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[73-2 USTC ¶9731] United States of America , Plaintiff-Appellee v. George D. Meriwether, Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 72-2474, 486 F2d 498, 10/23/73, Reversing, remanding, and affirming unreported district court

[Code Sec. 7201]

Crimes: Tax evasion: False returns.--Conviction for willfully attempting to evade taxes by filing false returns was reversed on two counts involving 1962 and 1964 because there was insufficient evidence to determine that a bank installment loan department head had received money illegally from a bank client. Conviction for willfully attempting to evade taxes by filing false returns was affirmed on one count involving 1963. A chart summarizing the defendant's income, cash deposits and cash expenditures was admissible. The failure to include in the chart any net worth figures or cash on hand at the beginning and end of the tax year was not prejudicial since the government's case was based on a specific items method, not the net worth or cash expenditures method.

Wayman G. Sherrer, United States Attorney, Henry I. Frohsin, Assistant United States Attorney, Birmingham, Ala., Scott P. Crampton, Assistant Attorney General, Meyer Rothwacks, Robert E. Lindsay, Department of Justice, Washington, D. C. 20530 for plaintiff-appellee. George D. Meriwether, 3014 3rd Court East, Tuscaloosa, Ala., pro se, Fournier J. Gale, III, Cabaniss, Johnston, Gardner & Clark, Ninth Floor, First National Bldg., Birmingham, Ala., for defendant-appellant.

Before TUTTLE, GODBOLD and MORGAN, Circuit Judges.

MORGAN, Circuit Judge:

Meriwether was convicted by a jury of willfully attempting to evade his and his wife's federal income tax for the years 1962, 1963, and 1964, by filing false returns in violation of 26 U. S. C. §7201. We reversed that conviction and remanded the case for a new trial. ¹ Upon retrial, the government premised its case upon the same three-count indictment utilized in the first trial, ² but relied exclusively upon specific items of income received to prove its case, declining altogether to use the net worth theory which we had held was insufficiently proven in the first trial. Again, Meriwether was convicted by a jury on all three counts, and was sentenced to three concurrent three-year terms of imprisonment.

Prior to and during the indictment years, Meriwether was vice-president of the First National Bank of Tuscaloosa , Alabama , in charge of the installment loan department. The prosecution undertook to prove that Meriwether demanded and received money from specific bank customers as a condition for handling their commercial paper, and that these sums received were never reported as income. Meriwether allegedly received payments in varying amounts from J. B. Carl, Henry Dozier, and Raburn Hall from 1962 through 1964.

[Count 1]

I. The bill of particulars claimed that Meriwether had received from J. B. Carl and his company, Dixie Air, Inc., a total of $8,436.12 in 1962. At trial, proof was offered that Meriwether had received $11,426.12 in 1962 from Carl. These sums represented significantly more than half of Meriwether's allegedly unreported income during 1962, the period covered by Count 1 of the indictment. ³ The alleged income from Carl being such a substantial portion of the government's case on Count 1, the insufficiency of this evidence would require us to reverse the conviction as to this count.

J. B. Carl having died prior to the time of trial, the government's case concerning 1962 payments by Carl to Meriwether consisted entirely of circumstantial evidence. While it cannot be doubted that the jury could convict Meriwether of receiving these payments solely on the basis of circumstantial evidence, it could not convict him if this evidence was not "sufficient to exclude in the minds of the jury every reasonable hypothesis other than guilt of the defendant." Ford v. United States [54-1 USTC ¶9233], 210 F. 2d 313 (5th Cir. 1954).

The sole evidence before the jury concerning the alleged payments by Carl to Meriwether ⁴ came from Jim Kirby, a First National Bank employee in the installment loan department who had subsequently become vice-president in charge of that department. Kirby testified that particular checks made out to J. B. Carl were never deposited in the Dixie Air reserve account. He also explained in depth the mechanics within the bank of the reserve account agreement.

Dixie Air, Kirby testified, had entered into a dealer financing agreement with the bank. Under the terms of that agreement, the difference between the rate of interest charged by the bank and the rate charged by the dealer to its customer was to be withheld and deposited in a reserve account. This account protected the bank against contingent liability of the endorsing dealer, who would be liable for the commercial paper in the event of default by the purchaser of an airplane purchased from Dixie Air. Defendant Meriwether, as vice-president in charge of the installment loan department, was in 1962 responsible for preparation of the agreement setting up a four and a half percent reserve fund for Dixie Air. Thus, the jury could reasonably infer that Meriwether did know of Dixie Air's obligation to deposit the checks in controversy in its reserve account. Kirby's testimony also showed that, when the bank made out checks for the amount of the difference between the two rates of interest, these were approved at the bottom by Meriwether before being cashed at various teller's windows by J. B. Carl.

Kirby refused, however, to draw any inference from the bank's practices to the effect that Meriwether's knowledge of the reserve agreement or approval of the checks would require that Meriwether investigate the status of Dixie Air's reserve account. Moreover, noting that his testimony was derived only from the records of the bank, Kirby declined to infer that Meriwether had received any of the checks cashed by J. B. Carl which were not deposited, as the agreement required, in the reserve account. ⁵ Despite Kirby's disclaimers, the court admitted his testimony on this very limited basis:

The court, however, indicating that at this point in time it hasn't been shown to be relevant to what the defendant is charged with, and that although it is allowed into evidence, that allowance is conditional upon there being other evidence presented in the case which might connect this to the defendant. (Emphasis added).

No such further evidence was ever introduced. The government does not contend that any further evidence was admitted concerning the payments to Carl, but argues that evidence concerning other specific transactions (payments by Dozier and Hall to Meriwether) gave the jury sufficient evidence to infer that Meriwether received Dixie Air's reserve fund payments.

This evidence was not sufficient to go to the jury. There was not even a connecting inference between the cashing of the checks and any receipt of Meriwether of unreported cash income. J. B. Carl, from the evidence presented, could have kept the cash himself or could have channeled it back into Dixie Air for other purposes. The only theory which might support the inference the jury evidently drew would be that of "once a thief, always a thief." To convict a man of a felony on no more than this theory plus the fact that he was a responsible employee in the bank where the check was cashed would permit a conviction to be based on pure surmise. There is just nothing here to permit the jury to draw an inference that Meriwether received funds illegally from Carl.

Under similar crcumstances, we have held that evidence was insufficient to convict a defendant. In Ford v. United States , supra, a witness testified that she had left $100 in cash "at the defendant's office" and that she had made regular payoffs "to the police department" of $100 per month. The connection sought to be made was that the defendant, a former police chief, had received these payoffs. The court held that there was insufficient evidence connecting the defendant with the payoffs, and that admission of this evidence was both erroneous and highly prejudicial.

There was no sufficient proof that the defendant received the payoffs or any part of them, and a conclusion to that effect cannot be permitted to be based upon mere conjecture of suspicion. We have previously had occasion to comment on the necessity for safeguarding a defendant against the prejudice and danger inherent in this type of testimony. Montgomery v. United States, supra, 203 F. 2d at page 891 . . ..

The evidence sufficiently disclosed that in the defendant's office to chief of police he had opportunities of receiving income from graft, payoffs, or other illegal sources. There can, of course, be no presumption that the defendant was guilty of such gross misconduct as to be the recipient of such ill-gotten gains. The presumption is to the contrary. It was nevertheless within the jury's province to say whether that presumption had been overcome, or to infer that the defendant had some other source of income. From the testimony that the expenditures so far exceeded the available sources disclosed by the evidence, and from the evidence that such expenditures could not be accounted for by accumulated assets or by nontaxable receipts. But to undertake to aid the jury in this function by the admission of testimony of this woman as to payoffs with which the defendant was not shown to be connected was both erroneous and highly prejudicial. Ford v. United States [54-1 USTC ¶9233], 210 F. 2d at 317-318.

See also Blumberg v. United States [55-1 USTC ¶9437], 222 F. 2d 496 at 500 (5th Cir. 1955).

We cannot view this as a case in which there was evidence that the illegal payments were known to have been received by the defendant, as in Azcona v. United States [58-2 USTC ¶9666], 257 F. 2d 462 (5th Cir. 1958), or a case in which the jury was admonished to disregard the prejudicial testimony and where independent evidence of unreported income during the indictment period was sufficient to show unreported taxable income. United States v. Ford [56-2 USTC ¶9823], 237 F. 2d 57, 67 (2nd Cir. 1956). We therefore reverse the conviction as to Count 1 of the indictment.

[Count 3]

II. On Count 3 of the indictment, the government alleged that Meriwether had in 1964 received $3,000 in unreported income from Henry Dozier. The evidence adduced to support this charge was totally insufficient, a position which the government virtually admits. ⁶ In response to a question by the prosecution as to whether this amount was paid to Meriwether on February 4, 1964, Dozier said:

A. I do not know I couldn't say this particular one. I would have to refer back to my books.

Thereafter, the trial court allowed Dozier to review testimony at the first trial, after which the following exchange occurred:

Q. Having read those particular passages referred to, can you tell us whether or not you recollection is refreshed, whether or not you actually paid the $3,000.00 as of February 4, 1964, to the defendant, George Meriwether?

A. The only way I can answer it honestly is if it shows on my journal sheets, that is correct. From memory I cannot say about this check. But if it is on any journal, that is correct.

The journal sheets were never admitted in evidence, and Dozier, the sole witness on Count 3 of the indictment, was thus unable to testify as to this $3,000 payment. There was, therefore, no evidence upon which the jury could have found Meriwether guilty on Count 3 and this count should not have been submitted to the jury.

[Count 2]

III. Having reviewed and carefully studied all of defendant's contentions, we are in the position of reversing his convictions on Counts 1 and 3 of the three-count indictment, leaving only the second count standing. This situation raises the issue of cross-count prejudice. Although we find that there were no errors committed with respect to the second count itself, there is the possibility that evidence introduced with respect to the first and third counts fatally "infected" the deliberations about the second count.

Defendant argues that Count 2 must be reversed for two reasons (in addition to his arguments relating to Count 2 alone, which we reject). First, he argues that evidence was introduced with respect to the first and third counts which would have been irrelevant had he been tried on the second count standing alone. This argument is without merit because the trial court clearly instructed the jury that each of the counts must be considered by itself, and each one must be supported by sufficient evidence and proven beyond a reasonable doubt. Whenever a defendant is tried on a multi-count indictment there is the possibility that the jury will infer guilt on all counts from guilt on one of the individual counts, but this danger has not led us to abandon the practice of using multi-count indictments in proper circumstances.

In addition, we take into consideration the fact that the second count was by far the most substantial of the three. The amount by which defendant's actual income is alleged to have exceeded his reported income is more than $14,000 for that year, while the surplusage in Count 1 was only a little more than $7,000 and in Count 3 it was less than $2,700. The excess tax alleged to be due in Count 2 was more than $4,600, while in Count 1 it was a little more than $2,000 and in Count 3 it was less than $600. There was ample evidence to support the conviction on this count, and we see nothing to convince us that consideration of the other two counts improperly affected conviction on this count.

We do not understand defendant to argue that it was improper to use a multi-count indictment against him in the first instance, and indeed, such an argument would be unavailing. All three counts were for violations of the same statute allegedly committed in three consecutive years. There was nothing improper about trying defendant for all three alleged crimes in the same proceeding.

Defendant also argues that the introduction into evidence of Government Exhibit 179 was error requiring reversal of the second count. The exhibit is a three-page Summary of Income, Cash Deposits and Cash Expenditures of the defendant, which provides a month-by-month description of the financial dealings of the defendant for the years in question. Defendant's allegations of error with respect to the chart fall into two categories. First, he complains of specific items of misinformation included and items not supported by the evidence which were included in the chart. In addition, he argues that admission of the chart into evidence was prejudicial because it failed to make any allowance for cash on hand at the beginning or end of the taxable years.

Each of the allegedly incorrect entries related to the first and third counts of the indictment. Because we reverse defendant's conviction on those counts on other grounds, the errors in the chart are of no moment, unless improper admission of the sections of the chart dealing with the first and third counts infects the section of the chart dealing with the second count. But we find that this is not the case. The chart was actually three separate sheets of paper, each dealing with a separate year. In fact, the three pages are stapled together, so it is difficult to even look at all three pages simultaneously. The district judge instructed the jury correctly and explicitly that they were to consider the merits of each count of the indictment separately, and there is no reason to think that they failed to follow his instructions. The admission of summarizing charts such as Exhibit 179 rests in the discretion of the trial court, both abuse of discretion and resulting prejudice being required for reversal. Baines v. U. S. [70-1 USTC ¶15,938], 426 F. 2d 833, (5th Cir. 1970). Appellant has demonstrated neither.

Appellant has also alleged that the chart was defective because it did not include figures for cash on hand at the beginning and the end of each taxable year. But this allegation would have merit only in a case in which the government used a net worth of cash expenditures method of proof. Here, unlike the first trial of this case, the government relied entirely on the specific items method, attempting to show that appellant received specific sums from specific people on specific occasions. This reliance was made explicit in the government's bill of particulars and ably explained in the court's charge to the jury. In such a case, the failure to include figures for net worth or cash on hand at the beginning and end of the taxable years cannot possibly have prejudiced the defendant.

[Rule Violation Not Prejudicial]

IV. Defendant also alleges that the government violated F. R. Crim. P., Rule 17(b) regulating the issuance of subpoenas requested by defendants unable to pay for them ⁷ in that an Assistant United States Attorney was present during defendant's oral application to the court for subpoenas issued at government expense. Before its amendment in 1966, the rule required that all defendants proceeding in forma pauperis who request subpoenas issued at government expense must support such requests with affidavits "in which the defendant shall state the name and address of each witness and the testimony which he is expected by the defendant to give if subpoenaed, and shall show that the evidence of the witness is material to the defense . . .." The difficulty with this procedure was that it required indigent defendants to reveal many of the theories of their defense to the prosecution, although defendants able to pay for witnesses were able to have blank subpoenas issued. F. R. Crim. P., Rule 17(a). To cure this inequitable situation, Congress amended the rule in 1966 to provide that applications for subpoenas by defendants unable to pay for them be made to the court ex parte. The government asserts that ex parte means only that the prosecutor should not participate in the discussions about the subpoenas, although he may be present during the argument. But this interpretation of the rule conflicts with both the general understanding of the term ex parte, and with the purpose of the 1966 amendment to the rule. Black's Law Dictionary (4th Ed., 1968) defines ex parte as meaning: "On one side only; by or for one party; done for, in behalf of, or on the application of, one party only."

