Admissibility 2 Page1

---

[ Back ] [ Next ]

   

7203: Willful Failure to File Return, Supply Information, or Pay Tax: Evidence: Admissibility

 

Part 2

 

[54-1 USTC ¶9291]Joseph W. Clark, Appellant v. United States of America , Appellee

(CA-8), In the United States Court of Appeals for the Eighth Circuit, No. 14,652, 211 F2d 100, March 19, 19 54

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

Criminal prosecution: Admissibility of evidence.--Appellant, convicted of attempted tax evasion through the filing of false returns, contended, on appeal, that the trial court erred in overruling his motion for acquittal. The appellate court dismissed his arguments as having no merit. It was proper for the Government to include in appellant's income the repayments of the outlays for cemetery lots, clergyman's and organist's fees, etc. which were deducted as business expenses. The inference of willfulness was warranted by the evidence that appellant submitted figures, unaccompanied by records, to the accountant for preparation of his returns and that only one of the four books or records was shown to the revenue agents. The statements of gross receipts filed by appellant with the Office of the License Collector for the purpose of obtaining his undertaker's license were properly admitted, while the exhibits prepared by expert accountants purporting to show that a return of appellant's income on an accrual instead of a cash basis would not leave any such great amount of unreported income as the Government claimed, were properly excluded. The erroneous admission of the waivers executed by appellant furnished no ground for a reversal since the conviction did not rely upon the waivers.

Don O. Russell for appellant. H. Brian Holland, Assistant Attorney General, Meyer Rothwacks and Joseph M. Howard, Special Assistants to the Attorney General, Harry Richards, United States Attorney, and William J. Costello, Assistant United States Attorney, for appellee.

Before JOHNSEN and COLLET, Circuit Judges, and NORDBYE, District Judge.

JOHNSEN, Circuit Judge:

Appellant, an undertaker in St. Louis , Missouri , was convicted of attempted income-tax evasion, 26 U. S. C. A. §145(b), for the years 1945 to 1949 inclusive, through the filing of false and fraudulent returns. The trial was to the court, without a jury.

The indictment alleged that he had knowingly misstated his net income for 1945, as being $3,437.92, whereas it was $46,808.98; for 1946, as being $5,423.24, whereas it was $30,267.19; for 1947, as being $6,998.34, whereas it was $12,822.31; for 1948, as being $6,178.14, whereas it was $23,239.96; and for 1949, as being $9,381.67, whereas it was $25,236.69. The amount of the tax which he had paid and the amount which it was claimed that he should have paid were also set out for each year. All of appellant's income was admittedly derived from his funeral business.

Each count of the indictment further undertook to show, equivalently as a bill of particulars, how the Government had arrived at its determination of net income for the year. The method employed was the same for all of the years. The computation first took the "Gross Receipts" of the business. From this was subtracted the "Cost of Goods Sold", that is, the merchandise purchased for sale. Next was subtracted "Other Business Deductions", consisting of salaries, interest, taxes, depreciation, rent, and all the other items which appellant had claimed as business expenditures in his returns. The amount remaining was treated as appellant's "Adjusted Gross Income". From this, subtraction was made of the amount of the standard deduction for nonbusiness expenses, which the Internal Revenue Code allowed, and which appellant had used in his returns, to arrive at appellant's "Net Income".

[Gross Receipts Not Taken As Basis]

Appellant's principal contention here is that the trial court erred in overruling his motion for acquittal, because the Government's method of computation did not legally establish that any understatement of income had been made in his returns. The gist of his argument is that the Government had improperly taken appellant's Gross Receipts as the foundation of its computation; that Gross Receipts are not the basis of income-tax liability, Southern Pacific Co. v. Lowe, 247 U. S. 330, 335, 38 S. Ct. 540, 62 L. Ed. 1142 [1 USTC ¶19], because they may include return of capital as well as income; that here they had admittedly included reimbursements of "outlays" made by appellant on behalf of customers, for cemetery lots, clergyman's and organist's fees, extra limousines hired from outside sources, newspaper notices, etc., which were not part of the services covered by his general funeral prices; and that, in any event, while the Government claimed that all such returns of capital had been subtracted from the Gross Receipts in arriving at appellant's Adjusted Gross Income--appellant's returns having showed that he had included such "outlays" as operating expenses in his business deductions, and the Government having accepted all of the deductions so claimed by him, for purposes of its result of Adjusted Gross Income--the Revenue Agents had failed to engage in any audit to establish that appellant had in fact included all of such "outlay" expenditures in his business deductions, and that it therefore had not legally established that its computation of Adjusted Gross Income did not consist of returns of capital.

This argument is without any legal substance on the realities of the situation. Of course, gross income and not gross receipts is the foundation of income-tax liability, for it is only earnings, profits and gains which the statute subjects to tax. And manifestly, gross receipts cannot be called gross income, insofar as they consist of borrowings of capital, returns of capital, or any of the other items which section 22 of the Internal Revenue Code, 26 U. S. C. A. §22, has excluded from gross income. But when all of these things have duly been taken into account, no matter by what process it has been done, the amount remaining of Gross Receipts necessarily may, in its character as a result, properly reflect the taxpayer's Gross Income, which it is his duty to report.

On the Government's evidence, that is what the result of its computation amounted to in the present situation. The fact that the computation started with appellant's Gross Receipts would not prevent the result reached, no matter by what other term in accounting nomenclature it might be possible to designate it, from legally being reflective of appellant's Gross Income for purposes of proving income-tax evasion by him.

[Taxpayer's Duty to Show Unclaimed Deductions]

The Government is not required to establish income-tax evasion by the same processes and formalities which a taxpayer is required to observe in making his return. The existence of unreported income may be demonstrated by any practical method of proof that is available on the circumstances of the particular situation. Cf. Burka v. Commissioner, 4 Cir., 179 Fed. (2d) 483, 485 [50-1 USTC ¶9167]. And it is not necessary, in order to make a case of tax evasion, that the exact amount of such income should be established. United States v. Johnson, 319 U. S. 503, 517, 63 S. Ct. 1233, 87 L. Ed. 1546 [43-1 USTC ¶9470]. Nor is it incumbent upon the Government, in making a prima facie case of evasion to prove the non-existence of any other deductions than those which the taxpayer has claimed in his return. United States v. Link, 3 Cir., 202 Fed. (2d) 592, 593, 594 [53-1 USTC ¶9230]. If the taxpayer legally has other deductions than those which he has so claimed, it is his privilege to show them and explain them as part of his defense. Sometimes the failure to claim deductions in a return may well be a part of the taxpayer's scheme to cover up his unreported income as a matter of not creating suspicion on the face of his return. It does not therefore destroy the Government's prima facie case as a matter of law that the defendant is able to develop on cross-examination of the Government's witnesses that a right to other deductions may exist, or to establish by his own evidence that such deductions do in fact exist, and especially is this true where the unreported income pointed to by the Government's evidence is reasonably capable of being found to have exceeded the amount of the unclaimed deductions. In any event, the attempt to establish unclaimed deductions as a defense against fraud in misstating income will ordinarily of itself present merely a question of fact, first as to the existence and amount of such deductions, and further, as suggested above, as a possible ingredient in the taxpayer's intent to conceal his unreported income by partially neutralizing the face of his returns.

[Repayments Not Included in Income]

What has been said is controlling of the present situation. The Government's computation, as has been indicated, did not use appellant's Gross Receipts as his Gross Income but simply took the Gross Receipts as the starting point of its method of arriving at his Adjusted Gross Income, in convenient approach and correlation to his manner of doing business, of keeping records, and of making his returns. The Revenue Agents subtracted the cost of all the merchandise which he had bought for sale, such as caskets, etc., and thus took account of any returns of capital from this source which were involved in his Gross Receipts. As to the "outlays" which appellant had made for cemetery lots, clergyman's and organist's fees, extra limousines hired from outside sources, newspaper notices, etc., which were not covered by the general funeral price, appellant's tax returns showed that he had made deductions of such items as costs of operation or business expenses, without correspondingly, however, having treated the repayment of them by the customer as being equivalent on this basis to income resulting to him.

The Government chose, for purposes of its computation, to allow the "outlays" to stand as business expenses, and to treat the repayment of them as income, instead of eliminating them from the deductions claimed by appellant and from the Gross Receipts as technically constituting outlays and returns of capital, for the reason primarily that appellant admitted to the Revenue Agents during their investigation that on some of these items he had made a profit, in that he had received a "kick-back" or had collected more from the customer than the amount of his actual outlay, and further appellant was not able to produce any bills, check-stubs, or other record of his expenditures, except for 1949 and part of 1948, from which it would have been possible for the Revenue Agents to determine how much the "outlay" receipts had in fact exceeded the "outlay" expenditures.

The result obtained by the Revenue Agents necessarily would be in the circumstances reflective of the amount of appellant's Adjusted Gross Income, assuming the correctness of the amount of the deductions allowed. And as we have said, the Government was entitled, for purposes of its prima facie case, to treat the amount of the deductions, with their inclusion of such "outlays", as being correct, if it chose to do so, because they had been so shown and declared in appellant's returns. Also, there was here no such establishment of omitted proper deductions, through cross-examination of the Government's witnesses or on the evidence of appellant, as legally destroyed the Government's prima facie case of existence of unreported taxable income and of willfulness in connection therewith.

[Inference of Willfulness Warranted]

Appellant further argues, however, that the evidence was legally insufficient to establish that such understatement of income as may have occurred was willful. The evidence showed that appellant's returns purported to have been prepared by an accountant, but that the fact was that appellant did not give the accountant access to his records but merely submitted figures to him, for preparation of the returns, which appellant compiled himself; that, both during the investigation and on the trial, appellant had never been able to explain or demonstrate from his records or otherwise how he had gotten the receipts figures which he gave the accountant; that, while appellant maintained four books or records in the operation of his business (a funeral record book; a cash receipts book; a journal showing receipts from ambulance and limousine rentals and stillborn burials; and a loose-leaf book of receipts from hearse loans to other undertakers) he gave the Revenue Agents, when they began their investigation, in response to their request for his books and records, only his funeral record book, told them that he had no other record of his receipts, and declared that the book correctly and completely showed all the receipts of his business, which it did not; that similarly when the Revenue Agents inquired about his bank account, he gave them the name of only one bank, and failed to give them the names of three other banks, in which he had an account; that his standard of living indicated an expenditure of money far beyond the amount of the net income which he showed in his returns; and that he was throughout the investigation and on the witness stand evasive or equivocal in much of what he said. All of these items of evidence were clearly relevant and sufficient to warrant the jury in making an inference of willfulness. Cf. Spies v. United States, 317 U. S. 492, 499, 500, 63 S. Ct. 364, 87 L. Ed. 418 [43-1 USTC ¶9243].

[Statements to City License Collector Admitted]

It is next contended that the court erred in admitting in evidence Exhibit Nos. 18 and 19, which were conflicting statements of gross receipts purporting to have been filed by appellant with the Office of the License Collector of the City of St. Louis, Missouri, as a basis for obtaining his undertaker's license. The ordinances of the City of St. Louis required an undertaker to file a statement of the gross receipts of his business for the previous fiscal year, in order to obtain his annual license. Both exhibits constituted statements of purported gross receipts, typed on appellant's business stationery. Neither of them was signed, but the ordinance does not appear to so require. Exhibit 18 purported to show appellant's gross receipts for the fiscal year July 1, 19 48 to June 30, 19 49. Exhibit 19 purported to show appellant's gross receipts for the calendar year 1949. The monthly receipts shown in Exhibit 19 were identical with the figures which appellant had given his accountant as the basis for preparing his 1949 tax return. The receipts shown in Exhibit 18, however, were substantially larger and corresponded closely to those appearing in his cash receipts book.

The only argument that merits consideration in relation to the Exhibits is that no sufficient foundation was laid for their admission. The Government offered them as being admissions on the part of appellant. The sufficiency of the foundation on this basis, to establish their identification or authenticity as having been prepared by appellant, was a matter for the discretion of the trial court. Metropolitan Life Ins. Co. v. Armstrong, 8 Cir., 85 Fed. (2d) 187, 194. And that discretion was not here abused.

The Exhibits were produced in court by the Assistant Chief Clerk in the License Collector's Office as part of the files of that Office. They did not bear any filing stamp, but the witness testified that no stamping or other official indication of filing was made as to any such licensing statements. The Revenue Agents testified that they had obtained the Exhibits from the License Collector's Office during the course of their investigation and had later returned them, but that, while they were in their possession, they had shown them to appellant in an effort to have him explain the discrepancy between them and he had admitted that the statements had been prepared and submitted by him as a basis for obtaining his license. He was interrogated under oath by the Revenue Agents and the sworn statement which he gave was introduced in evidence. In it he had said, among other things, as to the Exhibits: "I do not know how I arrived at these figures. I do not know why they are different * * * I don't know why I did not get the same figure * * * I will be frank with you, just as frank as I can. I have no explanation for anything."

On all of this, there is no basis to argue that the Exhibits were not legally entitled to be received in evidence. The question was not as to the admissibility of their contents as official statements or records, as appellant argues, but simply as to the sufficiency of their identification or authenticity as being statements of appellant. The elements as to their official character were merely incidents in the identification of them as personal statements.

[Exhibits Prepared by Expert Accountants Excluded]

The contention also is made that the court erred in sustaining the Government's objection to various exhibits prepared by expert accountants for appellant and to the testimony of such accountants in relation to the exhibits. The object and effect of this proffered evidence was to demonstrate that a return of appellant's income for each of the years on an accrual instead of a cash basis would not leave any such great amount of unreported income as the Government claimed. The court excluded the evidence on the ground that, on the face of the returns, the testimony of appellant himself, and the other circumstances appearing in the situation, it was indisputably clear that appellant had been reporting his income on a cash basis and not on an accrual basis, and that any hypothesizing of facts which had no probative basis was therefore wholly irrelevant and incompetent as a defense to the charge. Plainly, on the record, the court's ruling was proper.

One other contention is entitled to notice and mention. It is argued that it was error for the court to admit Exhibits Nos. 6 and 7, which consisted of two "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax" forms (Form 270, U. S. Treasury Department) which appellant had executed and given the Revenue Agents during the course of their investigation, in accordance with section 272(d) of the Internal Revenue Code, 26 U. S. C. A. §272(d). The signing of such a waiver by a taxpayer is without any effect to preclude him from maintaining a civil suit for refund of the taxes assessed by the Commissioner on the basis of it. Payson v. Commissioner, 2 Cir., 166 Fed. (2d) 1008, 1009 [48-1 USTC ¶9196]; Herber v. Jones, D. C. W. D. Okla., 103 Fed. Supp. 210, 214 [51-2 USTC ¶9439], aff'd 10 Cir., 198 Fed. (2d) 544 [52-2 USTC ¶9397]. Much less then is such a waiver entitled to have any effect to convict a taxpayer on a criminal charge of evasion. See also Annotation. 11 A. L. R. 2d pp. 903, 907, 912, 915.

The Exhibits therefore should not have been received in evidence as having legal probative quality. But appellant is not entitled to a reversal for this error. The case is not one that was tried to a jury. The evidence is overwhelmingly convincing of appellant's guilt to anyone reading the record. The court did not refer to the waivers in its detailed findings of fact. And there is nothing else in the proceedings to suggest that the court in any way relied upon or attached weight to the waivers as a factor in its convicting of appellant. On these circumstances, we do not think that it can reasonably be said that any substantial right of appellant has been affected as a matter of either process or result. Rule 52(a), Federal Rules of Criminal Procedure, 18 U. S. C. A.

Affirmed.

 

 

[55-2 USTC ¶9694]J. A. Herzog, Appellant v. United States of America , Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 14,611, 226 F2d 561, October 11, 1955

Appeal from the United States District Court for the Northern District of California, Southern Division.

