Opinion ID: 538863
Heading Depth: 2
Heading Rank: 1

Heading: Tax Treatment of Skimmed Money

Text: 21 On appeal, Mr. Toushin argues that the district court erred in instructing the jury as to when skimmed money from a wholly owned corporation is taxable. In assessing this claim, we must view the instructions as a whole. United States v. Sims, 895 F.2d 326, 329 (7th Cir.1990); United States v. Grier, 866 F.2d 908, 932 (7th Cir.1989); United States v. Fournier, 861 F.2d 148, 150 (7th Cir.1988). Moreover, we must view the instruction in the context of the entire trial. As we stated in United States v. Bailey, 859 F.2d 1265 (7th Cir.1988), cert. denied, --- U.S. ----, 109 S.Ct. 796, 102 L.Ed.2d 787 (1989): 22 [B]ecause  'a judgment of conviction is commonly the culmination of a trial which includes testimony of witnesses, argument of counsel, receipt of exhibits in evidence, and instruction of the jury by the judge,'  we review the instruction in the context of the overall trial and the arguments by counsel. 23 Id. at 1277 (quoting United States v. Piccolo, 835 F.2d 517, 519 (3d Cir.1987), cert. denied, 486 U.S. 1032, 108 S.Ct. 2014, 100 L.Ed.2d 602 (1988)) (quoting Cupp v. Naughten, 414 U.S. 141, 147, 94 S.Ct. 396, 400, 38 L.Ed.2d 368 (1973)). To determine whether the instructions given in this case were proper, we must first examine the substantive issue underlying this appeal: when skimmed money from a wholly owned corporation becomes taxable. 24 There is no dispute that the illegal nature of the cash--skimmed from Mr. Toushin's business--does not in itself change the fact that it should have been reported as income. As the Supreme Court held in Rutkin v. United States, 343 U.S. 130, 137, 72 S.Ct. 571, 575, 96 L.Ed. 833 (1952), unlawful gain is still taxable income. Mr. Toushin claims that the money became taxable to him at the time he took control over it: when he skimmed it from the business. According to this view, the cash would have been taxable to him in years prior to 1980 and, consequently, this prosecution for tax fraud in 1980, 1981 and 1982 necessarily would fail due to the expiration of the statute of limitations. 6 25 The government concedes that embezzled money is taxable in the year embezzled. However, it argues that a sole shareholder may not embezzle funds from his corporation. See Davis v. United States, 226 F.2d 331, 335 (6th Cir.1955), cert. denied, 350 U.S. 965, 76 S.Ct. 432, 100 L.Ed. 838 (1956). Instead, the government asserts that money taken by the owner of a wholly owned business is not taxable until the owner uses the money as his own. Since an owner may take the money for a number of legitimate reasons--storage or safekeeping, for example--the government argues that the only way to determine when the taxpayer treats the money as his own is when the taxpayer uses the money for personal benefit. 7 At oral argument, government counsel repeated this plea for a bright-line test in cases of skimming from wholly owned corporations. Otherwise, the government argues, it would be difficult to distinguish individuals who actually intend to skim money from individuals who undertake legitimate acts. 26 In our view, the district court should not have acquiesced in the government's request for an instruction articulating a rigid rule. Rather, the jury should have had the opportunity to evaluate all the evidence before it in light of the general rule that: 27 An unlawful gain, as well as a lawful one, constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it. 28 Rutkin, 343 U.S. at 137, 72 S.Ct. at 575. Income is taxable when the holder has such control over it that he has the freedom to dispose of it at will. Id.; see also Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 337, 74 L.Ed. 916 (1930) (income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not). Such control must be to the exclusion of any of the rights in the money asserted by the corporation. See Commissioner v. First Security Bank of Utah, 405 U.S. 394, 403, 92 S.Ct. 1085, 1091, 31 L.Ed.2d 318 (1972) (taxpayer must have complete dominion over money for it to be taxable). The taxpayer exercises ownership over the money when he has the power to dispose of it. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431, 75 S.Ct. 473, 476, 99 L.Ed. 483 (1955); Helvering v. Horst, 311 U.S. 112, 118, 61 S.Ct. 144, 147, 85 L.Ed. 75 (1940). 