"In its more usual sense, ex parte means that an application is made by one party to a proceeding in the absence of the other. [Emphasis added]." In addition, we would defeat the purpose of the amendment to the rule if we upheld the government's contention. The ex parte provision of the rule was not intended to protect the defendant from opposition from the prosecutor; it was intended to shield the theory of his defense from the prosecutor's scrutiny. Allowing the prosecutor to observe the defendant's support of his motion permits this scrutiny, even when the prosecutor remains silent. The government urges us to hold that because the prosecutor was excused from the room on several occasions when the defendant had to explain to the judge why he wanted a certain witness to be subpoenaed, the procedure used did not require the defendant to reveal the "theory" of his defense. This we decline to do. The names of witnesses to be called by the defendant could easily aid the government in determining the strategy the defendant plans to use at trial. The government should not be able to obtain a list of adverse witnesses in the case of a defendant unable to pay their fees when it is not able to do so in the cases of defendants able to pay witness fees. When an indigent defendant's case is subjected to pre-trial scrutiny be the prosecutor, while the monied defendant is able to proceed without such scrutiny, serious equal protection questions are raised, and it appears that a major reason for the amendment was to avoid such questions. ⁸ See Douglas v. People of California , 372 U. S. 353 (1963) and Griffin v. People of Illinois , 351 U. S. 12 (1956). We note that the Court of Appeals for the First Circuit has announced a like interpretation of the rule. Holden v. United States , 393 F. 2d 276 (1st Cir. 1968). See also United States v. Sutton, 464 F. 2d 552 (5th Cir. 1972).

The district judge to whom this case was transferred after the first trial seems to have accepted defendant's interpretation of the rule, for on May 10, 1972, he ruled that all further proceedings under the rule would be held in the absence of the prosecutor. However, the court held that the defendant had waived all objections to past violations of the rule in spite of the fact that the defendant on February 7, 1972, had filed a motion to exclude the prosecutor from the Rule 17(b) proceedings.

It is not necessary to decide the questions of waiver, however, since in order to obtain a reversal of the conviction, defendant is required to show that he was prejudiced by the failure to comply with the rule. Here he has failed to make such a showing. The major factor which causes us to reach this conclusion is that this was not the first, but the second trial of the same charges against the defendant. Although the theory of the prosecution was different on re-trial, the essential facts sought to be proved by the government were virtually the same. In both cases, the government attempted to show that the defendant received payments from customers of the bank in return for the processing of their loan applications, and that the defendant failed to report these sums as income on his federal income tax return. Most of the witnesses subpoenaed by the defendant were already known to the government. In short, although the presence of the Assistant United States Attorney at application proceedings held under Rule 17(b) violates the rule, we find that the defendant in this case was not prejudiced by such breach, and his conviction cannot be reversed on these grounds.

We have examined the first of defendant's arguments, including the allegations that certain statements were taken from him in violation of the rule of Miranda v. Arizona, 383 U. S. 436 (1966), and find them all to be without merit.

[Conclusion]

The judgment with respect to the first and third counts of the indictment is REVERSED and the case is REMANDED for further proceedings not inconsistent with this opinion; the judgment with respect to the second count of the indictment is AFFIRMED.

¹ United States v. Meriwether [71-1 USTC ¶9390], 440 F. 2d 753 (5th Cir. 1971).

² Count 1 (1962) charged that Meriwether reported their joint taxable income as $9,522.72, on which the tax owed was $2,065.91, when he knew that their joint taxable income was $16,542.72, on which the tax owed was $4,104.52.

Count 2 (1963) charged the reported taxable income as $9,803.67, as compared with actual income of $24,005.58, and reported tax to be $2,137.04, as against tax owed of $6,790.40.

Count 3 (1964) charged that the income reported was $6,274.32, as against actual joint taxable income of $8,948.62, with tax reported of $1,127.86, as against tax owed of $1,674.43.

³ The indictment also alleged that Meriwether received $6,500 from Dozier and $250 from Ball during 1962.

⁴ Evidence concerning payments by Dozier to Meriwether from another reserve account of a different company can, of course, prove nothing concerning payments by Carl to Meriwether. They might, however, under proper circumstances, show that Meriwether had an obligation to handle reserve accounts in a particular way.

⁵ Q. Now, Mr. Kirby, in your sixteen years experience in the bank, . . . is it not the custom and practice and was it not the custom and practice at the time these transactions took place that when a dealer in aircraft such as this or any other dealer of vehicles brings to the bank a deal as I believe it is called in the trade or a contract which it sells to the bank, is not that dealer paid a commission?

A. We rather refer to it as a finance participation rather than a commission. The difference between the amount of interest charged by the dealer and the amount that we charge to handle the paper.

Q. New with regard--whatever you call it, he is paid an amount of money for bringing that deal to the bank, is he not?

A. Yes sir.

Q. Now isn't that what happened here in each of these cases, isn't these--

A. Checks were written for the amount of difference between the interest charged and the amount that we got for handling it.

Q. That's right. In other words, that was his commission--well, call it participation in the financial arrangements, that was his participation in the financial arrangement? . . .

Q. That was his commission paid for bringing to the bank a piece of paper which the bank bought?

A. Yes, sir.

Q. Now that really isn't unusual, that is the way it is done, isn't it?

A. Ordinarily this money is placed in the reserve against--

Q. Well, if there is an agreement to place it in reserve?

A. Yes, sir.

Q. Then he still is being paid, and what he does with it then or whatever agreement has been made is beyond the agreement of paying him?

A. First there is an agreement to pay him, yes sir.

Q. Then you have another agreement that when we pay you, you must take that amount and place it over here as security for bad debts, now that is another agreement, is it not?

A. Right. . . .

Q. You don't mean--all these checks were made payable to Dixie Air or to J. B. Carl?

A. Yes, sir.

Q. And all of these checks were cashed by J. B. Carl?

A. Cashed or handled in L & D.

Q. He asked you a question about how could you get an official check in L & D 2, that is installment loan which we are talking about?

A. Yes, sir.

Q. You can cash a check down there, can you not?

A. Yes, sir, you can cash a check.

Q. And that is what you had here, is it not?

A. I won't say that. I didn't say that. It was handled in the department. It could have been--could have been cashed, could have been deposited in the L & D 2. This stamp only shows this stamp went through L & D 2 on that particular day. [The teller's stamp].

Q. There is nothing on those checks to show it went to Mr. Meriwether, is there?

A. No, sir.

Q. Nothing at all, is it?

A. No, sir.

Q. And you don't mean by your testimony to infer that this money went to Mr. Meriwether are you, sir?

A. Sir, I'm testifying from the records of the bank.

Q. I just want to get this straight. As far as the records show, as far as your knowledge is concerned, these checks were either paid to Mr. Carl, cashed by him and paid to him, or either handled through the L & D?

A. Yes, sir.

Q. There is nothing wrong with the bank--nothing wrong with cashing a bank official checks, in the Loan Department is there?

A. No, sir. . . .

Q. Would you just glance down at it [the Dixie Air reserve account] and see if it doesn't appear to be a--an average balance in that reserve account of about $30,000?

A. The sheets I have here would an average of $30,000 plus.

Q. At least $30,000?

A. Yes, Sir. . . .

Q. . . . I will ask you do the checks show what Mr. Carl did with the money?

A. No, sir.

⁶ The government's brief includes the following statement: "The Government is unable to say with certainty that there is no merit in taxpayer's contention . . . that the specific items proof for 1964 was insufficient to establish a deficiency in reported income and tax."

⁷ Rule 17(b) provides:

Defendants Unable to Pay. The court shall order at any time that a subpoena be issued for service on a named witness upon an ex parte application of a defendant upon a satisfactory showing that the defendant is financially unable to pay the fees of the witness and that the presence of the witness is necessary to an adequate defense. If the court orders the subpoena to be issued the costs incurred by the process and the fees of the witness so subpoenaed shall be paid in the same manner in which similar costs and fees are paid in case of a witness subpoenaed in behalf of the government.

⁸ The advisory committee notes to rule 17 include the following observation: "Criticism has been directed at the requirement that an indigent defendant disclose in advance the theory of his defense in order to obtain the issuance of a subpoena at government expense while the government and defendants able to pay may have subpoenas issued in blank without any disclosure. See Report of the Attorney General's Committee on Poverty and the Administration of Criminal Justice (1963) p. 27."

 

 

[71-2 USTC ¶9729] United States of America , Appellee v. Nathan Suskin, Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 35443, 450 F2d 596, 11/1/71, Affirming unreported District Court decision

[Code Sec. 7201--Result unchanged by '69 Tax Reform Act]

Crimes: Attempt to evade or defeat taxes: Jury trial: "Leads" doctrine: Defenses: Evidence.--The Court upheld the taxpayer's conviction for willful tax evasion for filing a false return. The "leads doctrine" (conceived in Holland v. United States, 54-2 USTC ¶9714) was misapplied where the government's method of proof was by specific items. However, the error was harmless because the District Court twice warned the jury that it must not consider the truth or falsity of the extra judicial declarations, but only whether they showed the government had followed up its leads. And, with respect to a premium payment (payoffs) lead, any impact the declarations might have was mitigated when an agent conceded that he would not expect those he questioned to admit receiving payoffs. The following issues were also decided by the Court: (1) The Court rejected the taxpayer's claim that he should be allowed to use Derby 's (the corporation he worked for) prior losses to present a carry forward defense. (2) Evidence that the IRS allowed a deduction for travel and entertainment to Kassel (the company on whose behalf payoffs were made) was properly excluded. (3) The District Court's refusal to charge the Cohan rule could not have affected the taxpayer's conviction. (4) It was proper to allow the jury to pass on both counts together. (5) The District Court did not abuse its discretion by refusing to grant an adjournment for the Passover season or by excusing jurors of the Jewish faith.

Robert A. Morse, United States Attorney, David G. Trager, Raymond J. Dearie, Assistant United States Attorneys, New York, N. Y., for appellee. Louis Bender, Lloyd A. Hale, 225 Broadway, New York , N. Y., for appellant.

Before MOORE , SMITH and HAYS, Circuit Judges.

SMITH, Circuit Judge:

Nathan Suskin was found guilty by a jury in the United States District Court for the Eastern District of New York, George Rosling, Judge, of willful tax evasion for filing a false return in 1961, in violation of 26 U. S. C. §7201, and acquitted of the same charge for failing to file any return in 1962, a special verdict indicating that the prosecution had failed to prove beyond a reasonable doubt that a return for 1962 was not filed. Suskin appeals from the resulting judgment of conviction on court one of the indictment. Suskin received an eighteen month sentence, fifteen of which were suspended, a year's probation, and a fine of $2,500. We find no error and affirm the judgment.

[Facts]

The business arrangements which gave rise to the suspect returns will be outlined only sparingly, without regard to Suskin's numerous points of contention at trial, since no attack is made in this appeal on the sufficiency of the evidence to support a verdict of guilty on count one. Suskin was a principal in Derby Fabrics, Inc. (" Derby "), a textile converting and jobbing concern of which one Finkle was president and sole stockholder. Prior to 1961 Derby accumulated substantial losses and debts personally guaranteed by Suskin. Sometime in 1960, Suskin entered a business relationship with Jerry Kassel, Inc. (" Kassel "), also a textile converter, which hoped to profit from Suskin's contacts within the taxtile industry.

In 1961 Suskin received some $32,000 from Kassel , largely, at Suskin's request, in the form of checks made payable to Derby which were cashed by Suskin; he was also reimbursed for between $1,500 and $2,000 in out-of-pocket expenses. Suskin reported a gross income of $11,650 and claimed deductions in the amount of $1,040, which were allowed by the government. Suskin explained that the unreported income received from Kassel had all been expended on "premium" payments (payoffs) to other business concerns, and payments on Derby 's outstanding loans. The government contended that in fact substantially all of the excess was pocketed by Suskin.

The facts underlying count two of the indictment, on which Suskin was acquitted, are important to this appeal only insofar as they detail a markedly different method of payment, and wholly different figures, than those set forth in court one. The government charged that Suskin, who reported $14,250 and no deductions on his copy of his 1962 return, which allegedly was never filed, in fact received $37,000 in compensation in 1962, including $15,250 in salary, $9,500 in commissions and $13,500 in unaccounted for travel and entertainment expenses; the mode of payment was said to be a salary check of $250 per week together with a travel and entertainment check of $250 per week with the balance received in commissions.

["Leads" Doctrine]

To defendant's explanations that his unreported income for 1961 had been spent variously on debt and "premium" payments, the district court applied the "leads" doctrine of Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121 (1954), requiring the government to demonstrate that it had followed up the leads provided by defendant. Government compliance took the form of testimony by an Internal Revenue Service agent as to his conversations with third persons in positions to have received any debt or "premium" payments made. We agree with defendant, as the government now concedes, that the "leads" doctrine, conceived by the Holland court where the government's case rested on the "net worth" theory, is misapplied here where the government's method of proof was by specific items; we hold, however, that the error was harmless. First, the district court twice warned the jury that it must not consider the truth or falsity of the extrajudicial declarations, but only whether they showed the government had followed up its leads. Second, with regard to the "premium" payment lead, any impact the extrajudicial declarations might have had was mitigated when the trial judge elicited from the agent the concession that he would not expect those he questioned to admit receiving payoffs. Finally, with regard to the debt repayment lead, the agent's testimony was corroborated by subsequent direct testimony of the extrajudicial declarant.