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

Criminal prosecution: Tax evasion: Admissibility of evidence.--Taxpayer operated a car agency, and was found guilty of willfully attempting to evade income taxes for 1948. One of the issues of fact in the case was whether payments in excess of invoice prices were made to taxpayer by the persons who purchased used cars from him. Taxpayer attempted to offer into evidence bi-monthly issues of the Kelley Blue Book, a trade journal, to establish the market value of the cars and to impeach the testimony of the used car dealers by showing that the prices they claimed they paid for the cars were in excess of the market value. The District Court refused to permit the Blue Book to be introduced into evidence, and the Court of Appeals in upholding the ruling of the District Court stated the evidence was properly excluded for market price is collateral to the main issue of whether or not taxpayer's invoices correctly reflected the prices paid. Taxpayer said he received the prices listed on his books, the dealers testified that they had paid more than the amount listed on the books. Market value was not in issue. Court of Appeals also ruled that since the taxpayer received less than the Blue Book prices, and the car dealers claimed they paid more than the Blue Book prices, admission of the Blue Book evidence would not serve to impeach the car dealers by showing it would be unlikely for car dealers to pay more than the market value for the cars for it would appear to be just as unreasonable for a seller to accept less than market value as it would be for a buyer to pay more than market value. In addition to this, the Court of Appeals held proper the exclusion of evidence which taxpayer attempted to use to establish his innocence of crime by showing that he did not commit similar crimes on other occasions, and evidence which the taxpayer sought to use to impeach a witness where the subject matter of the witness' testimony was collateral to the issues in the instant case.

Criminal prosecution: Tax evasion: Instructions to the jury.--Taxpayer complained that the trial court erred in refusing to give requested instructions to the jury concerning bias or interest of witnesses. Since the trial court instructed the jury that a witness is presumed to speak the truth, that this presumption may be rebutted by the manner in which he testifies, the Court of Appeals ruled that the jury in evaluating the testimony of witnesses by virtue of said instruction could consider possible bias or interest of the witnesses; consequently taxpayer's claim of prejudice is without merit. Taxpayer also assigned as error the trial judge's charge to the jury on willfulness, but no objection was made to the instruction prior to the time the jury retired. Court of Appeals ruled no party may assign as error any portion of the charge or omission therefrom unless he objects thereto before the jury retires to consider its verdict.

Criminal prosecution: Tax evasion: Examination of Grand Jury testimony of witnesses.--Taxpayer claimed that his rights were substantially prejudiced by the trial court's denial of his request for examination of the grand jury testimony of certain witnesses. Court of Appeals stated that neither of the witnesses whose grand jury testimony the taxpayer sought to examine were questioned during cross-examination with respect to any contradictory statements they might have uttered before the grand jury, nor was it suggested to the court what contradictory statements the taxpayer hoped to find. There was no attempt to lay a foundation of any kind and the trial court did not err in denying taxpayer's request.

Phillips, Avakian & Johnston, Spurgeon Avakian, J. Richard Johnston, Frederick Bernays Wiener , Washington , D. C., for appellant. Lloyd H. Burke, United States Attorney, John Lockley, Richard H. Foster, Assistant United States Attorneys, San Francisco, Calif, for appellee.

Before MATHEWS and CHAMBERS, Circuit Judges, and BYRNE, District Judge.

BYRNE, District Judge:

Appellant J. A. Herzog operated a Pontiac agency dealing in both new and used cars. His principal business appears to have been the wholesaling of used cars to other used car dealers. Most of Herzog's car sales were handled through two employees, Douglass and Cline, who received the money from the sales and purportedly turned it over to Herzog or his office manager.

In March of 1954 Herzog was indicted on three counts charging wilful attempted income tax evasion. ¹ He was found not guilty on counts one and two relating to 1947 taxes, and guilty on count three relating to 1948 taxes. On this appeal, appellant does not contend that the evidence in the record is insufficient to support the guilty verdict. What he does contend is that his rights were substantially prejudiced by (a) rulings excluding certain evidence offered by him, (b) failure to give certain requested instructions, and (c) denial of his request for examination of the grand jury testimony of certain witnesses.

One of the issues of fact in the case was whether side payments in excess of invoice prices were made to Herzog by the persons who purchased used cars from him. Appellant offered in evidence bi-monthly issues of the Kelley Blue Book, a trade journal that sets out estimated car prices, and a summary prepared by an accountant showing a comparison of the Blue Book price of each car, with the invoice price as shown on appellant's records and the total price (including side payments of cash) allegedly paid by the used car dealers. Appellant's asserted purpose in offering this evidence was to establish the market value of the cars and to impeach the testimony of the used car dealers by showing that the prices they claimed they paid for the cars were in excess of the market value.

There was evidence that during the period in question automobiles were scarce and that dealers paid whatever was necessary to obtain them. It is clear that the trial judge considered the Blue Books as untrustworthy in that they did not reflect the true market value and during a colloquy with counsel stated, "The evidence was that nobody paid much attention to the Blue Book during that period of time." However, even if it be said that the Blue Books did accurately reflect actual market values, they were properly excluded as they would not tend to prove or disprove any issue in the case. It is true that where market price is crucial, the state of the market may be proven by quotations or reports in trade journals. Wolcher v. United States, 200 Fed. (2d) 493 (CA 9, 1952) [52-2 USTC ¶9547]. Here market price is collateral to the main issue of whether or not Herzog's invoices correctly reflected the prices paid. Herzog and the car dealers did not disagree in any material way as to the market value of automobiles. Herzog said he received the prices listed on his books; the dealers testified that they had paid more than the amount listed on those books. Market value was not in issue.

Assuming that by some process of mental gymnastics it could be said that the Blue Books established the actual prices paid by the car dealers to appellant, the exclusion of the evidence would not be prejudicial. The Blue Book prices, although lower than the prices claimed to have been paid by the car dealers, were higher than the prices listed on appellant's books. The most that could be said would be that appellant understated his income in a lesser amount than that charged in the indictment. The Government is not required to show the exact amount of income tax evasion and if a smaller amount than that charged in the indictment is shown, a defendant may nevertheless be found guilty. United States v. Schenck, 126 Fed. (2d) 702, (CCA 2, 1942) [42-1 USTC ¶9363].

Appellant argues that the Blue Book evidence tended to impeach the car dealer witnesses; that if they really paid as much as they claimed, they could not have expected to make any profit in view of the lower market value of the cars as shown by the Blue Books, and it just is not like car dealers to pay more than the market price for cars. This argument overlooks the fact that the Blue Book prices were higher than the prices the appellant testified he received. If there were any merit to the argument it would apply with equal force to the testimony of the appellant as it would appear to be just as unreasonable for a seller to accept less than market value as it would be for a buyer to pay more than market value.

Neal McNeil, a used car customer of appellant during 1946 and 1947, testified to transactions occurring during that period, including a conversation with appellant in which appellant told him he was going to show only a portion of his selling price on the invoice and wished to collect the balance in cash. McNeil further testified that he conformed to this procedure in purchasing cars from appellant and paid him or his employees by check for the invoice price plus an additional amount in cash. On cross examination McNeil was asked if he had been involved in difficulties with the O. P. A. during the summer of 1946. He replied in the negative. Subsequently the appellant sought to introduce into evidence a certain journal entry appearing in McNeil's books reciting the disbursement of $2200.00 as "attorney fees, etc., in connection with threatened O. P. A. suit . . ." This evidence was proffered for the purpose of impeachment and was excluded. The trial court's ruling was correct. McNeil's O. P. A. difficulties, if any, were not an issue in this case. The purpose of evidence is to prove or disprove some issue in the cause on trial. If proffered evidence does not tend to do either of these things, it has no place in the trial and is either immaterial or collateral to the inquiry. A witness cannot be impeached where the subject matter of his testimony is either immaterial or collateral to the issues in the cause in which the testimony is given. Arine v. United States, 10 Fed. (2d) 778 (CCA 9); Shanahan v. Southern Pacific Co., 188 Fed. (2d) 564 (CA 9).

The government produced evidence that 18 new "house" or "executive" cars were transferred into appellant's personal ownership and subsequently when resold the income was not recorded on the books of the agency nor reflected in appellant's tax returns. The appellant then offered evidence to show that there were 13 other "house" or "executive" automobiles registered in his name and when resold the sales were recorded on the books. This evidence was properly excluded as immaterial. A defendant cannot establish his innocence of crime by showing that he did not commit similar crimes on other occasions. Cf. United States v. Dennis, 183 Fed. (2d) 201, 232 (CA 2d). For the same reason evidence was properly excluded which was offered for the purpose of showing that there were some sales as to which no evidence of side money had been presented.

The appellant complains that the court erred in refusing to give requested instructions concerning bias or interest of witnesses. A trial court is not obliged to give an instruction in the language requested but may use words of its own selection. Nye & Nissen v. United States, 168 Fed. (2d) 846 (CCA 9), affirmed 336 U. S. 613; Wright v. United States, 175 Fed. (2d) 384 (CA 8); Petro v. United States, 210 Fed. (2d) 49 (CA 6). The court instructed the jury that a witness is presumed to speak the truth; that this presumption may be rebutted . . . "by the manner in which he testifies . . . (by demeanor) . . . (by contradiction) . . . by his relationship to the Government on the one hand and to the defense on the other hand." (Italics added.) This was a clear and accurate instruction that the jury, in evaluating the testimony of witnesses, should consider possible bias or interest. The appellant's claim of prejudice is without merit.

During the course of the trial, counsel for appellant requested that a transcript of the grand jury testimony of witnesses Douglass and Cline be made available for counsel's inspection. The trial court denied appellant's request remarking, "You have to make some showing that it would be impeaching, otherwise it is a fishing expedition . . ." Appellant assigns this ruling as error and cites as authority for his contention, Gordon v. United States, 344 U. S. 414; United States v. Socony-Vacuum Oil Co., 310 U. S. 150; Shelton v. United States, 205 Fed. (2d) 806 (CA 5); United States v. Cohen, 145 Fed. (2d) 82 (CCA 2); United States v. Krulewitch, 145 Fed. (2d) 76 (CCA 2); United States v. Alper, 156 Fed. (2d) 222 (CCA 2).

Other than the Alper case, the cases cited by appellant all deal with statements given by a witness to Government agents rather than testimony before a grand jury. None of the cases suggests that grand jury testimony or statements in Government reports should be turned over to the defendant to inspect for possible impeachment material without some prior showing that statements contradictory to the witness's testimony at trial are contained therein. In the Gordon case the Supreme Court reversed a conviction because of the denial of a motion to inspect pretrial statements of Government witnesses. After noting that the holdings of their opinion were confined to the limited and definite category of documents dealt with in that case, the Court stated: "By proper cross-examination, defense counsel laid a foundation for his demand by showing that the documents were in existence, were in possession of the Government, were made by the Government's witness under examination, were contradictory of his present testimony, and that the contradiction was as to relevant, important and material matters which directly bore on the main issue to be tried; . . ." (Italics added).

Surely there is at least as great a need for laying a foundation before invading the secrecy of grand jury proceedings, as would ordinarily be required before permitting the examination of statements and reports in the possession of the prosecutor. A trial court unquestionably has the power, under Rule 6(e) of the Federal Rules of Criminal Procedure, to order grand jury proceedings transcribed and produced for inspection by the defendant but such power should be exercised only where there is a clear showing that the ends of justice require it.

The Alper case does not deal directly with the question of inspection by the defendant of grand jury testimony; rather it concerns itself with inspection, preliminarily, by the trial judge. The purpose in the court's inspection is, of course, to determine whether in the court's discretion the testimony should be made available to the defendant. In the instant case the trial judge was not requested to inspect the grand jury testimony. Appellant's request was that the testimony be produced for the appellant's (not the trial judge's) inspection. We are not to be understood as saying that it would have been error to refuse such a request had it been made. The exercise of the power to compel disclosure of matters occurring before the grand jury is within the court's discretion, and a preliminary examination looking to the exercise of that discretion should be undertaken by the judge only upon a proper showing. The Alper court enumerated certain criteria which should be taken into account before grand jury testimony is ordered transcribed and produced for the court's inspection. To the criteria there enumerated, we add another. The person requesting the inspection should be required to specify the particular statements he is seeking for impeachment purposes. It is one thing to ask a trial judge to inspect the transcript of grand jury proceedings to determine whether a witness there testified he spent the month of July in Alaska, or that he had a gun in his possession on a certain occasion, or that he rode a white horse in a parade. It is an entirely different matter to ask a trial judge to inspect the transcript and then make known to the parties whether in his opinion any statements of a witness before the grand jury contradict any statements the witness made during the course of the trial. Not only is the latter course a "fishing expedition", but the judge is chumming the fish for the fisherman. For the judge to act as associate counsel in this manner is contrary to every concept of proper judicial functions.

In the case at bar neither of the witnesses whose grand jury testimony the defendant sought to examine were questioned during cross-examination with respect to any contradictory statements they might have uttered before the grand jury, nor was it suggested to the court what contradictory statements the defendant hoped to find. There was no attempt to lay a foundation of any kind and the trial court did not err in denying the appellant's request.

During oral argument the appellant for the first time objected to the trial judge's charge to the jury on wilfulness. We are not required to determine whether there is any merit to this belatedly raised point since there was no objection made to the instruction prior to the time the jury retired. Rule 30 of the Federal Rules of Criminal Procedure provides in part: ". . . No party may assign as error any portion of the charge or omission therefrom unless he objects thereto before the jury retires to consider its verdict . . ." But, argues the appellant in a supplemental brief following oral argument, this court's decision in Bloch v. U. S., 221 Fed. (2d) 786 [55-1 USTC ¶9364], rehearing denied 223 Fed. (2d) 297 [55-2 USTC ¶9641], requires this division of the court to disregard Rule 30, and "This Court's decision in the Bloch case requires reversal here." Appellant points to the similarity of the disputed instructions in Bloch and this case; that in neither case was the disputed instruction objected to in the trial court; that the Bloch court disregarded Rule 30 and consequently this division of the court must do the same. Having been left with no alternative we disagree with the Bloch case. We agree with Brown v. United States, 222 Fed. (2d) 293 (CA 9), which was decided three days after and overrules sub silentio the Bloch case. In the Brown case the court refused to consider the objection because there had been no compliance with Rule 30 and stated, "It is not necessary to discuss the merit of the disputed instruction inasmuch as no objection to it was made by appellant prior to the time the jury retired."

Appellant's contention that he is entitled to have the disputed instruction considered on the merits if Bloch was so entitled in his case is not unreasonable and, by the same token, Brown would be entitled to have the merits of the disputed instruction considered in his case. The Brown case and the Bloch case cannot both be right. It is not a situation where each case presents a separate problem dependent upon the instructions considered as a whole, nor is it a question of whether the instruction is slightly tainted with error or seriously tainted. The question is whether the court reaches the merits of the objection to any instruction where Rule 30 has not been complied with. We agree with Brown that absent an objection in the trial court, this court does not reach the merits of an objection to instructions.

There is a long line of Ninth Circuit cases in addition to Brown v. U. S., supra, which specifically hold that appellate courts will not look to the merits of objections where Rule 30 has not been followed. It is true that the force of some of these decisions has been weakened where the court, after stating that the objection need not be considered on the merits, proceeded by way of dictum to indicate that even if it were considered on the merits it would be found that there was no prejudicial error. Despite the erosive weakening effect of this dictum, this circuit has almost without exception upheld Rule 30. See Mitchell v. U. S., 213 Fed. (2d) 951, 957 (CA 9) [54-2 USTC ¶9449]; Bateman v. U. S., 212 Fed. (2d) 61, 70 (CA 9) [54-1 USTC ¶9341], "Under Rule 30 of the Federal Rules of Criminal Procedure, 18 U. S. C. A., failure to except to an instruction on the ground urged on appeal forecloses review of the question."; Kobey v. U. S., 208 Fed. (2d) 583, 598 (CA 9) [54-1 USTC ¶9106]; Benatar v. U. S., 209 Fed. (2d) 734, 743 (CA 9) [54-1 USTC ¶9174], "We are precluded by Rule 30 of the Federal Rules of Criminal Procedure, 18 U. S. C. A., from reaching the merits of the appellants' objection . . ."; Zamloch v. U. S., 193 Fed. (2d) 889, 892 (CA 9), ". . . under Rule 30 of the Rules of Criminal Procedure, 18 U. S. C. A., in order to have considered an assignment of error in the failure to give a specific instruction a request that it be given must first be made to the Court."; Enriquez v. U. S., 188 Fed. (2d) 313, 316 (CA 9), "We may say that Rule 30 is not designed as a mere trap for the unwary. Painstaking compliance with its requirements, although not an easy matter for the lawyer, is of the very essence of the orderly administration of criminal justice."; Ziegler v. U. S., 174 Fed. (2d) 439, 448 (CA 9), "Appellant did not object to any portion of the charge or omission therefrom before the jury retired to consider its verdict. Hence we are not required to consider specifications 6-13."

