Tax Fraud - section 7201 and section 7206
Supreme Court case
Willfulness needs a tax deficiency


Michael H. Boulware, Petitioner v. United States.

Supreme Court of the United States; 06-1509, March 3, 2008.

Vacating and remanding CA-9, 2007-1 USTC ¶50,516.

On Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit. March 3, 2008.

[ Code Secs. 7201 and 7206]

Crimes: Tax evasion: Tax deficiency required: False tax returns: Evidence: Return of capital: Contemporaneous intent. --
An individual's convictions for tax evasion and filing false tax returns were vacated and remanded because the trial court refused to allow him to introduce evidence that corporate distributions to him were a return of capital. However, contrary to the Ninth Circuit's holding in M. Miller, CA-9, 76-2 USTC ¶9809, a corporate distributee accused of tax evasion may claim return-of-capital treatment for a distribution without producing evidence that either he or the corporation intended a capital return at the time of the distribution. There is no criminal tax evasion without a tax deficiency and there is no deficiency related to a distribution if a corporation has no earnings and profits (E&P) and the amount distributed does not exceed the taxpayer's basis in his stock. Thus, the fact that a shareholder distributee of a successful corporation may have different tax liability from a shareholder of a corporation without E&P merely follows from the way Code Secs. 301 and 316(a) are written and from the requirement of a tax deficiency to be convicted of tax evasion. Under Code Sec. 7201, bad intentions alone are not punishable.




Syllabus


One element of tax evasion under 26 U. S. C. §7201 is "the existence of a tax deficiency." Sansone v. United States [ 65-1 USTC ¶9307], 380 U.S. 343, 351. Petitioner Boulware was charged with criminal tax evasion and filing a false income tax return for diverting funds from a closely held corporation, HIE, of which he was the president, founder, and controlling shareholder. To support his argument that the Government could not establish the tax deficiency required to convict him, Boulware sought to introduce evidence that HIE had no earnings and profits in the relevant taxable years, so he in effect received distributions of property that were returns of capital, up to his basis in his stock,which are not taxable, see 26 U. S. C. §§301 and 316(a). Under §301(a), unless the Internal Revenue Code requires otherwise, a "distribution of property" "made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in [ §301(c)]." Section 301(c) provides that the portion of the distribution that is a "dividend," as defined by §316(a), must be included in the recipient's gross income; and the portion that is not a dividend is, depending on the shareholder's basis for his stock, either a nontaxable return of capital or a taxable capital gain. Section 316(a) defines "dividend" as a "distribution" out of "earnings and profits." The District Court granted the Government's in limine motion to bar evidence supporting Boulware's return-of-capital theory, relying on the Ninth Circuit's Miller decision that a diversion of funds in a criminal tax evasion case may be deemed a return of capital only if the taxpayer or corporation demonstrates that the distributions were intended to be such a return. The court later found Boulware's proffer of evidence insufficient under Miller and declined to instruct the jury on his theory. In affirming his conviction, the Ninth Circuit held that Boulware's proffer was properly rejected under Miller because he offered no proof that the amounts diverted were intended as a return of capital when they were made.

Held: A distributee accused of criminal tax evasion may claim return-of-capital treatment without producing evidence that, when the distribution occurred, either he or the corporation intended a return of capital. Pp. 6-17.

(a) Tax classifications like "dividend" and "return of capital" turn on a transaction's "objective economic realities," not "the particular form the parties employed." Frank Lyon Co. v. United States [ 78-1 USTC ¶9370], 435 U.S. 561, 573. In economic reality, a shareholder's informal receipt of corporate property "may be as effective a means of distributing profits among stockholders as the formal declaration of a dividend," Palmer v. Commissioner [ 37-2 USTC ¶9532], 302 U.S. 63, 69, or as effective a means of returning a shareholder's capital, see ibid. Economic substance remains the touchstone for characterizing funds that a shareholder diverts before they can be recorded on a corporation's books. Pp. 6-8.

(b) Miller's view that a return-of-capital defense requires evidence of a corresponding contemporaneous intent sits uncomfortably not only with the tax law's economic realism, but also with the particular wording of §§301 and 316(a). As these sections are written, the tax consequences of a corporation's distribution made with respect to stock depend, not on anyone's purpose to return capital or get it back, but on facts wholly independent of intent: whether the corporation had earnings and profits, and the amount of the taxpayer's basis for his stock. The Miller court could claim no textual hook for its contemporaneous intent requirement, but argued that it avoided supposed anomalies. The court, however, mistakenly reasoned that applying §§301 and 316(a) in criminal cases unnecessarily emphasizes the deficiency's amount while ignoring the willfulness of the intent to evade taxes. Willfulness is an element of the crimes because the substantive provisions defining tax evasion and filing a false return expressly require it, see, e.g., §7201. Nothing in §§301 and 316(a) relieves the Government of the burden of proving willfulness or impedes it from doing so if there is evidence of willfulness. The Miller court also erred in finding it troublesome that, without a contemporaneous intent requirement, a shareholder distributee would be immune from punishment if the corporation had no earnings and profits but convicted if the corporation did have earning and profits.An acquittal in the former instance would in fact result merely from the Government's failure to prove an element of the crime. The fact that a shareholder of a successful corporation may have different tax liability from a shareholder of a corporation without earnings and profits merely follows from the way §§301 and 316(a) are written and from §7201's tax deficiency requirement. Even if there were compelling reasons to extend §7201 to cases in which no taxes are owed,Congress, not the Judiciary, would have to do the rewriting. Pp. 8-12.

(c) Miller also suffers from its own anomalies. First, §§301 and 316are odd stalks for grafting a contemporaneous intent requirement. Correct application of their rules will often become possible only at the end of the corporation's tax year, regardless of the shareholder or corporation's understanding months earlier when a particular distribution may have been made. Moreover, §301(a), which expressly provides that distributions made with respect to stock "shall be treated in the manner provided in [ §301(c)]," ostensibly provides for all variations of tax treatment of such distributions unless a separate Code provision requires otherwise. Yet Miller effectively converts the section into one of merely partial coverage, leaving the tax status of one class of distributions in limbo in criminal cases. Allowing §61(a) of the Code, which defines gross income, "[e]xcept as otherwise provided," as "all income from whatever source derived," to step in where §301(a) has been pushed aside would sanction yet another eccentricity: §301(a) would not cover what it says it "shall," (distributions with respect to stock for which no more specific provision is made), while §61(a) would have to apply to what by its terms it should not (a receipt of funds for which tax treatment is "otherwise provided" in §301(a)). Miller erred in requiring contemporaneous intent, and the Ninth Circuit's judgment here, relying on Miller, is likewise erroneous. Pp. 12-14.

(d) This Court declines to address the Government's argument that the judgment should be affirmed on the ground that before any distribution may be treated as a return of capital, it must first be distributed to the shareholder "with respect to...stock." The facts in this case have not been raked over with that condition in mind, and any canvas of evidence and Boulware's proffer should be made by a court familiar with the entire evidentiary record. Nor will the Court take up in the first instance the question whether an unlawful diversion may ever be deemed a "distribution...with respect to [a corporation's] stock." Pp. 14-17.

[ 2007-1 USTC ¶50,516] 470 F.3d 931, vacated and remanded.

SOUTER, J., delivered the opinion for a unanimous Court.


Opinion of the Court


JUSTICE SOUTER: delivered the opinion of the Court.

Sections 301 and 316(a) of the Internal Revenue Code set the conditions for treating certain corporate distributions as returns of capital, nontaxable to the recipient. 26 U. S. C. §§301, 316(a) (2000 ed. and Supp. V.). The question here is whether a distributee accused of criminal tax evasion may claim return-of-capital treatment without producing evidence that either he or the corporation intended a capital return when the distribution occurred. We hold that no such showing is required.


I


"[T]he capstone of [the] system of sanctions...calculated to induce...fulfillment of every duty under the income tax law," Spies v. United States [ 43-1 USTC ¶9243], 317 U.S. 492, 497 (1943), is 26 U. S. C. §7201, making it a felony willfully to "attemp[t] in any manner to evade or defeat any tax imposed by" the Code. 1 One element of tax evasion under §7201 is "the existence of a tax deficiency," Sansone v. United States [ 65-1 USTC ¶9307], 380 U.S. 343, 351 (1965); see also Lawn v. United States [ 58-1 USTC ¶9189], 355 U.S. 339, 361 (1958), 2 which the Government must prove beyond a reasonable doubt, see ibid. ("[O]f course, a conviction upon a charge of attempting to evade assessment of income taxes by the filing of a fraudulent return cannot stand in the absence of proof of a deficiency").

Any deficiency determination in this case will turn on §§301 and 316(a) of the Code. According to §301(a), unless another provision of the Code requires otherwise, a "distribution of property" that is "made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in [ §301(c)]." Under §301(c), the portion of the distribution that is a "dividend," as defined by §316(a), must be included in the recipient's gross income; and the portion that is not a dividend is, depending on the shareholder's basis for his stock, either a nontaxable return of capital or a gain on the sale or exchange of stock, ordinarily taxable to the shareholder as a capital gain. Finally, §316(a) defines "dividend" as
"any distribution 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 taxable year), without regard to the amount of the earnings and profits at the time the distribution was made."