[Remaining Contentions]

Defendant's remaining contentions, five in number, none of which we find meritorious, will be dealt with seriatim. Inasmuch as defendant admits having received and cashed some $32,000 in 1961 checks payable to Derby, the claim that he should be allowed to use Derby's prior losses to present a loss carry forward defense is absurd; the losses were corporate but the money never went to the corporation. Hauptman v. Director of Internal Revenue [62-2 USTC ¶9724], 309 F. 2d 62 (2d Cir. 1962) involves an entirely different case where the sharecholder of a one-man corporation elected, as the law permitted, to come under Subchapter S, thereby benefitting personally from the corporation's net operating losses even though liquidation was foreseeable.

The district court was correct in excluding evidence that the Internal Revenue Service had finally allowed Kassel a deduction for travel and entertainment. It is true that the Internal Revenue agent who conducted the audit on Kassel testified at trial that he had disallowed those deductions; but defense counsel, not the government, brought the disallowance to the jury's attention. The district court had previously directed defense counsel not to attempt to elicit the results of the audit of Kassel , and afterwards instructed the jury to disregard that information.

The district court's refusal to charge the rule of Cohan v. Commissioner of Internal Revenue [2 USTC ¶489], 39 F. 2d 540 (2d Cir. 1930), could not have affected defendant's conviction on count one of the indictment. Defendant was allowed all claimed deductions for travel and expenses in 1961; he attributed his unreported income to repayment of debts and to payoffs, to which the Cohan rule plainly has no relevance. Moreover, the jury could not have believed defendant made any substantial expenditures even for the purposes claimed, and still have found him guilty beyond a reasonable doubt.

It was proper to allow the jury to pass on both counts together. The jury was able to distinguish between them and indeed acquitted on the second.

Lastly, the district court did not abuse its discretion by refusing to grant an adjournment for the eight day Passover season or by excusing jurors of the Jewish faith. Defendant's cointention that he was denied a petit jury composed of a fair cross section of the community in violation of 28 U. S. C. §§ 1861, 1862 and 1863 is belied both by the district court's efforts to accommodate prospective jurors of the Jewish faith, specifically by the announcement during voir dire that there would be no sessions on the principal holidays, and by the actual qualification of Jewish jurors. There is no indication either of systematic exclusion of Jewish jurors or that defendant was denied a fairly representative jury.

Judgment affirmed.

 

 

[70-1 USTC ¶9375] United States of America , Plaintiff-Appellee v. Harry Davis, d/b/a Davis Mfg. Co., Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 27489, 424 F2d 1241, 3/10/70

[Code Secs. 7201 and 7206(1)]

Criminal penalties: Irregularities in trial procedure: Fact-finding.--After noting that there was ample evidence to support the jury's verdict of guilty on six counts of criminal violation of the Internal Revenue laws, the Court examined the taxpayer's objections to the trial procedure and affirmed the convictions. No error was found in the mere unsealing of an envelope containing documents to be turned over by the Government to the taxpayer before trial, since there was no evidence of any tampering with the contents. As with certain other documents, the taxpayer failed to object clearly to them at trial, so there was no reversible error in admission. There was also no error in the denial of the taxpayer's motion to introduce testimony and an unknown informer's statement presented at the grand jury hearing, but not at trial. The taxpayer's claim that no Miranda warning had been given was unsupported by the record.

Eldon B. Mahon, United States Attorney, Dallas, Tex., Johnnie M. Walters, Assistant Attorney General, Joseph M. Howard, Richard B. Buhrman, Department of Justice, Washington, D. C. 20530 for plaintiff-appellee. Edwin M. Sigel, Sigel, Simms & Roane, 311 Oil & Gas Bldg., Houston, Tex., Michael Jay Kuper, 1200 Republic Bank Bldg., Dallas, Tex., for defendant-appellant.

Before TUTTLE, WISDOM and GOLDBERG, Circuit Judges.

PER CURIAM:

This appeal from a conviction of the appellant on six counts for violation of the criminal provisions of the Internal Revenue laws (§7201 and 7206(1)) raises five points aside from the contention that there was not sufficient evidence to support submitting the case to the jury, in light of the appellant's contentions respecting his purpose in not showing the substantial amount of unreported income on his books for the three years in question.

First, we state that there was ample evidence to support the jury's verdict. The next point raised by appellant is that after the trial court ordered all documents to be shown that were in possession of the government to counsel for the appellant, a certain number of documents were placed in a sealed envelope for later inspection, and that at some time unknown as to either party, but before the trial, the sealed envelope had been unsealed and appellant was unable to ascertain whether any of the documents in the sealed envelope were present or missing. As to this point, we conclude that appellant's description of this occurrence as "a wholly unscrupulous pretrial incident" with no proof to support his contention, is an overstatement of the facts even as contended for by the appellant. Moreover, no specific relief was requested by appellant of the trial court by calling this specific incident to the court's attention at the time of trial. The trial court, therefore, committed no error that is before us for review.

We conclude that the trial court did not err in denying appellant's motion no produce certain grand jury testimony of three persons who testified before the grand jury, but who were not called to testify before the jury on the trial itself, or in denying appellant's motion to produce a statement by an unnamed informer who testified before the grand jury, but who did not testify at the trial.

As to the contention that the trial court erred in denying appellant's motion to suppress evidence on the ground that the evidence had been obtained by "use of a revenue agent in lieu of a special agent to uncover incriminating evidence," without giving a Miranda warning and was a violation of taxpayer's Fourth, Fifth and Sixth Amendment rights is unsupported by the record. The trial court made full findings with respect to the normalcy of the original investigation by the revenue agent to the effect that when he discovered some evidence of possible criminal action, he notified the appellant that he had better get a lawyer and that he (the agent) was turning the matter over to a "special agent." This fact distinguishes the case from the others in this and other circuits in which the courts have begun applying, to some extent, some of the protections now afforded accused persons in other types of criminal actions.

Finally, we have carefully considered the record with respect to the introduction of certain documents, some of which were for a period of time following the years of prosecution. We agree with the position of the government to the effect that counsel for appellant did not make plain to the trial court which of the several specific documents were objected to and obtain a ruling with respect to each one, as to their relevancy on the issues involved in the prosecution years.

The judgment is AFFIRMED.

 

 

[63-1 USTC ¶9376]Paul J. Richard, Defendant, Appellant v. United States of America , Appellee

(CA-1), U. S. Court of Appeals, 1st Cir., No. 6061, 315 F2d 331, 3/29/63, Affirming District Court, 63-1 USTC ¶9243

[1954 Code Sec. 7201]

Tax evasion: Transcript of taxpayer's deposition: Newspaper publicity.--A stenographic transcript of a deposition voluntarily given by the taxpayer to the Internal Revenue Service was properly admitted at his trial for tax evasion, although notations indicated that something had been said off the record, where there was no showing that any material part of the deposition had not been transcribed and the Government had initially offered to black out all off-the-record comments. A newspaper comment on the cost to the Government of summoning one of twenty-nine witnesses did not prejudice the jury, in view of the overwhelming substantive evidence.

Frederick Bernays Wiener, Suite 851 Stoneleigh Court, 1025 Connecticut Ave., N. W., Washington, D. C. (Archie Smith, 134 Brown St., Providence, Edward M. Botelle, 414 Washington Trust Bldg., Westerly, R. I., on brief), for appellant. Norman Sepenuk, Department of Justice, Washington 25, D. C. (Louis F. Oberorfer, Assistant Attorney General, Lee A. Jackson, Joseph M. Howard, Department of Justice, Washington 25, D. C., Raymond J. Pettine, United States Attorney, Providence, R. I., on brief), for appellee.

Before HARTIGAN and ALDRICH, Circuit Judges, and GIGNOUX, District Judge.

Opinion of the Court

ALDRICH Circuit Judge:

The defendant was convicted by a jury of falsifying his income tax returns. Apart from one matter not pressed at the argument his complaints on this appeal are to the admission of a stenographic transcript of what might be loosely termed a deposition, voluntarily given by him to the Internal Revenue Service, described by counsel as bob-tailed, and to the denial of motions for a mistrial and for a new trial because of the publication, during trial, of certain newspaper articles.

The case was tried upon the net worth theory. The defendant makes no claim that the evidence did not warrant a conviction if his deposition was properly admitted. ¹ The transcript was duly authenticated, and there is no suggestion of duress or overreaching so far as the merits are concerned. In fact the defendant was represented by counsel throughout the taking. The sole objection pressed is that in a number of places there are notations indicating that something was said off the record, and in some instances there is a purported short summary, authorship not shown, of the subject matter of the off-the-record discussion, which had apparently included statements by the defendant. The government intially offered to black these matters out, but the defendant replied that this would not "help the situation. . .. [T]he document on its face . . . is not admissible." He explained his objection to be that the deposition was undeniably incomplete. The court having overruled that objection, nothing more was said by the defendant about the government's offer to black out "all off-the-record comments" and the document was introduced unmarred.

[Off-the-Record Discussions]

It is, of course, normally true that, upon objection, a party must offer the entire material portions of a statement. It would be a misconstruction to apply that principle here. There was no showing that any material part of the deposition had not been transcribed. The implication "on its face" is just the opposite. The natural assumption is that the parties went off the record for something considered to be immaterial. And, indeed, when, at the end of the deposition, defendant was asked if he had anything he wanted to add for the record, he replied he had not. If this is a "bob-tailed" transcript, the defendant is seeking to use a properly severed tail to wag the dog.

It may further be noted that at the outset of his deposition the defendant acknowledged that he understood that the answers "may be used . . . against you should the investigation result in a trial." He made no objection to the off-the-record procedure at the time. We find it surprising that under these circumstances he should think he could do so now.

The interpolations or interpretations of the off-the-record discussions present a different situation. If, however, the defendant had a separate objection to these insertions, he should have accepted the government's offer of excission. Again, the defendant is patently too late.

[Newspaper Publicity]

The facts with relation to the requested mistrial are these. The trial lasted six days, the government producing, as part of its case, some twenty-nine witnesses. One of these, a Mr. Wynhoff, having identified himself as a resident of Florida , testified that the defendant had paid him $3,000 for a certain horse. This figure entered into the government's net worth calculations. Wynhoff's direct testimony was not protracted. There was no cross. That evening a local newspaper published an item to the effect that bringing Wynhoff from Florida had cost the government $315.52 for thirteen words, or $24.27 per word." ² Although the article placed no special emphasis on it, it stated that the government was "compelled to summon Mr. Wynhoff when the defense refused to stipulate the $3,000 figure." The following morning the defendant moved for a mistrial. In denying the motion the court stated it assumed that the jurors had seen the article. The court did not suggest examining the jurors, individually or collectively, as to whether, if they had seen it, they had been influenced. Nor did the defendant at any time request such an examination.

Thereafter, in its charge, the court instructed the jury that the case should be decided "solely on the evidence that has been presented here in this courtroom," and that if any jurors had read any newspaper articles they should "disregard them completely." ¹³ In addition, the court gave the customary charge that the burden was on the government to prove its case beyond a reasonable doubt, and that no inferences should be drawn against the defendant for failure to take the stand.

Following the verdict the defendant moved for a new trial. Accompanying the motion was an affidavit to the effect that two jurors, although they had not seen the article in question, had seen another of like tenor the following morning, and that one recalled (nine days after trial) that it dealt with the cost to the government of summoning a witness from Florida. There was no indication that either juror remembered the defendant's refusal to stipulate. In denying this motion the court stated that the evidence to support the verdict was "overwhelming," and that no "conscientious and intelligent" jury could have reached any other result. Before us defendant does not challenge this characterization; nor is there anything contradictory thereto in his record appendix.

The daily newspaper is one of the facts of life. We do not, of course, disagree with the defendant that some publications may be so prejudicial that the court should at least volunteer to interrogate the jury, or should even grant a mistrial out of hand. Colorful judicial observations quoted by the defendant about the impossibility of eradicating skunks, or of obliterating elephants, however, do not become apposite until it is determined that such zoological phenomena have been introduced. The jury, knowing that the witness came from Florida , already appreciated that his testimony involved expense. ⁴ There was nothing startling about the particular amount. The only new fact brought to the jury's attention was the defendant's refusal to stipulate.

The defendant, of course, was not obliged to stipulate. Even though disclosure or comment ⁵ was improper, viewing this case as a whole we cannot quarrel with the district court's decision that these publications, relating to one of twenty-nine witnesses, did not prejudice the jury so as materially to increase the likelihood of a finding of guilt. Particularly is this so where the substantive evidence of guilt is "overwhelming." United States v. Tramaglino, 2 Cir., 1952, 197 F. 2d 928, cert. den. 344 U. S. 864; Williams v. United States , 4 Cir., 1954, 218 F. 2d 276; United States v. Lee, 7 Cir., 1939, 107 F. 2d 522, cert. den. 309 U. S. 659; McFarland v. United States , D. C. Cir., 1945, 150 F. 2d 593; cert. den. 326 U. S. 788.

Judgment will be entered affirming the judgment of the District Court.

¹ The government argues, persuasively, that there was ample evidence without the deposition, but for the purposes of this appeal we will accept defendant's position that it was an essential part of the government's case.

² The total figure was right, but the division was wrong, as Wyhoff used seventeen words.

³ The government, quite properly, says that such an instruction should not identify an offending article. However, we might suggest that it is often desirable to instruct a jury of the unfairness of considering newspaper articles because, by the very circumstance that they are not in evidence, there is no opportunity of contradicting their accuracy or otherwise explaining them away.

⁴ Comment about the cost of prosecution is not irremedial error. Windisch v. United States, 5 Cir., 1961, [61-2 USTC ¶9720], 295 F. 2d 531; Calico v. Commonwealth, 1911, 145 Ky. 641; McDonald v. State, 1927, 193 Wis. 204.

