts.’” (R. 165a.) The trial court agreed. It referred approvingly to the Currier decision as involving ‘‘momney received under circumstances similar to those presented here,’’ which was deemed ‘‘in the nature of a constructive dividend and taxable.”’ (R. 169a.)” The Government and trial court, however, 24 Cf. Jack M. Chesbro, 21 T.C. 123 (1953), aff’d, 225 F. 2d 674 (2d Cir. 1955), involving civil fraud under section 293(b) of the 1939 Code. There, also, unrecorded amounts withdrawn from a closely held corporation were treated as dividends to the stock- holders. See further cases cited at p. 30, infra. 25 In the Court of Appeals the Government conceded that in the Currier ease the First Circuit was ‘‘concerned with the earnings, profits or deductions’’ of the corporation from which withdrawals were made. Brief of Appellee, pp. 44-45. 27 overlooked one vital detail. In the Currier case, as in the Augustine case, the Government diligently showed that the corporation had an earned surplus and the withdrawn amounts were regarded as income only to the extent that an earned surplus was proven. See further Rothwacks, Taxability of Corporate Receipts Diverted by Officer-Stockholders, 7 N.Y.U. Ann. Tax Inst. 577 (1949). 5. The decision below presents an extremely im- portant question in the administration of criminal sanctions against taxpayers. Section 145(b) is the most thorough coercive measure designed to assure payment of the income tax. The ‘‘serious and inclu- sive felony’’ which it defines is ‘‘the climax” of the ‘‘variety of sanctions” imposed by Congress. Spies v. United States, supra, at 496-497. If the decision below is permitted to stand, it will inevitably under- mine basic principles of the criminal law which this Court has painstakingly guarded and preserved in prosecutions for tax evasion. Indeed, unless the deci- sion below is reversed, it will similarly upset established rules of tax law where only civil liabilities are involved. For as we shall shortly indicate, the grave implications with which this case is laden do not tolerate nice dis- tinctions between criminal tax cases and civil tax cases. As we have pointed out, before a defendant can be convicted of tax evasion, the Government must prove ‘Can understatement of taxable income.’’** Apart from the element of willful concealment, the crux of the crime is omitted ‘‘income within the legal sense of that term.’’ United States v. Smith, supra, at 910. Obviously, ‘‘the legal sense’? of income is exactly the same for 26 See p. 10, supra. 28 criminal purposes as for civil purposes. Unless a receipt is income when a deficiency is asserted, it can- not be income when evasion is charged. In criminal cases, too, the Treasury ‘‘can add nothing to income as defined by Congress,’’ though it may firmly feel that the definition could be improved. Cf. M. E. Blatt Co. v. United States, 305 U. S. 267, 279 (1938). The one critical distinction between a charge of evasion and an assertion of deficiency is that the Government has the burden of proving that income was realized. And in carrying that burden the Government must pro- duce evidence which adequately spells out the receipt of income as Congress has defined it. Undoubtedly, not even the Government would candidly quarrel with the elementary principles which we have just stated. Yet in the present prosecution the Government has blandly proceeded to do what these principles prohibit, and the Court of Appeals has approved. This case involves distributions from a corporation to its sole stockholder. It has long been settled that distributions to stockholders are not taxable as ordinary income except as they are covered by an earned sur- plus.” As tersely stated in Commissioner v. Munter, supra, at 211, ‘‘dividends are taxable as income”’ to the recipients ‘‘if the corporation paid them out of its earnings and profits.’’ It is equally settled that the same rule applies where corporate funds are in- formally withdrawn by stockholders of a close corpo- ration.