Sections 301 and 316(a) together thus make the existence of "earnings and profits" 3 the decisive fact in determining the tax consequences of distributions from a corporation to a shareholder with respect to his stock. This requirement of "relating the tax status of corporate distributions to earnings and profits is responsive to a felt need for protecting returns of capital from tax." 4 Bittker & Lokken ¶92.1.1, p. 92-3.


II


In this criminal tax proceeding, petitioner Michael Boulware was charged with several counts of tax evasion and filing a false income tax return, stemming from his diversion of funds from Hawaiian Isles Enterprises (HIE), a closely held corporation of which he was the president,founder, and controlling (though not sole) shareholder. At trial, 4 the United States sought to establish that Boulware had received taxable income by "systematically divert[ing]funds from HIE in order to support a lavish lifestyle." 384 F.3d 794, 799 (CA9 2004). The Government's evidence showed that
"[Boulware] gave millions of dollars of HIE money to his girlfriend...and millions of dollars to his wife...without reporting any of this money on his personal income tax returns....[H]e siphoned off this money primarily by writing checks to employees and friends and having them return the cash to him, by diverting payments by HIE customers, by submitting fraudulent invoices to HIE, and by laundering HIE money through companies in the Kingdom of Tonga and Hong Kong." Ibid.

In defense, Boulware sought to introduce evidence that HIE had no retained or current earnings and profits in the relevant taxable years, with the consequence (he argued)that he in effect received distributions of property that must have been returns of capital, up to his basis in his stock. See §301(c)(2). Because the return of capital was nontaxable, the argument went, the Government could not establish the tax deficiency required to convict him.

The Government moved in limine to bar evidence in support of Boulware's return-of-capital theory, on the grounds of "irrelevan[ce] in [this] criminal tax case," App. 20. The Government relied on the Ninth Circuit's decision in United States v. Miller [ 76-2 USTC ¶9809], 545 F.2d 1204 (1976), in which that court held that in a criminal tax evasion case, a diversion of funds may be deemed a return of capital only after "some demonstration on the part of the taxpayer and/or the corporation that such [a distribution was] intended to be such a return," id., at 1215. Boulware, the Government argued, had offered to make no such demonstration. App. 21.

The District Court granted the Government's motion,and when Boulware sought "to present evidence of [HIE's] alleged over-reporting of income, and an offer of proof relating to the issue of...dividends," id., at 135, the District Court denied his request. The court said that "[n]ot only would much of [his proffered] evidence be excludable as expert legal opinion, it is plainly insufficient under the Miller case," id., at 138, and accordingly declined to instruct the jury on Boulware's return-of-capital theory. The jury rejected his alternative defenses (that the diverted funds were nontaxable corporate advances or loans, or that he used the moneys for corporate purposes), and found him guilty on nine counts, four of tax evasion and five of filing a false return.

The Ninth Circuit affirmed. [ 2007-1 USTC ¶50,516] 470 F.3d 931 (2006). It acknowledged that "imposing an intent requirement creates a disconnect between civil and criminal liability," but thought that under Miller, "the characterization of diverted corporate funds for civil tax purposes does not dictate their characterization for purposes of a criminal tax evasion charge." [ 2007-1 USTC ¶50,516] 470 F.3d, at 934. The court held the test in a criminal case to be "whether the defendant has willfully attempted to evade the payment or assessment of a tax." Ibid. Because Boulware "`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,' " id., at 935 (quoting Miller, supra, at 1215), the Ninth Circuit held that Boulware's proffer was "properly rejected...as inadequate," [ 2007-1 USTC ¶50,516] 470 F.3d, at 935.

Judge Thomas concurred because the panel was bound by Miller, but noted that "Miller --and now the majority opinion --hold that a defendant may be criminally sanctioned for tax evasion without owing a penny in taxes to the government." [ 2007-1 USTC ¶50,516] 470 F.3d, at 938. That, he said, not only "indicate[s] a logical fallacy, but is in flat contradiction with the tax evasion statute's requirement...of a tax deficiency." Ibid. (internal quotation marks omitted). 5

We granted certiorari, 551 U. S. ___ (2007), to resolve a split among the Courts of Appeals over the application of §§301 and 316(a) to informally transferred or diverted corporate funds in criminal tax proceedings. 6 We now vacate and remand.


III



A


The colorful behavior described in the allegations requires a reminder that tax classifications like "dividend"and "return of capital" turn on "the objective economic realities of a transaction rather than...the particular form the parties employed," Frank Lyon Co. v. United States [ 78-1 USTC ¶9370], 435 U.S. 561, 573 (1978); a "given result at the end of a straight path is not made a different result...by following a devious path," Minnesota Tea Co. v. Helvering [ 38-1 USTC ¶9050], 302 U.S. 609, 613 (1938). 7 As for distributions with respect to stock, in economic reality a shareholder's informal receipt of corporate property "may be as effective a means of distributing profits among stockholders as the formal declaration of a dividend," Palmer v. Commissioner [ 37-2 USTC ¶9532], 302 U.S. 63, 69 (1937), or as effective a means of returning a shareholder's capital, see ibid. Accordingly, "[a] distribution to a shareholder in his capacity as such...is subject to §301 even though it is not declared in formal fashion." B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders ¶8.05[1], pp. 8-36 to 8-37 (6th ed. 1999) (hereinafter Bittker & Eustice); see also Gardner, The Tax Consequences of Shareholder Diversions in Close Corporations, 21 Tax L. Rev. 223, 239 (1966) (hereinafter Gardner) ("Sections 316 and 301 do not require any formal path to be taken by a corporation in order for those provisions to apply").

There is no reason to doubt that economic substance remains the right touchstone for characterizing funds received when a shareholder diverts them before they can be recorded on the corporation's books. While they "never even pass through the corporation's hands," Bittker & Eustice ¶8.05[9], p. 8-51, even diverted funds may be seen as dividends or capital distributions for purposes of §§301and 316(a), see Truesdell v. Commissioner [ CCH Dec. 44,500], 89 T.C. 1280 (1987) (treating diverted funds as "constructive" distributions in civil tax proceedings). The point, again, is that "taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed --the actual benefit for which the tax is paid." Corliss v. Bowers [ 2 USTC ¶525], 281 U.S. 376, 378 (1930); see also Griffiths v. Commissioner [ 40-1 USTC ¶9123], 308 U.S. 355, 358 (1939). 8


B


Miller's view that a criminal defendant may not treat a distribution as a return of capital without evidence of a corresponding contemporaneous intent sits uncomfortably not only with the tax law's economic realism, but with the particular wording of §§301 and 316(a), as well. As those sections are written, the tax consequences of a "distribution by a corporation with respect to its stock" depend, not on anyone's purpose to return capital or to get it back, but on facts wholly independent of intent: whether the corporation had earnings and profits, and the amount of the taxpayer's basis for his stock. Cf. Truesdell v. Commissioner, Internal Revenue Service (IRS) Action on Decision 1988-25, 1988 WL 570761 (Sept. 12, 1988) (recommendation regarding acquiescence); IRS Non Docketed Service Advice Review, 1989 WL 1172952 (Mar. 15, 1989) (reply to request for reconsideration) ("[I]ntent is irrelevant....[E]very distribution made with respect to a shareholder's stock is taxable as ordinary income, capital gain, or not at all pursuant to section 301(c) dependent upon the corporation's earnings and profits and the shareholder's stock basis. The determination is computational and not dependent upon intent").

When the Miller court went the other way, needless to say, it could claim no textual hook for the contemporaneous intent requirement, but argued for it as the way to avoid two supposed anomalies. First, the court thought that applying §§301 and 316(a) in criminal cases unnecessarily emphasizes the exact amount of deficiency while "completely ignor[ing] one essential element of the crime charged: the willful intent to evade taxes...." [ 76-2 USTC ¶9809] 545 F.2d, at 1214. But there is an analytical mistake here. Willfulness is an element of the crimes charged because the substantive provisions defining tax evasion and filing a false return expressly require it, see §7201 ("Any person who willfully attempts..."); §7206(1) ("Willfully makes and subscribes..."). The element of willfulness is addressed at trial by requiring the Government to prove it. Nothing in §§301 and 316(a) as written (that is, without an intent requirement) relieves the Government of this burden of proving willfulness or impedes it from doing so if evidence of willfulness is there. Those two sections as written simply address a different element of criminal evasion, the existence of a tax deficiency, and both deficiency and willfulness can be addressed straightforwardly (in jury instructions or bench findings) without tacking an intent requirement onto the rule distinguishing dividends from capital returns.

Second, the Miller court worried that if a defendant could claim capital treatment without showing a corresponding and contemporaneous intent,
"[a] taxpayer who diverted funds from his close corporation when it was in the midst of a financial difficulty and had no earnings and profits would be immune from punishment (to the extent 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 successful year and had earnings and profits." [ 76-2 USTC ¶9809] 545 F.2d, at 1214.

"Such a result," said the court, "would constitute an extreme example of form over substance." Ibid. The Circuit thus assumed that a taxpayer like Boulware could be convicted of evasion with no showing of deficiency from an unreported dividend or capital gain.