⁵ The articles not only revealed the defendant's refusal to stipulate, but gave the source as the United States Attorney. The defendant accordingly argues that we should view them in a more serious light. Without passing upon such a principle, we point out that at the trial defendant's counsel expressly disclaimed "blaming [the United States Attorney] for this appearing in here. Of course, he has no control over these things." The motion for new trial, likewise, placed no blame on the United States Attorney. The defendant now argues that he must have been responsible. We will not consider on appeal what was disclaimed below. We may add that it seems quite apparent from the record that the United States Attorney was perturbed by, rather than the instigator of, the publications.

 

 

 

[58-2 USTC ¶9934]William C. Wolfe, Appellant v. United States of America , Appellee

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 13,222, 261 F2d 158, 11/13/58, Aff'g an unreported District Court decision

[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]

Income tax evasion: Intent: Admissibility of events after crime.--Evidence (prepared 3 years after the last year covered in a prosecution of taxpayer for income tax evasion and 2 years after the investigation was started) that personal expenditures--traveling expenses, entertainment, repairs and additions to personal residence--paid for by taxpayer's corporation and deducted by it as a business expense, and not reported as income by taxpayer, were accounts receivable from taxpayer to the corporation and capital expenditures, was properly excluded. The questions for decision were whether the expenditures were caused to be entered on the corporate books and to be deducted as business expenses with intent to evade and defeat corporate income tax, and whether taxpayer, having failed to include such expenditures in personal income, filed false personal income tax returns with intent to defraud. Such expenditures paid by a corporation to a president and principal stockholder (taxpayer) as reimbursement for ordinary and necessary business expenses, where they are in fact not so incurred, are not deductible by the corporation and are income to the taxpayer when paid. District Court affirmed.

[1939 Code Sec. 3615(a)--similar to 1954 Code Sec. 7602]

Production of books: Possession through purchase of corporation's assets.--Even though taxpayer had possession of the corporate books by purchase of his corporation's assets in liquidation, he was properly required to produce the books. District Court affirmed.

Charles F. Wood, of Greenebaum, Barnett & Wood, Louisville, Ky. (Bernard H. Barnett, A. Robert Doll, of counsel, Greenebaum, Barnett & Wood, Kentucky Home Life Building, Louisville, Ky., were with him on brief), for appellant. Fred B. Ugast, Department of Justice, Washington, D. C. (Charles K. Rice, Assistant Attorney General, Joseph M. Howard, Joseph R. Cannon, Washington, D. C., J. Leonard Walker, United States Attorney, Louisville, Ky., were with him on brief), for appellee.

Before SIMONS, Chief Judge, ALLEN and MARTIN, Circuit Judges.

PER CURIAM:

An indictment in six counts was returned against appellant charging violations of 26 U. S. C., Section 145(b). The jury found appellant not guilty under Counts 1, 4 and 6 and guilty under Counts 2, 3 and 5. Counts 2 and 3 charged that appellant willfully and knowingly attempted to evade and defeat income taxes due and owing from the Wolfe Paint & Varnish Company, Inc., hereinafter called the corporation, for the fiscal years ended June 30, 1951 and 1952, respectively. Count 5 charged that appellant willfully and knowingly attempted to evade and defeat personal income taxes owed by him and his wife for the calendar year 1951. Appellant at all times involved was president and principal stockholder of the corporation.

The jury's verdict was supported by ample evidence. The finding that appellant was guilty of causing false and fraudulent income tax returns to be filed by the corporation and also of causing false and fraudulent joint income tax returns to be filed for the calendar year 1951 for himself and his wife, was supported by a detailed stipulation between the parties, by admissions of appellant in open court, by financial records including corporation checks and appellant's personal checks, and by the testimony of numerous disinterested witnesses.

[Personal Expenses of Corporate President]

Personal items of appellant's travel and entertainment expenses, excessive in amount, paid for by the corporation and deducted as corporate business expense, caused a large understatement of income by the corporation and a corresponding understatement of personal income by appellant for each of the years covered by Counts 2, 3 and 5 of the indictment. The items wrongly charged to and paid by the corporation as traveling and entertainment expenses included a trip to a football game, a stay at a resort, purchase and installation of a dishwasher in appellant's home, traveling expenses of appellant and his wife on vacation in the Caribbean, upholstering of a divan belonging to appellant, purchase of a television set, and luggage for a gift to one of appellant's relatives. Items furnished at appellant's residence and charged to the corporation included substantial amounts of fuel oil, storm doors and windows, crushed stone for a driveway, alleged repairs, installation of rubber and asphalt tile, construction of a tool house and an additional room on appellant's residence. Corporation employees performing services for appellant in connection with the above items were paid by the corporation.

[Willful Intent]

Cogent evidence was also presented at the trial bearing upon the willful intent of appellant to evade and defeat personal and corporation income taxes. Thus while the corporation bookkeeper ostensibly was regularly furnished by appellant with an account of his personal traveling expenses, it was appellant's custom in connection with such trips to give the bookkeeper a single figure without any itemization whatever. Thereupon the bookkeeper drew a corporation check in the identical amount to reimburse appellant. The bookkeeper testified that, at the time construction work was done by corporation employees on appellant's property and charged to the corporation, she did not know of the construction. She testified that appellant told her these were business expenses.

An accountant audited the corporation books at regular periods. He observed that evidence to support appellant's claimed travel and entertainment expense was lacking and several times warned appellant to keep a detailed record of such expenses and not to mingle personal with corporation expenditures. These warnings were ignored. A number of substantial items that were questioned by the accountant were also questioned by the Internal Revenue Agent Devereaux, who was conducting the investigation. Appellant falsely stated to the agent that these were items of expenses at the plant. At the trial appellant admitted that in explanation of these matters he had lied to the Internal Revenue Agent. A number of witnesses testified that alterations and erasures were made on invoices changing directions as to the place of delivery of materials or other purchases. The changes were such as to make it appear that the invoices covered expenditures at the plant instead of at appellant's residence. Appellant testified that he made one of these alterations after the investigation had started. It was also testified that appellant told an employee of the Stoll Oil Company to charge certain fuel oil to the corporation and not to say anything about it.

Appellant admitted that he had "drawn more traveling expenses than" he "had spent." Speaking of Agent Devereaux's showing appellant the excessive amounts drawn, appellant testified, "I believe he [Devereaux] was right." He said that when he checked the figures "there wasn't too much difference" between Mr. Devereaux's figures ($27,826.50) and his own ($21,397.65). Since the latter figure was appellant's computation of the profit he had made in overstating his traveling and entertainment expenses and took no account of living expenses, which rightly were included in the calculation of Mr. Devereaux, the discrepancy is even less than indicated by the above figures. Defendant's admission supports the computation of the Internal Revenue Department as to deficiencies determined.

[Admissions]

It is unnecessary to discuss appellant's explanations of these statements nor to further itemize the numerous transactions in which materials, purchases and labor delivered to or done for appellant personally were charged to the corporation. Suffice it to say that under appellant's stipulation, his own admissions, under the books and financial records of the corporation, the record of his personal checks, and other substantial evidence, the jury was clearly entitled to render the verdict attacked here. The deficiencies in corporation income taxes were calculated by the government as being $18,765.79 for the fiscal year ended June 30, 1951, and $4,370.83 for the fiscal year ended June 30, 1952. Deficiencies in personal income tax due from appellant and his wife for the calendar year 1951 were calculated to be $20,075.50.

[Evidence Covering Events After Crime]

The principal question presented is whether the court erred in excluding the testimony of an accountant, Mr. James Amick, who in 1955, three years after the last year covered in the prosecution and two years after the investigation was begun, prepared two exhibits, one of corporation income and one of personal income of defendant and his wife (Exhibits 24 and 25, respectively). In these exhibits, which were offered in evidence, the accountant made a theoretical allocation of certain items in controversy, although not covering the admittedly false and excessive expenditures of appellant called business expenses. The allocations seem to have been made with the purpose of showing that a large number of such item should have been treated as capital expenditures instead of business expenses. When the corporation was liquidated in 1955 appellant claims to have bought the corporation assets, including books and records. The accountant stated that in calculating appellant's gain upon the liquidation certain items were treated by the accountant as capital gains. Thus in effect it is argued that a capital gains tax was paid with reference to the items in question.

As to Exhibit 24, the accountant testified that his treatment of these items, conceded by appellant to have been overpaid, was based on matters "outside this proceeding."

In Exhibit 25, which purports to be an adjustment by the accountant of the net personal income of appellant and his wife, the accountant ignored all of the admitted excessive payments made to appellant for traveling and entertainment expenses, as well as all his personal expenditures paid for and deducted by the corporation. The accountant testified that, when the corporation was liquidated in 1955, the traveling and entertainment payments and appellant's personal expenditures paid for by the corporation were treated by the accountant at that time as "accounts receivable from Mr. Wolfe to the corporation."

The account admitted that the corporation books contained no entry listing travel and entertainment expenses of appellant and personal expenditures of appellant paid by the corporation as accounts receivable. The cost of the tool house and the additional room constructed at appellant's residence and charged to the corporation was charged on the corporation books as a business expense. However, the accountant in Exhibit 25 charged these items as capital expenditures and again resorted to matters outside the record in order to calculate the value from depreciated cost.

[Matters Outside Record]

Appellant contends that the exclusion of these exhibits and the failure to send them to the jury deprived him of his constitutional right to show that the government's calculations were wrong. Since the proffered evidence covered events long after the crimes charged had been committed, if the evidence was admissible the court was vested with a sound discretion to exclude it. United States v. Stoehr, 196 Fed. (2d) 276, 281-283 (C. A. 3) [52-1 USTC ¶9299], certiorari denied 344 U. S. 826. If this is the rule which should be applied here we are convinced that this discretion was not abused. The accountant had no personal knowledge of the facts, the exhibits were made up from matters outside the record and long after the crimes charged were committed. However, we think that the exhibits were clearly not admissible because they were irrelevant and immaterial. The issues of fact here were not whether the expenditures involved were capital expenditures rather than ordinary and necessary business expenditures. The controlling question of fact was whether the expenditures when made were properly charged to the corporation. If the jury determined that they were not properly charged to the corporation, they then had to determine whether appellant caused them to be entered on the corporation books and to be deducted in the corporation tax returns as business expenses with the intent to evade and defeat the tax, and whether appellant filed false personal income tax returns for himself and his wife, with intent to defraud. It was at no time an issue in the trial whether the expenditures of appellant should have been treated as capital gain. He had not reported the expenditures either as ordinary income or capital gain. Moreover, appellant did not rely upon the accountant's opinion that the expenditures should be charged as capital gain. Hence, the opinion of the accountant was relevant neither upon the question whether appellant did the acts charged, nor upon the question of intent. White v. United States , 216 Fed. (2d) 1, 4 (C. A. 5) [54-2 USTC ¶9653]. The exhibits were rightly excluded.

[Items of Income and Expense]

Other questions may be dealt with more briefly. The amounts paid by the corporation to its president and principal stockholder as reimbursement for ordinary and necessary business expenses, where they were in fact not so incurred, are not deductible by the corporation. These payments constituted income to appellant in the year paid. United States v. Schenck, 126 Fed. (2d) 702 (C. A. 2) [42-1 USTC ¶9363], certiorari denied 316 U. S. 705; United States v. Lange, 161 Fed. (2d) 699 (C. A. 7) [47-1 USTC ¶9249]; Lash v. United States, 221 Fed. (2d) 237 (C. A. 1) [55-1 USTC ¶9344], certiorari denied 350 U. S. 826. The case of Williams Company, Inc. v. Lambert, 56-2 USTC ¶9839, is not controlling. That case presented no question of evasion or of avoidance of income tax. Williams v. United States , 245 Fed. (2d) 559 (C. A. 5) [57-2 USTC ¶9759].

[Production of Books]

Moreover, appellant was required to produce the books of the Wolfe corporation under a subpoena duces tecum properly presented, even though he had possession of the books by purchase of the corporation's assets in liquidation. Wilson v. United States, 221 U. S. 361; Wheeler v. United States, 226 U. S. 478, 489; Grant v. United States, 227 U. S. 74, 79, cited with approval in Curcio v. United States, 354 U. S. 118, 122.

The judgment of the District Court is affirmed.

 

 

[55-2 USTC ¶9710] United States of America , Plaintiff-Appellee v. Indian Trailer Corporation and Harry L. Bartholomew, Defendants-Appellants

(CA-7), In the United States Court of Appeals for the Seventh Circuit, No. 11359. October Term, 1955, October Session, 1955, 226 F2d 595, October 21, 1955

Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division.

[1939 Code Sec. 145(b)--substantially unchanged in 1954 Code Sec. 7201]

Tax evasion: Criminal prosecution: Instructions to jury: Admission of evidence--Taxpayers Indian Trailer Corporation and Harry L. Bartholomew, its president, were convicted of wilfully and knowingly attempting to evade income tax by filing false and fraudulent returns. Of the four assignments of error made, the Court recognized two: the erroneous refusal to give one of taxpayers' instructions based upon their theory of the case; and the erroneous admission into evidence of a 12-page transcript of questions asked of Bartholomew at the office of the Intelligence Unit of the Bureau of Internal Revenue. The Court held that the errors committed affected the substantial rights of the defendants, and reversed the conviction and remanded the cause for a new trial.

Robert Tieken, Mitchell S. Rieger, John Peter Lulinski, for plaintiff-appellee. Joseph E. Green, Richard E. Gorman, for defendants-appellants.

Before DUFFY, Chief Judge, and MAJOR and SWAIM, Circuit Judges.

[Facts]

DUFFY, Chief Judge:

Defendants, Indian Trailer Corporation and Harry L. Bartholomew, its president, were convicted under a single count indictment of violation of §145(b), Title 26 U. S. C. A., to-wit: of wilfully and knowingly attempting to evade a large part of the tax owing by the corporation for the fiscal year ending October 31, 1946, by filing false and fraudulent returns.

