to you to which you were not entitled?
'A No, sir.
'Q Did you ever receive any statement or memorandum from Mr. Csicsek concerning the status of your Loans and Exchange Account at any time?
'A From -- like a six-month period when we would get the order I maybe would have an inkling of what it was about.'
Citations from defendant's own testimony to the same effect might be multiplied. For example, he made strenuous efforts to borrow money from a Philadelphia bank to pay off his indebtedness on his loan accounts in order to clear the way for a long-term loan from an insurance company. Certainly, if defendant's withdrawals of corporate funds constituted borrowings, they were not income.
In the light of the admitted facts, it is pointless for defendant to argue that, since there was no corporate authority for either the withdrawals or the credits, the evidence shows that what defendant did constituted embezzlement. We are not called upon here to adjudicate legal issues between defendant and his corporate creatures. Moreover, defendant could not embezzle funds from his wholly owned corporations. United States v. Augustine, 188 F.2d 359 (3rd Cir. 1951); Davis v. United States, 226 F.2d 331 (6th Cir. 1955); Kann v. Commissioner of Internal Revenue, 210 F.2d 247 (3d Cir. 1953).
Defendant contends that the verdicts on Counts 4, 5, 7, 8 and 9 cannot stand because of the Government's failure to investigate defendant's Exhibit 7, -- relying on Holland, supra. We have concluded earlier that Holland has no application in the circumstances of the case at bar, and can add nothing to what has been said on the point.
Our review of the evidence persuades us that it amply supports the verdicts on Counts 2, 3, 4, 5, 7, 8 and 9. Our disposition of Count 1, supra, makes it unnecessary, of course, to consider the evidence with relation thereto.
Defendant's next point is that the verdicts on Counts 2 and 3, and on Counts 4, 5, 7, 8 and 9, are repugnant to one another and cannot stand together. He says that 'the money coming from the suppressed sales' of the corporations was income either to those corporations or to defendant, but that it could not be income to both. His argument is, in effect, that if defendant and his corporations are one in the sense that he cannot embezzle corporate funds, then they must likewise be one in respect of corporate income credited to defendant's account on the corporate books; that the Government 'may not have it both ways.' Defendant overlooks the well-established principle that a corporation and the aggregate of individuals constituting it may be one, or separate entities, as the case may be, for one purpose and not for another. The general rule in all jurisdictions seems to be as stated in Tucker Binenstock, 310 Pa. 254, 263, 165 A. 247, 250 (1933):
'The fiction of a corporation as an entity distinct from the aggregate of individuals comprising it was designed to serve convenience and justice. There is consequently an exception recognized wherever the rule is known, namely, that the fiction will be disregarded and the individuals and corporation considered as identical whenever justice or public policy demand it and when the rights of innocent parties are not prejudiced thereby nor the theory of corporate entity made useless.'
It has been the law until very recently
that embezzled money does not constitute taxable income to the embezzler Commissioner v. Wilcox, 327 U.S. 404, 66 S. Ct. 546, 90 L. Ed. 752 (1946). Courts have held consistently that one cannot embezzle funds from his wholly owned corporation, -- probably for the reason that if a regularly-declared dividend is taxable income, informal withdrawals or diversions of corporate income should also be taxable income. Such holding may involve a disregard of the theory of separate entities. As our Court of Appeals stated in Kann v. Commissioner, supra, 3 Cir., 210 F.2d 247, 251:
'Indeed, under the Pennsylvania and Ohio codes, supra, Note 6, and bearing in mind the principles of corporate entity, it would seem to be possible for the proprietor of a one-man corporation to be guilty of embezzlement if he diverted corporate monies to his own pocket without the formality of declaring dividends. Such local law concept of embezzlement, while it may be useful to deter those in control of a corporation from defrauding creditors and minority stockholders, should not, in our opinion, be used as a vehicle for tax avoidance, absent a clear mandate to the contrary.'
It follows that there is nothing inconsistent in the Government's position. It is merely asserting settled principles of law based on justice and public policy.
In the course of his oral argument, defendant's learned counsel stated: 'Now, I concede that if a corporation gets money and has it and then the officer gets payment improperly, there may arise some question as to whether or not the company doesn't have to account for that and Goldberg has to account for it.' The situation disclosed by the evidence here is no different in effect than the case supposed by counsel. However, instead of withdrawing cash and then paying it back to the corporation to be credited to his loan account, defendant shortened the operation by taking the credit directly.
We find no inconsistency or repugnancy in the verdicts on the Counts in question.
Defendant's final contention is that the trial Judge erred in refusing to charge as to the taxability of corporate distributions, as requested.
In defining gross income, we read to the jury a portion of 61 of the Internal Revenue Code of 1954, 26 U.S.C. § 61, which, of course, lists dividends among many items of income. Defendant's counsel submitted no point on the subject, but stated at the close of the charge that we 'did not go into the limitation upon dividends with respect to the earnings and profits available therefor, which is also contained in the Internal Revenue Code.' We instructed the jury to disregard what we had said concerning the inclusion of dividends in gross income. This did not meet counsel's suggestion for he then stated that, since part of the Government's theory must be that there was a corporate distribution in the nature of a dividend received by defendant, the jury must be instructed with respect to 'the limitations in the Code dealing with the funds.'
Counsel misunderstood the Government's theory of the case. It was the Government's contention that defendant received income by reason of the discharge of his indebtedness to his corporations. We pointed out to counsel that when we read to the jury the portion of 61, we were attempting merely to define generally what was meant by gross income. We granted defendant an exception to our refusal further to charge on the subject of dividends.
Counsel now contends that if the credits received by defendant did not constitute 'embezzlement,' then they had to be corporate distributions to him; and that under § 316(a) of the Code, 26 U.S.C. § 316(a), 'a corporate distribution may be taxed as a dividend only if made out of accumulated earnings and profits or earnings and profits of the taxable year in question.' He argues that the question should have been submitted to the jury with appropriate instructions. A very similar argument was advanced in the analogous case of Davis v. United States, 6 Cir., 226 F.2d 331 (1955). The Court's answer is conclusive here (334-335):
'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 the 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, 281 U.S. 376, 378, 50 S. Ct. 336, 74 L. Ed. 916.'
We think, under the evidence, that the only issue properly before the jury on this facet of the case was whether defendant received income by reason of the discharges of his indebtedness to the several corporations by the application to his 'loans and exchange accounts' of the credits entered there in amounts offsetting the differences between the actual cash sales income and the cash sales income as understated in the rewritten books.
Now, June 26th, 1962, it is ordered and decreed that:
1. Defendant's motion in arrest of judgment as to Count 1 of the indictment is granted, and judgment on that Court is arrested.
2. Defendant's motions as to Counts 2, 3, 4, 5, 7, 8 and 9 of the indictment are denied.
3. Defendant is ordered to appear for sentence on July 10th, 1962, at 11 A.M.