But the acquittal that the author of Miller called form trumping substance would in fact result from the Government's failure to prove an element of the crime. There is no criminal tax evasion without a tax deficiency, see supra, at 1-2, 9 and there is no deficiency owing to a distribution (received with respect to a corporation's stock) if a corporation has no earnings and profits and the value distributed does not exceed the taxpayer-shareholder's basis for his stock. Thus the fact that a shareholder distributee of a successful corporation may have different tax liability from a shareholder of a corporation without earnings and profits merely follows from the way §§301 and 316(a) are written (to distinguish dividend from capital return), and from the requirement of tax deficiency for a §7201 crime. Without the deficiency there is nothing but some act expressing the will to evade, and, under §7201,acting on "bad intentions, alone, [is] not punishable," United States v. D'Agostino [ 98-1 USTC ¶50,380], 145 F.3d 69, 73 (CA2 1998).

It is neither here nor there whether the Miller court was justified in thinking it would improve things to convict more of the evasively inclined by dropping the deficiency requirement and finding some other device to exempt returns of capital. 10 Even if there were compelling reasons extend §7201 to cases in which no taxes are owed, it bears repeating that "[t]he spirit of the doctrine which denies to the federal judiciary power to create crimes forthrightly admonishes that we should not enlarge the reach of enacted crimes by constituting them from anything less than the incriminating components contemplated by the words used in the statute," Morissette v. United States, 342 U.S. 246, 263 (1952) (opinion for the Court by Jackson, J.). If §301, §316(a), or §7201 could stand amending, Congress will have to do the rewriting.


C


Not only is Miller devoid of the support claimed for it,but it suffers the demerit of some anomalies of its own. First and most obviously, §§301 and 316 are odd stalks for grafting a contemporaneous intent requirement, given the fact that the correct application of their rules will often become known only at the end of the corporation's tax year, regardless of the shareholder's or corporation's understanding months earlier when a particular distribution may have been made. Section 316(a)(2) conditions treating a distribution as a constructive dividend by reference to earnings and profits, and earnings and profits are to be"computed as of the close of the taxable year...without regard to the amount of the earnings and profits at the time the distribution was made." A corporation may make a deliberate distribution to a shareholder, with everyone expecting a profitable year and considering the distribution to be a dividend, only to have the shareholder end up liable for no tax if the company closes out its tax year in the red (so long as the shareholder's basis covers the distribution); when such facts are clear at the time the reporting forms and returns are filed, 11 the shareholder does not violate §7201 by paying no tax on the moneys received, intent being beside the point. And since intent to make a distribution a taxable one cannot control, it would be odd to condition nontaxable return-of-capital treatment on contemporaneous intent, when the statute says nothing about intent at all.

The intent interpretation is strange for another reason, too (a reason in some tension with the Ninth Circuit's assumption that an unreported distribution without contemporaneous intent to return capital will support a conviction for evasion). The text of §301(a) ostensibly provides for all variations of tax treatment of distributions received with respect to a corporation's stock unless a separate provision of the Code requires otherwise. Yet Miller effectively converts the section into one of merely partial coverage, with the result of leaving one class of distributions in a tax status limbo in criminal cases. That is, while §301(a) expressly provides that distributions made by a corporation to a shareholder with respect to its stock "shall be treated in the manner provided in [ §301(c)]," under Miller, a distribution from a corporation without earnings and profits would fail to be a return of capital for lack of contemporaneous intent to treat it that way; but to the extent that distribution did not exceed the taxpayer's basis for the stock (and thus become a capital gain), §301(a) would leave the distribution unaccounted for.

It is no answer to say that §61(a) of the Code would step in where §301(a) has been pushed out. Although §61(a) defines gross income, "[e]xcept as otherwise provided," as "all income from whatever source derived," the plain text of §301(a) does provide otherwise for distributions made with respect to stock. So using §61(a) as a stopgap would only sanction yet another eccentricity: §301(a) would be held not to cover what its text says it "shall" (the class of distributions made with respect to stock for which no other more specific provision is made), while §61(a) would need to be applied to what by its terms it should not be (a receipt of funds for which tax treatment is "otherwise provided" in §301(a)).

The implausibility of a statutory reading that either creates a tax limbo or forces resort to an a textual stopgap is all the clearer from the Ninth Circuit's discussion in this case of its own understanding of the consequences of Miller's rule: the court openly acknowledged that "imposing an intent requirement creates a disconnect between civil and criminal liability," [ 2007-1 USTC ¶50,516] 470 F.3d, at 934. In construing distribution rules that draw no distinction in terms of criminal or civil consequences, the disparity of treatment assumed by the Court of Appeals counts heavily against its contemporaneous intent construction (quite apart from the Circuit's understanding that its interpretation entails criminal liability for evasion without any showing of a tax deficiency).

Miller erred in requiring a contemporaneous intent to treat the receipt of corporate funds as a return of capital,and the judgment of the Court of Appeals here, relying on Miller, is likewise erroneous.


IV


The Government has raised nothing that calls for affirmance in the face of the Court of Appeals's reliance on Miller. The United States does not defend differential treatment of criminal and civil cases, see Brief for United States 24, and it thus stops short of fully defending the Ninth Circuit's treatment. The Government's argument,instead, is that we should affirm under the rule that before any distribution may be treated as a return of capital (or, by a parity of reasoning, a dividend), it must first be distributed to the shareholder "with respect to...stock." Id., at 19 (internal quotations omitted). The taxpayer's intent, the Government says, may be relevant to this limiting condition, and Boulware never expressly claimed any such intent. See ibid. ("[I]ntent is...relevant to whether a payment is a `distribution...with respect to [a corporation's] stock' "); but see Tr. of Oral Arg. 44 ("[J]ust to be clear, the Government is arguing for an objective test here").

The Government is of course correct that "with respect to...stock" is a limiting condition in §301(a). See supra, at 2-3. 12 As the Government variously says, it requires that "the distribution of property by the corporation be made to a shareholder because of his ownership of its stock," Brief for United States 16; and that "`an amount paid by a corporation to a shareholder [be] paid to the shareholder in his capacity as such,' " ibid. (quoting 26 CFR §1.301-1(c) (2007) (emphasis deleted)).

This, however, is not the time or place to home in on the"with respect to...stock" condition. Facts with a bearing on it may range from the distribution of stock ownership 13 to conditions of corporate employment (whether, for example, a shareholder's efforts on behalf of a corporation amount to a good reason to treat a payment of property as salary). The facts in this case have yet to be raked over with the stock ownership condition in mind, since Miller seems to have pretermitted a full consideration of the defensive proffer, and if consideration is to be given to that condition now, the canvas of evidence and Boulware's proffer should be made by a court familiar with the whole evidentiary record. 14

As a more specific version of its "with respect to...stock" position, the Government says that the diversions of corporate funds to Boulware were in fact unlawful, see Brief for United States 34-37; see also n. 5, supra, and it argues that §§301 and 316(a) are inapplicable to illegal transfers, see Brief for United States 34-37; see also D'Agostino [ 98-1 USTC ¶50,380], 145 F.3d, at 73 ("[T]he `no earnings and profits, no income' rule would not necessarily apply in a case of unlawful diversion, such as embezzlement, theft, a violation of corporate law, or an attempt to defraud third party creditors" (emphasis in original)); see also n. 8, supra. The Government goes so far as to claim that "[t]he only rational basis for the jury's judgment was a conclusion that [Boulware] unlawfully diverted the funds." Brief for United States 37.

But we decline to take up the question whether an unlawful diversion may ever be deemed a "distribution...with respect to [a corporation's] stock," a question which was not considered by the Ninth Circuit. We do, however, reject the Government's current characterization of the jury verdict in Boulware's case. True, the jurors were not moved by Boulware's suggestion that the diversions were corporate advances or loans, or that he was using the funds for corporate purposes. But the jury was not asked,and cannot be said to have answered, whether Boulware breached any fiduciary duty as a controlling shareholder,unlawfully diverted corporate funds to defraud his wife, or embezzled HIE's funds outright.


V


Sections §§301 and 316(a) govern the tax consequences of constructive distributions made by a corporation to a shareholder with respect to its stock. A defendant in a criminal tax case does not need to show a contemporaneous intent to treat diversions as returns of capital before relying on those sections to demonstrate no taxes are owed. The judgment of the Court of Appeals is vacated, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

1 A related provision, 26 U. S. C. §7206(1), criminalizes the willful filing of a tax return believed to be materially false. See n. 9, infra.

2 "[T]he elements of §7201 are willfulness[,] the existence of a tax deficiency,...and an affirmative act constituting an evasion or attempted evasion of the tax." Sansone v. United States [ 65-1 USTC ¶9307], 380 U.S. 343, 351 (1965). The Courts of Appeals have divided over whether the Government must prove the tax deficiency is "substantial," see United States v. Daniels, 387 F.3d 636, 640-641, and n. 2 (CA7 2004) (collecting cases); we do not address that issue here.