The cause was tried as a consolidated case was two other indictments in one of which Harry L. Bartholomew was charged with a like crime in regard to his individual income for the calendar year 1946, and in the other, Bartholomew's wife, Julia, was charged with a like crime in regard to her individual income for the same year. The jury disagreed as to the charges in the indictment naming Harry L. Bartholomew individually, and acquitted Julia Bartholomew of the charges made in the indictment against her.

[Error Claimed]

Defendants rely on four principal claims of error. 1) Failure to sustain a Motion to Dismiss which raised the question of the Statute of Limitations; 2) The refusal to admit a record of the corporation known as "Bill of Materials"; 3) Admitting as a matter of rebuttal a 12-page stenographic transcript of an interview of government agents with defendant Bartholomew; and 4) based on instructions given and refused.

The indictment in the case at bar was returned on January 7, 1953. It alleges the filing of false and fraudulent returns on January 9, 1947. The 6-year Statute of Limitations is applicable. Proof was offered by defendants that the returns were, in fact, filed on January 6, 1947, and that the indictment was thus barred by the Statute of Limitations.

[Checks and Returns Mailed]

Bartholomew testified that on January 4, 1947, a Saturday, he signed three checks each drawn on the corporation's account, and each made payable to the Collector of Internal Revenue, and that the said checks were numbered consecutively. The first of these checks, No. 8544, in amount of $21,823.70, was in payment of the final portion of the taxes owing on the corporate return in question, and was stapled to such return; the second of such checks, No. 8545, was in the amount of $8,046.77 and was given in payment for the excess profits tax for the fiscal year under consideration, to which return it was likewise stapled; the third of said checks, No. 8546, was in the amount of $8,500.00 and was given to discharge a quarterly payment upon Bartholomew's individual declaration of estimated tax, such declaration being also stapled to the check. He testified that all three checks were prepared by his bookkeeper, given to him by his auditor, Weinig, and simultaneously signed by him, and that all three returns, with checks attached, were placed in a single envelope with postage prepaid, duly addressed to the Collector of Internal Revenue.

It was stipulated that in the event mail was posted in a box at either of the post offices where Bartholomew customarily deposited the company mail, it would reach the Collector's office in the ordinary course of the mails on Monday, January 6, 1947. On the face of the declaration of the estimated tax, which was paid by check No. 8546, there appears a government stamp showing the document was received by the Collector on January 6, 1947. Mr. Weinig, the auditor, testified that the two returns of the corporation and the declaration of estimated individual tax were signed on January 4, 1947, and that the three checks, Nos. 8544, 8545 and 8546 were prepared in sequence on that day. Mrs. Bartholomew testified that she placed the envelope in the mail at a certain post office box which she identified as being the box she always used when posting mail for the company.

It is apparent that a strong showing was made that all of the documents were mailed to the Collector on January 4, and it is without dispute that one of them was received by the Collector on January 6. If the other two were received on the same date, prosecution on the indictments was barred by the Statute of Limitations.

[Government Witness]

On this point the government called only one witness who testified that he was in charge of receiving tax returns in the office of the Collector in Chicago , and he described the customary procedure. He testified that the stamp showing the date of the receipt of the income tax return of the corporation was January 8, 1947, and this indicated that the return was actually received by the Collector's office on that date. It further appeared in answer to the trial court's questions, that all three checks had cleared the bank on the same day, January 9, 1947. Judge Barnes, who heard the testimony on the Motion to Dismiss, made a finding that the return in question was actually received by the Collector on January 8, 1947. There was some evidence which, if believed by him, supports such finding. Improbable though it may seem to us, we cannot disturb the court's finding as he was the sole judge of the credibility of the witnesses who testified before him.

[Unaccounted for Overpayments]

Defendant, Indian Trailer Company, was in the business of manufacturing mobile house trailers to be sold to dealers or distributors. It was the theory of the government's case that during the period in question the distributors paid to defendants $200.00 per trailer over the invoice price, and that such receipts were not shown on the books of the corporation, nor were they otherwise accounted for to the government. The defendants admitted that Bartholomew received money from the distributors, the receipt of which was not shown on the books of the corporation, but claimed that such funds were used for the purchase of scarce materials used in the manufacture of trailers, which purchases likewise did not appear on the records of the corporation, same having been obtained at over-ceiling prices. Defendants claim the monies so received were placed by Bartholomew into a procurement pool or "kitty" which was not a fund of the corporation, and that this fund was totally exhausted by using same for the purposes for which it was established. Bartholomew claimed he never received full reimbursement for his own personal advances to the corporation from his own funds.

During the period in question trailers such as manufactured by defendant corporation were in short supply and there was a broad market for same. The distributors and dealers were clamoring for more trailers than they had been receiving. Testimony was received showing that many more trailers were produced than could have been manufactured with material obtained from regular sources of supply. The evidence is quite clear that many of the distributors and dealers knew that the monies they paid over the regular invoice price was due to the difficulty defendants were having in obtaining material necessary for the construction of the trailers. Nevertheless, if the only question before us was the sufficiency of the evidence, we would feel that the judgment should be affirmed although we recognize that the case was a close one. Any claimed error must be closely scrutinized, for such error might have been the deciding influence which caused the jury to find the defendant corporation and its president guilty.

We think serious questions are presented as to an instruction which was refused and in the admission of certain evidence offered by the government.

[Error in Instruction]

In considering whether substantial and prejudicial error was committed, we must keep in mind that the burden was upon the government to prove beyond a reasonable doubt that the defendant did wilfully and knowingly attempt to defeat and evade taxes as alleged, and that the burden of proof never shifted to the defendant. United States v. Fenwick, 7 Cir., 177 Fed. (2d) 488, 492 [49-2 USTC ¶9448]. And, on the question of instructions "* * * the defendant is entitled to have presented instructions relating to a theory of defense for which there is any foundation in the evidence, even though the evidence may be weak, insufficient, inconsistent, or of doubtful credibility." Tatum v. United States , D. C. Cir., 190 Fed. (2d) 612, 617.

[Refused Instruction]

Defendants tendered the following instruction which was refused: "The court instructs the jury that if amounts of money over and above invoice payments were received by the defendants or any of them under understandings and agreements that such moneys would be placed in a fund and would be used to purchase materials in order that the contributors to the fund would get more trailers, then such payments and such fund would not constitute income to any of the defendants in these cases and you should find all and each of said defendants not guilty." This tendered instruction was consistent with what the defendants, in their opening statement, asserted would be proved, and the theory which was supported by testimony of some of the defendants' witnesses.

The defendants were entitled to have an instruction based upon their theory of the case. This was not a prosecution for selling trailers at over-ceiling price. The big question before the jury should have been whether there was a wilful intent to evade taxes. We hold failure to give such instruction was error. Marson v. United States , 6 Cir., 203 Fed. (2d) 904, 912.

[Error in Admission of Document]

On April 11, 1951, Bartholomew was interviewed by revenue agents at the office of the Intelligence Unit of the Bureau of Internal Revenue. The government offered in evidence a 12-page transcript of the questions there asked and the answers given. Over the objection of defendants the document was received in evidence and later the jury took same to the jury room. The only impeaching question asked of Bartholomew was with reference to a question appearing on page 5 of the transcript: "Q. Did you, Mr. Bartholomew, ever solicit, request, receive or collect any amount representing over-payment or payment in excess of invoice price for trailers sold to your customers during the year 1946? A. I did not." The witness admitted that he made the answer appearing in the transcript and gave testimony in explanation thereof.

If the government desired to have the entire 12-page transcript received into evidence, impeaching questions should have been asked. Bartholomew was entitled to have his attention drawn to the particular statement proposed to be proven. Mattox v. United States , 156 U. S. 237. The exhibit in question contained questions and answers on matters that had little, if any, relevance to the case at bar, and may well have been prejudicial to the defendants. To illustrate, there were questions pertaining to threats Bartholomew had received from dealers because of his activities as President of the Capital Trailer Coach Association; the reference to checks received from dealers who were not witnesses in the case; the account of a fire at defendant's plant in 1945, and the disposition made of the insurance proceeds. We think the admission of this document was error.

Defendant sought to introduce into evidence a document entitled "Bill of Materials" which contained a list of items necessary to produce a trailer coach according to the specifications then in use. Defendant Bartholomew testified the materials listed were identical with the materials necessarily used during the period in question.

The importance to the defendants of having this information before the jury is their claim that it would establish that their expenditures for materials were, in fact, great than the amount shown on their tax return, and that the monies paid in by their dealers and distributors were expended for materials not shown on the company's books. Departments insist that this Exhibit would demonstrate that all the trailers actually produced by the company during the period in question could not possibly have been manufactured using only the goods which were purchased with the company's funds.

[Bill of Materials Inadmissible]

Defendants' inventory of materials on hand at the beginning of the period (October 31, 1945) was received in evidence. Likewise received were defendants' purchases as per invoice of steel channels, nails, and wires during the pertinent period. Also received was the inventory of such materials as remained at the close of the period. Defendants contend that to complete the proof necessary to tell the true story of the amount of materials that went into the construction of the trailer coaches, defendants offered Exhibit 35, the Bill of Materials. The trial court ruled Exhibit 35 was not admissible.

Whether Exhibit 35 should have been received into evidence depends upon the interpretation of Title 28 U. S. C. A. §1732. That statute, in pertinent part, reads:

"Title 28, §1732(a) In any court of the United States * * * any writing or record, whether in the form of an entry in a book or otherwise, made as a memorandum or record of any act, transaction, occurrence, or event, shall be admissible as evidence of such act, transaction, occurrence, or event, if made in regular course of any business, and if it was the regular course of such business to make such memorandum or record at the time of such act, transaction, occurrence, or event or within a reasonable time thereafter.

"All other circumstances of the making of such writing or record, including lack of personal knowledge by entrant or maker, may be shown to affect its weight, but such circumstances shall not affect its admissibility."

One of the purposes of this statute was to avoid the strict requirements of the common law which made it necessary to produce as witnesses, every person who had anything to do with the record, in order to prove its authenticity. However, the requirement remains that the record must be made in the regular course of business evidencing acts, transactions, occurrences, or events taking place on or about that time. Palmer et al. v. Hoffman, 318 U. S. 109, 115.

Exhibit 35 was prepared more than one month after the close of the fiscal year set forth in the indictment. No "acts, transactions, occurrences, or events," within the meaning of §1732 are evidenced by the document. It does not appear that the Exhibit was a periodic analysis or summary which was customarily kept in the regular operation of its business. We think it did not meet the requirements of §1732 and was not admissible into evidence.

By what we have said we do not mean to indicate that Exhibit 35 could not be used at all. We think such a document could be used as a memorandum to refresh Bartholomew's memory if the proper foundation is laid showing the data was obtained from the books and records of the company.

We hold that the errors committed affected the substantial rights of the defendants and cannot be regarded as harmless errors under Rule 52, Federal Rules of Criminal Procedure. Bihn v. United States , 328 U. S. 633; United States v. Donnelly, 7 Cir., 179 Fed. (2d) 227, 233.

The judgment of conviction is reversed and the cause is remanded for a new trial.

Reversed.

 

 

[49-2 USTC ¶9482] United States of America v. Fred Pannell, Appellant

(CA-3), United States Court of Appeals for the Third Circuit, No. 9988, 178 F2d 98, November 28, 1949

Appeal from the Judgment of the United States District Court for the Eastern District of Pennsylvania.

Penalties: False return: What constitutes punishable felony.--The crime denounced by Code Sec. 145(b) is complete when the taxpayer wilfully and knowingly files a fraudulent return with intent to evade taxes. United States v. Croessant, 49-2 USTC ¶9483, followed.

Penalties: Jury instructions: Guilt of co-defendant.--There was no error in refusing to give requested jury instructions emphasizing certain phases of the evidence where the jury had been charged to consider all relevant facts and circumstances. Taxpayer was not entitled to show that his co-defendant had entered a plea of nolo contendere, because, even treating such plea as an admission of guilt, it would not show that taxpayer was not guilty. Affirming an unreported decision of the District Court.

David Berger, Land Title Bldg., Philadelphia 10, Pennsylvania , Attorney for Appellant. Thomas J. Curtin, Assistant United States Attorney, U. S. Court House, Philadelphia 7, Pennsylvania, for Appellee.

Before MARIS, GOODRICH and O'CONNELL, Circuit Judges.

Opinion of the Court

GOODRICH, Circuit Judge:

The defendant was convicted in the District Court of a violation of Section 145(b) of the Internal Revenue Code. He makes three points in his argument for reversal. We shall discuss them in order.

1. The first point has to do with the question of what acts constitute a crime punishable as a felony by the terms of Section 145(b). The identical question was raised and discussed in United States v. Croessant, 178 F. (2d) 96 (3d Circuit) [49-2 USTC ¶9483], decided this day. The discussion of the legal question there found is equally applicable to this case. The adverse answer there given to the defendant's argument governs the situation here.

2. The defendant complains that certain instructions to the jury which he asked for were not given. The instructions submitted by the defendant were not completely accurate, we think, but that difficulty could easily have been removed by editing. They emphasized certain phases of the evidence. ¹ Our question, however, is not whether it would have been improper to give the charge requested. The question is a wider one: did the Judge's charge, taken as a whole, cover the points adequately and present to the jury the questions which they had to decide? The Judge's charge in this case is detailed and thorough. On the question of the defendant's guilt, he told them, "you will determine whether, if and to the extent that his tax returns were false, he knew them to be false and, by means of them willfully and knowingly attempted * * * to defeat a large part of the * * * tax * * * owed by him to the United States * * *." He brought the same problem before them more than once in varying language. He gave them definitions of "knowingly" and "wilfully." We think the jury could not possibly have been misled if they followed directions. The defendant's requests, emphasizing as they did, certain phases of the evidence were not demandable as a matter of right. The court had already told the jury that they were to consider all the relevant facts and circumstances.