There are decisions from other circuits which recognize that Rule 30 precludes appellate courts from considering objections to instructions made for the first time on appeal. ² In other cases the court indicates (in most instances dictum) that it may disregard Rule 30 where there is "grave error amounting to a denial of a fundamental right", ³ where there are "unusual circumstances present", ⁴ where error "affects substantive rights", ⁵ where the error is "plain and fundamental". ⁶ One court went so far as to say, "Although these rules (F. R. Crim. P.) so recently promulgated by the Supreme Court and having the effect of law should be obeyed we may in our discretion conclude not to apply them." ⁷ In the cases where the courts have indicated that they may disregard this rule if they so choose, they in most instances cite as authority for this power, Screws v. U. S., 325 U. S. 91, 107 (1944) and U. S. v. Atkinson, 297 U. S. 157 (1936). The flaw is at once apparent when it is recognized that both of these cases were decided before Rule 30 was promulgated by the Supreme Court pursuant to authority from Congress. To the extent that the Screws and the Atkinson cases conflict with Rule 30, they have not been the law since the Federal Rules of Criminal Procedure became effective March 21, 1946. ⁸ Rule 30 is clear and unambiguous and its application is not dependent upon the personal whims of the court. It provides that no portion of the charge to the jury or omission therefrom may be assigned as error unless objection is made before the jury retires. This rule which has the force of law leaves no area in which it may be disregarded. There is no distinction made for "grave error", "fundamental error", "slight error", "serious error" or any other kind of error. If there is a failure to except to an instruction the appellate courts are foreclosed from reviewing the question. Obviously if this court is precluded from reaching the merits of the objection, it does not reach the question of whether the error was "grave", "slight", "serious" or whether there was error at all.

Some courts appear to find in Rule 52 ⁹ the authority to disregard Rule 30. See Bloch v. United States, supra. It would indeed be an anomaly if the Supreme Court in adopting and promulgating both of these rules at the same time intended that one would nullify the other. An examination of these rules clearly reveals that there is no conflict between them. Rule 52 does four things: (1) defines "Harmless Error", (2) provides that "Harmless Error" shall be disregarded by the courts, (3) defines "Plain Error", and (4) provides that "Plain Error" may be noticed although not brought to the attention of the court. The definitions make it clear that all error is either "Harmless" or "Plain" depending upon whether it affects substantial rights. It cannot be disputed that "Plain" error and prejudicial error mean the same thing, as prejudicial error is error which affects substantial rights. Cf. Kotteakos v. U. S., 328 U. S. 750. There is no mysterious third type of error which appellate courts may recognize under certain circumstances. If error is harmless it will not be considered whether called to the attention of the court or not; if it is plain or prejudicial error it must be considered if properly brought to the attention of the court and may be considered although not brought to the attention of the court.

Those who seek to derive support from Rule 52(b) for the nullification of Rule 30, read into Rule 52(b) the words "by appellate courts" and "trial" so that the rule will read: "Plain errors or defects affecting substantial rights may be noticed by appellate courts although they were not brought to the attention of the trial court." That of course is not what the rule states. The words "the court" refer to the court which notices the error and the clear meaning of the sentence is that a court may notice plain or prejudicial error although not brought to the attention of the court noticing the error. In applying the rule this court may notice plain or prejudicial error although not set forth as a specification of error relied upon as required by Rule 18(d) of the rules of this court. The manifest intent of the rule is to permit courts sua sponte to notice error which the parties through neglect or inadvertence failed to call to the court's attention, ¹⁰ but it does not authorize the consideration of matters which another rule specifically states shall not be assigned as error.

Every experienced member of the Bench and Bar knows that there are counselors who are very adept at sowing error in the record to provide an "ace in the hole" for reversal on appeal in the event of an adverse verdict of the jury. The trial judge does not have an opportunity to scrutinize proposed jury instructions at his leisure. Ordinarily the trial is delayed and the jury remains at recess while the judge settles the instructions with counsel after each party has submitted several dozen instructions. The attention of the court is engaged in the consideration of those instructions which are questioned by counsel with time for only a cursory examination of the instructions which are agreed upon by both parties. This would be a very fertile field for sowing error if a defendant were permitted to assign as error a charge in which he acquiesced. Rule 30 is designed to impede such tactics and its salutary purpose should not be frustrated by giving a twisted construction to a simultaneously promulgated rule.

Affirmed.

¹ 26 U. S. C. 145(b).

² Contreras v. U. S., 213 Fed. (2d) 96, 99 (CA 5) [54-1 USTC ¶49,039]; Finnegan v. U. S., 204 Fed. (2d) 105, 115 (CA 8), cert. den. 346 U. S. 821; U. S. v. Furlong, 194 Fed. (2d) 1, 3 (CA 7); James v. U. S., 191 Fed. (2d) 472 at 474 (CADC), U. S. v. McCarthy, 170 Fed. (2d) 267, 268 (CA-2); Thayer v. U. S., 168 Fed. (2d) 247, 249 (CCA 10).

³ Fisher v. U. S., 212 Fed. (2d) 441, 444 (CA 10).

⁴ U. S. v. Marachowsky, 201 Fed. (2d) 5 (CA 7).

⁵ Tatum v. U. S., 190 Fed. (2d) 612, 614 (CADC).

⁶ U. S. v. Bushwick Mills, 165 Fed. (2d) 198, 201 (CCA 2).

⁷ U. S. v. Perplies, 165 Fed. (2d) 874 (CCA 7).

⁸ The Bloch case also relied upon Morris v. United States, 156 Fed. (2d) 525, a Ninth Circuit Case, the trial of which took place before the adoption of the Federal Rules of Criminal Procedure.

⁹ RULE 52. HARMLESS ERROR AND PLAIN ERROR.

(a) Harmless Error. Any error, defect, irregularity or variance which does not affect substantial rights shall be disregarded.

(b) Plain Error. Plain errors or defects affecting substantial rights may be noticed although they were not brought to the attention of the court.

¹⁰ The revisor's note to the section states that Rule 52(b) is based upon Wiborg v. United States, 163 U. S. 632, and former Rule 27 of the Supreme Court which provided that errors not specified would be disregarded, "save as the court, at its option, may notice a plain error not assigned or specified".

CHAMBERS, Circuit Judge, concurring:

I concur. Although I disagree with the decision in the Bloch case, I would be reluctant to go against it were it not for my belief that Brown v. United States, 9 Cir., 222 Fed. (2d) 293, already has overruled Bloch sub silentio.

 

 

[52-2 USTC ¶9547]Louis E. Wolcher, Appellant v. United States of America, Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 12,992, 200 F2d 493, November 17, 19 52

Appeal from the United States District Court, Northern District of California, Southern Division.

Criminal penalties: Evidence: Admissibility.--The defendant was convicted of wilfully and knowingly attempting to evade and defeat income and victory taxes. He claimed, on appeal, that the lower court committed errors in admitting and excluding evidence, and that these erroneous rulings were prejudicial. One of the errors alleged was the admission of a working copy of a partnership tax return which differed materially from the actual return filed by the partnership of which the defendant was a member. The partnership return was not involved in the case but was offered and received by the lower court on the theory that its purpose was to show "wilfullness and intent." The reviewing court ruled it was error to admit the working copy of the return in evidence and the case was remanded for a new trial.

Leo R. Friedman, San Francisco, California, for appellant. Chauncey Tramutolo, United States Attorney, Robert B. McMillan, Assistant United States Attorney, Walter M. Campbell, Jr., Regular Counsel, Penal Division, Bureau of Internal Revenue, and James H. Shelton, Special Attorney, Penal Division, Bureau of Internal Revenue, for appellee.

Before HEALY, ORR and POPE, Circuit Judges.

POPE, Circuit Judge:

The appellant was convicted under an indictment charging that he wilfully and knowingly attempted to evade and defeat some $30,000 of the income and victory taxes due and owing by him for the fiscal year ending June 30, 19 44, in violation of §145b of the Internal Revenue Code. The questions presented on this appeal all relate to claimed errors in admitting and excluding evidence. It is therefore necessary to state only enough of the facts to indicate the significance of the evidence rejected or admitted over objection.

[Government's Contentions]

The theory of the Government's proof was that during the year in question Wolcher collected large sums from the sale of whiskey from which he derived income which he failed to return. The sales were made through San Francisco liquor wholesalers who would receive checks for the ceiling price of the liquor while the purchaser would pay an additional over-ceiling amount in cash which went to Wolcher. His income tax return reported no gross income from sales of liquor at wholesale (which the sales above described were) except for an item of $3,000 profit made on a transaction not involved here.

[Appellant's Contentions]

Wolcher admitted the over-ceiling transactions, but contended that although he received those proceeds he made no profits from these operations for the reason that in purchasing or acquiring the liquor, he himself was obliged to make over-ceiling payments or bonuses in a large amount, and that the sums so paid wiped out any possible profit. He testified that the amounts so laid out by him were paid to one William Gersh, stating that on some shipments the over-ceiling bonus paid Gersh amounted to $20 and on others to $25 a case. He fixed the amount which he had thus paid Gersh as approximately $115,000. Gersh was the publisher of a New York City trade paper called "The Cash Box" devoted entirely to coin machines. Wolcher operated a concern which sold coin-operated machines and he had known Gersh for 15 or 20 years. Wolcher testified that he sent substantial sums of money to Gersh during the period in question and that these remittances were made by check and by cash either through the mail or by express or delivered to Gersh in person.

Gersh was called as a rebuttal witness for the Government and while he stated that in 1943 he had handled money belonging to Wolcher in amounts totaling $85,000, his version was that the money was sent to him to obtain coin machines for Wolcher. His testimony was that at that time coin machines were very difficult to procure, and that they could be bought only by cash payment in advance of the full purchase price. This, he said, was why Wolcher sent him these sums of money. He testified that he bought ten phonographs for Wolcher during this period, the purchase amounting to $5250, but that he had returned all the balance of the $85,000 to Wolcher.

Wolcher's version of the $5250 purchase which Gersh made was that he, Wolcher, had seen in a coin machine industry publication known as "The Billboard" an advertisement offering these machines for sale, and that he had sent a letter ordering them. He said that since the sellers wanted a deposit on the deal he telephoned to Gersh to make the deposit for him out of the money which Gersh had received from him and then had on hand, and that this is how Gersh happened to put up the $5250 on these machines. He testified that there was no shortage of coin machines; that during the year he purchased hundreds of thousands of dollars worth of such equipment; that although the only equipment of that character then for sale was used equipment, yet it was advertised for sale in large quantities.

[Admissibility of Written Statement as "Past Recollection Recorded"]

Wolcher was asked on cross-examination: "Did you make the statement to Mr. Kirby that you were making in excess of $20 a case on all whiskey which you sold?" He answered that he did not recall making such a statement. Thereafter Kirby was called and testified that in the latter part of 1942 or the first part of 1943 he had a conversation with Wolcher relative to the liquor transactions. He was asked to relate the conversation. The witness was permitted to answer, over objection, but was able to recall only that there was "a conversation of approximately $20 a case profit." The Government then produced a statment which Kirby had made in writing in 1948 at the instance of an agent of the Rebenue Bureau. He was permitted to examine it and then was asked if on such examination his recollection as to the conversation inquired about had been refreshed. He replied in the negative. He then testified that when he had made the statement, the matter was then more fresh in his recollection than it was now. Thereupon the statement was offered and received in evidence over the objection of the defendant, upon statement of counsel for the government that it was offered as his "past recollection recorded." The objection was both that it was not a proper mode of impeachment, as well as that it was heresay and otherwise not competent.

The document thus received was in question and answer form and contained the statement that Kirby had a very poor memory but that he would guess that the conversation took place in 1943, and at that time Wolcher, talking to Kirby about shipments of whiskey, stated that his profit "was estimated at $20 a case. That is the estimate of profit would be $20 a case."

This 1948 statement purporting to describe a conversation in 1943, should not have been admitted. We do not discuss the question of the propriety of attempting impeachment in the unusual manner here employed, for we think that since Wolcher was the defendant a statement of a material fact, not amounting to a confession of guilt, if properly proven would be admissible as an admission of an accused defendant. ¹

The statement was incompetent and inadmissible for two reasons: Such a memorandum when used as past recollection recorded, where the witness "has no recollection of the facts stated in it," must have been made "while the occurrences mentioned in it were recent and fresh in his recollection." Maxwell v. Wilkinson, 113 U. S. 656, 658. The recording, in 1948, of something said to have happened in 1943, was not sufficiently fresh and vivid to be probably accurate. This memorandum failed to measure up to any of the usual requirements of trustworthiness. ² Furthermore, the statement was not properly verified by the witness. He did not testify that at the time he made the written statement he then knew it to be true. All that he said was that at the time the statement was made his recollection was fresher than it was at the trial. Its assertions were vouched for by no one.

[Admissibility of Working Copy of Partnership Return]

During the taxable year in question Wolcher had been a member of a partnership known as "The Gold Coast" which was engaged in the sale of liquor by the glass. The business and the income of this partnership had nothing to do with the charge in this case. ³ The Government called as one of its witnesses an accountant who had been employed by Wolcher to prepare a partnership tax return for The Gold Coast for the fiscal year ending July 1, 19 44. He produced a working copy of the return he had prepared. This return was never filed and differed materially from the return of the Gold Coast which was actually filed. In the return which the witness had prepared the inventory of the Gold Coast was shown to be some $31,000 whereas the return actually filed showed a much smaller inventory, some $16,500. The working copy of the partnership return thus prepared by the accountant was received in evidence over appellant's objection.

It was conceded by the Government that the Gold Coast return was not involved in the case because any profit shown thereon would not be included in Wolcher's return for the year here in question. It was offered and received by the court on the theory that its purpose was to show "wilfullness and intent."

When there is proof than an act has been done and the question arises whether it was done with criminal intent, other similar acts by the accused may be proven for the purpose of demonstrating that he was acting at the time alleged in the indictment with criminal intent and volition. In such cases the fact that the prior acts may themselves be criminal in character does not exclude them.

At the same time we must bear in mind that the commission of a wrongful act charged cannot ordinarily be established by proof that the defendant has previously committed other wrongful acts. It is fundamental that such a method of proof is inadmissible merely for the purpose of showing that the defendant has a generally criminal disposition or character. ⁴ Hence, if in order to prove intent, evidence is to be received of other wrongful acts, the acts thus proven must be of such character that as a matter of logic they tend to demonstrate a criminal intent at the time of the commission of the act now charged. For one thing the prior acts must be similar to the one now charged. ⁵

The caution which the courts must exercise in such cases is well set forth in Boyer v. United States, (CA DC) 132 Fed. (2d) 12, 13. In that case, while the prior act proven was similar to that charged, the receipt of the proof of the prior act was held to be error because it occurred nearly two years before the date charged in the indictment. The general rule relating to admission or exclusion of evidence of such acts was stated as follows (p. 13): "In various circumstances, therefore, evidence of earlier acts good or bad may be admitted, as tending in one way or another to show a man's state of mind, when he is charged with a later fraud. But the fact that intent is in issue is not enough to let in evidence of similar acts, unless they are "so connected with the offense charged in point of time and circumstances as to throw light upon the intent."

In the case before us the circumstances relating to the preliminary draft of the partnership return were in no way connected "in point of circumstances" with the offense charged in the indictment. The only resemblance between the two sets of acts would be that both had to do with tax returns. But the partnership return was of an entirely different nature from the transaction for which the defendant was here on trial. The evidence relating to the partnership was not logically relevant either to prove or disprove the intent or knowledge of Wolcher in connection with his performance of the acts shown at the trial and charged in the indictment.

There is complete lack of proof that the accountant's tentative partnership return was correct, or that the partnership return actually filed was not. But in the circumstances it must have been offered on the theory that the change from the larger inventory in the preliminary draft, to the smaller in the return as filed, meant that some act of chicanery was afoot. The jury would be apt to place that construction on it, and were thus invited to infer that the failure to include the tentative inventory in the final partnership return was a wrongful act. Upon this unwarranted assumption they were further permitted to infer defendant's guilt from the fact of a prior unrelated, dissimilar wrongful act. As stated in Boyer v. United States, supra, (p. 13) "No doubt the alleged fact that a man committed a crime on another occasion tends to show a disposition to commit similar crimes. But when the prior crime has no other relevance than that, it is inadmissible. Its tendency to create hostility, surprise, and confusion of issues is thought to outweigh its probative value. The law seeks 'a convenient balance between the necessity of obtaining proof and the danger of unfair prejudice.' The alleged fact that a man committed one forgery clearly increases the likelihood that he committed another forgery, but testimony to the earlier crime is not, for that reason alone, admissible." We hold that it was error to admit the working copy of the Gold Coast partnership return in evidence.