3 Although the Code does not "comprehensively define `earnings and profits,'" 4 B. Bittker & L. Lokken, Federal Taxation of Income, Estates and Gifts ¶92.1.3, p.92-6 (3d ed. 2003) (hereinafter Bittker & Lokken), the "[p]rovisions of the Code and regulations relating to earnings and profits ordinarily take taxable income as the point of departure," id., at 92-9.

4 The trial at issue in this case was actually Boulware's second trial on §§7201 and 7206(1) charges, his convictions on those counts in an earlier trial having been vacated by the Ninth Circuit for reasons not a tissue here, see 384 F.3d 794 (2004). In that earlier trial, Boulware was also convicted of conspiracy to make false statements to a federally insured financial institution, in violation of 18 U. S. C. §371. The Ninth Circuit affirmed Boulware's conspiracy conviction that first time around, however, so the present trial did not include a conspiracy charge.

5 Judge Thomas went on to say that the Government would prevail even without Miller's rule because, in his view, Boulware's diversions were "unlawful," and the return-of-capital rules would not apply to diversions made for unlawful purposes. See [ 2007-1 USTC ¶50,516] 470 F.3d, at 938-939.

6 As noted, the Ninth Circuit holds that §§301 and 316(a) are not to be consulted in a criminal tax evasion case until the defendant produces evidence of an intent to treat diverted funds as a return of capital at the time it was made. See [ 2007-1 USTC ¶50,516] 470 F.3d 931 (2006) (case below). By contrast, the Second Circuit allows a criminal defendant to invoke §§301 and 316(a) without evidence of a contemporaneous intent to treat such moneys as returns of capital. See United States v. Bok [ 98-2 USTC ¶50,765], 156 F.3d 157, 162 (1998) ( "[I]n return of capital cases, a taxpayer's intent is not determinative in defining the taxpayer's conduct"). Meanwhile, the Third, Sixth, and Eleventh Circuits arguably have taken the position that §§301 and 316(a) are altogether inapplicable in criminal tax cases involving informal distributions. See United States v. Williams [ 89-2 USTC ¶9390], 875 F.2d 846, 850-852 (CA11 1989); United States v. Goldberg [ 64-1 USTC ¶9316], 330 F.2d 30, 38 (CA3 1964); Davis v. United States [ 55-2 USTC ¶9685], 226 F.2d 331, 334-335 (CA6 1955); but see Brief for Petitioner 16 ( "[T]hese cases can be read to address the allocation of the burden of proof on the return of capital issue, rather than the applicable substantive principles").

7 We have also recognized that "[t]he legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted." Gregory v. Helvering [ 35-1 USTC ¶9043], 293 U.S. 465, 469 (1935). The rule is a two-way street: "while a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not,...and may not enjoy the benefit of some other route he might have chosen to follow but did not," Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974); see also id., at 148 (referring to "the established tax principle that a transaction is to be given its tax effect in accord with what actually occurred and not in accord with what might have occurred"); Founders Gen. Corp. v. Hoey, 300 U.S. 268, 275 (1937) ( "To make the taxability of the transaction depend upon the determination whether there existed an alternative form which the statute did not tax would create burden and uncertainty"). The question here, of course, is not whether alternative routes may have offered better or worse tax consequences, see generally Isenbergh, Review: Musings on Form and Substance in Taxation, 49 U. Chi. L. Rev. 859 (1982); rather, it is "whether what was done...was the thing which the statute[, here §§301 and 316(a),] intended," Gregory, supra, at 469.

8 Thus in the period between this Court's decisions in Commissioner v. Wilcox [ 46-1 USTC ¶9188], 327 U.S. 404 (1946) (holding embezzled funds to be nontaxable to the embezzler) and James v. United States [ 61-1 USTC ¶9449], 366 U. S. 213 (1961) (overruling Wilcox, holding embezzled funds to be taxable income), the Government routinely argued that diverted funds were "constructive distributions," taxable to the recipient as dividends. See generally Gardner 237 ( "While Wilcox was good law, the safest way to insure that both the corporation and the shareholder would be taxed on their respective gain from the diverted funds was to label them dividends"); 4 Bittker & Lokken ¶92.2 (7), p. 92-23, n. 37.

9 Boulware was also convicted of violating §7206(1), which makes it a felony "[w]illfully [to] mak[e] and subscrib[e] any 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 [the taxpayer]does not believe to be true and correct as to every material matter." He argues that if the Ninth Circuit erred, its error calls into question not only his §7201 conviction, but his §7206(1) conviction as well. Brief for Petitioner 15-16. Although the Courts of Appeals are unanimous in holding that §7206(1) "does not require the prosecution to prove the existence of a tax deficiency," United States v. Tarwater, 308 F. 3d 494, 504 (CA6 2002); see also United States v. Peters, 153 F.3d 445, 461 (CA7 1998) (collecting cases), it is arguable that "the nature and character of the funds received can be critical in determining whether ... §7206(1) has been violated, [even if] proof of a tax deficiency is unnecessary," 1 I. Comisky, L. Feld, & S. Harris, Tax Fraud & Evasion ¶2.03[5], p. 21 (2007); see also Brief for Petitioner 15-16. The Government does not argue that Boulware's §§7201 and 7206(1) convictions should be treated differently at this stage of the proceedings, however, and we will accede to the Government's working assumption here that the §§7201 and 7206(1) convictions stand or fall together.

10 "A better [method of exempting returns of capital from taxation]could no doubt be devised." 4 Bittker & Lokken ¶92.1.1, p. 92-3; see ibid. (suggesting, for example, that "all receipts from a corporation could be treated as taxable income, and a correction for any resulting over taxation could be made in computing gain or loss when stock is sold, exchanged, or becomes worthless"); see also Andrews, "Out of its Earnings and Profits": Some Reflections on the Taxation of Dividends, 69 Harv. L. Rev. 1403, 1439 (1956) (criticizing the earnings and profits concept "[a]s a device for separating income from return of capital," and suggesting that "[d]istributions which ought to be treated as return of capital [could] be brought within the concept of a partial liquidation by special provision").

11 Sometimes these facts are not clear, and in certain circumstances a corporation may be required to assume it is profitable. For example, the instructions to IRS Form 1099-DIV provide that when a corporation is unsure whether it has sufficient earnings and profits at the end of the taxable year to cover a distribution to shareholders, "the entire payment must be reported as a dividend." See http://www.irs.gov/pub/irs-pdf/i1099div.pdf (as visited Feb. 15, 2008, and available in Clerk of Court's case file).

12 Another limiting condition is that the diversion of funds must be a "distribution" in the first place (regardless of the "with respect to stock" limitation), see supra, at 6-8, though the Government is content to assume that §301(a)'s "distribution" language is capacious enough to cover the diversions involved here, and that if Boulware bears the burden of production in going forward with the defense that the funds he received constituted a "distribution" within the meaning of §301(a), see n. 14, infra, that burden has been met. Nor does the Government dispute that Boulware offered sufficient evidence of his basis and HIE's lack of earnings and profits. See Brief for United States 34, n. 11.

13 See, e.g., Truesdell v. Commissioner, IRS Non Docketed Service Advice Review, 1989 WL 1172952 (Mar. 15, 1989) ( "We believe a corporation and its shareholders have a common objective --to earn a profit for the corporation to pass onto its shareholders. Especially where the corporation is wholly owned by one shareholder, the corporation becomes the alter ego of the shareholder in his profit making capacity....[B]y passing corporate funds to himself as shareholder, a sole shareholder is acting in pursuit of these common objectives"). We note, however, that although Boulware was not a sole shareholder, the Tax Court has taken it as "well settled that a distribution of corporate earnings to shareholders may constitute a dividend," and so a return of capital as well, "notwithstanding that it is not in proportion to stock-holdings." Dellinger v. Commissioner [ CCH Dec. 23,749], 32 T.C. 1178, 1183 (1959); see ibid. (noting that because other stockholders did not complain when a taxpayer received unequal property, "under the circumstances they must be deemed to have ratified the distribution"); see also Crowley v. Comissioner [ 92-1 USTC ¶50,235], 962 F.2d 1077 (CA1 1992); Lengsfield v. Commissioner [ 57-1 USTC ¶9437], 241 F.2d 508 (CA5 1957); Baird v. Commissioner [ CCH Dec. 21,363], 25 T. C. 387 (1955); Thielking v. Commissioner [ CCH Dec. 43,891(M)], 53 TCM 746 (1987), ¶87, 227, P-H Memo TC.

14 Boulware does not dispute that he bears the burden of producing some evidence to support his return-of-capital theory, including evidence that the corporation lacked earnings and profits and that he had sufficient basis in his stock to cover the distribution. See Tr. of Oral Arg. 53. He instead argues that, as to the "with respect to... stock"requirement, it suffices to show "[t]hat he is a stockholder, and that he did not receive this money in any non stockholder capacity." Id., at 57. The Government, for its part, on the authority of Holland v. United States [ 54-2 USTC ¶9714], 348 U.S. 121 (1954) and Bok [ 98-2 USTC ¶50,765], 156 F.3d, at 163-164, argues that Boulware must offer more evidence than that. We express no view on that issue here, just as we decline to consider the more general question whether the Second Circuit's rule in Bok, which places on the criminal defendant the burden to produce evidence in support of a return-of-capital theory, is authorized by Holland and consistent with Sandstrom v. Montana, 442 U.S. 510 (1979), and related cases.
United States of America, Plaintiff-Appellee v. Michael H. Boulware, Defendant-Appellant.