3. Defendant complains that the court refused to admit testimony that his wife, who had been jointly indicted with him, had entered a plea of nolo contendere. He agrees with the rule that such an admission of guilt by an alleged joint offender would not be evidence against him. Toner v. United States , 173 Fed. (2d) 140 (3d Cir. 1949). But he says that he may offer, on his own behalf, the fact of his co-defendant's admission of guilt to establish lack of it in himself. His argument works the nolo contendere plea pretty hard. Just what is involved in the plea is shrouded in some doubt. ² It appears that the plea was left in present Rule 11 of the Federal Rules of Criminal Procedure to preserve a sometimes useful device by which a defendant may admit his liability to punishment without being embarrassed in other proceedings. ³

But even if we should treat the plea of nolo contendere as a plea of guilty for the purposes of discussion here, the District Judge was still right. The fact that Mrs. Pannell may have admitted that she was guilty did not prove that her husband was not guilty also. This is not a case where admission or proof of guilt by one is inconsistent with guilt of another. ⁴ See Bacon v. State, 147 Tex. Cr. App. 605, 183 S. W. 2d 177 (1944).

The judgment of the District Court will be affirmed.

¹ The complaint is especially made for failure to charge on defendant's points 9, 10, 11 and 12. They are as follows:

"9. Before the defendant can be convicted of the offenses charged in the indictment the jury must find some affirmative wilful act on his part.

"10. If the jury believe that the defendant devoted his whole time to the farming part of his business and left all the accounting and money matters solely to his wife, the fact that his income was in excess of the amount shown in the income tax returns would not, in and of itself, be evidence of an affirmative wilful act on his part.

"11. If the jury believe that the defendant relied on the assumption that his wife maintained accurate records of all accounting and money matters connected with his business, and that she submitted these records to the accountant to prepare the income tax returns, the fact that the returns did not disclose his true income would not, in and of itself, be an affirmative wilful act on his part.

"12. If the jury believe that the defendant relied on the assumption that the returns were prepared by the accountant from records furnished to him by his wife, the fact that he subscribed them without examination would not, in and of itself, be evidence of an affirmative wilful act on his part."

² See discussion by Mr. Justice Stone in Hudson v. United States, 272 U. S. 451 (1926).

³ New York University School of Law Institute--Proceedings, Vol. 6, pp. 187-188 (1946).

⁴ See 1 Wigmore on Evidence 573 (3d ed. 1940).

 

 

[61-1 USTC ¶9327]Charles A. Watkins, d/b/a C. A. Watkins Company, Defendant, Appellant v. United States of America, Plaintiff, Appellee

(CA-1), U. S. Court of Appeals, 1st Circuit, No. 5671, 287 F2d 932, 3/28/61, Rev'g and rem'g unreported District Court decision

[1954 Code Sec. 7201 and 1939 Code Sec. 145(b)]

Criminal procedure: Wilful evasion: Evidence: Instructions.--Prejudicial error was found in the trial court proceedings as follows: (1) the District Court was unduly restrictive in ruling as immaterial evidence of the defendant-taxpayer as to the extent of his business with a particular customer and the extent of his business with his supplier where the offer of evidence tended to lessen the probability that defendant-taxpayer intentionally omitted income or knowingly used incorrect memoranda to prepare his returns; (2) the admission into evidence of a summary of travel expenses was prejudicial; and (3) the District Court misstated the law, regarding prepayments for goods to be delivered in the future, in ruling upon the admission of evidence and in its charge.

Robert A. Raulerson, Manchester , N. H. (McLane, Carleton, Graf, Greene & Brown, Manchester , N. H., on brief), for defendant-appellant. Alexander J. Kalinski, Assistant United States Attorney, Concord, N. H. (Maurice P. Bois, United States Attorney, Manchester, N. H., on brief), for plaintiff-appellee.

Before HARTIGAN and ALDRICH, Circuit Judges.

Opinion of the Court

HARTIGAN, Circuit Judge:

Defendant-appellant, Charles A. Watkins, was found guilty on three counts of an indictment charging him with wilfully and knowingly attempting to evade and defeat a large part of the income tax due and owing by him and his wife to the United States of America by filing false and fraudulent joint returns. ¹ The district court entered judgment on January 5, 1960 and imposed a fine of $7,000 on Count I, a fine of $6,000 plus costs on Count II and a term of imprisonment of three months on Count III.

Defendant is an independent distributor of industrial rubber goods. During part of the three year period he maintained an inventory of his own but by the end of 1954 he had completely disposed of it. In general, he would obtain an order for goods from a customer and, in turn, order them from his supplier to be shipped directly to defendant's customer. After receipt of an invoice from his supplier, defendant would bill his customer. The customer generally would deduct a cash discount, if applicable, and also freight, and remit the balance to the defendant. Defendant testified that he was not always able to pair off the receipts with the bills, since one receipt might cover a number of bills. He also testified that in keeping his records he would ordinarily record a receipt of payment from a customer in three places, if he followed his system, i.e., (1) in the ledger of the particular customer's account, (2) on his bank deposit slip and (3) in a memorandum list of sales receipts. The total receipts recorded on his income tax returns coincided approximately with the total of the checks in the memorandum list for each year, however, there were twenty alleged omissions from this memorandum list, which was used by defendant in making out the returns. These checks were all entered somewhere in his records, but did not appear in the memorandum list. Defendant conceded that eighteen of these items had been omitted from the returns but contended their omission was not wilful.

Defendant contends that the district court erred prejudicially, inter alia, (1) by restricting him in the scope of his presentation of evidence tending to show lack of willfullness, (2) by failing to strike certain schedules and summaries which were inaccurate, misleading and prejudicial, and (3) by restricting the defense in regard to evidence that a prepaid item was not taxable income and erroneously charging the jury in regard to this item.

After examining the record in regard to the first contention, i.e., that the defendant was prejudicially restricted in his presentation of evidence tending to show that the omission of the sales receipts from his income tax returns was not wilful, we believe that the district court was unduly restrictive. The trial judge allowed the government to put in evidence (1) of unreported receipts from prior years, (2) of double deductions, and overstated deductions taken by the defendant on his returns both for the years within the indictment and for prior years; (3) of computations which in a government expert's opinion must have been made by defendant to make the book entries he did in regard to certain unreported items; and (4) of stock purchases and other large expenditures made when defendant's income tax returns indicated limited amounts of net income and limited amounts of cash available for such expenditures. The district court ruled as immaterial defendant's evidence of (1) the extent of defendant's business with Harold Haines, from whom had come about six of the omitted sales receipts; (2) the testimony of George P. Fleming concerning defendant's manner, method and extent of business with Quaker Rubber Corp., defendant's principal supplier.

We believe that these offers of evidence were relevant to defendant's contentions that his omission of sales receipts was not wilful. See 1 Wigmore, §§ 34-36 (3d ed. 1940). Each of these offers tended to lessen the probability that defendant intentionally omitted these receipts from his income tax returns, or knowingly used an incomplete memorandum list in the preparation of his returns and also tended to strengthen the probability that defendant, allegedly an imprecise bookkeeper, had unintentionally omitted these sales receipts from his returns. Particularly in view of the wide scope given the government we believe that defendant was prejudiced in the exclusions of these items of evidence.

Defendant also contends that the district court erred by allowing the admission into evidence of a summary (Ex. 49) comparing the amounts listed by defendant in his tax returns as deductible travel expenses with the amounts recorded by defendant in a memorandum book. The testimony of defendant was that the memo book was a record of his cash payments in regard to travel expenses. He testified that there were also some checks which related to the amounts claimed in the returns and which were not included in the memorandum book. The special agent, a witness for the government, testified that he had not gone through the checks which might have been taken on the returns under traveling, etc. because the total amount of such checks was not sufficient. We believe that, in view of this testimony, the summary which listed the various expense items shown in the returns, totalled the figures in the notebook and labelled the difference "overstated" was a prejudicial exhibit and should have been stricken. There may have been a gap between the amount able to be supstantiated by either memoranda of cash expenditures or checks but a summary exhibit which misleadingly magnifies that gap is certainly prejudicial. ²

Defendant also claims error in the admission of (1) a summary of defendant's income data over a six year span as reflected by his income tax returns, and (2) a summary of "total cash available per returns" for the same six year period. The picture as portrayed by either of these summaries compared with the evidence of substantial expenditures during that same period is relevant as tending to show that the defendant was put on notice that there was a discrepancy, and that he should have made investigation of the figures used in making his returns. Of course, there might have been other explanations for not having noticed the discrepancy, e.g., that the various expenditures originated from funds already available to defendant. This does not, however, make the exhibits irrelevant. See Wigmore §32 (3d ed. 1940). ³

In regard to the third contention of defendant, the evidence and offer of proof indicate that Harold Haines, near the end of 1952, knew that he would require certain belting and potato cleaner strips and in order to guarantee delivery at the existing price placed an order with defendant for certain goods and prepaid the sales price. Haines' check involved in defendant's last claim of error was received by defendant in early January 1953. Defendant contends that the exclusion of evidence that the prepaid transaction with Harold Haines had never been completed, and the court's charge that receipts of the money without restriction by defendant made the amount taxable income constituted prejudicial error. We shall examine first the law regarding prepayment for goods to be acquired and delivered in the future. Defendant has cited Veenstra & DeHaan Coal Co. [CCH Dec. 16,715], 11 T. C. 964 (1948) and Woodlawn Park Cemetery Co. [CCH Dec. 18,281], 16 T. C. 1067 (1951) to support his contention that gross receipts are not equivalent to gross income and that in the case of prepayments for goods to be obtained and delivered in the future there is no taxable income until there is a completed sale. These two cases involve accrualmethod taxpayers. However, that distinction does not seem to us to be material. See 2 Mertens, Federal Income Taxation, §12.125 (1955). As in the Veenstra and Woodlawn Park cases, defendant at the time of the receipt of Haines' prepayment did not know the cost of the goods which were to be delivered as part of the order. If there was never any goods delivered as part of the order, and consequently never any possibility of setting a cost of goods sold, there could be no gain constituting income subject to taxation. In addition, in the instant case there was evidence that Haines customarily cancelled orders when his unpredictable season ended. This is further evidence of the contingent nature of the transaction between defendant and Haines. The government has cited to us no cases which overcome the persuasive force of the Veenstra and Woodlawn Park cases. Consequently, we believe the district court misstated the law in regard to this transaction in its ruling and charge.

It should be noted, however, that the defendant in his request for instructions regarding the Haines transaction asked for too much. The record indicates that defendant's offer of proof was that at least part of the Haines order involving prepayment was filled by defendant. We think that the reasoning of the Veenstra and Woodlawn Park cases requires that the amount of gain in regard to the completed sale of that portion of the order be reported as income in the year that the sale of the items is completed. Therefore, the rejection of defendant's request for instructions on this matter was not prejudicial error.

The district court excluded testimony that the order was never completed. Since defendant testified that he did not learn about the asserted incompleteness until preparing for trial, his omission of this item from his return for 1953 could not be due to his belief that it was not yet income. Therefore, this theory of the transaction has no bearing on defendant's intent at the time of filing his return for 1953.

According to defendant's offer of proof only $2500 of the order was not filled. Proof that a certain part of the asserted deficiency was not due, contrary to defendant's impression, would not defeat the count for 1953 provided that there still was a substantial understatement of income in the return for that year and such understatement was made wilfully. According to defendant's offer of proof there was still a substantial amount of unreported income from the portion of the Haines order that was completed. Therefore, the offer of proof laid an insufficient foundation for the only other basis for the relevancy of any testimony in regard to the incompleteness of the prepaid order. Consequently the district court's exclusion of this testimony was not error. See Holt v. U. S. [59-2 USTC ¶9771], 272 F. 2d 272 (9 Cir. 1959).

Defendant also maintains that the district court made improper and prejudicial comments during the course of the trial. We have reviewed the record in this regard and believe that many of these instances stemmed from remarks and actions of defendant's counsel. In several instances the court corrected its comments. We do not believe that the district court committed error by its remarks during the trial. ⁴ We find no merit in defendant's other arguments.

Judgment will be entered vacating the judgment of the district court and remanding the case for a new trial.

¹ Counts I, II and III alleged wilful evasion of taxes owing for the calendar years 1953, 1954 and 1955 respectively. The statutes alleged to be violated were I. R. C. 1939 §145(b), 26 U. S. C. §145(b) (1952) as to Count I, and I. R. C. 1954 §7201, 26 U. S. C. §7201 (1958) as to Counts II and III.

² The district judge did not permit the defendant to introduce a schedule (Ex. S-4) summarizing the calculations made by an accountant testifying for defendant of expenses incurred in traveling during periods for which no data was kept, although the accountant's testimony was admitted. The exclusion of this schedule accentuates the prejudicial effect of admitting Exhibit 49, which emphasized the differences between the memo books and returns as "overstatements."

³ It might be better in the circumstances of such use of each summary to have a cautionary instruction on the proper limits of the summary's relevancy. But the record does not indicate that such a cautionary instruction was requested.

⁴ The defendant argues particularly that the district court erred by stating on several occasions that the only issue was whether defendant received money that he did not report. The court's charge to the jury correctly emphasized defendant's theory that although the checks were unreported, the omission was not wilful. The court's comments earlier in the trial were generally related to the Haines prepaid transaction, although they might conceivably have confused the issues in the jurors' minds. We have considered previously the court's statements of law in regard to this transaction. In any case, the matter is not likely to arise at a new trial.

 

 

[58-1 USTC ¶9173]George M. Mason, Appellant v. United States of America , Appellee

(CA-10), U. S. Court of Appeals, 10th Circuit, No. 5639, 250 F2d 704, 12/18/57, Affirming unreported District Court decision

[1939 Code Sec. 145(a)--similar to 1954 Code Sec. 7203]

Crimes: Due process of law: Right to waive trial by jury and demand trial by the court: Right to plead nolo contendere: Admission of evidence.--Taxpayer is appealing a conviction on either counts of wilfully and knowingly failing to make and file income and employment tax returns, on the ground that he was denied due process of law. Held, the right to waive a trial by jury and demand a trial by the court is not an absolute one, but must be with the approval of the court and consent of the government. Held further, the trial court did not abuse its discretion in refusing to accept a plea of nolo contendere. Held further, the taxpayer was not prejudiced by any admission or exclusion of evidence. Conviction affirmed.

