United States of America, Plaintiff-appellee, v. Marcus Wayne Williams, Defendant-appellant, 875 F.2d 846 (11th Cir. 1989)

We affirm the convictions and judgments in this criminal tax evasion case holding that where a shareholder, officer, or director diverts unreported funds from his or her corporation, the government is not required to characterize the funds (as dividends, loan, return of capital or otherwise) to prove a tax deficiency to support a conviction under 26 U.S.C.A. Secs. 7201 or 7203; the government must only prove the diversion and that the taxpayer acted willfully.

Marcus Wayne Williams was the sole shareholder, president, and chief executive officer of Technical Fabrications, Inc. ("TFI"). Williams was also a shareholder, president, and chief executive officer of TFI's wholly-owned subsidiary, M.W. Industries ("MWI"). Between 1980 and 1982, several companies breached contracts with TFI. TFI representatives, including Williams, negotiated monetary settlements with these companies. Williams diverted much of the settlement money to his own use. The following transactions are relevant to this case:

(1) In May, 1981, Teledyne Continental Motors paid TFI $90,000 for hurricane damage to a building that TFI leased from Teledyne. TFI deposited the $90,000 into a TFI checking account at Central Bank in Mobile, Alabama. In June, 1981, when TFI closed the Central Bank account, the bank issued a $92,041.14 cashier's check payable to TFI. TFI endorsed the check to Williams who purchased another cashier's check for the same amount. In August, 1981, Williams combined this check with another cashier's check and cash to purchase a $102,245.83 cashier's check payable to the investment firm Merrill Lynch Pierce Fenner & Smith Inc. ("Merrill Lynch"). Williams deposited this check into a personal Merrill Lynch account and bought $100,000 in bonds. Williams did not report the $90,000 on his tax returns. TFI did not record the Teledyne settlement and did not report the $90,000 on its tax returns.

(2) In December, 1981, UOP Corp. paid TFI $170,274 under a cancellation clause in a steel fabrication contract. TFI endorsed the UOP check to Williams who endorsed the check to MWI. MWI deposited the check into a MWI checking account at the First National Bank of Mobile.

Between April and July, 1982, General Electric Environmental Services, Inc. ("GEESI") paid TFI $97,500 for delay in performance of a contract. Williams deposited this money into the MWI account. The UOP and GEESI deposits constituted all but $586 of the MWI account.

Williams subsequently withdrew all the money in the MWI account through checks payable to himself. Williams combined these checks with other funds to purchase cashier's checks. He combined the cashier's checks with cash and deposited $255,285 into his Merrill Lynch account to purchase bonds. Williams reported no income from these transactions on his tax returns. TFI's records failed to reflect the transactions. MWI's tax returns also failed to reflect activity during this time.

(3) In August, 1982, Williams drew a $97,548 check on a TFI account and deposited the check into a personal Robinson-Humphrey Co. account to purchase $100,000 in bonds. Williams ordered a TFI accountant to record the check as for "stock material." Williams did not report the $97,548 on his tax returns.

In January, 1988, a grand jury indicted Williams on two counts of attempt to evade federal income tax in violation of 26 U.S.C.A. Sec. 7201 (West Supp.1989).¹  In May, 1988, a jury convicted Williams for one violation of section 7201 and for one violation of willful failure to pay tax in violation of 26 U.S.C.A. Sec. 7203 (West Supp.1989)²  (a lesser included offense of section 7201). In June, 1988, the district court denied Williams's post-trial motions for judgment of acquittal and a new trial. In August, 1988, the district court sentenced Williams to five years in prison and fined him $10,000 for the section 7201 violation. The district court suspended a one-year sentence and a $1,000 fine for the section 7203 violation and placed Williams on five years probation to begin after his section 7201 sentence ends. TFI is currently a debtor in a Chapter 11 bankruptcy proceeding.

Williams first contends that the district court improperly denied his motion for judgment of acquittal. He argues that the government based its case on a theory that TFI paid Williams constructive dividends. The government, Williams alleges, failed to prove constructive dividends because it offered no proof of TFI's "earnings and profits." Second, Williams contends that the district court erroneously refused to charge the jury on earnings and profits. Third, Williams contends that the district court improperly limited cross-examination of a government witness. Fourth, Williams contends that the district court erroneously failed to compel production of certain materials under the Jencks Act and Fed.R.Evid. 612. Finally, Williams contends that the district court improperly excluded portions of his testimony.