U.S. Court of Appeals, 9th Circuit; 05-10752, December 13, 2006, 470 F3d 931.

Affirming an unreported DC Hawaii decision.

[ Code Secs. 7201 and 7206]

Crimes: Tax evasion: False tax returns: Evidence: Increased sentence: Diversion of corporate funds: Return of capital. --
An individual was properly convicted and sentenced by a federal district court for tax evasion and for filing a false tax return in connection with his failure to report funds diverted from his closely held corporation as income for the tax years at issue. The court correctly refused to admit evidence allegedly showing the diverted funds were nontaxable returns of capital. The constructive distribution rules that apply to civil matters do not apply to criminal matters absent some showing that the distributions were intended to be a return of capital. The taxpayer 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 diverted. The taxpayer's increased sentence upon retrial was objectively justified in light of the additional evidence adduced. The testimony showed that the individual continued to engage in fraudulent activities even after he knew about the government's investigation.

Before: Rymer and Thomas, Circuit Judges, and Larson * , District Judge.


OPINION


Opinion by Judge Rymer; Concurrence by Judge Thomas


OPINION


RYMER, Circuit Judge: In a return trip following retrial after we reversed his first conviction, United States v. Boulware, 384 F.3d 794 (9th Cir. 2003) ( Boulware I), Michael H. Boulware appeals his conviction and sentence for filing a false tax return in violation of 26 U.S.C. §7206(1), tax evasion in violation of 26 U.S.C. §7201, and conspiracy to make a false statement to influence a financial institution in violation of 18 U.S.C. §1014. We conclude there is no reversible error, and affirm.


I


Without belaboring the background recited in our prior opinion, Boulware is the founder, former President, and majority owner of a closely held corporation, Hawaiian Isles Enterprises (HIE). HIE dealt in tobacco distribution, coffee processing and sales, arcade games, vending machines, and bottled water. A second superceding indictment charged Boulware with thirteen (later reduced to nine) counts of tax evasion and tax fraud in connection with his failure to report funds diverted from HIE as income for the years 1989-97; one count of conspiracy to make a false statement to influence a financial institution in connection with HIE's use of false invoices in applying for a loan from GECC Finance Corporation; and four counts of making a false statement to influence a financial institution in connection with the false invoices. Boulware was convicted on the tax counts and the conspiracy count, which we reversed on the ground that the district court had erroneously excluded evidence of a Hawaii state court's adjudication of property rights in certain funds diverted from HIE. Boulware I, 384 F.3d at 800-09. On retrial as originally, the government's theory was that during the period 1989- 1997, through a number of different devices, Boulware diverted more than $10 million from HIE and failed to report or pay taxes on this income; and that he used fraudulent invoices in applying for a bank loan. He was convicted on all counts. The district court again sentenced Boulware to 36 months' imprisonment on the false return counts, but increased the sentence from 51 to 60 months on the tax evasion and conspiracy counts, all to run concurrently.

Boulware timely appeals.


II


Boulware first claims that the district court erred in excluding evidence that he contends would have shown that the funds he took from HIE were nontaxable returns of capital rather than income. An essential element of the crime of tax evasion is the existence of a tax deficiency. Boulware I, 384 F.3d at 810. However, for purposes of civil tax liability, when a distribution from a corporation to its shareholder constitutes a return of capital, that distribution is normally not taxable. 26 U.S.C. §§301, 306; United States v. Miller [ 76-2 USTC ¶9809], 545 F.2d 1204, 1210-12 & n.5 (9th Cir. 1976). Hence, to negate the tax deficiency element, Boulware sought to show that the money he received from HIE constituted returns of the capital he had invested as the corporation was, at the time, without earnings or profits. The government moved in limine to preclude a "return of capital" defense, relying on Miller. There, we held that constructive distribution rules applicable in the civil arena could not be automatically applied to a criminal tax matter in the absence of some demonstration on the part of the defendant or corporation that distributions were intended to be a return of capital. Id. at 1214-15. In response, Boulware argued that whether corporate funds could be characterized as a return of capital is a question of fact for the jury, and he proffered testimony of an expert who would explain that if the monies transferred from HIE to Boulware were not loans or advances, or if Boulware did not use those funds for corporate purposes, then the transfer could be deemed a constructive dividend or return of capital to Boulware which may or may not be income to him depending upon whether HIE had earnings and profits for the years when the transfers occurred. The district court ruled that this offer of proof did not meet the Miller threshold because the defendant must show not merely that the funds could have been a return of capital, but that the funds were in fact a return of capital at the time of the transfer.

Boulware contends that the district court misread Miller. In his view, the issue in Miller was whether the evidence was sufficient to convict the taxpayer in spite of his return of capital defense, not whether the taxpayer had made a sufficient initial showing to introduce evidence pertaining to that defense; thus, the rest of Miller --upon which the district court relied --is dicta. We disagree that any part of Miller's reasoning can be disregarded. See Baripind v. Enomoto, 400 F.3d 744, 750-51 (9th Cir. 2005) (holding that what a majority opinion says regarding an issue presented for review is the law of the circuit, regardless of whether or not it is "in some technical sense 'necessary' to the disposition in the case"). Boulware concedes that Miller controls if this is so. Accordingly, his alternative position that imposing an intent requirement creates a disconnect between civil and criminal liability necessarily fails. We held in Miller that the characterization of diverted corporate funds for civil tax purposes does not dictate their characterization for purposes of a criminal tax evasion charge; rather, the appropriate characterization for criminal purposes is whether the defendant has willfully attempted to evade the payment or assessment of a tax. [ 76-2 USTC ¶9809] 545 F.2d at 1214. As we explained, "[w]here 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 different course." Id. Boulware's reliance on Truesdell v. Commissioner [ CCH Dec. 44,500], 89 T.C. 1280 (1987), where the U.S. Tax Court held that funds diverted from a corporation in excess of earnings and profits were returns of capital, is misplaced because Truesdell was a civil proceeding and thus inapposite given Miller's explicit holding that civil classifications of diverted corporate funds do not control in criminal cases. See also United States v. Williams [ 89-2 USTC ¶9390], 875 F.2d 846, 849-52 (11th Cir. 1989) (approving Miller despite Truesdell and distinguishing between civil and criminal contexts); United States v. Schmidt [ 93-1 USTC ¶50,074], 935 F.2d 1440, 1446 (4th Cir. 1991) (noting that "[t]he important distinction between civil and criminal tax cases concerning the key element to be focused upon is compellingly set out in [ Miller].").

Boulware also posits that requiring a defendant in a criminal case to show that a distribution was intended to be a return of capital unconstitutionally shifts the burden of proof to the defendant, but again, we held in Miller and Boulware I that once the government has shown that the taxpayer diverted funds from the corporation and failed to report them, the burden shifts to the taxpayer to show that the funds constituted a return of capital. Boulware I, 384 F.3d at 811 (citing Miller [ 76-2 USTC ¶9809], 545 F.2d at 1215 & n.13). Like the defendant in Miller, Boulware "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." Id. at 1215. Nor were any adjustments made to HIE's books showing a return of capital to Boulware, or to his coshareholder. See id. at 1214 n.12. Accordingly, the district court properly required a foundation to be laid before allowing the asserted defense to go forward, and properly rejected Boulware's proffer as inadequate.

Finally, Boulware points out that accepting the district court's interpretation of Miller puts us in conflict with the Second Circuit, which has held that a taxpayer need not show that the distribution was characterized as a return of capital at the time of the transaction. See United States v. D'Agostino [ 98-1 USTC ¶50,380], 145 F.3d 69, 72-73 (2d Cir. 1998); United States v. Bok [ 98-2 USTC ¶50,765], 156 F.3d 157, 162 (2d Cir. 1998) (holding that a showing that a corporation had no earings and profits is sufficient to support a return of capital defense, but acknowledging that this is a departure from the prevailing view among federal courts). Whether or not the facts in this case would implicate the Second Circuit's rule, which is by no means certain, we are satisfied that the district court correctly interpreted and applied Miller by which it, and we, are bound.


III


Secondly, Boulware challenges exclusion of evidence that he believes would have shown that HIE overpaid tobacco taxes and was simply making up for the overpayment by under-reporting income. The district court sustained a relevance objection to testimony by Boulware's attorney regarding advice he had given Boulware about payment of these taxes, and to testimony by HIE's controller regarding tax adjustments made on HIE's books. Boulware himself, however, was allowed to testify that HIE had been overpaying its tobacco taxes and had tried to recoup these overpayments by underpaying in subsequent periods and adjusting its books accordingly. He admitted that this was "self-help," and testified that he did not understand the increase in HIE's income to have any effect on his own taxes.

We discern no error. Boulware failed before the district court to link the excluded testimony about HIE's tobacco taxes to his personal income taxes, and fares no better before us. His suggestion that tobacco tax evidence was probative of intent lacks factual or legal support. In any event, nothing about it indicates that Boulware did not have income that he failed to report on his personal return. Although the court allowed some exploration of the subject at Boulware's behest, it retained discretion to curtail the extent of it. As the subject itself lacked relevance, the court likewise properly refused to read HRS 245-7 to the jury; whether or not HIE's method of tax recovery was legal under state law had no bearing on whether Boulware was guilty of federal tax evasion or tax fraud.