Walter L. Budge for appellant. C. Nelson Day, Assistant United States Attorney (A. Pratt Kesler , United States Attorney, was with him on brief), for appellee.

Before HUXMAN, MURRAH and BREITENSTEIN, United States Circuit Judges.

HUXMAN, Circuit Judge:

Appellant George M. Mason, was duly tried and convicted by a jury on an eight count information in the United States District Court for the District of Utah. Count one and two charged him with wilfully and knowingly failing to make and file an income tax return for the years 1952 and 1953, respectively. Counts three through eight charged him with wilfully and knowingly failing to file employment tax returns for the periods set out in the various counts. Trial was had to a jury and it found appellant guilty on all counts. He was sentenced to serve six months and one day on each of counts one, two, three and four, the sentences being made to run concurrently. Sentence on counts five, six, seven and eight was suspended and as to those counts he was placed on probation for two years.

One general assignment of error is urged for reversal. It is that "Trial of appellant in the court below was not conducted in a manner 'fair' as guaranteed by the Constitution of the United States of America ." The gist of this is to say that the trial resulted in a denial of due process. This general assignment is broken down into three parts.

[Right to Trial by Court]

It is urged that the court violated appellant's Constitutional rights by requiring trial by jury. Appellant sought to waive trial by jury and requested a court trial. Over appellant's objection, the court submitted the case to a jury for trial. Trial by jury is guaranteed to an accused by the Sixth Amendment to the Constitution and by Article 3, Section 2 of the United States Constitution. It is argued that trial by jury is a privilege accorded to the accused which he may waive and when waived by him and a trial by the court is requested the request must be granted.

In most cases where this question has been considered the accused had waived the right to a jury trial and the question then arose whether there was a valid Constitutional waiver of such right. No cases are cited and our search has failed to reveal one in which the precise question of an accused's right to waive a jury trial and demand trial by the court was in issue. We, however, feel that the philosophy of the law is well established that the trial court is vested with a sound discretion in determining whether a jury trial should or should not be had, notwithstanding the accused's request that he be tried to the court. Such is the sense of Rule 23(a) of the Federal Rules of Criminal Procedure which provides that "Cases required to be tried by jury shall be so tried unless the defendant waives a jury trial in writing with the approval of the court and the consent of the government." Under this rule, the right to waive a jury and be tried to the court is not an absolute one; it requires the approval of the court and the consent of the government. Such we think is also the philosophy of the law as declared by the Supreme Court in Patton v. United States, 281 U. S. 276, 312, where the Court said:

"In affirming the power of the defendant in any criminal case to waive a trial by a constitutional jury and submit to trial by a jury of less than twelve persons, or by the court, we do not mean to hold that the waiver must be put into effect at all events. That perhaps sufficiently appears already. Trial by jury is the normal and, with occasional exceptions, the preferable mode of disposing of issues of fact in criminal cases above the grade of petty offenses. In such cases the value and appropriateness of jury trial have been established by long experience, and are not now to be denied. Not only must the right of the accused to a trial by a constitutional jury be jealously preserved, but the maintenance of the jury as a fact finding body in criminal cases is of such importance and has such a place in our traditions, that, before any waiver can become effective, the consent of government counsel and the sanction of the court must be had, in addition to the express and intelligent consent of the defendant. And the duty of the trial court in that regard is not to be discharged as a mere matter of rote, but with sound and advised discretion with an eye to avoid unreasonable or undue departures from that mode of trial or from any of the essential elements thereof, and with a caution increasing in degree as the offenses dealt with increase in gravity." ¹

[Right to Plead Nolo Contendere]

Appellant's contention that the trial court violated due process in refusing to accept appellant's offer to plead nolo contendere is not well taken. Rule 11 of the Federal Rules of Criminal Procedure provides that "A defendant may plead not guilty, guilty or, with the consent of the court, nolo contendere * * *" It is not necessary to decide whether a refusal to accept a plea of nono contendere under certain circumstances may constitute an abuse of descretion. All the cases hold that the trial court is vested with a broad discretion in determining whether a plea of nolo contendere shall be accepted. ² The record is devoid of any suggestion that the court abused its discretion in refusing to accept the plea.

[Admission of Evidence]

Finally, it is contended that such grave errors were committed throughout the trial in the admission and rejection of evidence as to result in the denial of due process. We have examined the lengthy record of 375 pages. It contains a great amount of detailed evidence relating to receipt of money by appellant, not only in the years in question but in other years as well, with respect to his failure to file income tax returns in a number of years other than the ones in question. There was also a great deal of detailed evidence of questionable probative value, cumulative evidence, and matters of that kind. It may be conceded that much of this evidence might well have been eliminated. It is sufficient, however, to say that there was little objection to the receipt of any evidence. The trial court gave clear, full and correct instructions on all material issues. Assuming without deciding that evidence was erroneously received and that some was also excluded, none of it was of such a nature as to be offensive to the concept of a fair and impartial trial as contemplated by what is meant by due process. In other words, the record is devoid of any suggestion showing that the trial was not carried on in a wholesome manner having due regard to the protection of every right afforded appellant by the law of the land.

Affirmed.

¹ Reaffirmed in Adams v. United States ex rel. McCann, 317 U. S. 269, 275.

² United States v. Standard Ultramarine & Color Co., 137 Fed. Supp. 167; A. B. Dick Co. v. Marr, 95 Fed. Supp. 83; United States v. Jones, 119 Fed. Supp. 288; United States v. Safeway Stores, 20 F. R. D. 451.

 

 

[54-2 USTC ¶9489]Arthur H. Marienfeld, Appellant v. United States of America , Appellee

(CA-8), In the United States Court of Appeals for the Eighth Circuit, No. 14,976, 214 F2d 632, July 12, 1954

Appeal from the United States District Court for the Eastern District of Missouri.

Gross income: Illegal gains: Embezzlement.--Appellant sold and converted the by-products from the boning operation done for its customer. The retained proceeds were not reported as income. His defense and that the embezzled money did not constitute income. His conviction was affirmed on the authority of Rutkin v. U. S., 343 U. S. 130, 52-1 USTC ¶9260. One special concurrence.

Criminal prosecution: Double jeopardy.--At the first trial the jury was discharged because of its inability to reach a verdict. Appellant interposed a plea of double jeopardy which was overruled. There could not be any question of error arising in the second trial, from which the appeal was taken.

Criminal prosecution: Admissibility of evidence: Amount embezzled.--There was no error in not admitting an audit made by appellant's accountant which showed that the amount of funds withheld by appellant from his customer exceeded the amount which the Government claimed appellant failed to report.

Criminal prosecution: Cross-examination.--Cross examination of appellant was not improper which disclosed that he had failed to report more income than charged in the indictment.

Criminal prosecution: Instruction to jury.--There was no error in refusing the requested instruction to the jury that appellant could not be convicted if no additional tax was due, since only in the event the unreported receipts were not taxable could this instruction be appropriate.

Harry C. Blanton and James A. Finch, Jr., for appellant. W. Francis Murrell, Assistant United States Attorney (Harry Richards, United States Attorney, and Max H. Goldschein, Special Assistant to the Attorney General, Department of Justice, were with him on the brief), for appellee.

Before SANBORN, JOHNSEN, and COLLET, Circuit Judges.

COLLET, Circuit Judge:

Appellant was convicted of willfully attempting to evade his income taxes by filing a false income tax return for the year 1946. His defense was that the money received by him that year which he did not report was money he embezzled and hence was not his income. The trial court filed a memorandum opinion in ruling on the motion for new trial [54-1 USTC ¶9245]. In that opinion appears the following statement of many of the salient facts:

"The defendant was in the business of selling beef and pork at wholesale under the name of Mar Meat Company, and in his meat operations engaged in a boning operation of beef and pork carcasses delivered to him by the Stokely-Van Camp Company (herein referred to as 'Stokely'). Stokely had a contract with the Government to put up canned meat rations for the Army. It used the boned meat for that purpose. After defendant boned the meat delivered to him by Stokely, the meat was shipped to Stokely for canning. For the boning operation defendant received payment from Stokely on a pound basis. Stokely furnished the packing materials, paid the freight, and paid the storage charges on boned meat that went to cold storage.

"In the boning operation there were certain by-products that could not be used in Army rations. Defendant was authorized by Stokely to sell these by-products for the 'account' of Stokely. The by-products were 'bones, suet, kidneys, skin, shank meat, ox joints and tenderloin.' Defendant did sell these. The tenderloin, in some instances, was converted by defendant into hamburger before sale. In making hamburger suet was added. Stokely did not authorize or have knowledge of the use of by-products, by defendant, to make and sell hamburger. Much of Stokely's meat after boning went to cold storage. The tenderloin which defendant made into hamburger was, for the most part, also placed in storage. Stokely's boned meat was placed in storage in its name, as Stokely had directed. The hamburger made from tenderloin was put in cold storage by defendant in his name without the knowledge of Stokely.

[Dray Tickets Used]

"Defendant, needing more money than he could honestly make, conceived a plan to get some of it out of the boning operation being done for Stokely. Defendant proceeded to sell a part of the by-products and withheld information of such sales from Stokely by keeping and sending false reports to Stokely. Income from such sales went into defendant's personal bank account and was used by him for personal purposes. All customers required a record of their purchases. Defendant furnished such a record by using 'dray tickets,' but kept off his office records any reference to such sales. The purchasers of meat products were unaware of defendant's fraudulent scheme. Defendant used dray tickets in each sale involved in his fraud on Stokely. The dray tickets so used, unlike those used in legitimate transactions, were unnumbered. Defendant's bookkeeper testified to the practice. Defendant did likewise. The bookkeeper testified that at defendant's direction, when money came into the office, collected on the unnumbered dray tickets, he made no record of it but delivered the money to defendant. Defendant used the same method of getting funds in the sale of both converted by-products of Stockely and unconverted by-products of Stokely. He used the same kind of unnumbered dray tickets in sale of products that were not Stokely by-products, which were not recorded on his books.

"The income on these unrecorded dray tickets represented the income which the Government claims defendant failed to report in his income tax return, knowingly and with intent to defraud the Government of the tax on the sums of money. Such is the basis of this prosecution.

"The record shows, and defendant admitted, that the income was not shown on defendant's books. It was from defendant's books that his tax returns were made by an auditor. The auditor testified he did not receive any unnumbered dray tickets from the defendant to use in making defendant's returns for the period covered by the prosecution. This testimony was not disputed by the defendant while he was on the stand. And although defendant took the stand as a witness, he did not elect to testify to the events surrounding the preparation, signing and filing of the tax returns claimed by the Government to be fraudulent."

In addition to money kept by appellant in the manner detailed above, he also in many instances reported by-products as having been sold for one price when in fact they were sold for a higher price. He only remitted the lesser amount. Also, he charged Stokely for more packaging materials than he used.

[Charge to Jury]

In the charge to the jury, all money received by appellant, other than money received from the sale of by-products on unrecorded dray tickets, was eliminated from the jury's consideration. ¹ In defining what would constitute income to appellant, the court charged the jury as follows:

"Now, generally speaking, unlawful money gains, as well as lawful ones, may constitute taxable gains when the taxpayer and recipient of money has such control over the money, as a practical matter, that he readily realizes economic value from it. This occurs when cash is delivered by its owner to the taxpayer in a manner which allows the taxpayer freedom to dispose of it at will. The money received may have been obtained by unlawful means, such as by fraud, converting property of another and processing and selling it and retaining the proceeds, even though the taxpayer might be liable to a claim from the owner of the original property for its cost price or some other consideration."

The court then instructed the jury that money obtained by appellant from the sale of by-products in their original state was not taxable income to him and he was not required to report it, but that if appellant took tenderloin or other meat products and converted it into some other product, such as meat ground into hamburger, and sold the converted product, the income from such sales was income to appellant which should have been reported. ² (In the memorandum opinion the court concluded that all receipts from by-products, whether converted into other products or not, were taxable income of appellant.) Since appellant admitted the conversion of a large quantity of by-products, their sale, the retention of the proceeds of such sales, and his failure to report such receipts as income, and since the proceeds from such sales constituted a substantial sum, in effect, the only question left to the jury was the question of willfullness. ³

[State Law Not Decisive]

Thus the primary question for determination arises--was the income received from the sale of the converted by-products reportable income of appellant or was it Stokely's money which appellant did not obtain such a proprietary interest in or dominion over as to constitute it income to him.

Appellant says that since his acts in question were committed in Missouri, the law of Missouri should be applied in determining the legal effect of those acts; that such acts amounted to embezzlement under Missouri law, ⁴ and hence under the doctrine of Commissioner v. Wilcox, 327 U. S. 404 [46-1 USTC ¶9188], the embezzled funds were not income to appellant. But the present question is not whether appellant was guilty of embezzlement under the law of Missouri , but whether the funds he received were his income under the Act of Congress defining taxable income. State law will not be decisive in that determination. Daine v. Commissioner, 168 Fed. (2d) 449, 451 [48-1 USTC ¶9295]. As stated in theWilcox case:

"Moral turpitude is not a touchstone of taxability. The question, rather, is whether the taxpayer in fact received a statutory gain, profit or benefit. That the taxpayer's motive may have been reprehensible or the mode of receipt illegal has no bearing upon the application of §22(a)."

[Wilcox Case]

Although in the Wilcox case the opinion refers to the fact that under the law of Nevada the embezzlement was complete when the appropriation was made and that under Nevada law the rightful owner was entitled to replevy the money or have it summarily restored as soon as it was appropriated, we do not understand the opinion to hold that the varying local law of different states will determine for federal income tax purposes what shall be treated as taxable income under the federal income tax laws.