The government contends that the district court correctly denied Williams's motion for judgment of acquittal. The government argues that it proved that Williams received taxable income by diverting TFI funds. The government denies that it needed to characterize the income as constructive dividends and denies that it needed to prove "earnings and profits." As to Williams's other contentions, the government argues that the district court did not abuse its discretion by refusing to give Williams's proposed jury instructions, properly limited Williams's cross-examination of a government witness, properly handled Williams's request for materials under the Jencks Act and Fed.R.Evid. 612, and did not prejudice Williams when it sustained objections to a portion of his testimony.

Williams presents five issues on appeal: (1) whether the district court erred in denying Williams's motion for judgment of acquittal because sufficient evidence did not support a finding of a tax deficiency beyond a reasonable doubt; (2) whether the district court committed reversible error by refusing Williams's suggested jury charges concerning earnings and profits; (3) whether the district court abused its discretion by improperly denying Williams an adequate opportunity to cross-examine a government witness; (4) whether the district court erred in refusing to compel production of Jencks Act documents or to compel the production of documents pursuant to Fed.R.Evid. 612; and (5) whether the district court abused its discretion by excluding a portion of Williams's testimony.

The government must prove three elements beyond a reasonable doubt to support a section 7201 conviction: (1) a tax deficiency; (2) an affirmative act constituting an evasion or attempted evasion of the tax; and (3) willfulness. Sansone v. United States, 380 U.S. 343, 351, 85 S. Ct. 1004, 1010, 13 L. Ed. 2d 882 (1965); United States v. Cruz, 698 F.2d 1148, 1150 (11th Cir.), cert. denied, 464 U.S. 960, 104 S. Ct. 391, 78 L. Ed. 2d 335 (1983). The government must prove two elements beyond a reasonable doubt to support a section 7203 conviction: (1) failure to pay taxes when due; and (2) willfulness. Sansone, 380 U.S. at 351, 85 S. Ct. at 1010.

Williams argues that the government presented insufficient evidence to prove a tax deficiency. He argues that the government based its case on a theory that TFI paid him constructive dividends. That theory, Williams argues, requires the government to prove TFI's "earnings and profits."³  Williams maintains that the government failed to present any earnings and profits evidence.

The government argues that sufficient evidence supported the jury's finding of a tax deficiency. The government argues that, in criminal tax cases, it is not necessary to characterize unreported income as "constructive dividends" or otherwise.

When reviewing a sufficiency of the evidence challenge to a denial of a motion for judgment of acquittal, we must view the evidence in a light most favorable to the government and determine whether a reasonable jury could find that the evidence established guilt beyond a reasonable doubt. United States v. Lopez, 758 F.2d 1517, 1521 (11th Cir. 1985), cert. denied, 474 U.S. 1054, 106 S. Ct. 789, 88 L. Ed. 2d 767 (1986) (citing Glasser v. United States, 315 U.S. 60, 62, 62 S. Ct. 457, 461, 86 L. Ed. 680 (1942)); United States v. Gonzalez, 617 F.2d 104, 106 (5th Cir.), cert. denied, 449 U.S. 868, 101 S. Ct. 202, 66 L. Ed. 2d 86 (1980).

In deciding whether the government was required to prove earnings and profits to demonstrate Williams's tax deficiency, we are without the benefit of binding precedent. Williams urges us to accept the reasoning of a recent civil case, Truesdell v. Commissioner, 89 T.C. 1280 (1987). The government urges us to adopt the rule in the criminal case Davis v. United States, 226 F.2d 331 (6th Cir. 1955), cert. denied, 350 U.S. 965, 76 S. Ct. 432, 100 L. Ed. 838 (1956). For the reasons discussed below, we adopt the Davis rule.

In Davis, a jury convicted a taxpayer of diverting corporate funds in violation of 26 U.S.C.A. Sec. 145(b), a precursor of section 7201. The taxpayer appealed contending that the government failed to demonstrate sufficient corporate surplus to cover a dividend distribution. Davis, 226 F.2d at 334. The court rejected this contention and affirmed the conviction.

