U.S. v. Mews

• Decision Date: 17 January 1991
• Docket Number: No. 90-2578,90-2578
• Citation: 923 F.2d 67
• Parties: -529, 91-1 USTC P 50,044 UNITED STATES of America, Plaintiff-Appellee, v. Levi R. MEWS, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 67

923 F.2d 67

67 A.F.T.R.2d 91-529, 91-1 USTC P 50,044

UNITED STATES of America, Plaintiff-Appellee, v. Levi R. MEWS, Defendant-Appellant.

No. 90-2578.

United States Court of Appeals Seventh Circuit.

Argued Dec. 7, 1990.

Decided Jan. 17, 1991.

Mel S. Johnson, Asst. U.S. Atty., Milwaukee, Wis., for plaintiff-appellee.

Robert E. Meldman, Mulcahy & Wherry, Robert E. Dallman, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, Milwaukee, Wis., William F. Garrow, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, Denver, Colo., for defendant-appellant.

Before POSNER and RIPPLE, Circuit Judges, and GRANT, Senior District Judge. ^*

POSNER, Circuit Judge.

A jury convicted Levi Mews of filing a false income tax return in 1982, in which he reported taxable income of $2,600, and in 1983, in which he reported taxable income of $4,640. 26 U.S.C. Sec. 7206(1). The judge sentenced Mews to thirty months in prison and fined him $50,000. The principal question is whether certain transfers between corporations wholly owned by Mews were "constructive dividends" to him, in which event he was required to report them as income. Most of the transfers, all of which were made at his direction, took the form of one corporation's paying a debt owed by the other. One, however, took the form of one corporation's giving money to another to buy a Cadillac for Mews's use. The corporation that bought the Cadillac had no business activities at the time it bought it and the time during which Mews used it. Another one of the transfers, in extinguishing a mortgage debt of the transferee, incidentally extinguished a personal debt of Mews, for he had cosigned the mortgage note along with his corporation.

In the two intercorporate transfers just mentioned, the personal benefit to Mews was palpable and direct; in the others less so. The jury was instructed that, before the transfer could be deemed a constructive dividend to Mews, the government had to prove both that Mews had gotten a personal benefit from the transfer and that the conferral of such a benefit was the transfer's primary purpose.

These requirements, though drawn from language in a civil case involving constructive dividends, Mills v. Internal Revenue Service, 840 F.2d 229, 235 (4th Cir.1988) (more distant ancestors are Sammons v. Commissioner, 472 F.2d 449, 451-52 (5th Cir.1972), and Stinnett's Pontiac Service, Inc. v. Commissioner, 730 F.2d 634, 640-41 (11th Cir.1984)), do not exist, unless "personal benefit" is understood to be a fiction.

By "constructive dividend" the law means simply a corporate disbursement that is a dividend in the contemplation of law though not called such by the corporation making the disbursement. Hadley v. Commissioner, 36 F.2d 543, 544 (D.C.Cir.1929); Sachs v. Commissioner, 277 F.2d 879, 882-83 (8th Cir.1960). Every disbursement that is not an expenditure for the corporation's benefit--that is not a purchase, a loan (as in Mills itself, or Joseph Lupowitz Sons, Inc. v. Commissioner, 497 F.2d 862, 868 (3d Cir.1974)), the repayment of a debt, an ordinary and necessary business expense, etc.--must be a dividend, for if it does not benefit the corporation it must benefit the shareholders. It need not be paid to the shareholders any more than it need be called a dividend. Just as you cannot escape income tax by assigning the right to receive your income to somebody else, Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1930); Hillsboro National Bank v. Commissioner, 460 U.S. 370, 398-99, 103 S.Ct. 1134, 1151-52, 75 L.Ed.2d 130 (1983), so a shareholder cannot, by directing his corporation to pay to X rather than to himself what corporation law deems a dividend to him, avoid having to report it as income. Hardin v. United States, 461 F.2d 865, 872-73 (5th Cir.1972).

The intercorporate transfers in this case were not loans, purchases, repayments of corporate debts, charitable expenditures, ordinary and necessary business expenses, or other disbursements made in pursuit of corporate goals or opportunities or pursuant to corporate duties. So they had to be dividends. The fact that Mews, the one and only shareholder, did not put the monies in his pocket but instead had them paid directly to a legal fiction wholly owned by himself did not change their character as dividends. Id. The purchase of the Cadillac was unrelated to the corporate objectives of the transferor. It was instead related to the objectives of the owner of the transferor, and hence was a dividend. Where the money composing the dividend ended up was a detail of no legal significance, though the fact that it ended up in the purchase of a car for Mews's personal use--for which neither corporation charged Mews, so that he was receiving income measured by the fair rental value of the car--must have underscored its character as a dividend in the eyes of the jury.

It is true that, had this transfer not been used to finance Mews's personal consumption (just as another transfer was used to extinguish a personal obligation of his), the tax significance of a decision to characterize the transfer as a loan--the only possible competing characterization--rather than as a dividend would have been subtle rather than blatant. If a dividend were classified as a loan because it was not used to defray a personal expense of Mews's, he would not be beating but only postponing tax liability, to such time as the transferee corporation paid out the money to him or used it to defray his personal expenses, or repaid the money to the transferor corporation which then paid the money to Mews or used it to defray his personal expenses. But postponement is not necessarily an innocent motive in the tax field. The (honest segment of the) tax shelter industry was built on the advantages of postponing tax liability. If you want to postpone tax liability you must follow the forms that the law provides. Mews did not do this. The fact that he used a corporation that he owned to hold a dividend for him that another corporation which he owned had in effect declared did not detract from its character as a dividend to him, any more than would his action in putting a dividend check in his pocket rather than cashing it have...