IV


Boulware next asserts that the court's receipt of a summary exhibit categorizing and organizing a series of schedules listing each financial transaction pertaining to his taxable income over the relevant period offended Rule 1006 of the Federal Rules of Evidence. The government introduced the compilation (Exhibit 3300) through its summary witness, IRS Agent Randall Tanahara. Boulware objected on the ground that Exhibit 3300 was cumulative and not allowed of a summary witness. The court overruled the objection. Later, Boulware moved to strike the exhibit on the ground that it merely summarized evidence already in the record, which the court denied. Boulware did not (and does not) dispute the accuracy of the information contained in the schedules. The jury was instructed that charts and summaries are only as good as the underlying supporting material admitted into evidence, and that the jury should give them only such weight as it thinks the underlying material deserves.

Boulware relies on United States v. Wood [ 91-2 USTC ¶50,432], 943 F.2d 1048 (9th Cir. 1991), United States v. Soulard [ 84-1 USTC ¶9386], 730 F.2d 1292 (9th Cir. 1984), and United States v. Abbas [ 74-2 USTC ¶9755], 504 F.2d 123 (9th Cir. 1974), as articulating a bright-line rule against admission of summary charts as evidence. There is no question that, as Wood, Soulard, and Abbas indicate, we do not approve of receiving summary exhibits of material already in evidence; however, in none of these cases did we reverse for this reason. Moreover, we have elsewhere recognized a district court's discretion under Fed. R. Evid. 611(a) to admit summary exhibits for the purpose of assisting the jury in evaluating voluminous evidence. See, e.g., United States v. Poschwatta [ 87-2 USTC ¶9565], 829 F.2d 1477, 1481 (9th Cir. 1987) (holding that admission of a chart summarizing income figures already admitted into evidence, while perhaps not the best practice, was not an abuse of discretion); United States v. Gardner [ 80-1 USTC ¶9390], 611 F.2d 770, 776 (9th Cir. 1980) (holding that admission of a chart summarizing the defendant's financial status was well within the discretion of the trial court pursuant to Fed. R. Evid. 611(a)). Here, the court no doubt believed that it would be helpful to have the voluminous financial materials reduced to summary form (even though, as it happens, the summary was 116 pages long). Nevertheless, we do not need either to embrace or condemn the procedure followed in this case because, even if it were error to allow the summary exhibit into evidence, the error is harmless given admissibility of the underlying data, lack of objection to accuracy of the summary, and the limiting instruction. See United States v. Krasn, 614 F.2d 1229, 1238 (9th Cir. 1980) (holding that charts should not have been admitted, but that it was harmless error as the defendant had an opportunity to challenge the facts and data upon which the charts were based and the court gave a limiting instruction); Gardner [ 80-1 USTC ¶9390], 611 F.2d at 776 (noting the defendant's opportunity to cross-examine the government witness who prepared the chart and finding no reversible error in admission of chart); Abbas [ 74-2 USTC ¶9755], 504 F.2d at 125 (same).


V


The government questioned Boulware during cross-examination about a letter that he had written to his girlfriend, Jin Sook Lee, soon after divorcing his wife in 1994. The letter referred to gifts Boulware had bought for Lee, including a diamond that he testified was purchased with a credit card. The letter was not received into evidence. A 1991 invoice with the name "Gina Lee" reflecting sale of a 5.03 carat diamond for $70,000 was in evidence; this purchase was evidently by cashier's check. The Assistant United States Attorney (AUSA) argued in closing that, based on his recollection, Boulware had "lied to you during the course of this case" about how he bought the diamond and that if he would lie about how he bought a diamond for $70,000, he would lie about how he got $10 million. The day after closing arguments were concluded, Boulware moved for a mistrial, or alternatively, for an instruction about the government's misstatement. The court denied both requests. It found that the AUSA simply made a mistake in good faith and that, assuming the argument was improper, it was not prejudicial because it was but a single part of an extensive litany of evidence showing Boulware's lack of veracity, it had to do with a fifteen-year old event, and the AUSA stated that he was only relating his own recollection.

Even if the AUSA's recollection --thus his statement to the jury --were incorrect, the district court did not clearly err in its findings or abuse its discretion in denying Boulware's requests. The inaccuracy of the AUSA's characterization was not immediately apparent, and the record was somewhat ambiguous given references to different diamond purchases. Regardless, it is unlikely that the statements materially affected the trial. The jury was instructed that statements of counsel are not evidence, and that the jury's recollection of the evidence controls. See United States v. Kerr, 981 F.2d 1050, 1053 (9th Cir. 1992) (observing that "[t]o determine whether the prosecutor's misconduct affected the jury's verdict, we look first to the substance of a curative instruction."). The point was but one of many made in closing about Boulware's credability. And the evidence against Boulware was strong. See United States v. Weatherspoon, 410 F.3d 1142, 1151 (9th Cir. 2005) (noting importance of the strength of the case against a defendant in measuring prejudicial effect of improper statements).


VI


We reversed Boulware's first conviction because the district court had erroneously excluded evidence of a state court judgment establishing that money Boulware had taken from HIE and given to Lee was not a gift to her, but rather belonged to HIE and was being held in trust by Lee. Boulware I, 384 F.3d at 798, 800. Although we held that the judgment was relevant, we also rejected Boulware's argument that it was controlling on the issue of whether the money held by Lee belonged to HIE and was therefore not taxable to him. The district court on retrial received the state court judgment into evidence, but it instructed the jury that the state court judgment determined that the money that Boulware transferred to Lee remained the property of HIE; that this determination was not binding on the jury; but that the judgment could be considered in determining the purpose of the transfer and whether it constituted unreported income to Boulware.

Boulware now maintains that the state court judgment resolving the property dispute between Lee and HIE is binding on the federal courts and, additionally, that Boulware I was wrong in concluding otherwise. However, Boulware I is the law of the case, and controlling. Jeffries v. Wood, 114 F.3d 1484, 1489 (9th Cir. 1998) (en banc). Under our mandate, "the district court did not err in ruling that the state court judgment does not have preclusive effect as to the ownership of the monies." Boulware I, 384 F.3d at 805. The court's instructions on remand were faithful to Boulware I, and thus were not erroneous.


VII


Boulware's press for reversal based on cumulative error fails as there is no accumulation.


VIII


Boulware raises two issues with respect to his sentence. First, he contends that the court's imposing a 60-month term of custody on the tax evasion and conspiracy counts is vindictive given that his original sentence on these counts, before reversal, was to 51 months. We disagree. Different evidence was adduced upon retrial. For example, Nathan Suzuki testified about Boulware's continuing fraudulent activities even after he knew about the government's investigation. Additional evidence could lead the district judge to find that an increased sentence was objectively justified. Wasman v. United States, 468 U.S. 559, 565 (1984).

Additionally, Boulware argues that his sentence of 60 months on the conspiracy conviction is unreasonable and must be vacated if the tax counts are reversed. As we affirm conviction on the tax counts, the premise of Boulware's challenge to the conspiracy sentence disappears.

AFFIRMED.


[Concurring Opinion]


THOMAS, Circuit Judge, concurring: I agree entirely with the analysis and conclusions of the majority. I write separately only to comment that if we were writing on a clean slate, rather than under the controlling precedent of United States v. Miller [ 76-2 USTC ¶9809], 545 F.2d 1204, 1211-15 (9th Cir. 1976), I would adopt the approach of the Second Circuit concerning the return to capital defense. See United States v. Bok [ 98-2 USTC ¶50,765], 156 F.3d 157, 162 (2d Cir. 1998); United States v. D'Agostino [ 98-1 USTC ¶50,380], 145 F.3d 69, 72-73 (2d Cir. 1998).

I believe the Second Circuit's analysis is more consistent with the statutory requirements of criminal tax evasion. The elements of criminal tax evasion under 26 U.S.C. §7201 are: "(1) the existence of a tax deficiency, (2) willfulness in attempted evasion of taxes, and (3) an affirmative act constituting an evasion or attempted evasion." United States v. Marabelles [ 84-1 USTC ¶9189], 724 F.2d 1374, 1380 (9th Cir. 1984). Thus, an explicit requirement to impose liability under §7201 is "the existence of a tax deficiency." As the majority opinion notes, notwithstanding a taxpayer's wrongful intent regarding diverted income, a sole shareholder of a company cannot be held civilly liable for any distribution that exceeds the earnings and profits of the corporation and that does not exceed the shareholders adjusted basis in the stock --instead such diversions are considered a return of the shareholder's capital investment. Truesdell v. Commissioner [ CCH Dec. 44,500], 89 T.C. 1280, 1294- 95 (T.C. 1987) (relying on 26 U.S.C. §§301, 306). See also United States v. Miller [ 76-2 USTC ¶9809], 545 F.2d 1204, 1210-12 & n.5 (9th Cir. 1976). Thus, Miller --and now the majority opinion --hold that a defendant may be criminally sanctioned for tax evasion without owing a penny in taxes to the government. Not only does this result indicate a logical fallacy, but is in flat contradiction with the tax evasion statute's requirement of "the existence of a tax deficiency." Marabelles [ 84-1 USTC ¶9189], 724 F.2d at 1380. Therefore, without the constriction of Miller, I would hold that the Second Circuit approach to the return to capital defense is the better one, adopting the approach that "the return of capital theory applies equally in both criminal and civil cases, assuming the diversion itself was not unlawful." Bok [ 98-2 USTC ¶50,765], 156 F.3d at 162 (citing D'Agostino [ 98-1 USTC ¶50,380], 145 F.3d at 72-73).