What we have said applies also with respect to an inventory which the accountant had prepared to accompany the working copy of the partnership return. In addition, it is noted that there was no evidence that the values attached to the inventory were correct or where they were obtained. They may have been gleaned by inquiry from miscellaneous persons who may or may not have been qualified to state values. None of these persons were called. The instrument was wholly without foundation. Compare United States v. Kelley, (2d cir.) 105 Fed. (2d) 912, 917 [39-2 USTC ¶9621].

[Admissibility of Office Memorandum]

The court also admitted in evidence a paper or memorandum obtained by a Government special agent from Wolcher's office files. The paper was dated February, 1936, and was a carbon copy of a purported note sent to the Seattle office of Wolcher's business. It bore the initials "L. E. W." and "E. C." It contained language to the effect that the writer or writers "should like to receive a check from you very soon against our private account, so that we can show a similar profit in the coming year and perhaps make considerable more money." The paper was wholly without foundation; there was no proof of its genuineness or who wrote it, or that it was a document made in the regular course of business, or otherwise. Its receipt over appellant's objection was error.

[Admissibility of Trade Paper or Magazine]

After the witness Gersh had testified on rebuttal that the sums he received from Wolcher were sent to him because coin machines were very difficult to purchase and could only be obtained by one armed with the full cash price, Wolcher testified on surrebuttal that at the time in question coin machines were plentiful and easily purchased and that they could be purchased on time. For the purpose of corroborating his testimony in this respect he offered in evidence volumes containing all weekly issues of the "Billboard" for the year here in question. These issues contained numerous advertisements of offers to sell coin machines on terms permitting down payments of substantially less than the full amount of the price. The evidence showed that the "Billboard" was a national publication and a trade paper specializing in this sort of information. They were excluded as immaterial.

It is generally held that the state of the market in securities or commodities may be proven by reports or quotations in newspapers and trade journals. ⁶ If the market in coin machines at the time in question was as claimed by Wolcher, the existence of the numerous offers to sell here sought to be proven would tend to corroborate Wolcher's testimony. We think that the offered evidence should have been received.

[Admissibility of Correspondence]

For a like purpose Wolcher offered in evidence correspondence between himself and a New Jersey company which was engaged in the business of selling similar machines. The correspondence was offered for two purposes. One was to show that the particular purchase of phonographs to which Gersh had testified had actually been negotiated by Wolcher himself and not by Gersh as the latter claimed. The second was to disclose that the coin machines were readily available without the necessity of cash in advance as Gersh had testified. The court refused to admit this evidence.

We think this evidence was material. It would have had weight in determining the question whether Wolcher or Gersh was telling the truth with respect to why the money was sent by Wolcher. It should have been admitted. ⁷

[Admissibility of Testimony]

Among the items of bonuses which Wolcher testified he had to pay in order to get whiskey during the year in question was a bonus or under-the-counter payment to one Worthy made to procure some 500 cases of whiskey furnished to the Gold Coast. Wolcher sought to show that this particular payment was occasioned by the fact that the quantity then procured was an especially large one and one very difficult to secure in the condition of the market for whiskey at that time. To show that there was a special reason for the demand and the payment of the bonus, Wolcher sought to prove by an employee of the seller that the particular purchase was very much out of line with the ordinary purchases of Gold Coast or by the Silver Rail, another liquor selling place in which Wolcher had an interest. This evidence was excluded.

It would appear that the size of the purchase and its relation to the purchases commonly made for this place would be a part of the circumstances then present likely to throw some light upon the probability or improbability of Wolcher's statement.

The question remains whether these erroneous rulings were prejudicial. If they were to be considered singly, each by itself, the situation might be different. Thus the exclusion of the evidence that the purchase of liquor on account of which Wolcher claimed to have paid a $10,000 bonus to Worthy was disproportionate in amount and value to other sales to the Silver Rail and the Gold Coast, might not be prejudicial in view of the fact that the witness Grusenemeyer testified to substantially the same matter. The evidence thus excluded might well be regarded as merely cumulative, and therefore its exclusion not prejudicial.

[Errors Were Prejudicial]

But with respect to the remaining erroneous rulings, when we consider them all together and in the light of the sharp conflicts of testimony which were left to be resolved by the jury, we cannot disregard the errors committed as without probable substantial influence upon the verdict of the jury. The rule which we endeavor to apply is that stated in Kotteakos v. United States, 328 U. S. 750, 764: "If, when all is said and done, the conviction is sure that the error did not influence the jury, or had but very slight effect, the verdict and the judgment should stand, except perhaps where the departure is from a constitutional norm, or a specific command of Congress. . . . But if one cannot say, with fair assurance, after pondering all that happened without stripping the erroneous action from the whole, that the judgment was not substantially swayed by the error, it is impossible to conclude that substantial rights were not affected. The inquiry cannot be merely whether there was enough to support the result, apart from the phase affected by the error. It is rather, even so, whether the error itself had substantial influence. If so, or if one is left in grave doubt, the conviction cannot stand."

We cannot say that these errors are those which "do not affect substantial rights" and hence that they should be disregarded. ⁸ The errors here listed require a reversal since in our judgment "the error might have operated to the substantial injury of the defendant" United States v. Grady, (7 cir.) 185 Fed. (2d) 273, 275.

The judgment is reversed and the cause is remanded with directions to grant the appellant a new trial.

¹ Dimmick v. United States, (9 cir.) 116 Fed. 825, 831; Ercoli v. United States, (CA DC) 131 Fed. (2d) 354, 356; see Wigmore on Evidence, §821, note 4, and §1039, note 2.

² The cases are collected in Wigmore on Evidence, 3d Ed., §745.

³ It did appear that some of the whiskey from which Wolcher is claiming to have made the profits here in question was sold by or through him to the Gold Coast.

⁴ See the cases cited in Shea v. United States, (6 cir.) 236 Fed. 97, 104.

⁵ Cf. Wigmore on Evidence, 3d Ed. §302.

⁶ Numerous cases are collected in a note at 43 A. L. R. 1192.

⁷ In Caten v. Salt City Movers & Storage Co., (2d cir.) 149 Fed. 2d 428, 433, the court held that the trial court had properly admitted in evidence a letter received from a dealer in the type of merchandise there in question. The letter was received as evidence of the alues as stated in the dealer's letter.

⁸ Rules Criminal Procedure, 52a.

 

 

[55-2 USTC ¶9665]E. C. Lloyd, Appellant v. United States of America, Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 15207, 226 F2d 9, September 30, 19 55

Appeals from the United States District Court for the Northern District of Alabama.

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

Criminal tax evasion: Admissibility of evidence.--Taxpayer was convicted of wilful attempts to evade and defeat his Federal income tax for the years 1945, 1946, 1947. The following assignments of error were overruled on appeal: (1) that there was not sufficient evidence to support the jury's findings of wilfulness essential to the statutory offense, (2) that the court erred in refusing to grant taxpayer's motion to suppress, as illegally obtained evidence, his 1946 cash receipts book and photostatic copies thereof, (3) that the court abused its discretion in sequestering taxpayer's accountant witness and not sequestering the Government's accountant witness, (4) that the court erred in admitting, over taxpayer's objections, testimony of revenue agents claimed to be inadmissible as conclusions and hearsay, (5) that the court erred in admitting, over taxpayer's objections, testimony and records concerning the financial circumstances of taxpayer's wife and daughter.

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

Criminal tax evasion: Evidence: Offer to compromise on prior year's tax.--The trial court admitted, over taxpayer's objection, evidence with respect to taxpayer's offer to compromise his tax liability for the years 1924 to 1932, inclusive. There was held to be no logical probative value as to taxpayer's intent in commission of later acts in addition to the general proof of his criminal tendencies. Admission of such evidence was held to be highly prejudicial; the judgment was accordingly reversed and the cause remanded for a new trial.

William S. Pritchard, Winston B. McCall, Birmingham, Ala., for appellant. Frank M. Johnson, Jr., United States Attorney, Leon J. Hopper, Assistant United States Attorney, Birmingham, Ala., for appellee.

Before RIVES, TUTTLE and CAMERON, Circuit Judges.

RIVES, Circuit Judge:

Appellant was convicted upon a jury trial under three counts of two separate indictments ¹ charging him with the offense of willfully attempting to evade and defeat his federal income tax for the calendar years 1945, 1946 and 1947, by filing false and fraudulent returns in violation of Title 26 U. S. C. A. Section 145(b). He was sentenced by the district court to 18 months imprisonment and to pay a $2,500.00 fine.

On a hearing of the defendant's motion for a bill of particulars, the United States Attorney represented to the court and to counsel for the defendant "that the method employed in computing the corrected net income was the specific-item adjustment method," and thereupon the court ordered the Government "to furnish the defendant with information as to the categories in which the specific item adjustments were made in said computations." The Government then informed the defendant that the items upon which adjustments were made were for 1945, receipts, merchandise purchases, and delivery expenses, and for 1946 and 1947, receipts and merchandise purchases.

The evidence tended to show that, on his bakery books and in his returns for the years involved, appellant overstated the expense of merchandise purchased by approximately $17,350.00, principally by writing five $3,000.00 checks on his bakery account, four of which were drawn on the Commercial National Bank at Anniston, Alabama, and charged on his bakery books as "flour purchases", and one of which, dated July 2, 1946, was drawn on his adopted daughter's account at that bank and shown on the bakery books as a sugar purchase, which checks were supported by no invoices or other records to corroborate appellant's claim that they actually represented payment for merchandise purchases as reflected upon his bakery books, and which actual use for such purpose was somewhat negatived by testimony of a revenue agent, Potter, revealing that on the date each check was drawn a corresponding amount was deposited to the credit of appellant's personal loan account at that same bank; that four other counter checks aggregating $1,650.00 were also drawn by appellant during 1945 and 1946 on the Anniston Cotton Oil Company, and were represented on his bakery books as "miscellaneous merchandise purchases", though the owner of that Company, J. A. Stewart, testified that he gave appellant cash for these checks and that they were not received in payment for any merchandise or services rendered by his Company either to appellant or his bakery establishment; that for the year 1945 the delivery expenses of appellant's bakery were overstated by $1,300.00, proof of which overstatement was made by testimony that three checks drawn by appellant, dated December 7, 1945, one of which was made payable to the Alabama Motor Company and the other two to C. J. Alford, were not issued or received in payment of any delivery expenses, as indicated by the books of the bakery, but were simply cashed by appellant, the witness C. J. Alford testifying that at the time appellant "laughed casually" and said he was "going to the Elks Club" to "play blackjack"; further, that appellant's bookkeeper, for about two months in 1945 and ten months in 1946, admittedly erased and altered original entries on the cash book of the bakery so as to reduce by $300.00 per week the record of actual cash receipts from merchandise sales, which alterations, according to appellant's testimony, were made so that he could use the $300.00 weekly to make necessary purchases of bakery products on the "black market" from OPA violators. In addition to this direct testimony by his bookkeeper and appellant's admission as to these false understatements of cash receipts on the bakery books, there is much circumstantial evidence of unreported cash receipts from cash deposited by appellant during the tax years involved in bank accounts in the name of his wife and adopted daughter, from cash invested in United States Savings Bonds, and from purportedly nontaxable "loans" made to appellant's bakery by his wife during the prosecution years. ²

Appellant in brief assigns twenty specifications of error, each of which has been carefully considered, but we think that only those hereinafter discussed require separate treatment.

(1) Sufficiency of the evidence. Appellant insists that language from the recent decision of the Supreme Court in Holland v. United States, 348 U. S. 121, 125-129, 139 [54-2 USTC ¶9714], and from several decisions of this Court, ³ require direction of a judgment of his acquittal for insufficiency of the evidence to warrant the jury's finding of guilt beyond a reasonable doubt, particularly as to the element of willfulness essential to constitute this specific statutory offense; that the Government failed to eliminate in its computations, as available sources of funds for appellant's proven deposits, loans and purchases, amounts which had been accumulated by appellant and his wife in nonprosecution years, and failed directly to trace any unreported cash receipts into the bank accounts of either appellant, his wife or daughter, or to show that amounts entered upon his bakery books for merchandise purchases did not truly reflect deductible cash expenditures actually used for such purpose; finally, that the starting point for the revenue agents' net worth computations, under Bryan v. United States, 5 Cir., 175 Fed. (2d) 223, 227 [49-1 USTC ¶9322], was not established with the definiteness required to support a tax fraud conviction based upon wholly circumstantial proof. See Pollock v. United States, 5th Cir., 202 Fed. (2d) 281, 284 [53-1 USTC ¶9229].

It is not this Court's function to determine guilt or innocence. That judgment is exclusively for the jury, subject however to the decision of the district court reviewable by this Court as to whether the evidence is legally sufficient to sustain conviction, a matter, of course, presenting a question of law. Kotteakos v. United States, 328 U. S. 750, 763. In the performance of its function, the court has no right to invade the province of the jury by determining questions of credibility and weight of evidence. Goldman v. United States, 245 U. S. 474, 477; Stilson v. United States, 250 U. S. 583, 588; Glasser v. United States, 315 U. S. 60, 80; Mortensen v. United States, 322 U. S. 369, 374. "The verdict of a jury must be sustained if there is substantial evidence, taking the view most favorable to the Government, to support it." Glasser v. United States, supra. In circumstantial evidence cases, this Court has said that the test to be applied is whether the jury might reasonably find that the evidence excludes every reasonable hypothesis except that of guilt. Vick v. United States, 216 Fed. (2d) 228, 232, and cases there cited; see also United States v. Levy, 7th Cir., 138 Fed. (2d) 429, 430, 431.

We think a fair reading of this record impels the conclusion that a jury question as to appellant's guilt was presented, certainly under the prosecution's "specific item adjustments method" of proving unreported income by means of substantial understatements of cash receipts and overstatements of merchandise purchases and delivery expenses for the tax years involved. See Spies v. United States, 317 U. S. 492, 500 [43-1 USTC ¶9243]; Bostwick v. United States, 5th Cir., 218 Fed. (2d) 790, 794 [55-1 USTC ¶9170]. The specific willful intent and bad motive required for conviction under this statute is, of course, inherently unsusceptible of direct proof, but as in the Bostwick case, supra, might here have been inferred by the jury from appellant's conduct, if the jury believed from the testimony that he knowingly permitted the making of false book entries and alterations to conceal cash receipts, purposely inflated his operating expenses, and thereby depreciated his net taxable income by means of fictitious flour and sugar purchases, delivery expenses, etc. See United States v. Rosenblum, 7th Cir., 176 Fed. (2d) 321, 329-330 [49-1 USTC ¶9314]. True, appellant correctly contends that "the intent to avoid detection of price ceiling violation is not the specific intent to evade income taxes," but by the same token, "if the tax evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime." Spies v. United States, supra at p. 499. That the appellant might conceivably have been found innocent had his explanations been believed by the jury is no tenable ground for attacking the submission of such cogent, prima facie proof. Cf. United States v. Fleischman, 339 U. S. 349, 360-361; Casey v. United States, 276 U. S. 413, 418.

Appellant's further reliance upon such authorities as this Court's Bryan case, supra, for the proposition that indefinite proof of initial net worth is sufficient to invalidate all subsequent computations of the revenue agents, is here misplaced, for essentially this is a "specific item adjustment" rather than a net worth tax fraud prosecution, though in support of its prima facie case based on that theory the Government introduced its net worth and circumstantial proof in anticipation of the defense that appellant had available assets at the inception of the prosecution years sufficient to account for his proven expenditures over and above reported income. The jury might plausibly have inferred that, if appellant and his wife had had available in 1942 the approximately $101,000.00 cash reserve it was shown they would have needed to explain appellant's subsequent excess expenditures over reported cash receipts and deposited funds, they would not have found it necessary to borrow several thousand dollars from various banks and pay interest upon such loans during this period. Cf. Barcott v. United States, 9th Cir., 169 Fed. (2d) 929 [48-2 USTC ¶9377]. In any event, proof of guilt in such cases to a mathematical certainty is neither possible nor required. While we think a jury case was made for each of the three tax years, the sentence imposed would be justified if the evidence supported the jury's finding that appellant willfully attempted to evade a substantial part of his income tax during any one of the three tax years involved. See Holland v. United States, supra; Schuermann v. United States, 8th Cir., 174 Fed. (2d) 397, 399 [49-1 USTC ¶9281]; United States v. Schenck, 2nd Cir., 126 Fed. (2d) 702, 707 [42-1 USTC ¶9363]; Norwitt v. United States, 9th Cir., 195 Fed. (2d) 127, 135 [52-1 USTC ¶9252]; Pollock v. United States, 5th Cir., 202 Fed. (2d) 281, 284 [53-1 USTC ¶9229].