We find it difficult to reconcile the Wilcox case with the later opinion of the Supreme Court in Rutkin v. United States, 343 U. S. 130 [52-1 USTC ¶9260]. Since four members of that court were unable to do so, we shall not attempt to do so, but will apply the reasoning of both cases in reaching a solution to our present problem.

In the Wilcox case the court approved the previously declared criterion for determining taxable income as depending "upon the enjoyment by the taxpayer of privileges and benefits so substantial and important as to make it reasonable and just to deal with him as if he were the owner, and to tax him on that basis." And further--"In fact, no single, conclusive criterion has yet been found to determine in all situations what is a sufficient gain to support the imposition of an income tax. No more can be said in general than that all relevant facts and circumstances must be considered."

The Wilcox case was a clear-cut case of embezzlement. The taxpayer was a bookkeeper who collected money due his employer and immediately pocketed it. The court held that under the foregoing general criterion the money was clearly embezzled funds of the bookkeeper's employer and not the bookkeeper's income.

[Rutkin Case]

In the Rutkin case the court reiterates previous expressions of the court (also found in the Wilcox opinion) that Sec. 22(a), cast in broad sweeping terms "supports the declarations of this court that Congress in enacting that section [Sec. 22(a)] exercised its full power to tax income." The court laid down the criterion in theRutkin case in the following language:

"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. Burnet v. Wells, 289 U. S. 670, 678 [3 USTC ¶1108]; Corliss v. Bowers, 281 U. S. 376, 378 [2 USTC ¶525]. That occurs when cash, as here, is delivered by its owner to the taxpayer in a manner which allows the recipient freedom to dispose of it at will, even though it may have been obtained by fraud and his freedom to use it may be assailable by someone with a better title to it."

Assuming from the jury's verdict, under the instructions given that the money receipts involved had been extorted by the taxpayer upon a threat to kill payor and his family, the court held without qualification that money obtained by extortion was taxable income to the extortionist under the clause of Sec. 22(a):--"* * * and income derived from any source whatever." We deem it noteworthy that in reaching the foregoing conclusion the court stated:

"Petitioner's [the extortionist's] control over the cash so received was such that, in the absence of Reinfeld's[the payor's] unlikely repudiation of the transaction and demand for the money's return, petitioner could enjoy its use as fully as though his title to it were unassailable."

This latter expression demonstrates the application in the Rutkin case of the principle stated inCommissioner v. Wilcox, heretofore quoted, that all relevant facts must be considered and no conclusive criterion has been found to determine all situations. Since the court in Commissioner v. Wilcox flatly held that embezzled funds were not taxable income to the embezzler and in the Rutkin case has unequivocally held that extorted funds were taxable income to the extortionist, the line of demarcation lies between those rather closely related factual situations and must be determined by the facts in the individual case.

[Distinction Between Wilcox and Present Case]

The only distinction apparent to us between the facts in the present case and those in the Wilcox case is that the obligation of appellant to pay Stokely for the by-products was, under the oral agreement and the practice followed, deferred until appellant had made a report showing the amount due Stokely and a statement had been rendered by Stokely to appellant for that amount, with the right of control, use and dominion over the funds during the interim, whereas in theWilcox case the bookkeeper was under the immediate and instantaneous legal obligation to pay to his employer the money collected for the latter. In the Wilcox case -- art lays down two requisites before the taxable gain may exist. First, "the presence of a claim of right to the alleged gain and (2) the absence of a definite, unconditional obligation to repay or return that which would otherwise constitute a gain. Without some bona fide legal or equitable claim, even though it be contingent or contested in nature, the taxpayer cannot be said to have received any gain or profit within the reach of §22(a)." Under the facts in this case, the agreement and the practice above referred to gave to appellant a purely temporary claim of right to the proceeds of the sale of the by-product, i.e., until the report was made and the statement was rendered. But we see no possible distinction between this case and theWilcox case with reference to the existence of a bona fide legal or equitable claim to the money. Appellant, like Wilcox, had no bona fide claim. And the obligation of appellant to repay differed from that of Wilcox only in point of time.

[Controlled by Rutkin Case]

The only factual distinction we find between theRutkin case and the Wilcox case is that Rutkin extorted the funds in question under such circumstances that his "control over the cash so received was such that, in the absence of Reinfeld's unlikely repudiation of the transaction[the extortion] and demand for the money's return, petitioner could enjoy its use as fully as though his title to it were unassailable." The obligation to return was the same as in the Wilcox case. The obligation of an extortionist to return funds so taken and that of an embezzler is equally existent. Nor was there any bona fide legal or equitable claim to the money Rutkin extorted. The nature of appellant's possession, dominion over, opportunity for use of, and freedom to dispose of the funds in question is more synonymous with that existing in the Rutkin case. In our judgment this case is controlled by the Rutkin case. There being no dispute of fact about appellant's relation to the funds, there was no factual issue in that regard for the jury to determine and the instruction was proper. The question of the willfullness of the appellant's acts was properly submitted and not now complained of.

[Double Jeopardy]

Appellant interposed a plea of double jeopardy which was overruled. This was the second trial. At the first, after the jury had been considering a verdict for several hours, the foreman sent the trial judge a note stating it was hopelessly deadlocked. It was called to the courtroom and asked in what proportion they were divided, after being cautioned not to indicate how either group was voting. The foreman answered that it stood eight for conviction and four for acquittal; they were immediately discharged. In overruling the plea the court stated:

"The court finds and declares that the jury was discharged on July 6th, 1953, because of the contents of the note above referred to and the inability of the jury to agree upon a verdict. The inquiry made by the Court was collateral to the person of the jury. The jury had informed the Court that they were hopelessly deadlocked, apparently at eight to four, and could not reach a verdict.

s/Rubey M. Hulen,

Judge."

The motion incorporating the plea of double jeopardy called for the outright discharge of appellant. It necessarily did not and could not present any question of error arising in the second trial from which this appeal is taken. The inquiry was ill-advised, under authority of Nigro v. United States (CCA 8, 1925), 4 Fed. (2d) 781, yet it is the well-established rule, as appellant concedes, that a trial judge has the discretion to discharge a jury when it has become hopelessly deadlocked. The trial judge is the only person who can know why he discharged the jury. He states in the memorandum quoted that it was because of the jury's inability to reach a verdict. Upon the record before us we accept his statement. The record furnishes ample ground for the discharge of the jury upon that ground. This assignment must therefore be held to be without merit.

[Audit Excluded]

Complaint is made of the action of the trial court in excluding an audit made by appellant's accountant which showed the total amount of funds withheld by appellant, owing to Stokely, exceeded the amount which the Government claimed appellant unlawfully failed to report. The audit was presumably made from the exhibits which were in the courtroom, available to inspection by the Government. Under ordinary circumstances such a summarization of voluminous documentary evidence should be admitted. But since this evidence only went to show the amount of the funds which appellant claims were embezzled and hence not taxable income, that question was immaterial in the light of the fact that the funds were taxable income. The same is true of the exclusion of evidence tending to show appellant's acknowledgment of Stockely's rightful ownership of the unreported funds and his repayment of a portion thereof after the return of the indictment in this case.

On cross-examination appellant was asked and required to answer questions disclosing that he had failed to report more and different income than charged in the indictment. He contends that rules of proper cross-examination were violated and that he was forced to give evidence against himself. We find no error in the admission of this testimony. Appellant testified in considerable detail and extent that he fraudulently withheld from Stokely as much or more money than he was charged with failing to report. He thereby voluntarily furnished evidence that he failed to report taxable income, if the money belonging to Stokely which he withheld was taxable to him. He did so in order to exonerate himself from willfully attempting to evade taxes on his income. The only injury which could result to him from this testimony, in the event the funds he testified about fraudulently withholding were taxable to him, was to indicate that his intent in failing to report his income was willful. Upon that ground this testimony was admissible. United States v. Manton, 107 Fed. (2d) 834, 845.

An instruction was requested and refused to the effect that appellant could not be convicted if no additional tax was due. Error is assigned on account of its refusal. Only in the event the unreported receipts were not taxable could this instruction be appropriate. Since they were taxable, the refusal of this instruction was not error.

Finding no error, the judgment is affirmed.

¹ "The sums represented by these unrecorded dray ticket sales are the sums which Government claims the defendant intentionally omitted from his tax return, as to the period charged in the indictment, namely, 1946, with the intent to defraud the Government of the tax due thereon. No other money which has been mentioned in evidence will be considered by you as making up such amount so claimed by the Government to be omitted from the defendant's 1946 tax return."

² "Now I say to you, as to the money which the defendant obtained by the sale of by-product from boning the Stokely meat, that money belonged to Stokely and not to the defendant, and that money was not taxable income to the defendant, and he was not required to report it on the income tax return; but if the defendant took tenderloin or other meat products, the property of the Stokely Company, which he was authorized to sell as tenderloin or in its original form, and converted it into some other product, such as meat ground into hamburger, without authority from Stokely--as I recall the testimony, there is no such authority in the evidence, from Stokely--and then sold the converted products, the income from such sales is income to the defendant which should have been reported in his tax return for 1946 for the income of that character which he received during that year."

³ In the same connection the jury was further charged as follows: "If you find from the evidence that these unrecorded dray tickets correctly describe the products listed--and Mr. Jost testified they did, and defendant's counsel was careful to develop during the testimony of the various witnesses that they did correctly list the products--then the income from the sale of meat products other than the by-products which the defendant was authorized to sell is income to the defendant which he should have included in his income tax return."

⁴ Sec. 560.250, 560.260 R. S. Mo. 1949.

[Concurring Opinion]

JOHNSEN, Circuit Judge, concurring specially:

I don't think anyone can be absolutely sure, on the basis of the Rutkin case, 343 U. S. 130, 72 S. Ct. 571, 96 L. Ed. 833 [52-1 USTC ¶9260], and the Wilcox case, 327 U. S. 404, 66 S. Ct. 546, 90 L. Ed. 752 [46-1USTC ¶9188], just what the law objectively is on the general question that is here involved.

In the Rutkin case, the Court seems to have analogized extortion into the category of fraud, for tax purposes, saying that "it would be an extraordinary result to hold here that petitioner is to be tax free because his fraud was so transparent that it did not mislead his victim and his victim paid him money because of fear instead of fraud." 343 U. S. at page 138.

The use of such a broad analogy would make it possible to regard any funds criminally acquired from another--whether through extortion, embezzlement, larceny, robbery, burglary or other similar means--as constituting in a sufficient sense fraud proceeds, to entitle them to be so treated in their tax consequence. But if the Court intended this to be the significance of the Rutkin case, there would have been no occasion for it to have left the Wilcox case standing as one of tax non-liability, and to say of it, as it did in theRutkin opinion, supra, ibid., that "We limit that (embezzlement) case to its facts."

If the Rutkin case and the Wilcox case are not inconsistent, there must exist some basis on which to distinguish the difference in the treatment of the funds involved. Is there any distinction that can be made between them in relation to the use and enjoyment which Rutkin and Wilcox respectively had of the illegally acquired funds? There is none. Each had the full use and enjoyment of the funds in terms of economic value. Did the Court then mean to imply that there was a difference by virtue of the fact that in the Rutkin case, as in a fraud situation, the victim had himself turned over the money to the criminal for the latter's use, while in theWilcox case he had not?

That difference would have the effect of making a holdup man subject to income tax, who permitted his victim to hand over his bill-fold, while leaving without tax liability one who compelled his victim to put his hands in the air and himself engaged in stripping the victim's pockets. Certainly Rutkin's victim, who testified that he paid the extortion funds to protect himself and his family from the danger of being shot, 343 U. S. at page 134, was not any more voluntarily or willingly doing so than would be a holdup victim in gladly handing over his bill-fold to save his life. The fact therefore that in the Rutkin case the victim had turned over the money to the criminal as the latter's own, and in theWilcox case he had not, does not, in my opinion, afford any rational basis for distinguishing the two cases in their tax consequences.

[The Only Proper Basis]

If criminally acquired funds are at all to be subjected to tax liability--and I think they should be, just as much as any other economic gains, both as a tax matter and as a matter of justice and of deterrence in either individual or organized crime--that liability, it seems to me, can only and needs only to be predicated upon the simple and solid basis under the statute of actual economic gain, value and enjoyment having existed to the criminal. One who acquires funds by criminal means and uses them for his own purposes has had no less measure of economic gain, value and enjoyment from them than the law-abiding citizen can hope to obtain from the funds which he acquires in honest pursuits.

Tax liability necessarily is an economic not a moral question. No prostitute, narcotics peddler, or anyone else can escape the payment of income tax upon any earnings on moral grounds. No more should an embezzler, a thief, a robber, a burglar, or any other criminal be permitted to go taxfree or be immune from prosecution for evasion, upon the moral or legal basis that the money which he acquired was not technically his own but his victim's, as against the economic realities of the funds having been taken by him with intent to appropriate and enjoy them as his own, with such utilization and enjoyment actually having been made of them by him, and with him thus being left in the position of not being able to restore them as the identical object taken. As a tax matter, when these economic realities have existed, it also cannot affect the situation, I think, that the criminal may be able and may undertake, after he has been caught up with, to pay back the amount of his illegal acquisition, in funds not constituting the identical object which he took.

I have always felt that our decision in Kurrle v. Helvering, 8 Cir., 126 Fed. (2d) 723 [42-1 USTC ¶9357], which preceded the Wilcox case, was sound, and that of necessity there would ultimately have to come a return to that position. The Rutkin case is not capable of any practicable application or workability, if it is to be used merely to make artificial refinements in fact situations to escape the Wilcox case. And so I would not rest our decision in the present case on any narrow line of demarcation between whether appellant had an immediate or a deferred obligation to account for the funds which he collected. In either event, he misappropriated the funds, and the economic gain, value and enjoyment which he received resulted from the fact of that misappropriation.

I would affirm the conviction and sentence here upon the general basis which I have discussed above. The Rutkin case and any other attempt to impose tax liability for economic gain and enjoyment from criminally acquired funds can only soundly be made to rest on that ground.