I emphasize that even if we were to apply Bok and D'Agostino to the case at hand, the outcome would not be affected. Bok expressly holds that the return to capital defense does not apply if the diversion itself were unlawful. Bok [ 98-2 USTC ¶50,765], 156 F.3d at 162. More broadly, the Internal Revenue Service does not consider distributions to be a return to capital if made for unlawful purposes. Truesdale [ CCH Dec. 44,500], 89 T.C. at 1298 (only permitting the return to capital defense after determining that the diversions "were not per se unlawful[,] ... not, at least on their face, stolen, embezzled or diverted in fraud of creditors"). Because Boulware claimed that the diversions were made to defraud his ex-wife from her share of property in the divorce proceedings, these diversions may be properly considered unlawful. United States v. Boulware, 384 F.3d 794, 801 (9th Cir. 2004). In addition, the record indicates that Boulware was not a sole shareholder of HIE, which would also likely preclude him from asserting a return to capital defense. See Truesdale [ CCH Dec. 44,500], 89 T.C. at 1282 (petitioner was president and sole shareholder of the company from which funds were diverted); Bok [ 98-2 USTC ¶50,765], 156 F.3d at 160 (similarly applying the return to capital defense in the context of a sole shareholder).

* The Honorable Stephen G. Larson, United States District Judge for the Central District of California, sitting by designation.



[76-2 USTC ¶9809]United States of America, Appellee v. Marvin Miller, Appellant
(CA-9), U. S. Court of Appeals, 9th Circuit, No. 75-3016, 545 F2d 1204, 11/10/76, Affirming unreported District Court decision

[Code Secs. 61, 301, 316, 7201, and 7206--result unchanged under '76 Tax Reform Act]

Criminal penalties: Evasion of tax: False returns: Shareholder diversion in close corporation: No corporate earnings and profits.--Funds of a closely held corporation that were diverted to its effective owner, or to third parties on his behalf, constituted ordinary income to him rather than a constructive return of capital. This conclusion was not affected by the absence of corporate earnings and profits, or by a showing that the taxpayer's basis in the stock of the corporation exceeded the amount of funds diverted to him. The essence of the crimes charged was the willful concealment of income, irrespective of the nature of the income. Nor did it matter that a contrary result might have been reached in a civil tax fraud case involving the identical facts. .
Before BARNES and ELY, Circuit Judges, and VAN PELT, * District Judge.
Opinion
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). 1
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 of adult books, films and devices to the general public by mail order and to wholesale distributors. Miller dominated and controlled Covina, for which he received a set salary. He purchased 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. 2
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 by Miller. About $298,000.00 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 government 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 payments 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 years considered 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 selfserving statement is worth), he later testified that the sole purpose of all of his concealment activities was to hide his income from his creditors and not to cheat the government. 3 Miller 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 accountant'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 occurred during the year. 4 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 Revenue 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 6 and hence the distribution had no substantial tax consequences. 7 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 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 insufficient evidence to establish that he intentionally filed false corporate returns for Covina. 8
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 conviction 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 taxpayer intended to evade and defeat his taxes. Goldberg v. United States [64-1 USTC ¶9316], 330 F. 2d 30, 40 (3rd Cir.), cert. denied, 377 U. S. 953 (1964); Simon v. C. I. R. [57-2 USTC ¶9989], 248 F. 2d 869, 876 (8th Cir. 1957); Drybrough v. C. I. R. [57-1 USTC ¶9212], 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 I. R. C. §§ 301(c) and 316(a). See, e.g., O'Rourke v. United States [65-2 USTC ¶9506], 347 F. 2d 124, 127 (9th Cir. 1965). Because dividends 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, 347 F. 2d at 127-28; Hartman v. United States [57-2 USTC ¶9726], 245 F. 2d 349, 352-53 (8th Cir. 1957). However, where, as here, there are no corporate earnings and profits from which a dividend could be paid, the classification of the diverted funds becomes more critical. 9 If the corporation has no earnings and profits and if the taxpayer's cost basis of the stock exceeds the amount of the diverted funds, the application 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 characterization of the $197,000.00 in direct and indirect payments to him as salary rather than constructive corporate distributions. 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), subscribing 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. 10 Consequently, those issues are not dealt with herein because the trial court's characterization is not in error.
As support for his argument that funds diverted by a taxpayer from his close corporation must be treated as constructive distributions, Miller basically argues that most courts have traditionally 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. C. I. R. [66-2 USTC ¶9743], 368 F. 2d 439, 442 (9th Cir. 1966); DiZenzo v. C. I. R. [65-2 USTC ¶9518], 348 F. 2d 122, 126 (2nd Cir. 1965); Clark v. C. I. R. [59-1 USTC ¶9430], 266 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 as earnings and profits of the corporation. The government primarily relies on Davis v. United States [55-2 USTC ¶9685], 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 irrespective 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 sufficient surplus to cover a dividend distribution, as otherwise there would be no way in which he could receive such cash as a gain taxable to him and, since there is no proof of such a surplus, he is only a holder of the cash for the benefit of the corporation. However, it does not make any difference whether he received it as a legal distribution of cash as the result of a dividend, or whether he took it fraudulently, using his wholly owned corporation with its false bookkeeping methods and concealment of sales and receipts 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 refinements of title as it is with actual command over the property taxed--the actual benefit for which the tax is paid." Corliss v. Bowers [2 USTC ¶525], 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 [3 USTC ¶1108], 289 U. S. 670, 53 S. Ct. 761, 77 L. Ed. 1439; Helvering v. Horst [40-2 USTC ¶9787] 311 U. S. 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 received the cash over which he 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 [54-2 USTC ¶9551], 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 and Lofts, 285 T. M., Tax Crimes--Evasion of Another's Tax and Defenses, p. A-5 (1973). But see, Bernstein v. United States [56-2 USTC ¶9635], 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, 348 F. 2d at 126 (2nd Cir.); Simon, supra, 248 F. 2d at 876 (8th Cir.). 11
This court must decide whether the rules of constructive distribution are to be automatically applied in the present situation, a review of a criminal tax proceeding. In civil tax cases the purpose is tax collection and the key issue is the establishment 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 876.
The difficulty in automatically applying the constructive distribution 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 different course. 12 To apply the constructive distribution rules to this situation would nullify all of the taxpayer's prior unlawful acts.
If constructive distribution rules were automatically applied, an anomalous situation 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 from punishment (to the extent 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 successful 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 corporate and personal funds, contrary to the intent and express language of the statutes. We therefore conclude that whether diverted funds constitute constructive corporate distributions depends on the factual circumstances involved in each case under consideration.
In holding that the constructive distribution rules should not automatically be applied, 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 on the part of the taxpayer and/or the corporation that such distributions were intended to be such a return. 13 To hold otherwise would be to permit the taxpayer to divert such funds and if not caught, to later pay out another return 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 salary, it is noted that, on appeal of a conviction in a criminal case, the evidence must be considered in a light 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 v. Hood, 493 F. 2d 677, 680 (9th Cir.), cert. denied, 419 U. S. 852 (1974).
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 shareholder 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, see e.g., Harry L. Epstein [CCH Dec. 29,892B], 53 T. C. 459 (1970), such cases are civil tax proceedings. As discussed above, the application of theories established in civil tax cases 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. Harrison Property Management Co., Inc. v. United States [73-1 USTC ¶9292], 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 taxpayer has by his own wrongful 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. 14
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 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. 15
Finally, the trial judge found Miller's set salary to be too small for the years in question. The judge noted Miller's responsibilities and control of the corporation 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 considered 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 demonstrate (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 pursuant to such evasion, Miller caused to be prepared and subscribed false returns for Covina, his wife and himself, and the latter two's joint tax returr as proscribed by 26 U. S. C. §7206(1); 16 (3) that he used the U. S. Postal Service to send and deliver the false returns in violation of 18 U. S. C. §1341; 17 and (4) that he filed or caused to be filed claims for tax refunds knowing 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.
* The Honorable Robert Van Pelt, Senior Judge, District of Nebraska, sitting by designation.
1 The twenty-four counts were:
Count Code Section Offense
18 U. S. C. §1341 The use of the U. S. Postal Service to send and
A. (Mail Fraud) deliver the following false returns.
1 " Miller's personal U. S. tax return for 1969.
2 " Mrs. Miller's personal U. S. tax return for 1969.
Covina's corporate U. S. tax return for the fiscal
3 " year ending May 31, 1970.
4 " Millers' joint U. S. tax return for 1970.
Miller's personal California state tax return for
5 " 1970.
Mrs. Miller's personal California state tax return
6 " for 1970.
Millers' amended joint personal U. S. tax return
7 " for 1970.
Pursuant to a willful attempt to evade taxes, the
26 U. S. C. §7201 preparation and filing of the following false
B. (Tax Evasion) returns:
Covina's corporate tax return for the fiscal year
8 " ending May 31, 1969.
11 " Miller's personal U. S. tax return for 1968.
13 " Mrs. Miller's personal U. S. tax return for 1968.
15 " Miller's personal U. S. tax return for 1969.
18 " Mrs. Miller's personal U. S. tax return for 1969.
21 " Millers' joint U. S. tax return for 1970.
26 U. S. C. §7206(1)
Subscribing a False
C. Tax Return Signing and/or preparing a fraudulent return for:
9 " Covina for the fiscal year ending May 31, 1970.
Covina's tax return for fiscal year ending May 31,
10 " 1970.
12 " Miller's personal U. S. tax return for 1968.
14 " Mrs. Miller's personal U. S. tax return for 1968.
26 U. S. C. §7206(1)
Subscribing a False
16 Tax Return Miller's personal U. S. tax return for 1969.
22 " Miller's joint U. S. tax return for 1970.
24 " Millers' amended joint U. S. tax return for 1970.
18 U. S. C. §287
Filling a False Claim
against the United The claim for a refund for overpayment of taxes
D. States incorporated in:
17 " Miller's personal U. S. tax return for 1969.
Mrs. Miller's personal U. S. tax return for 1969
20 " which included a claim for a refund.
Millers' joint U. S. tax return for 1970 which included
23 " a claim for a refund.
Millers' amended joint U. S. tax return for 1970
25 " which included an additional claim for refund.
E. No Count 19 was ever listed