(2) The motion to suppress evidence. The appellant moved to suppress as illegally obtained evidence the 1946 Cash Receipts Book of Lloyd's Bakery and photostatic copies of pages therefrom. ⁴ The examination and investigation of appellant's income tax returns for the years 1942 to 1947, inclusive, was commenced by Agent Smith in May, 1947, as a "routine assignment--the usual examination without any suspicion of fraud." By March 9, 19 48, fraud had been suspected, and Special Agent Potter from the Intelligence Unit was assigned to work with Agent Smith. Potter resigned in 1951 or 1952, and another Special Agent Moorman was assigned to complete the work with Agent Smith during 1953 and 1954. In such cases, where many of the facts are discovered on a routine investigation before fraud is suspected, it is not to be expected that a taxpayer will be formally warned at the beginning of an investigation, and informed of his constitutional rights. In any event, as we have several times held, such circumstances do not require the exclusion of the evidence, but may go to its weight or credibility. Montgomery v. United States, 5th Cir., 203 Fed. (2d) 887, 893 [53-1 USTC ¶9336], and cases there cited; Vloutis v. United States, 5th Cir., 219 Fed. (2d) 782, 787 [55-1 USTC ¶9262]; White v. United States, 5th Cir., 194 Fed. (2d) 215, 217 [52-1 USTC ¶9204].

(3) Sequestering appellant's accountant witness and not sequestering the Government's accountant witness. In Bostwick v. United States, 5th Cir., 218 Fed. (2d) 790, 792 [55-1 USTC ¶9170], we refused to hold that the district court had abused its discretion in sequestering the defendant's accountant witness, and a like ruling is due here. We deem it appropriate to state, however, that, in our opinion, ordinarily and in the absence of unusual circumstances, the same treatment in this respect should be accorded to the Government and to the defendant.

(4) Admission of testimony and records concerning financial circumstances of appellant's wife and daughter. Appellant filed both written and oral objections to the court's admission of testimony by the revenue agents, Smith and Moorman, relating to alleged unreported cash bakery receipts supposedly deposited by appellant during the prosecution years in bank accounts to the credit of his wife and daughter, the purchase of U. S. Savings Bonds in their names, admission of their bank and tax records, income and assets, etc. He insists there was no showing that he actually deposited such funds, if any, to their name, or that he had any such dominion or control over such funds as justified admission of such evidence of their separate and independent financial estates. The wife and daughter were members of appellant's household, and during the tax years in question were employees in his bakery. Appellant had given a statement to Government agents that his wife had no source of income except her salary at the bakery and interest on loans. We think that this evidence was competent for the purpose for which it was offered and admitted--to establish a justifiable inference for the jury that these excess funds and expenditures, not otherwise satisfactorily explained, were actually derived from unreported income taxable personally to the appellant. In view of the court's charge that "it is not up to the defendant to assume the burden of proving that the deposits in the bank accounts of his wife and daughter were not his income," no prejudice to appellant's rightful presumption of innocence or unfair shift of the burden of proof resulted from the admission of such testimony. Cf. Ford v. United States, 5th Cir., 210 Fed. (2d) 313, 316-317 [54-1 USTC ¶9233].

(5) Testimony of the revenue agents claimed to be inadmissible as conclusions and hearsay. Appellant insists that certain testimony by the revenue agents, Smith and Moorman, contained a series of theoretical estimates and conclusions based on hearsay as to his unreported income and practically required him "to prove himself innocent by assuming the burden of overcoming the prejudicial effect of the mass of exhibits, conjectures and conclusions which the Government has been allowed to get into the record." See Demetree v. United States, 5th Cir., 207 Fed. (2d) 892, 894 [53-2 USTC ¶9646]. The order in which both Smith and Moorman were permitted to express their conclusions did tend, we think, to impress the jury with the idea that the conclusionary figures were matters of original evidence rather than mere summaries of the calculations of the witnesses from evidentiary facts. For example, at the beginning of Smith's testimony he was permitted to state, over the appellant's objection, that for each of the three years he determined from his investigation that there was other taxable income in addition to that reported by the appellant, and to state the amount of the unreported income. He thereafter gave in some detail how those figures were arrived at, but we think the order of proof should have been reversed and his basic facts and figures first stated before his conclusions were expressed. Moorman went into detail as to the records which he had examined and other sources of his information, among other things stating that "I interviewed several witnesses myself." We think, however, that his subsequent testimony clearly revealed that his computations were not based on any such objectionable hearsay, but upon available facts and figures of record, the source of which was adequately disclosed. Again, Moorman, after describing the records and sources of his information, was permitted to testify, over the appellant's objection, to his determination of what he considered to be the appellant's correct income tax liability for each of the three tax years based upon his investigation. That kind of conclusion should not have been expressed until the facts and figures on which it was based had first been adequately proved and explained to the jury. Moorman's subsequent testimony was probably sufficient to sustain his conclusions, and we do not say that we would base a reversal on the erroneous admissions of his conclusionary statements when they were subsequently connected up. We do, however, express our disapproval of permitting this order of proof, especially in view of its tendency to divert the jury's attention from the original and basic evidentiary facts and to emphasize the conclusions of the witness when such conclusions were, in fact, mere summaries of his calculations from other facts.

(6) Admission in evidence and revenue agents' use of charts. Appellant strenuously insists that the large scale charts summarizing the revenue agents' computations and admitted in evidence over his objection were offered and used before the jury as primary proof of his unreported tax liability, and that their use should here be condemned as prejudicial because the court permitted them to acquire "an existence of their own, independent of the evidence which gave rise to them." Holland v. United States, supra; see Elder v. United States, 5th Cir., 213 Fed. (2d) 876. We think the general rule is that the admission of such charts is discretionary with the trial court, and that its rulings thereon are subject to review only upon a clear showing of abuse and resulting prejudice to an accused. See United States v. Johnson, 319 U. S. 503, 519 [43-1 USTC ¶9470]; Noell v. United States, 9th Cir., 183 Fed. (id) 334, 339; United States v. Bramson, 2nd Cir., 139 Fed. (2d) 298, 600; United States v. Weinbren, 2nd Cir., 121 Fed. (2d) 826, 829; Bomberg v. United States, 7th Cir., 71 Fed. (2d) 637, 640; United States v. Glazer, 110 Fed. Supp. 558 [53-1 USTC ¶9351]; 4 Wigmore on Evidence, 3rd ed., Sec. 1230. While the Supreme Court's recent admonition in the Holland case, supra, should make trial courts mindful to guard against permitting any unrestricted acceptance and use by a jury of such charts as a substitute for primary and independent proof, practical problems inevitably encountered both by the Government and by the accused in presenting this too often confusing and complex tax fraud proof still justify the use of illustrative charts by both sides to summarize the varying computations, and make the primary and independent proof upon which such charts must be based more intelligible to the jury. See United States v. Schenck, supra at p. 709; United States v. Park Avenue Pharmacy, 2nd Cir., 56 Fed. (2d) 753, 756. The use of this type evidence, however, has inherent dangers to an accused, for a jury is often unfairly and unduly impressed by the aparent authenticity of a government witness' chart computations, as such, rather than by the truth and accuracy of the underlying facts and figures supporting them. A trial court is charged with grave responsibilities in such instance to insure that an accused is not unjustly convicted in a "trial by charts," however impressive the array produced. Ordinarily, it would be the better practice, not so carefully observed in this instance, to require that the source of the facts and figures upon which such a chart is based be fully disclosed before its admission into evidence. Whenever possible, such charts should be confined in their preparation to strictly mathematical computations, subject to detailed explanation upon the trial by the testimony of expert government witnesses, and they should not be encumbered by such impressive, conclusionary captions as "Overstatement of Merchandise Purchases", "Overstatement of Delivery Expenses", "Unreported Cash Receipts of Lloyd's Bakery", "Unreported and Undeposited Cash Receipts Invested in United States Savings Bonds", "Unreported Net Income of Mr. E. C. Lloyd", "Income Tax Unported and Unpaid by Mr. Lloyd", such as were used on the Government charts here in dispute. While a prosecution witness may testify as to such conclusions from his mathematical computations, we think the danger in permitting the unrestricted use of such phrases upon charts results from a jury's natural tendency to accept such unsworn, conclusionary verbiage as authentic, primary proof, instead of purely in summarization and explanation of sworn testimony or authenticated documentary evidence.

Though we have felt it timely and appropriate thus to elaborate upon the Supreme Court's admonition to trial courts against permitting any unrestricted and indiscriminate use of such charts, in view of the broad discretion vested in the trial court in the admission of such evidence, we pretermit a decision as to whether that discretion was abused in this case and whether the appellant suffered such prejudice from the use of the charts as would justify a reversal, a reversal of this case being necessary in any event on account of the rulings next to be discussed.

(7) Evidence with respect to appellant's offer to compromise his tax liability for the years 1924 to 1932, inclusive. Over the appellant's objections, the Government was permitted to prove that the appellant submitted an offer of $750.00 to compromise an income tax liability amounting to $3,107.68, which he had incurred for the tax years 1924 to 1932, inclusive. The offer was rejected and the Government was permitted further to prove, over the appellant's objection, that an investigation followed in regard to suspected fraud and misrepresentation of facts in the filing of the offer in compromise; that the appellant had made a sworn statement that he borrowed the $750.00 from relatives and that he afterwards admitted that statement was untrue; and that certain other facts stated as to his assets and liabilities were likewise untrue. The court first stated:

"Overrule the objection and will receive the evidence or permit it to be considered by the jury only as bearing on the possible source of funds which the evidence may disclose were in the possession of or received by the taxpayer Defendant for the years '45, '6 and '7."

A short time later, the court stated:

"That evidence is admitted, gentlemen of the jury, only for such light as it might shed in your deliberations on the issue of intent, which is one of the elements of the charge in this case. Your consideration is limited to that issue only."

The jury must have been confused as to the purpose for which they could properly consider such testimony. In our opinion, it was not admissible for either purpose. The earliest tax year investigated by the agents was 1942, ten years after 1932, the last year for which the settlement was offered, and eight years after 1934, the year in which the offer in compromise was made. Appellant's attorney very properly called to the attention of the court "the difference in the economy and values whatever they were in the years 1932, '3 and '4 against now, and suggest because of the vast difference in values and the economy it couldn't throw any light we could rely upon for the years '45, '6 and '7." A remark of the Supreme Court in United States v. Calderon, 348 U. S. 160, 164 [54-2 USTC ¶9712], is pertinent here. "Proof that the taxpayer was impoverished by the depression, that he was working for his meals and $8 a week in 1935, is too remote, absent proof of the taxpayer's financial circumstances in the intervening years."

The offer in compromise and testimony relating thereto were equally inadmissible to show intent. Evidence of other wrongful acts to prove intent must go further than showing that the defendant has a generally criminal disposition or character, and must logically tend to prove the defendant's criminal intent at the time of the commission of the act charged. The prior acts must be similar to the one charged and must not be so remote as to be lacking in evidentiary value. Excellent discussions of this subject are contained in the opinions of this Court in Weiss v. United States, 120 Fed. (2d) 472; on rehearing, 122 Fed. (2d) 675, 682-689; and in the opinion of the District of Columbia Circuit in Boyer v. United States, 132 Fed. (2d) 12, 13. See, also, Wolcher v. United States, 9th Cir., 206[200] Fed. (2d) 493, 497 [52-2 USTC ¶9547]; Lambert v. United States, 5th Cir., 101 Fed. (2d) 960, 964; 2 Wigmore on Evidence, 3rd ed., Secs. 302ff. In the Boyer case, supra, the time elapsed between the two transactions was "nearly two years," and the earlier wrongful act was held inadmissible. In the present case, more than eight years had passed and there was no logical probative value as to the appellant's intent in the commission of the later act in addition to the general proof of his criminal tendencies.

It seems to us that the admission of such evidence was highly prejudicial to the appellant, since it indicated to the jury that he had cheated on his income taxes over a period of years theretofore and was further unworthy of belief because he had made misstatements in his offer of compromise. We are unwilling to say that without such inadmissible evidence the jury might not have reached a different verdict. See Kotteakos v. United States, supra, 328 U. S. at p. 764. The judgment is accordingly reversed and the cause remanded for a new trial.

Reversed and remanded.

¹ Count 2 of the original indictment mistakenly referred to the year 1945 instead of 1946, and was ordered nol prossed by the court on motion of the United States Attorney. A separate indictment for the year 1946 was consolidated for trial and on appeal with the indictment for 1945 and 1947.

² According to the testimony of the revenue agents, Smith and Moorman, and certain chart summarizations prepared by the latter witness, appellant understated his cash receipts or sales on his bakery books and tax returns for the years involved in the total sum of $52,072.00, which aggregate understatement analyzed by years and disposition is as follows:

                                                         "1945               1946               1947                Total

"DEPOSITED IN PERSONAL BANK ACCOUNTS

Mrs. May W. Lloyd's Checking Account .....         $ 4,408.00           $ 550.00                              $ 4,958.00

Mrs. May W. Lloyd's Savings Account ......                              1,850.00                                1,850.00

Miss Mary Elizabeth Lloyd's Checking

Account ..................................           4,389.00           8,365.00           3,910.00            16,664.00

TOTAL ....................................         $ 8,797.00         $10,765.00         $ 3.910.00           $23,472.00

'LOANED' TO LLOYD'S BAKERY BY

MRS. MAY W. LLOYD ........................                              6,587.00           6,713.00            13,300.00

INVESTED IN U. S. SAVINGS BONDS ..........           8,512.50           6,787.50                               15,300.00

                                                   $17,309.50         $24,139.50         $10,623.00         $52,072.00"

 

³ Demetree v. United States, 207 Fed. (2d) 892, 894 [53-2 USTC ¶9646]; Ford v. United States, 210 Fed. (2d) 313, 315 [54-1 USTC ¶9233]; Wardlaw v. United States, 203 Fed. (2d) 884, 887 [53-1 USTC ¶9335]; Jones v. United States, 164 Fed. (2d) 398, 400 [47-2 USTC ¶9402].

⁴ In his motion to suppress, "Defendant states that the Government Agents in this case, when they first came to see him about his income tax matters, told him that it was a routine check-up and that they would let him know after the investigation how much taxes he owed. At no time was it intimated to him that there might be a criminal prosecution. Defendant was never warned and was never told by the said Agents that the evidence here sought to be suppressed would be used in either a civil or criminal prosecution against him. The defendant never consented to the said Agents getting possession of or removing from his place of business or photostating any pages contained in the said 1946 Cash Receipts Book of Lloyd Bakery. Defendant states that said Daily Cash Receipts Book was obtained by stealth by the said Government Agents and secretly removed from his place of business and photostated by the said Government Agents without his consent."

 

 

[54-2 USTC ¶9522]Milton D. Hartman, Appellant v. United States of America, Appellee

(CA-8), In the United States Court of Appeals for the Eighth Circuit, No. 14,762, 215 F2d 386, July 26, 19 54

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

Criminal penalties: Admissibility of evidence.--Taxpayer was convicted in a lower Court on two counts of tax evasion. Taxpayer contended that the trial judge erred in admitting prejudicial irrelevant testimony pertaining to tax issues not contained in the indictment. Thus there was error, for example, in admitting testimony about a family partnership taxpayer had set up when the family partnership was not in issue, and evidence pertaining thereto merely served to mislead the jury. Also taxpayer claimed that once such irrelevant testimony was admitted taxpayer ought to have been able to introduce rebuttal evidence against the prejudicial evidence admitted, which testimony the trial judge excluded. The Circuit Court found that the admission of the irrelevant testimony and exclusion of the rebuttal testimony were reversible error.

