Opinion ID: 173675
Heading Depth: 3
Heading Rank: 2

Heading: Filing of a False Income Tax Return

Text: Junior and Senior contend that the home construction costs were the only basis for the jury's verdict related to Junior's 2000 tax return. The jury rejected the prosecution's accusation that Junior had understated his income on his 1999 tax return by failing to include the $250,000 loan from C&G enterprises or the clothing and entertainment expenditures (which were omitted from both the 1999 and 2000 returns) (Count Two). They assert the Boulware objective characterization rule requires consideration of (1) the timing or tax year of the recognition of the distribution and (2) the classification of the transaction as compensation, loans, dividends, returns of capital, or gains from the exchange or sale of property. They reason that Junior's home construction cost distributions could not be assigned to him as income in 2000 because it was impossible for Circle to classify the distributions paid after 1 April 2000 until its fiscal year closed in March 2001 and that the deposit made in January 2000 was de minimis and, therefore, not a material matter. They suggest that Boulware 's holding as to 26 U.S.C. § 7206(1) extends to § 7206(2) since both contain similar language regarding the truthfulness of the tax return: every material matter in § 7206(1) and any material matter in § 7206(2). They maintain that the only expense paid by Circle on Junior's home before 1 April 2000 was the general contractor's deposit paid in January 2000. The government responds that the evidence was sufficient to sustain the convictions because it showed that the Marchellettas skimmed over $1,000,000 from their company to fund personal expenses, failed to disclose this information to their accountant, and signed false tax returns omitting this income. They also maintain that Kottwitz facilitated the Marchellettas' actions by writing checks and supervising Circle's books which showed the expenditures as business expenses. Randy Brown, a certified public accountant who prepared amended 2001 tax returns and subsequent returns for Circle and the Marchellettas, explained that Circle's 2001 tax year began on 1 April 2000 and ended on 31 March 2001. R24 at 106-07. Circle spent $144,000 during the 2000 calendar year and $908,000 during the 2001 tax year on Junior's home construction costs. Id. at 106, 108, 111. Brown stated that the construction costs were not due to be reported as income to Junior until the costs were expensed by Circle, and could be treated as an officer loan until the point that the company takes it as a deduction. Id. at 107. Brown prepared Junior's 2001 personal tax return in 2004, and explained that Junior's income of $1,330,546 was a result of his wages, dividends, and various officer advances which he received from Circle including the home construction costs in 2000 and 2001 and personal credit card and auto use expenses. Id. at 115-16. He stated that the advancement of monies from a company to a shareholder happens a lot such as loans or personal credit card expenses. Id. at 117. He explicated that it depends on the internal accounting of the company as to when or whether an expense was initially treated as an officer advance or was buried in other expenses such that the classification of the expense would have to wait until the company's financial statement adjustments at the end of the year. Id. at 117-18; see also IRS Agent John W. Lesso's testimony that nothing's final until the financial statements are prepared. R26 at 278. Junior testified that he understood the construction expenses to be an employee loan. R18 at 306. Circle paid a $36,456 deposit, due five days within the commencement of construction, on Junior's home in January 2000. R18 at 27-78. No other expenses were paid on behalf of Junior's home construction until April 2000. Id. For a conviction under 26 U.S.C. § 7206(1), the government must prove that the defendants: (1) filed a tax return with a written declaration made under the penalty of perjury; (2) did not believe the return to be true and correct as to every material matter; and (3) acted willfully and not merely negligently. United States v. Edwards, 777 F.2d 644, 651 (11th Cir.1985). A conviction under § 7201 requires that the government show that the defendants (1) acted willfully; (2) deficiently paid their taxes; and (3) affirmatively acted to evade or attempted to evade their taxes. Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 1010, 13 L.Ed.2d 882 (1965). Therefore, the specific intent of willfullness is a requirement in both offenses. United States v. Lankford, 955 F.2d 1545, 1550 (11th Cir.1992) (§ 7206(1)); Sansone, 380 U.S. at 351, 85 S.Ct. at 1010. The willfulness standard requires `the voluntary, intentional violation of a known legal duty' and can be negated by a good-faith misunderstanding of the law[,] a good-faith belief that one is not violating the law, regardless of whether or not the belief is reasonable, or a good-faith reliance on a professional's advice. United States v. Morris, 20 F.3d 1111, 1114-15 (11th Cir.1994) (citing Cheek, 498 U.S. at 202, 111 S.Ct. at 610-11). In Boulware, the Supreme Court noted that tax classifications mandated consideration of the objective economic realities of a transaction rather than . . . the particular form [of classification] that the parties employed. Boulware, 552 U.S. at 429, 128 S.Ct. at 1175. The Court held that intent is irrelevant to the timing of objective tax classifications and IRS reporting requirements for distributions to shareholders of closely held corporations; objective application of the Internal Revenue Code Sections 301 and 316 apply. Id. at 424-25, 434, 439, 128 S.Ct. at 1173, 1179, 1182. Specifically, it stated that a criminal tax defendant . . . does not need to show a contemporaneous intent to treat diversions as returns of capital before relying on [Sections 301 and 316] to demonstrate that no taxes are owed. Id. at 439, 128 S.Ct. at 1182. The Supreme Court applied Boulware to 26 U.S.C. § 7206(1) cases noting that [a]lthough . . . § 7206(1) does not require the prosecution to prove the existence of a tax deficiency, . . . the nature and character of the funds received can be critical in determining whether . . . § 7602(1) has been violated. Id. at 433 n. 9, 128 S.Ct. at 1178 n. 9 (internal quotation marks and citations omitted). The Court noted that classifications of transactions between closely-held corporations and shareholders may be difficult because a corporation and its shareholders have a common objectiveto earn a profit for the corporation to pass onto its shareholders, that a corporation . . . wholly owned by one shareholder . . . becomes the alter ego of the shareholder in his profit making capacity, and that, by passing corporate funds to himself as shareholder, the owner-shareholder is acting in pursuit of these common objectives. [37] Id. at 438 n. 13, 128 S.Ct. at 1181 n. 13 ( citing Truesdell v. Comm'r, IRS Non Docketed Service Advice Review, 1989 WL 1172952 (Mar. 15 1989)) (internal quotations omitted). [E]conomic substance remains the right touchstone for characterizing funds received when a shareholder diverts them before they can be recorded on the corporation's books as the diverted funds may be treated as dividends or capital distributions based on the benefit received by the shareholder. Id. at 430, 128 S.Ct. at 1176. If it is unclear, however, whether the corporation will have sufficient funds to cover distributions to its shareholders at the end of its tax year, it must report the distributions as dividends even if the distribution will later be treated as a capital gain or a return on capital. Id. at 434 n. 11, 128 S.Ct. at 1179 n. 11. [A] distribution of property. . . made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c). [38] 26 U.S.C. § 301(a). Subsection (c) provides that, if the amount of the distribution constitutes a dividend, it should be included in gross income; if the amount which is not a dividend, it should be applied against and reduce the adjusted basis of the stock; and, if the amount which is not a dividend . . . exceeds the adjusted basis for the stock, it should be treated as gain from the sale or exchange of property. § 301(c)(1)-(3)(a). Income should be included in an individual's gross income during the year that it is received by the taxpayer. [39] 26 U.S.C. § 451(a); 26 C.F.R. § 1.301-1 (a dividend becomes taxable when it is unqualifiedly made subject to [the shareholders'] demands.); Avery v. Comm'r of Internal Revenue, 292 U.S. 210, 215, 54 S.Ct. 674, 676, 78 L.Ed. 1216 (1934) (a dividend becomes taxable to the shareholder upon actual receipt). The receipt of income can be actual or constructive. Constructive receipt of income occurs when it is is credited to the taxpayers account and he can draw upon it. 26 C.F.R. § 1.451-2(a). Constructive receipt does not occur, however, if the taxpayer's control of [the received income] is subject to substantial limitations or restrictions. Id. A constructive dividend is a corporate disbursement for the benefit of a shareholder and must be reported by the shareholder as income. [40] United States v. Mews, 923 F.2d 67, 68 (7th Cir.1991). Although the personal expense entries in Circle's books could not have been characterized as dividends or balanced in relation to Junior's and Senior's shareholder interests until the end of Circle's accounting year, the jury possessed sufficient evidence to convict on Counts Three, Four and Five. Circle's payment of $5,000 for suits and $8,000 for night-club visits for Junior, which were erroneously labeled on Circle's books and not reported by Junior as personal income, provided sufficient substantive evidence of the understatement of income. Circle's payments of New York landscaping fees for Senior, which were not reported by Senior as personal income, provided sufficient substantive evidence of the understatement of income. Further, if the jury determined that Circle's payment of the landscaping fees constituted personal income to Senior, the objective element of a tax deficiency was met to satisfy the charge that Senior evaded taxes. Viewing the evidence in the light most favorable to the government, the jury could find sufficient circumstantial evidence to support a finding of intent and willfulness on these counts.