8 The questions of control and receipt properly are construed as questions of fact that should be left to the determination of the finder of fact. 29 The problem of proof is no doubt more difficult when this rule must be applied to the transfer of funds from a corporation to its sole owner. However, we do not believe that this difficulty justifies the substitution of a formalistic test for the jury's evaluation of the facts. It is not beyond the capability of courts and jurors to determine when an individual has exercised the sort of dominion and control over funds that would justify, under the general rule, imposing tax liability upon him. See United States v. Curtis, 782 F.2d 593, 596-98 (6th Cir.1986) (approving instruction that asked the jury to determine if sole shareholder of corporation had dominion and control over money to exclusion of corporation's interest); United States v. Thetford, 676 F.2d 170, 175 (5th Cir.1982) (noting that diversion of funds by sole stockholder without adequate report was sufficient for conviction; evidence of diversion for non-corporate purpose not essential), cert. denied, 459 U.S. 1148, 103 S.Ct. 790, 74 L.Ed.2d 996 (1983); Dawkins v. Commissioner, 238 F.2d 174, 178-79 (8th Cir.1956) (examining facts to determine if controlling shareholder diverted funds to himself in previous years); Davis v. United States, 226 F.2d at 335 (examining sole shareholder's entire treatment of customers' checks to determine whether he exercised personal, exclusive control); Alisa v. Commissioner, 35 T.C.M. (CCH) 1113, 1118 (1976) (examining facts to determine whether sole shareholder personally benefitted from diversion). 9 30 Of course, the actual expenditure of funds by the taxpayer is not irrelevant to the analysis. Indeed, such expenditures are highly relevant to and probative of the determination of whether the taxpayer had the absolute control necessary for the funds to constitute income. However, as the cases in the preceding paragraph amply demonstrate, the ultimate issue is control--not expenditure. For instance, in Dawkins, the defendant placed money belonging to his wholly owned corporation in a safe deposit box. The evidence indicated that the defendant used money from this box for his personal expenses, and none of the money was reported to the IRS. These facts permitted a conclusion that the defendant had exercised dominion and control over all the money, and, consequently, the court properly found that all the money was immediately taxable: 31 The evidence warrants the conclusion that Dawkins had unfettered control of the proceeds of the unreported sales at all times both before and after such proceeds were placed in the deposit box. He used such funds at any time he chose for his own purposes. He was at all times in a position to enjoy the economic benefits of such funds, and he did so. 32 The status of the funds is determined as of the date of taking.... The Tax Court was warranted in treating the diverted sales receipts as income to Dawkins in the year in which the diversions occurred.... 33 238 F.2d at 179 (emphasis supplied). Similarly, the Sixth Circuit in Davis v. United States treated the funds taken by a sole owner of a corporation and placed in his own safe or bank account to be taxable as of the time he had control over it. Control did not require that the defendant spend the misappropriated funds, merely that he treated the funds as his own: 34 [T]hrough 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. 226 F.2d at 335. 10 35 Finally, the Fifth Circuit in United States v. Thetford decided a similar tax evasion case involving the owner of a wholly owned corporation. The government alleged that the taxpayer had skimmed about $100,000 in 1973 and 1974 from his corporation. The taxpayer claimed that he did not take the money for personal use; rather, he merely held and disbursed the funds for the corporation. 676 F.2d at 175. The court rejected the taxpayer's argument that the burden was on the government to show that he had spent the money for non-corporate purposes. Once a taxpayer has taken control of funds diverted from a corporation and then fails to report such funds as income or to make any adjustment in the corporate books to reflect a return of capital, that is sufficient to imply willful intent to evade taxes. Id.; see also United States v. Wilson, 887 F.2d 69, 73 (5th Cir.1989) (government need not prove that money diverted from corporation by its two owners was spent for non-corporate purpose).