Criminal penalties: Instructions to the jury.--Taxpayer was convicted of tax evasion. Taxpayer claimed that the trial judge instructed the jury erroneously on the necessary wilfulness for tax evasion. The Circuit Court found that the trial judge was in error in instructing that the taxpayer was guilty of tax evasion if he did not use ordinary diligence as to the correctness of his tax return.

William J. Becker for appellant. Robert C. Tucker, Assistant United States Attorney (Harry Richards, United States Attorney, was with him on the brief), for appellee.

Before GARDNER, Chief Judge, WOODROUGH ANDTHOMAS, Circuit Judges.

WOODROUGH, Circuit Judge:

This appeal is taken to reverse a judgment of conviction upon jury verdict finding defendant guilty on both counts of a two count indictment charging attempted evasions of income taxes by false income tax returns for the years 1945 and 1946, respectively, in violation of 26 U. S. C. A., Sec. 145(b).

The substance of the charge of the first count, ¹ was that the defendant had received two specified items of taxable income in the year 1945 which he wilfully and fraudulently omitted from the income tax return made by him for that year in an attempt to "defeat and evade" that part of the income tax due from him in respect to those items for that year. The second count charged in similar language that he had received a certain $12,000 item of taxable income in 1946 which he wilfully omitted from the income tax return he made in that year in an attempt to "defeat and evade" that part of the income tax due from him in respect to that item for that year.

The two transactions involved in the first count were distinct and independent of the transaction involved in the second count and separate penalties were imposed in respect to each count. The two counts must be separately considered on this appeal.

The First Count Covering The Two Items in 1945

It appears that in the year 1945 the defendant did not keep any books to show his individual income. He had his individual bank books and cancelled checks which he had turned over to internal revenue agents shortly after the end of the year, but some of them had been lost and were not available at the trial which did not take place until 1952. He was the owner in 1945 of substantially all the stock of a corporation known as Hartman Corporation of America and was engaged in operating it as its managing officer and received a salary from it. He also had income from rents and from his operation of a partnership business. His personal income tax return for the year filed with the Collector of Internal Revenue showed an amount of salary received, also an amount of rents received and an amount received as partnership income. The prosecuting attorney stated at the opening of the trial that the income tax return which defendant had filed was taken as true so far as those elements of his income were concerned. But defendant was also the owner of substantially all the stock and was the managing officer of a corporation known as Hunter-Hartman Corporation. It had originally belonged half to one Hunter and half to defendant Hartman, but Hunter was called to military service and sold his share to Hartman. During 1945 the Hunter-Hartman Corporation was practically inactive and was referred to as dormant. Defendant managed its affairs but was not entitled to and did not receive any salary from it.

The accusation under the first count of the indictment was that in 1945 defendant caused a sum of $3,930.00 belonging to said Hunter-Hartman Corporation in the form of a credit to it in that amount in its bank account to be transferred to his own individual credit in his personal bank account and that he thereby received net taxable income in that amount. That defendant also in the same year caused a sum of $13,927.92 belonging to Hunter-Hartman Corporation in the form of a credit to it in its bank account to be transferred to his own personal bank account and thereby received net taxable income in that amount.

Mr. Hagerty, the expert accountant who testified for the government, said that notwithstanding defendant was practically the owner of the Hunter-Hartman Corporation, his transfer of its funds to himself constituted net income to him because the capital structure of the corporation remained unchanged during 1945 and 1946. When defendant was asked by the investigating revenue officer if it did not occur to him that a transfer of the corporation's funds to his personal credit would constitute a gain that would be taxable to him, he answered that he understood now that it would but it did not appear that way to him before. The defendant testified on his own behalf and it is evident from his testimony that at the time he testified he was convinced that a transfer by him of any of his corporation's funds to his personal bank account would, without more, constitute receipt by him of taxable income. The case was tried on that theory and for the purposes of this review it is assumed that any transfer by defendant of his wholly owned corporation's funds from its bank account to his own individual bank account constituted receipt of taxable income by defendant in the amount of the transfer. ²

The government also charged under the first count that defendant wilfully concealed the fact that he had received the said two items of income from his Hunter-Hartman Corporation by causing that corporation's books to be made up in such a way as to conceal the transfer of the items from the corporation to himself. And that he wilfully caused those two items of his income to be omitted from his income tax return for the year in an attempt to evade the tax due in respect to them.

It appeared on the trial without any dispute that the defendant did in the year 1945 effect a reduction of a claim for rent that was made against Hunter-Hartman by its landlord. The corporation vacated premises it occupied under a lease and the landlord sued for the rental for the whole term. But a new tenant was obtained and the landlord's claim was reduced. The reduced amount was paid to the landlord but defendant caused the whole amount of the claim to be checked out of the corporation's bank account and the difference between the amount sued for by the landlord and the amount actually paid to and accepted by the landlord to be deposited in a bank to defendant's personal credit. The amount of the difference was $2,555.90 and that was the first item charged in the first count to have been taxable income received by defendant and wrongfully omitted from his return.

It also appeared on the trial without any dispute that the Hunter-Hartman. Corporation's books showed that corporation to be indebted to Chicago Transformer Company on open account in the sum of $13,927.92 and defendant effected a compromise settlement of that debt by paying the creditor $3,500. He caused the difference, amounting to $10,427.92, which was withdrawn from Hunter-Hartman Corporation, to be deposited to his own credit in his personal bank account. The amount of that difference was the second item charged in the first count to have been taxable income received by defendant and wrongfully omitted by him from his return.

The defendant made no denial at the trial and concedes here that he did take the two amounts of $2,555.90 and $10,427.92, each being the difference between a claim against Hunter-Hartman Corporation and the lesser amount he settled the claim for, from the funds of the Hunter-Hartman Corporation in 1945 and caused them to be deposited to his own credit in his bank account. He also admitted on the trial, and now admits, that neither of said amounts was included in his income tax return.

[Defense on First Count]

His defense was that both of his corporations, Hunter-Hartman Corporation and the Hartman Corporation of America, employed bookkeepers and certified accountants who were fully informed of and kept complete accounts of all the business transactions and that for many years he had relied confidently upon them to prepare his individual income tax returns for him. That he had never attempted to make out an income tax return for himself and would not know how to go about it. That they made out his return for 1945 for him in the same way they had always done and he did not even examine it to see whether it included the two items in question in the first count or not, but signed it as it was presented to him in the place indicated for him to sign. That if the two items ought to have been included in the return the omission was not through any intention on his part to defeat or evade tax and that he never had any such intention. As to the entries that were made in the, books of his corporations, defendant testified that he informed his bookkeeper and the accountants of the facts of his transactions but left it entirely to them and never gave any direction concerning what book entries should be made to record the transactions. They made all the entries and none was found in his handwriting.

The bookkeeper and accountants whom defendant employed to make out his income tax return were witnesses for the government but they corroborated him to the extent that they took full responsibility for making out his income tax return for him for 1945 and obtaining his signature thereon. There was no evidence that he gave any direction or made any suggestion that the return should be falsified in any respect. The certified public accountant who actually made out the return explained that he knew defendant drew no salary from the Hunter-Hartman Corporation and that that corporation was practically dormant and in making up defendant's income tax return he had simply failed to check that corporation's books with reference to any transfers from it to defendant. He testified "I was acquainted with the fact defendant was not receiving any salary from the Hunter-Hartman Corporation and I saw no reason to look at the books of the Hunter-Hartman Corporation." There was controversy as to whether defendant had caused those books to be made up in such a way as to conceal the transfer of the items of the first count.

But on the whole relevant evidence the issue for the jury on the first count was a very narrow one. In view of defendant's own showing that he had caused the two identified items of Hunter-Hartman Corporation funds to be transferred to his individual credit and that neither of the items were included in his income tax returns, the remaining question was whether defendant had violated the statute in respect to one or the other or both of the items. And on the face of the record here that issue appears to have been a genuine one which defendant was entitled to have tried on competent evidence that was relevant to it.

Even though it be assumed that a taxpayer who withdraws corporate funds from his wholly owned corporation and deposits them to his individual account does thereby receive taxable income in the amount so withdrawn and deposited, that conclusion is not one that is so obvious or self-evident that nobody could have erred in respect to it without criminal intent. On the contrary, it is obvious that a man may obtain no more actual gain by taking from his wholly owned corporation and putting into his personal bank account than by taking from one pocket and putting into another. The issue under the first count was whether or not the defendant, knowing that one or both of the two items were taxable income received by him, wilfully attempted to evade the tax by concealment and fraudulent omission of the items from his tax return.

[Taxpayer's Position]

Appellant seeks reversal of the conviction on the first count on the grounds (1) that the trial of that count was not confined to the issues but that prejudicial irrelevant testimony was adduced and received over his objections; (2) that vitally important testimony offered in his defense was erroneously excluded and that (3) an erroneous instruction was given to which exception was duly taken.

(1) In support of his first contention, appellant invokes the elemental rule of law that a defendant is entitled to be tried "only for the offense charged" against him, and he contends that the rule was not observed on the trial under the first count. He presents that the prosecutor adduced a mass of testimony against him which tended to arouse suspicion that he had been guilty of misconduct in respect to his income taxes and to excite prejudice against him, but which did not tend to prove the charge of the count and was irrelevant. Though the court warned the prosecutor at the opening of the trial against bringing such testimony into the case appellant claims that so much of such testimony was adduced and received over his objection as to district the attention of the jury from the issue and he did not receive a fair trial on the real issue presented.

The trial was lengthy and much of the testimony for the government was given by accountants who had studied the books kept for defendant's corporations and partnership and gave their expert opinions concerning inferences to be drawn from the entries.

On the first submission of the appeal we had difficulty in appraising the significance and relation to the issue of much of the testimony included in the record and a rehearing was had on the question, among others, "Was incompetent prejudicial evidence received?"

In response to that question counsel for defendant compiled from the record a long list of matters on which the government adduced evidence which was received over objection and which it is claimed was irrelevant and prejudicial. Though some of the matters were plainly of small moment and the jury would not have been affected by them, consideration of the whole list compels the conclusion that error occurred in the trial on the first count in receiving inadmissible prejudicial evidence adduced for the government and duly objected to by defendant.

[Prejudicial Evidence Admitted]

(a) Without going into all particulars we note that at the outset of the trial in his opening statement to the jury when the prosecutor undertook to explain the accusation against defendant and clarify it beyond the somewhat confusing verbiage of the indictment, he introduced the matter of a family partnership defendant had organized which would channel some of the profits of war contracts into the pockets of members of defendant's family (father, grandfather, wife, etc.) who were taxable in the lower brackets. The prosecutor indicated that the family partnership was a mere sham existing on paper only and was a device to defraud the government of taxes. The defendant objected that the matter of the family partnership was not within the scope of the indictment and that evidence concerning his family partnership was irrelevant and prejudicial. His objections were overruled and from the outset to the end of the trial the prosecutor kept the matter of defendant's family partnership constantly before the jury notwithstanding defendant's objections.

The formation of family partnerships to result in less income tax to the government than it would get without them has created a wide, fertile field for specialists in tax law and given rise to many problems for the courts. Those problems are worked out laboriously in many opinions. But the run of laymen on a jury cannot be expected to fairly appraise the legality or illegality of such organizations. If defendant here had been indicted for tax fraud in connection with the formation and carrying on of a family partnership to evade income tax, such offense could have been specified and an issue in respect to such charge which could have been framed, rendered understandable and passed on by the jury. But here, as pointed out, the charge of the first count was simply that defendant had received two certain items of taxable income from his Hunter-Hartman Corporation and had attempted to evade the tax in respect to those two items. There was no relation in fact or logic between defendant's taking the two items and failing to return them and his organizing and carrying on his family partnership which increased the number of taxpayers in respect to government war contract profits. The inevitable effect of injecting a mass of expert, highly technical evidence about defendant's formation and carrying on of a family partnership to reduce income taxes could only be to distract the attention of the jury from the issue they had to try and was necessarily prejudicial to defendant. There are many pages of the record directed entirely to the matter of defendant's family partnership and lengthy examinations of witnesses as to salaries and payments to members of defendant's family and as to tax returns made by them. The partnership profits ran into hundreds of thousands of dollars and the matter must have engaged the jury's attention. But none of it could be fairly related to the issue that was for trial. Whether or not the family partnership as carried on worked a fraud on the government, as claimed, was irrelevant and did not tend to throw any light on the issue that was for trial. The government's persistent introduction of evidence concerning the family partnership prejudiced defendant and prejudicial error resulted.

(b) As has been indicated, the qualified accountant whom the defendant employed to make out his income tax made his determination of the amounts of income that were received by defendant during each of the tax years 1945 and 1946 from the books that were kept under the accountant's own direction. He failed to include the two items of count one that were transferred from the Hunter-Hartman Corporation to defendant's account. He simply failed to check that corporation's books for the year for the purpose of making out the return. The revenue agent accountant who had most to do in preparing the case against defendant for trial testified at length concerning the book entries relating to the two items and then he was asked if in his opinion there was additional income which defendant received during 1945 and failed to return which was not included in the charge of the indictment. Defendant interposed appropriate objection to the interrogatories, but the witness was permitted to give his opinion that defendant had additional income in 1945 of $54,218.88 which he failed to return in that year.

As to the introduction of that testimony, counsel for the government stated that he knew and admitted that it was "immaterial and probably incompetent". He argued that he was entitled to bring it out by reason of questions that had been put to the same witness by defendant.

But the record does not disclose any questions asked the witness by defendant's counsel that justified the introduction of this irrelevant and damaging evidence against the defendant. He was charged with a certain offense and was then confronted with the opinion of the government officer that he was guilty of other additional unrelated offenses. It was plainly error to submit that opinion of the agent for the consideration of the jury. It cannot be doubted that the opinion expressed by the officer would carry weight with the jury and it must be held that the error in receiving it was prejudicial.

(c) Extended testimony was received over defendant's objections relating to expense accounts. The matter was foreign to anything charged in the first count of the indictment, but the government undertook to show by the testimony of the bookkeeper and accountants that beginning in 1943 defendant had caused "expense books" to be opened to record expenses incurred by members of defendant's family in connection with services rendered by them and that although defendant only reported the totals of such expenses, allotments were arbitrarily made to travel, meals, entertainment, etc., so that totals were balanced. The testimony was adapted to cause the jury to believe that defendant had been cheating on his expense accounts over the years and such was the only inference to be fairly drawn from it. The matter of cheating on expense accounts is a well known fraud and the testimony about it in the record here stands out conspicuously from the mass of technical accounting evidence. It could not have had any other effect on the trial than to prejudice the jury against defendant and divert attention from the issue.

(d) The government also introduced evidence over defendant's objection for the purpose of showing that defendant had caused two persons who were on his corporation's pay roll to do work around his private residence; that certain repairs to the residence were charged to the corporation; that defendant withdrew sums of money from the petty cash account and directed expense vouchers to be made up to cover the amounts. It also introduced evidence that during the fiscal year ending February 1945, defendant's family partnership had set up on its books a catalogue expense of $3200 and an expense account for a survey of $7500. These expenses were ultimately not actually paid out but as the partnership was on an accrual basis the amounts appeared to be deductible for tax purposes for that year.

Each of these matters was irrelevant to the issue and defendant's objection should have been sustained in each instance.

It need not be decided that some particular item of the irrelevant testimony was of itself so prejudicial as to necessitate reversal. The cumulative effect of the mass of evidence outside the scope of the indictment that was brought into the trial was to obscure the issue and to permit conviction that may well have been based on the general character of defendant. As has been stated, the first count charged defendant with omitting two specific taxable items of income from his 1945 income tax return in attempting to evade the tax in respect to those items. The proof ought to have been confined to that charge. Instead the testimony and massed documentary evidence ranged over the whole field of defendant's business affairs. Although it has been argued here that the extraneous matter was admissible to establish intent, the record does not support that justification of the admissions in evidence. In order for wrongful acts not included in a charge to be admissible to prove intent they must be of such a character that as a matter of logic they tend to demonstrate a criminal intent in the acts within the charge. Wolcher v. United States, 9 Cir., 200 Fed. (2d) 493 [52-2 USTC ¶9547].