The government dismissed court 3.
The defendant was found not guilty on count 8.
2 At 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).
3 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. v. Covina Pub. Inc., 9 Cal. App. 3d 659, 88 Cal. Rptr. 293 (1970).
4 It 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.
5 According to I. R. C. §316(a), a distribution of property by a corporating 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 out in I. R. C. §316(a), and shall be included in gross income. Insofar as a portion of the distribution 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).
6 Dividends are classified as 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.
7 However, Miller's expert witness testified that the basis for Miller's stock in Covina was only $128,200.00 (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 capital losses, he concluded that ultimately he owed taxes only for a long term capital gain of $1,699.00 for 1970.
It is noted herein that even if Miller's constructive distribution theory were accepted, Miller could nevertheless be convicted on several of the counts so long as his intent to falsify his return is found. See discussion 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 $1,699.00 for 1970. That amount is substantial enough to constitute a violation of 26 U. S. C. §7201, especially when considered 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 [68-1 USTC ¶9260], 391 F. 2d 210, 211 (9th Cir. 1968) (where the taxpayer was convicted for cheating on his tax return for failure to report a total net taxable income of $1,877.43 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.
8 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 hide their withdrawal by him, Miller had concealed their real nature as income to the corporation. Secondly, it is well established that under 26 U. S. C. §7206(1) it is not the evasion of taxes which is the prohibited offense but the falsification of tax statements. United States v. Bishop, 412 U. S. 346 (1973); Edwards v. United States [67-1 USTC ¶9356], 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 [67-1 USTC ¶9446], 377 F. 2d 469, 472 (1st Cir. 1972); Cf. United States v. Abbas [74-2 USTC ¶9755], 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 had no immediate tax consequences, Miller was nevertheless obligated to report such receipts to the government.
9 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 precluded the possibility of any earnings and profits for those years. However, due to the fact that Miller ordered the corporate books to be "scrambled," the trial judge concluded that no showing of an absence of earnings and profits could be obtained by an examination of the books. As to Miller's arguments as to the adequacy of the books, see footnote 13, infra.
10 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 [65-1 USTC ¶9307], 380 U. S. 343, 351 (1965), O'Rourke v. United States [65-2 USTC ¶9506], 347 F. 2d 124, 126 (9th Cir. 1965). A violation of 26 U. S. C. §7206(1) is complete when the taxpayer files a return "which he does not believe to be true and correct as to every material matter." United States v. Bishop [73-1 USTC ¶9459], 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 [74-2 USTC ¶9755], 504 F. 2d 123, 126 (9th Cir. 1974), cert. denied, 421 U. S. 988 (1975); United States v. Edwards [67-1 USTC ¶9356], 375 F. 2d 862, 865 (9th Cir. 1967). Mail fraud, 18 U. S. C. §1341, necessitates a scheme to defraud and the mailing of a letter for the purpose of executing the scheme. Pereira v. United States, 347 U. S. 1, 8 (1954). The filing of a false tax return pursuant to a scheme to obtain an unjustified tax refund is sufficient to establish a violation of presenting a false claim against the United States under 18 U. S. C. §287. United States v. Lopez, 420 F. 2d 313 (2nd Cir. 1969); Kercher v. United States [69-1 USTC ¶9361], 409 F. 2d 814 (8th Cir. 1969).
All of the above offenses require an intent to evade taxes (which in this case is equivalent to an intent to defraud the government, especially when Miller is faced by his claims for tax refunds). That requisite element is sufficiently 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 have willfully attempted to evade his tax obligations by hiding the diverted funds as non-taxable repayments of loans, (2) to have engaged in activities necessary to complete his scheme, e.g., signing and mailing his presumed false returns, (3) but, due to the after-the-fact categorization of the diverted funds as returns of capital, not to have had taxable income for at least some of the years in question. (The $197,000.00 payments were spread over the three year period from 1968 to 1970. To the extent that they would have exceeded Miller's $128,200.00 basis in the stock, such excess payments would have occurred initially in the latter part of 1969 and in 1970). Consequently, questions would arise as to whether Miller could be convicted of 26 U. S. C. §7201, which has been interpreted as requiring a tax deficiency to be present, or of 18 U. S. C. §§ 287 and 1341.
11 Appellant (after all briefs were filed, but prior to argument) cited the case of United States v. 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 holding of United States v. Davis, supra, and is now willing to apply the standard set out in the civil tax fraud case of DiZenzo v. C. I. R., supra, which requires that funds diverted by a shareholder 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 defendant had formed a corporation to which he transferred the business of his sole proprietorship. He continued to cash several of the checks by him after the formation of the corporation to his own account even though they belonged to the corporation at that point. The government contended that the funds were embezzled income. The 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 government has established that the defendant had received unreported funds the burden of proof to demonstrate that the funds were constructive dividends rather than 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 dividends rather than embezzled funds, may transfer the burden of going forward to the defendant. . . . Id. citing Holland v. United States [54-2 USTC ¶9714], 348 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 consideration by the jury of the defendant's contention that the diverted funds were returns of capital and hence non-taxable. Defendant's conviction was affirmed on two counts of violating §7206(1) of 26 U. S. C. (I. R. C. 1954), "Subscribing a False Tax Return"; which counts are similar to counts 9, 12, 14, 16, 22 and 24 in this case.
Leonard is not particularly helpful to appellant herein. First, the Second Circuit in Leonard relied on a civil tax fraud case for support of the proposition 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 had to be applied but rather noted that even if it were to accept the defendant's contention, the defendant nevertheless failed to 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 Leonard, 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 made. Consequently, even if Leonard were applicable, it would not support a reversal of the appellant's conviction on the false tax return counts.
12 At 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 make any adjustments in the corporate books to reflect a return of capital, he has already violated the tax evasion statutes. Accord, Spies v. United States [43-1 USTC ¶9243], 317 U. S. 492, 498-99 (1943); United States v. Swallow [75-1 USTC ¶9267], 511 F. 2d 514, 521 (10th Cir.), cert. denied, 423 U. S. 845 (1975).
13 The government establishes a prima facie case when it demonstrates that the taxpayer had unexplained funds which could be considered as income which the taxpayer fails to report in his return. United States v. Garcia [69-2 USTC ¶9600], 412 F. 2d 999, 1001 (10th Cir. 1969); Gendelman v. United States [51-2 USTC ¶9474], 191 F. 2d 993, 996 (9th Cir. 1951), cert. denied, 342 U. S. 909 (1952).
14 Miller 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 returns of capital. As discussed above, that syllogism is not necessarily correct. Nowhere in his testimony 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.
15 The trial judge noted defendant's argument that the concealment of the income (and subsequent notation of the repayments as returns of loans) was made solely to hide the sums from creditors. 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 creditors, or that he intended to fulfill his obligations to any of them. Moreover, as observed by the trial judge, the recording of the payments as returns of loans rather 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 basis of the stock), if the taxable income is successfully disguised as non-taxable items.
16 While note 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).
17 Again, after briefs had been filed but prior to oral argument, appellant's counsel cited to us the case of United States v. Henderson [74-2 USTC ¶9840], 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 v. Mirable, 503 F. 2d 1065, 1066-1067 (8th Cir. 1974); cert. denied, 420 U. S. 973 (1975); United States v. Flaxman, 495 F. 2d 344, 348-349 (7th Cir.) cert. denied, 419 U. S. 1031 (1974). We reject the holding in Henderson.