Appellant makes much of the fact that the government has not fixed a label of some kind on the funds that he took from his corporation. It is not necessary to describe them as additional salary, illicit bonuses, or commissions, or anything more than wrongful diversions, since, as above mentioned, substance controls over form and taxation is concerned with the actual command over the property taxed.

....

[I]f a man has a business of a lucrative nature and is constantly receiving money and depositing it to his own account and using it for his own purposes, this is proof that he has income, and if the amount exceeds exemptions and deductions, that ... income is taxable.

Davis, 226 F.2d at 335-36. Accord Weir v. Commissioner, 283 F.2d 675, 684 (6th Cir. 1960). Thus, under the Davis rule, the government did not need to characterize the diverted funds as constructive dividends, and did not need to prove TFI's earnings and profits, to prove Williams's tax deficiency.

The Tax Court recently refused to apply Davis in a civil case. Truesdell, 89 T.C. 1280.⁴  The Truesdell court held that the government could not support asserted tax deficiencies in a fund diversion case because it failed to demonstrate corporate earnings and profits necessary to cover a constructive dividend. The court noted that no Ninth Circuit civil case governed this issue; but the court discussed United States v. Miller, 545 F.2d 1204 (9th Cir. 1976), cert. denied, 430 U.S. 930, 97 S. Ct. 1549, 51 L. Ed. 2d 774 (1977), a criminal case with similar facts. Miller bolsters our decision to adopt the Davis rule by explaining why civil rules should not automatically apply to criminal cases.

In Miller, the court affirmed a conviction in a fund diversion case, upholding a finding that diverted funds constituted salary to the taxpayer. Noting that "Davis has been generally followed in the review of criminal tax proceedings by the circuit courts," the court rejected an argument that it should automatically apply civil rules to criminal cases.

In civil tax cases the purpose of 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 of assessment of a tax.

....

The difficulty in automatically applying the constructive dividend 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. The 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 been somehow made non-taxable if the taxpayer had proceeded on a different course.

Miller, 545 F.2d at 1213-14 (emphasis in original). See United States v. Thetford, 676 F.2d 170, 175 (5th Cir. 1982), cert. denied, 459 U.S. 1148, 103 S. Ct. 790, 74 L. Ed. 2d 996 (1983) (withholding, diverting, or skimming part of corporation's cash receipts renders shareholder criminally liable). Cf. Bernstein v. United States, 234 F.2d 475, 482 (5th Cir.), cert. denied, 352 U.S. 915, 77 S. Ct. 213, 1 L. Ed. 2d 122 (1956) (government bound to prove earnings and profits because bill of particulars alleged payments to be dividends; court distinguishes Davis) .

The Miller language distinguishing criminal from civil tax cases comports with reasoning found in Eleventh Circuit criminal tax cases. For example, in United States v. Cruz, 698 F.2d 1148, we upheld a section 7201 conviction of a Dominican Republic citizen who claimed that accrued Dominican Republic taxes entitled him to a United States tax credit. We refused to accept Cruz's arguments, labeling them "technicalities which would create a haven for federal tax evasion." Cruz, 698 F.2d at 1151. The court stated:

[U]nder Cruz's interpretation, a taxpayer in his position could wait and pay no tax ... until the United States authorities became aware of an irregularity in his tax return. Once discovered, he could either pay or immediately admit the foreign tax and claim the retroactive United States tax credit [.] ... In short, the taxpayer is able to gamble that neither government will become aware of his tax liability.

Cruz, 698 F.2d at 1151-52. See United States v. Santarelli, 778 F.2d 609, 617 (11th Cir. 1985) (upholding 26 U.S.C.A. Sec. 7206 conviction and citing Miller with approval).

Like the Cruz court, we refuse to condone a taxpayer wait-and-see "gamble." Williams diverted funds from his wholly-owned corporation and failed to account for the diversion on his tax returns. The jury convicted him for that failure, finding a tax deficiency and finding his actions willful. Viewing the evidence in a light most favorable to the government, we find that the evidence supports the convictions. We adopt the Davis rule and hold that the government need not characterize diverted income in criminal tax cases. Consequently, the government was not required to characterize Williams's income as constructive dividends, and not required to prove TFI's earnings and profits.⁵ 

Williams proposed two charges instructing the jury that, to convict, it needed to find that he received constructive dividends from TFI and that TFI had sufficient earnings and profits to support the dividends.⁶  The district court refused to give the instructions. Williams contends that the district court erred.