Here none of the great mass of documentary and oral evidence concerning defendant's family partnership, its organization, its personnel or the conduct of its affairs tended to throw any light on the issue of count one; nor did the extended evidence about defendant's handling of expense accounts. Nor the opinion of the revenue agent that defendant had attempted to evade other thousands of dollars of taxes than those he was charged with attempting to evade. The over-all effect of the mass of evidence extraneous to the issue was to allow the jury to suspect that defendant was a bad character. His right was to be tried for the specific offense charged against him.

2. As to Material Testimony Excluded

(a) On his direct examination, defendant was asked to explain what expenses were incurred in 1943 which necessitated the opening of the "expense books" previously testified to by the government witnesses. Objection was sustained on the ground that the books of the corporation would be the best evidence. Defendants should have been allowed to answer. Although testimony concerning the expense books should not have been admitted in the first instance, and the matter of cheating on expense accounts was irrelevant, after the government's evidence was received defendant should have been given opportunity to explain it away if he could.

(b) The defendant was further asked on his direct examination if he had relied on Mr. Nolte, the certified public accountant, to include all items of his income in his income tax return for 1945. Objections was sustained to his answer that he had so relied on the ground that "his reliance was a conclusion".

The defendant had admitted that he had caused the two items of $2555.90 and $10,427.92 covered by the first count to be transferred from the credit of his Hunter-Hartman Corporation to his own bank account and that his income tax return for the year did not include either of the items. His only defense, which was completely sufficient if he could establish it, was that he relied as he had done for many years upon the certified accountant he employed and that he had no intent to defeat or evade taxes. This court and others have consistently held that where the intent of the accused is in issue, he may testify as to what his intent was, Cummins v. U. S., 8 Cir., 232 Fed. 844; Buchanan v. U. S., 8 Cir., 233 Fed. 257; Haigler v. U. S., 10 Cir., 172 Fed. (2d) 986 [49-1 USTC ¶9171]; Miller v. U. S., 10 Cir., 120 Fed. (2d) 968, and it must be held that the exclusion of defendant's answer that he had relied upon his auditor, Mr. Nolte, who had prepared his income tax returns for many years, as well as for the year in question, was erroneous. Defendant's statement that he relied on his accountant bore directly on the vital issue and the exclusion of it from the jury's consideration was plainly very important and highly prejudicial. It is argued that it might be inferred from other parts of the record that defendant was claiming that he had relied on the accountant. But it was his right to have his direct and positive oath to that effect received in evidence and considered by the jury. The denial of that right must be held to be erroneous.

3. As to the Instruction Claimed to Be Erroneous

The court instructed the jury in part as follows:

"The duty to file the return is personal and cannot be delegated. Bona fide mistakes should not be treated as false and fraudulent, but no man who is able to read and write and who signs a tax return is able to escape the responsibility of at least good faith and ordinary diligence as to the correctness of the statement which he signs, whether prepared by him or somebody else."

The defendant took timely exception to the giving of the instruction and here contends it was erroneous.

The instruction was given in a criminal case on the trial of the charge that defendant violated Section 145(b) in that he did wilfully attempt to defeat and evade a tax due and owing by him to the United States by filing a false income tax return which he knew was false.

Therefore the statement that a man could not escape the responsibility of ordinary diligence as to the correctness of the statement which he signs meant in the connection in which it was used that the jury ought to convict defendant if they found he did not use ordinary diligence as to the correctness of his income tax return.

Such declaration of the law is directly contrary to that of the Supreme Court in Spies v. U. S., 317 U. S. 492[43-1 USTC ¶9243]. In that case the court said (l.c. 497), "The question here is whether there is a distinction between the acts necessary to make out a felony [under section 145(b)] and those which make out the misdemeanor[under section 145(a)]" and the court declared positively: "We think that in employing the terminology of attempt to embrace the gravest offenses against the revenues Congress intended some wilful commission in addition to the wilful omissions that make up the list of misdemeanors. Wilful but passive neglect of the statutory duty may constitute the lesser offense, but to combine with it a wilful and positive attempt to evade tax in any manner or to defeat it by any means lifts the offense to the degree of felony." The charge of the indictment here that defendant attempted to defeat and evade his tax by filing a false return could not be made out by merely showing that he failed to use "ordinary diligence as to the correctness" of his return. The erroneous instruction was prejudicial.

The Second Count

Count two of the indictment charged that in 1946 defendant collected $12,000.00 constituting taxable income from the Hunter-Hartman Corporation on a fictitious account for engineering services which were never rendered and that he attempted to evade the tax by wilfully omitting the item from his return for that year. Evidence introduced by the government tended to show that a $12,000.00 check ostensibly drawn to pay an engineering account shown on the books of the Hunter-Hartman Corporation was actually deposited to defendant's account. Defendant offered evidence to prove that he received no part of the $12,000.00 but that the check, along with several others issued at or near the same time, was drawn and deposited at the direction of his accountants in order to clear up existing equities shown on the books of the corporation. Or, in other words, that it was a "wash out" transaction and that he received no money. Thus the question whether income resulted to defendant by reason of the issuance of this check was a question of fact to be resolved by the jury.

But this second count like the first count presented a concrete genuine issue upon which defendant had the right to a trial confined to the issue.

On this appeal it is contended as to the second count (1) that prejudicial irrelevant testimony was received over defendant's objection, (2) that vitally important testimony was erroneously excluded and (3) that an erroneous instruction was given to which exception was duly taken.

All of its evidence was presented by the government on the trial of the case without specifying whether it was related to the first count or the second and that course has increased the difficulty of appraising the relation of much of the evidence to the indictment charges. But study of the record convinces that much of the evidence received was even less relevant to the second count than it was to the first. Only one single item of alleged income is involved in the second count and the testimony which has been pointed out as irrelevant and prejudicial as to the first count is equally so as to the second.

Whether or not defendant's family partnership was a sham or a means to cheat the government of tax; the opinion of the government agent that defendant attempted to evade more tax than he was accused of in the year 1946; the many items of evidence that were aimed to show general bad conduct on defendant's part, all of which were found to be irrelevant as to the first count were also inadmissible on the second.

We think there was the same error in the receiving and exclusion of evidence as to the second count and also as to the instruction given and excepted to.

The judgment is therefore reversed as to both counts and the case is remanded for new trial in accord with this opinion.

¹ The wording of the first count was

"The Grand Jury charges:

That on or about the 15th day of March, A. D. 1946, within the Eastern Division of the Eastern Judicial District of Missouri, and within the jurisdiction of the Court aforesaid, Milton D. Hartman of Ladue Village, Missouri, who, during the calendar year 1945, had two (2) dependents, did Willfully, Knowingly, Unlawfully and Feloniously attempt to defeat and evade a large part of the income tax due and owing by him to the United States of America for the calendar year 1945 by filing and causing to be filed with the Collector of Internal Revenue for the First Internal Revenue Collection District of Missouri, at St. Louis, a false and fraudulent income tax return, wherein he stated that his net income for said calendar year was the sum of Thirty-one Thousand Seven Hundred Eighty-four Dollars and Sixty-three cents ($31,784.63), and that the amount of income tax due and owing thereon was the sum of Fourteen Thousand Three Hundred Thirty-five Dollars and One cent ($14,335.01), whereas, as he then and there well knew, his net income for the calendar year was the sum of Forty-nine Thousand Six Hundred Thirty-two Dollars and Fifty-five cents ($49,632.55), determined as follows:

Salary ............................         $22,828.51

Rent ..............................          12,912.01

Net loss from operation of

Milton Hartman Stables ............         (7,327.58)

Loss on sale of property other

than capital assets ...............           (951.50)

Partnership income ................           6,625.17

Other income ......................           3,930.00

                                             13,927.92

Adjusted gross income .............         $51,934.53

Deductions:

Contributions .....................           $ 875.00

Taxes .............................           1,426.98

Total Deductions ..................           2,301.98

Net income ........................         $49,632.55

upon which net income he owed to the United States of America an income tax of Twenty-six Thousand Nine Hundred Forty-nine Dollars and Forty-two cents ($26,949.42). In violation of Section 145(b), Internal Revenue Code, 26 U. S. C., Section 145(b)."

² No question as to that theory is presented for review.

 

 

[54-1 USTC ¶9174]Morris V. Benatar and Benatars (a corporation), Appellants v. United States of America, Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 13,638, 209 F2d 734, January 6, 19 54

Appeal from the United States District Court for the Northern District of California, Southern Division.

Conspiracy to defraud: Evidence: Jury instructions.--In a prosecution for conspiring to defraud the United States of penalties and interest on withheld income and employment taxes, the evidence was sufficient to support a verdict finding the taxpayer corporation and its controlling officer guilty and to connect the latter with fraudulently filing a claim for abatement. A jury instruction, considered as a whole, did not indicate that the existence of the conspiracy could be assumed. Refusal to give a requested instruction was not reversible error because the defendants did not point out to the trial court that the requested instruction was relevant in the light of the evidence presented at the trial and also because the judgment would not have been different if the refused instruction had been given. Evidence of manipulation of another taxpayer's account to conceal the defendants' nonpayment of taxes was admissible to establish fraud. One dissent.

Leo R. Friedman, San Francisco, Calif., for appellants. Lloyd H. Burke, United States Attorney, Robert F. Peckham, Assistant United States Attorney, Robert G. Thurtle, Trial Attorney, Enforcement Division, Bureau of Internal Revenue, San Francisco, Calif., for appellee.

Before DENMAN, Chief Judge, ORR, Circuit Judge, and LEMMON, District Judge.

LEMMON, District Judge:

A retail drug corporation, its president, its office manager, and the faithless chief accountant in the office of the Collector of Internal Revenue at San Francisco--these were the protagonists of the venal conspiracy involved in this appeal.

When caught, the tax official attempted suicide. He later pleaded guilty to falsifying and destroying Government records, and was sentenced to prison. The office manager of the corporation was found guilty under the present indictment, was fined, and has not appealed.

The two other conspirators were the appellants herein.

1. The Indictment. As used herein, "Benatar" refers to Morris V. Benatar and "Benatars" refers to the corporate appellant.

Benatar, president of Benatars; Benatars, a California corporation; and Samuel W. Potter, the office manager of Benatars, were all three charged with a conspiracy "to defraud the United States by impairing, defeating, and obstructing the proper and lawful functions of the United States, to wit, the Bureau of Internal Revenue, etc., in ascertaining, computing, levying, assessing and collecting taxes, and penalties which may be due thereon," etc.

"The object of the conspiracy was to be accomplished as follows":

Benatar and Potter were to file withholding and employment tax returns for Benatars in a timely manner, but without the payment of the taxes due thereon; by the payment of the said taxes by Benatar and Potter on behalf of Benatars, at a time when penalties and interest were required to be added thereto; and by the acceptance by Edwin M. Furtado, in his official capacity, of said payment of taxes without the payment or addition of accrued penalties and interest, and without making demand, etc.; thereby to deprive the United States of $6,000.

Furtado, named as a conspirator but not as a defendant, was Chief of the Accounts Section, Wage and Excise Tax Division, in the office of the Collector of Internal Revenue at San Francisco.

It is alleged that the conspiracy commenced on November 1, 19 48, and continued until the filing of the indictment, April 15, 19 52.

Fourteen overt acts are set forth.

2. The Verdict And The Judgments. On October 3, 19 52, the jury found all three defendants guilty as charged. On October 24, 19 52, Benatar was sentenced to imprisonment for one year and a day; Benatars, to pay a fine of $10,000 and to bear with Benatar the costs of prosecution, jointly and severally; and Potter, to pay a fine of $2,500. Potter has not appealed.

3. The Facts. The record and exhibits are voluminous. It would serve no useful purpose to attempt an extended summary of their contents. For an understanding of this appeal, it will be sufficient to outline a few of the salient facts.

Frank Lewit Blote, an inspector for the Bureau of Internal Revenue, testified regarding the procedure relating to the collection of withholding and Social Security taxes during 1949-1951. He stated that when a return is received without a remittance, "the return is processed on an assessment list." Blote continued:

"The list is certified by the Commissioner (at Washington) as to the total amount of taxes due as a result of that list. It comes back in a Form 17, the First Notice and Demand for the payment of the the taxes set out."

In other words, "Form 17 was always issued after the time for payment had gone by."

Leo Schmidts, accountant-auditor for Benatars for ten and a half years, testified that while he was handling these tax returns, the custom was to send the check with the tax return.

After 1947, however, the defendant Potter supervised the preparation of tax returns. Then it became "the custom to wait until the first demand, the Form 17, was sent" before paying the tax.

Already we see a dilatory policy on the part of Benatars in the payment of its lawful taxes. As the appellee correctly observes, "Benatar's motive for not making the timely payments to the Collector was simply to use the government's money in the operation of his business."

We shall see presently that this policy of delay soon crystallized into one of downright evasion, subterfuge, and falsification.

At the time that he testified at the trial, Furtado was serving a sentence in a Federal prison, having pleaded guilty on four counts of falsifying Government records and destroying assessment sheets in the Internal Revenue office.

It was not long before Furtado and Benatars became "as thick as thieves." In 1951 "he was there possibly almost every day." At various times he left money at Benatars, and it was placed into the store safe. At other times he would "leave money in the cash booth to be left in an envelope; and he would take it out at various times."

In a sworn statement to special agents of the Intelligence Division, Bureau of Internal Revenue, Benatar declared that he saw Furtado "very often"; that Furtado was "always very friendly"; that "we" bought some "applicances" for Furtado and "charged him a little over cost"; that Benatar thought that "Potter complained to me about the liberties Mr. Furtado took in our office," but that Benatar "didn't take any steps to attempt to stop Mr. Furtado from these practices"; and that "On one occasion in 1951 Mr. Furtado told me he borrowed some money and wanted to leave it in my store and told me I could use it for a short while if I needed it."

Furtado did some shopping at Benatars too. His method of making his purchases and paying for them was similarly unique. He testified:

". . . when I desired some merchandise, either Mr. Schmits (sic) or Mr. Potter would accompany me and I believe, anything I wanted to buy they would make out a ticket with my name and give that ticket to Mr. Potter, who in turn gave it to Rose Batlin, and she would deposit it in her desk and when I got ready to pay for it, she would pull out this slip and run and adding machine tape on it and whatever the price showed I'd pay the amount of money less the amount of interest which I saved Mr. Benatar.

"Q. What interest do you refer to?

"Well, various interests I saved by holding up the issuing of the 69 and interest, charging him interest on the form 21." (Italics supplied)

We come next to "The Affair of the Backdated Letter."

David L. Moonie, a certified public accountant, performed some services for Benatars in the fall of 1948, in connection with an additional assessment of the unemployment tax for 1946. He invited Furtado to come over to lunch and gave him the papers in the case; namely, "in the nature of a bill for penalty and interest," together with "some supporting documents." Moonie introduced Furtado to Potter.

When Furtado took the stand, he stated that the tax in question "was not a penalty tax, but a tax for failure to pay the State of California on or before the due date." He testified that he told Potter and Moonie that he "knew that that particular type of tax could be abated or set aside if the taxpayer had filed for an extension of time with the Collector's office. Then the law would read that he would get credits as with the State. In other words, apply for an extension of time with the State of California, say that he would get an extension to February 15, an extension the same as with the Collector's office, have to February 15 to pay the State and take off the full credit on the 90 per cent." Continuing, Furtado testified:

"I told Mr. Potter that if I could have a letter dated February 1--I mean, dated prior to January 30, I could put that in the file and then when I made this claim the file clerk naturally, checking the files, making this claim, would then be accepted by the Bureau."

Furtado explained that he meant January 30, 19 47, and that he made this statement to Potter in September, 1948.

Potter followed the dishonest suggestion, and, "some time in September or October, 1948," Furtado received the following letter, dated January 28, 19 47, signed by Potter, and addressed to the Collector of Internal Revenue at San Francisco:

"Due to illness in our office we do not believe we will be able to file our report 940 on time.

"We will appreciate your giving us an extension of time on this report.

"For your information, the State of California has granted us permission to file our Social Security report on March 2, 19 47."

Furtado took this letter and placed it into the files, and then prepared the claim for abatement and gave it to Potter for signature and notarization, in November, 1948. The appellants do not deny that Benatar signed the claim, but assert that "he merely signed a paper presented to him by Mooney (sic), believing it was the proper and correct thing to do." Benatar's intent when he subscribed to the document was for the jury to determine, after considering all the circumstances of the case. The jury apparently decided against Benatar's innocent intentions. In this and in other respects, there was substantial evidence to support the verdict.

The conspiracy to defraud the Government of the United States was now in full swing.

