Opinion ID: 757334
Heading Depth: 3
Heading Rank: 2

Heading: Counts II and IV: Constructive Dividends

Text: 48 Dr. Peters' second contention involves Counts II and IV, which charged her with making false statements on her individual returns. In those counts, the government alleged that Dr. Peters diverted corporate funds into her personal accounts and that she made corporate expenditures for her personal benefit. These funds were not reported on either her corporate or personal return. Dr. Peters contends that the government failed to prove that she received such income because it did not prove that her corporation had sufficient earnings and profits in the relevant years to pay constructive dividends. In her view, the government was required to put forward such proof in order to show that any diverted funds constituted taxable income to her rather than nontaxable return of capital. 49 In making this argument, Dr. Peters relies on the rule used in several civil tax cases involving the proper characterization of corporate funds which have been diverted to the sole shareholder of a wholly-owned corporation. In such a case, the government must provide evidence of corporate earnings and profits to show that the money skimmed by the taxpayer was a taxable constructive dividend as opposed to nontaxable return of capital. See e.g., Truesdell v. Commissioner, 89 T.C. 1280, 1298, 1987 WL 258105 (1987). However, the majority of courts that have addressed this same situation in the context of a criminal proceeding have held that the government need not prove the character of the diverted funds. See United States v. Williams, 875 F.2d 846, 849-52 (11th Cir.1989); United States v. Miller, 545 F.2d 1204, 1213-14 (9th Cir.1976), cert. denied, 430 U.S. 930, 97 S.Ct. 1549, 51 L.Ed.2d 774 (1977); Davis v. United States, 226 F.2d 331, 335-36 (6th Cir.1955), cert. denied, 350 U.S. 965, 76 S.Ct. 432, 100 L.Ed. 838 (1956). These cases have stressed the distinction between the nature of a civil collection action and a criminal tax proceeding: 50 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 tax which the defendant has evaded, but whether he has willfully attempted to evade the payment or assessment of tax. 51 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 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. 52 Miller, 545 F.2d at 1214; see also Williams, 875 F.2d at 850. 53 The Second Circuit recently has taken a view different from that expressed in Williams, Miller and Davis. See United States v. D'Agostino, 145 F.3d 69, 72-73 (2d Cir.1998). In D'Agostino, the taxpayers argued that they did not owe any tax on the diverted corporate funds because those funds were not constructive dividends. The taxpayers further asserted that the diverted funds could not be constructive dividends because the corporation had no earnings and profits in the years in question and therefore must constitute a reduction in the taxpayer's loan account or capital account with the corporation. Because there was no tax deficiency, there could be no violation. By contrast, the government argued, per Williams, that whether the diverted funds constitute personal income or corporate income depends on the intent of the taxpayer at the time the funds are diverted. If the intent is to evade taxes, the income is personal and taxable. If the intent is to take a reduction under the loan account or capital account, then the funds are not taxable. The Second Circuit took the view of the defendants and followed their precedent in civil cases that required the government to put on earnings and profits evidence in this type of case. See id. at 73. 54 D'Agostino and the other criminal cases we have just discussed involved alleged violations of 26 U.S.C. § 7201, 21 which requires the existence of a tax deficiency. 22 By contrast, § 7206(1) 23 requires only that the taxpayer file a return which he does not believe to be true and correct as to every material matter. Indeed, this court has recently held that the government need not prove an actual tax deficiency in order to convict a defendant under § 7206(1). See United States v. Minneman, 143 F.3d 274, 279 (7th Cir.1998); accord United States v. Marashi, 913 F.2d 724 (9th Cir.1990); United States v. Wilson, 887 F.2d 69 (5th Cir.1989); United States v. Miller, 491 F.2d 638 (5th Cir.1974), cert. denied, 419 U.S. 970, 95 S.Ct. 236, 42 L.Ed.2d 186 (1974). Rather, the elements of a § 7206(1) violation are: (1) that the defendant made or caused to be made, a federal income tax return for the year in question which he verified to be true; (2) that the tax return was false as to a material matter; (3) that the defendant signed the return willfully and knowing it was false; and (4) that the return contained a written declaration that it was made under the penalty of perjury. See United States v. Whyte, 699 F.2d 375, 381 (7th Cir.1983). A false statement is material when it has the potential for hindering the IRS's efforts to monitor and verify the tax liability of the corporation and the taxpayer. United States v. Greenberg, 735 F.2d 29, 32 (2d Cir.1984). Here, the evidence showed that Dr. Peters diverted corporate funds directly to a personal account and that these funds were not accounted for in any way. 55 The focus of § 7206(1) is clearly on the taxpayer's intent. Here, there is no evidence in the record indicating that Dr. Peters intended the distributions at issue to be a return of capital. The record shows, however, a consistent pattern of diverting corporate funds into her personal accounts and making corporate expenditures for her personal benefit. Such a pattern is sufficient evidence to support the jury's conclusion that Dr. Peters filed tax returns which she did not believe to be true and correct as to every material matter. 26 U.S.C. § 7206(1). Accordingly, we hold that the government was not required to present evidence concerning the earnings and profits of Dr. Peters' corporation in order to convict her of a violation of § 7206(1).