A trial court possesses broad discretion in formulating jury charges. United States v. Lopez, 758 F.2d at 1521. Failure to give proposed instructions constitutes reversible error only if the proposed instruction: "(1) was correct, (2) was not substantially covered by others delivered, and (3) concerned a point in the trial so important that the failure to give the requested instruction seriously impaired the defendant's ability to defend himself." United States v. Sans, 731 F.2d 1521, 1529-30 (11th Cir. 1984), cert. denied, 469 U.S. 1111, 105 S. Ct. 791, 83 L. Ed. 2d 785 (1985).

The district court did not err in refusing to give Williams's proposed jury charges. Williams's proposed charges were not "correct." The government did not need to prove that Williams received dividends from TFI nor did it need to prove TFI's earnings and profits. The district court's refusal to give Williams's proposed instructions did not impair Williams's defense.

At trial, Williams's personal secretary testified as a government witness and questioned the veracity of documents showing the TFI fund diversions to be loans. Williams's attorney proffered evidence designed to impeach the secretary's credibility.⁷  The government objected to the proposed testimony on the ground of relevance. The district court sustained the objection.

Williams contends that the district court committed reversible error by limiting his attack on the secretary's credibility. See Fed.R.Evid. 607. Williams argues that her testimony was central to the government's case and that, without this credibility attack, her testimony stood unimpeached.

We cannot disturb a trial court's evidentiary ruling absent a clear showing of abuse of discretion. United States v. Russell, 703 F.2d 1243, 1249 (11th Cir. 1983). See United States v. Darwin, 757 F.2d 1193, 1202 (11th Cir. 1985), cert. denied, 474 U.S. 1110, 106 S. Ct. 896, 88 L. Ed. 2d 930 (1986) (extent of cross-examination relating to credibility is within the trial court's sound discretion).

Williams fails to demonstrate a connection between the affair, the prior litigation, and this tax evasion case. Merely asserting that a relationship exists is insufficient to demonstrate that a trial judge abused his discretion. See United States v. McCann, 465 F.2d 147, 163 (5th Cir. 1972), cert. denied, 412 U.S. 927, 93 S. Ct. 2747, 37 L. Ed. 2d 154 (1973) (no abuse of discretion where trial judge refused to admit evidence of lawsuits filed against defendants by witness's relations). In addition, our review of the record shows that the secretary's testimony did not stand unquestioned. Williams questioned the secretary regarding her lack of knowledge of TFI's accounting activities and about the fact that she testified against Williams on another occasion. We affirm the district court's decision to exclude Williams's proffered credibility attack against his personal secretary.

Prior to trial, Williams requested that the government produce materials pursuant to the Jencks Act, 18 U.S.C.A. Sec. 3500 (West 1985).⁸  During trial, Williams renewed his request and made a similar request for the production of material pursuant to Fed.R.Evid. 612.⁹ 

The district court reviewed disputed materials in camera and ordered the government to produce a revenue agent's fraud referral report and a portion of a special agent's report. The remaining disputed materials consisted primarily of records of the agents' daily contacts and activities. They also consisted of tax returns from Williams and his corporations, a copy of a previously-produced report written by both agents, personal file notes, and the revenue agent's report on his conclusions of law and intent. The district court sealed these materials for appellate review. We have reviewed the materials and hold that the district court did not commit error by refusing to compel production.

We will not disturb a district court's Jencks Act findings unless the determinations are clearly erroneous. United States v. Medel, 592 F.2d 1305, 1316-17 (5th Cir. 1979); United States v. Cruz, 478 F.2d 408, 413 (5th Cir.), cert. denied, 414 U.S. 910, 94 S. Ct. 259, 38 L. Ed. 2d 148 (1973).

The bulk of the disputed material concerns matters that do not relate to the subject matter of the agents' testimony. 18 U.S.C.A. Sec. 3500(b). For this reason, the district court's decision not to compel production of personal notes, contact sheets, witness lists, summaries of non-testifying witness statements, and the revenue agent's legal conclusions does not constitute error. See Medel, 592 F.2d at 1316. The government produced other material, such as the agents' joint report and the tax returns, and the court admitted these documents into evidence. The decision not to compel production of these materials, therefore, did not constitute error. See Medel, 592 F.2d at 1316-17. In addition, the district court did not err by failing to compel production of third-party materials sent to the agents. These materials are not "statements" within the meaning of the Jencks Act. 18 U.S.C.A. Sec. 3500(e).

Williams argues that because the agents "prepared and reviewed" the disputed materials, and because the agents' testimony related to their investigations, the government must produce the agents' files in their entirety. Based on Medel, we reject this reading of the Jencks Act and conclude that the district court did not clearly err in refusing to compel production of the above-mentioned materials.

Rule 612's language grants a trial court discretion in ordering the production of documents. See Cosden Oil & Chemical Co. v. Karl O. Helm Akteingesellschaft, 736 F.2d 1064, 1076-77 (5th Cir. 1984).

Of the material reviewed by the special agent during trial preparation, the government only failed to produce non-testifying witness statements. As discussed above, the Jencks Act does not require the government to produce such documents. See Medel, 592 F.2d at 1316 & n. 12. Because rule 612 is limited by the Jencks Act, the district court did not abuse its discretion by concluding that rule 612 did not compel production of the same documents.

Of the material reviewed by the revenue agent during trial preparation, the government only failed to produce two items: the agent's "sign-out sheet" and the agent's contact sheet. As discussed above, the government was not required to produce the contact sheet under the Jencks Act because the contact sheet's contents were unrelated to the subject matter of the agent's testimony. 18 U.S.C.A. Sec. 3500(b); Medel, 592 F.2d at 1316-17. Again, because the Jencks Act does not compel the production of these documents, the district court did not abuse its discretion by making the same ruling under rule 612. With respect to the agent's "sign-out sheet," Williams fails to demonstrate that the district court abused its discretion by failing to compel production. Williams merely asserts that the district court's denial of all disputed materials was "highly prejudicial."

We reject Williams's argument that Needelman v. United States, 261 F.2d 802 (5th Cir. 1958), cert. dismissed, 362 U.S. 600, 80 S. Ct. 960, 4 L. Ed. 2d 980 (1960) allows us to conclude that the district court abused its discretion by refusing to compel production of material outside the scope of the Jencks Act. The Needelman court merely held that the then-recent Jencks case, Jencks v. United States, 353 U.S. 657, 77 S. Ct. 1007, 1 L. Ed. 2d 1103 (1957), and the newly-passed Jencks Act did not remove a trial court's discretion to compel the production of materials used to refresh a witness's recollection. Needelman, 261 F.2d at 806. In this situation, Williams fails to convince us that the district court abused its discretion by refusing to compel the production of disputed materials under rule 612.

At trial, Williams sought to introduce testimony justifying his uncooperativeness toward the Internal Revenue Service ("IRS"). Williams sought to testify that an IRS agent lied to him when explaining why the IRS audited TFI. The government objected on hearsay and relevance grounds. The district court sustained the objection. Williams contends that the district court's decision constituted an abuse of discretion.

Williams's contention is meritless. Shortly after the district court's ruling, Williams testified as he desired without objection.

Mr. Ira Brown, the group supervisor of the IRS, lied to me.

He told me that the audit of TFI commenced as the result of an audit of a firm in the northeast by the name of UOP that had paid very substantial cancellation fees to subcontractors....

The district court's decision, therefore, could not have prejudiced Williams.VI. CONCLUSION

We hold that: (1) sufficient evidence supports the convictions; (2) the district court did not commit reversible error by refusing Williams's suggested earnings and profits jury charges; (3) the district court did not abuse its discretion by denying Williams an opportunity to cross-examine a government witness; (4) the district court did not err in refusing to compel production of Jencks Act documents or to compel the production of documents pursuant to Fed.R.Evid. 612; and (5) the district court did not abuse its discretion by excluding a portion of Williams's testimony.

The convictions and judgments are affirmed.

AFFIRMED.