Furtado testified that, some time in the latter part of March, 1951, he received from Benatars a check, No. 2677, dated February 11, 19 51, for $14,335.29, representing the corporation's tax liability for withholding and social security taxes for the quarter ending December 31, 19 50. He put the check underneath the blotter on his desk--and let it repose there for a while.

The following month he found another account for approximately the same amount of money. His testimony continues:

". . . so I took the check back to Mr. Potter and gave it to him, told him I didn't need it, he could destroy it as far as I was concerned; he could take his time making this payment; as a matter of fact, he might never have to pay it."

Counsel for the appellants apparently knew what was coming, for he strenuously objected to any testimony relative to "this so-called other account." The trial court overruled counsel's objection, and admitted the testimony, but only for the purpose of establishing whether there was or was not a conspiracy.

So the sordid tale was permitted to proceed.

Furtado testified that he found this convenient account in Form 23-E--the assessment list for fully-paid returns. The account was for $14,334.17, while, as we have seen, the Benatars tax liability for the same quarter was $14,335.29. The other account was that of the Calo Dog Food Company.

Satan himself could not have provided a handier tool for Furtado's villainy. Furtado drew a line through the number 13423, the master list number of the other account, and, in pencil, wrote in the master list number of Benatars--6457.

In the meanwhile, according to Schmidts, Benatars' accountant-auditor, there was entered the aforesaid Benatars check No. 2677 in the daily bank statements on February 27, 19 51, where it "appeared daily" until August 1, 19 51--a total of 155 days.

It should be explained here that the daily bank "reports" were prepared under the supervision of Schmidts, and were intended to show Benatar the daily bank balance or cash position of the corporation.

Among the somewhat picayunish criticisms of the appellee's brief interposed by the appellants is the statement that "Appellee would have one believe that check 2677 appeared as an individual item on each daily bank statement, whereas it only appeared in the lump sum representing issued but uncashed checks". Be that as it may, the stubborn fact remains that Schmidts repeatedly testified that the check appeared "daily" during the 155-day period; that such appearance reflected that "the check was outstanding during that period"; and that "the fact that the records reflected that the check was outstanding" was brought to Benatar's attention "Only through the daily bank reports", which he received each day during that period.

Shortly before August 1, 19 51, a "Government supervisor out of Washington" came to the San Francisco office of the Internal Revenue Bureau, and, with the local supervisor, was "checking the records for discrepancies in various accounts". This caused Furtado to get "a little worried about the whole thing".

Accordingly, Furtado went over to Benatars and asked Benatar and Potter for a check for the amount of the tax in question, $14,335.29. He told them that if he had a letter from them stating that the original check was "misplaced"--meaning that the original check was sent to the Collector's office but had never cleared the latter's file--he could "so set the books up" that the penalty and interest of $1,190.41 "could either be refunded to them or credited to another account". Furtado told Benatar and Potter what he would like to have in the letter.

The letter, which was dated August 28, 19 51, and was signed by Benatar, stated that "On August 10, 19 51, we placed a stop payment on our check #2677 in the amount of $14,335.29."

That statement, of course, was not true, and Benatar knew it was not true. We have already seen that the check was never processed in the Collector's office, but that Furtado first slipped it under his desk blotter and later returned it to Potter. In fact, Lenus Cardoza, assistant auditor of the American Trust Company, San Francisco, on which the check in question was drawn, testified that he had examined the records of the bank for the entire year of 1951, and found that there had been no such stop payment order entered.

The pleas of ignorance and innocence made on behalf of Benatar in this and in other respects are not convincing, and it is not surprising that the jury did not find them so. Benatar was both the actual and the titular head of the corporation that bore his name. He certainly was not ignorant of the deception surrounding a check for a sum as substantial as $14,335.29. He knew what was going on.

On August 14, 19 51 in the course of a conversation in Benatar's office Benatar showed Furtado the above-mentioned letter that the former had written to the Collector of Internal Revenue. Furtado told Benatar that to all appearances the letter "looked all right", and asked him "to be sure and stop payment on that check", referring, of course, to the original check, No. 2677.

During that conference between Benatar and Furtado, there occurred an illuminating bit of dialogue--illuminating as to Benatar's intent when dealing with the Government in tax matters. The following is Furtado's account of that part of the conversation:

"I told him, 'The books are so situated now that we can get a refund of $14,335.00--' I said around fifteen thousand dollars. He kind of smiled and said, 'If you get that, I will give you half of it'. I didn't say anything. He said, 'I will give you two-thirds of it.' Then I took my vacation."

But the Government was not taking a vacation. A month later, the blow fell, and Furtado's house of marked cards came tumbling about his ears:

". . . that Sunday night--September 16th--a clerk at the office called me up at my home and told me that they had discovered some particular discrepancy in the Benatar account. That is why I saw Mr. Potter that Monday morning, and I told Mr. Potter about this particular incident; that everything wasn't done according to the way I wanted it; that Mr. Benatar did not stop payment on his check, and that is how they caught this particular error, and he advised me to get an attorney. So I talked it over with my wife and she said I might as well plead guilty because when I got the attorney they had all the facts in evidence."

Furtado signed a full confession for the Collector's office. Four days later, on Monday morning, September 24, 19 51, he tried to commit suicide.

4. Benatar Had Direct And Complete Control Of The Corporation. Another example of appellants' microscopic criticism of the appellee's interpretation of the evidence in this case is found in the appellants' objection to the appellee's summary of Benatar's extrajudicial statement, supra, relative to Potter's powers. In that summary, the following appears:

"He (Potter) does not have independent authority to decide matters but refers all matters to me for approval. While I would not object or reprimand him should he cash large checks without my prior approval, he [would] obtain my permission prior to the cashing of such checks."

The appellants purport to correct this alleged "misstatement of fact and illogical conclusion" by quoting directly from the record, as follows:

"The Record. Benatar's statement, page 5, is as follows:

"Q. Does he have independent authority to decide matters, or does he refer all matters to you for your approval?

A. He refers matters to me for approval, sir.

Q. And does he have authority to O. K. checks for cashing?

A. Well, sir--

Q. I mean large checks, not a five or ten dollar check.

A. He would have, if he wanted to do it. I wouldn't frankly, object or reprimand him for it; but I do believe he asks me, if they are large checks; he would ask me.

Q. He would refer them to you?

A. He would refer the question to me before he cashed them."

It is difficult to perceive any substantial difference between these two versions. Whichever statement is accepted, it discloses that Benatar was the guiding spirit of the corporation which bore his name and, which, as the appellants admit, "was almost wholly owned" by him. Benatars was substantially, though not technically, a corporation sole.

5. The Specification of Errors. The specification complains of seven errors, as follows:

1. The District Court erred in denying Benatar's motion for a judgment of acquital, made at the conclusion of all the evidence. "The evidence was insufficient to establish the charge."

2. Same as to Benatars.

3. The District Court erred in instructing the jury as follows:

"Where the existence of a criminal conspiracy has been shown, every act or declaration of each member of such conspiracy, done or made thereafter pursuant to the concerted plan and in furtherance of the common object, is considered the act and declaration of all of the conspirators and is evidence against each of them. On the other hand, after a conspiracy has come to an end, either by the accomplishment of the common design, or by the parties abandoning the same, evidence of acts or declarations thereafter made by any of the conspirators can be considered only as against the person doing such acts or making such statements.

"In this regard I call your attention to one piece of evidence that has been admitted here which is limited entirely to the defendant Benatar, and that is the statement which is in evidence. Now, under any consideration of the evidence that statement was made after the conspiracy had terminated, and I have, at the time it was admitted, I specifically limited it to the defendant Benatar, and that is precisely what the language I have just read to you means. It means that statements such as that made after the conspiracy, statements made after the conspiracy is ended or declarations made after the conspiracy is ended can be considered against only the person making them and not other members of the conspiracy."

4. The District Court erred in refusing to give appellants' requested Instruction No. 12, which reads as follows:

"In determining whether or not a conspiracy existed as charged in the indictment and that the defendant Morris Benatar was a member of such conspiracy, you are instructed that you cannot take into consideration and must disregard and put out of your mind any and all testimony and evidence relating to any acts done or declarations made by any other alleged co-conspirator out of the presence of the defendant Morris Benatar and which acts or declarations were not authorized by Morris Benatar. In other words, so far as the defendant Morris Benatar is concerned, the existence of the conspiracy charged in the indictment and his connection therewith as a member must be established by evidence independent of the acts and declarations of any other alleged co-conspirator done or made out of the presence of Morris Benatar and which were not authorized by the said Morris Benatar."

5. The District Court erred in admitting in evidence over appellants' objections, and refusing to strike out the testimony of Furtado relative to the juggling of the Calo Dog Food accounts and changing his records in the Internal Revenue Office to show that the sum paid by the Calo Company for the quarter ending December 31, 19 50, had in fact been paid by Benatars. (The testimony of Furtado is summarized in an appendix to the appellant's brief, which appendix is referred to in the specification of errors.)

6. The District Court erred in admitting in evidence over appellants' objections and refusing to strike out Government's Exhibit 10, and the testimony of Furtado and Mooney (sic) relative thereto.

(This specification is quite lengthy, occupying four pages of the appellants' brief. It relates to the claim for abatement filed on behalf of Benatars, dated November 22, 19 48, hereinabove fully discussed.)

7. The District Court erred in admitting over appellants' objections and refusing to strike out the testimony of George C. Deckard and Government's Exhibit No. 49.

Deckard, called by the Government, testified in substance that he was assistant secretary and office manager of the Calo Dog Food Co., Inc.; that the company filed a return for withholding and social security taxes for the quarter ending December, 1950, on January 30, 19 51, together with the payment thereof; that the total for said quarter was $14,334.17.

The Government then offered in evidence the Calo Company's check, and two Federal Reserve Depositary Receipts totaling $14,334.17. The same were admitted as Government's Ex. 49, over the objections of appellants that the matters attempted to be proved did not fall within the purview of any conspiracy charge made in the indictment. At the conclusion of all the evidence appellants moved to strike out the testimony of Deckard and also Ex. 49 on the grounds that they were incompetent, immaterial, not within any of the issues of the indictment, and that the Calo transaction in its entirety was not part of the conspiracy charge.

(The evidence in this Calo-account episode has already been fully discussed).

6. There Was Substantial Evidence To Support The Charges Against Both Benatar and Benatars. The evidence tying Benatar to the conspiracy already has been amply summarized. It was clearly sufficient to support the verdict and judgment.

As far as the corporation was concerned, we have already pointed out that, substantially though not technically, it was Benatar's alter ego. Being a legal and not a human entity, it could act only through a human agent. Benatar was not only the corporation's agent, but its master.

But whichever was the master and whichever was the servant, together they plotted with Furtado to cheat the United States Government of its taxes. Both are equally guilty, though not equally punishable, in contemplation of law. See Pankratz Lumber Co. v. United States, 9 Cir., 1931, 50 Fed. (2d) 174.

There is no merit to Specified Errors Nos. 1 and 2.

7. The Instruction Relative To Benatar's Extrajudicial Statement Did Not Say To The Jury That The Conspiracy Charged In The Indictment Had Been Established. With regard to the third specified error, the appellants contend that "The instruction unequivocally states to the jury that the Court admitted the extrajudicial statement given by Benatar to the Internal Revenue officers because the conspiracy charged in the indictment had been established". (The italics are the appellants'.)

After this instruction had been given, counsel complained that the Court had said therein that Benatar's statement was admitted solely as against Benatar since it was made "after the conspiracy". From this counsel argues that "By the foregoing instruction the Court told the jury that so far as the appellant Benatar was concerned the conspiracy had been established and that Benatar was a part and parcel thereof".

In other words, the objection is that there are certain sentences in the second paragraph of the instruction which indicate that the existence of the conspiracy could be assumed to be established.

While such a construction might be plausible if one considered only certain isolated sentences in the second paragraph, if the instruction is considered as a whole no such inference is tenable.

And it is the law that an instruction must be construed as a whole. A trial judge cannot be expected to cram all the limitations, qualifications, exceptions, and distinctions of a legal principle into one sentence or even into one paragraph. Judicial pronouncements, like every other type of human discourse, must be allowed some elbow room. Isolated excerpts are not to be considered apart from their context, and, so considered, are not to be tortured into constituting error.

No intelligent juror would have construed the instruction in question as telling him that the existence of the conspiracy was to be taken as established.

The norm that should be applied to instructions has been repeatedly indicated by this Court. In Barcott v. United States, 9 Cir., 1948, 169 Fed. (2d) 929, 932 [48-2 USTC ¶9377], certiorari denied, 1949, 336 U. S. 912-913, Judge Orr said:

"Complaint is made of certain instructions requested by appellant and refused, and of certain instructions given by the Court. The alleged errors are said to be found in the language employed in certain instructions and of language omitted in other instructions.

"Detached paragraphs, sentences and phrases are emphasized and singled out. We have examined the charge given by the Court as a whole and find that it fully and fairly presents the law of the case." ¹

Considered as a whole, the instruction attacked as Error No. 3 does not constitute ground for reversal.

8. The Appellants Are Not In A Position To Complain Of The Court's Refusal To Give The Requested Instruction Relative To Extrajudicial Statements Of Any Alleged Co-Conspirator Tying Benatar To The Conspiracy. At the close of the District Judge's charge, counsel for the appellants made the following statement:

"Now, I would like to note an exception (objection) on behalf of each of the defendants for (sic) the failure of the Court to give defendants' Instruction No. 13--No. 12 first, which is to the effect that the guilt of Morris Benatar could not be established--that the existence of the conspiracy charged so far as Morris Benatar was concerned and his connection therewith could not be established by the acts and declarations of any other alleged co-conspirator in the case."

We are precluded by Rule 30 of the Federal Rules of Criminal Procedure from reaching the merits of the appellants' objection, embodied in Specified Error No. 4. That Rule reads in part as follows:

". . . No party may assign as error any portion of the charge or omission therefrom unless he objects thereto before the jury retires to consider its verdict, stating distinctly the matter to which he objects and the grounds of his objection . . ." (Italics supplied)

In his abortive objection quoted above, counsel for the appellants merely restated his request, but did not even attempt to give the grounds for his complaint that the Court below had failed to give the instruction that he had requested. He should have pointed out, if he could, that there was evidence in the record consisting of statements by Benatar's alleged co-conspirators to the effect that Benatar was a member of the conspiracy, which statements were being relied upon by the appellee to establish Benatar's connection with the conspiracy. In other words, he should have shown that the requested instruction was relevant, in the light of the evidence adduced in the present case. Refusal of a requested instruction on an abstract proposition of law, which could not aid the jury, is not error. Clark v. U. S., 5 Cir., 1923, 293 Fed. 301, 304.

Neither in his objection before the District Judge, supra, nor in his briefs on this point, nor in his oral argument did counsel for the appellant Benatar point to a single statement by any of the co-conspirators inplicating Benatar, except, of course, the statements made in Court under oath which were clearly admissible as against Benatar. In other words, none of the co-conspirators were quoted as having made extrajudicial statements connecting Benatar with the conspiracy.

Benatar's connection with the conspiracy was established, on the contrary, by his signing of the various tax returns, by his letter of August 28, 19 51, supra, and by his damaging statement to Furtado, with reference to the scheme for a fraudulent refund of $14,335.29: `If you get that, I will give you half of it.' I didn't say anything. He said, 'I will give you two-thirds of it.'" Furtado quoted this language of Benatar's in open court.

The error complained of, if error it were, necessarily should have been connected to the testimony, and the relevancy of the requested instruction should have been pointed out to the court below. No "fundamental" or "stock" conspiracy instruction was here involved.

It is true that a "fundamental" instruction should be given by the Court, regardless of a proper request or objection. But an instruction that needs to be related to the facts at bar in order to be proper, is not a "fundamental" one. In the latter case, the following language in Screws v. United States, 1945, 325 U. S. 91, 107, is apposite:

"It is true that no exception was taken to the trial court's charge. Normally we would under those circumstances not take note of the error. (Case cited)"

It is precisely to such special instructions, related to the particular facts of a given case, that Rule 30 of the Federal Rules of Criminal Procedure applies. If every failure to give such instructions is to constitute "plain error", so as not to require a proper request or objection, we might as well jettison Rule 30 altogether.

Nor should the application of the Rule be reserved for trivial and immaterial matters, where the error complained of would not be reversible anyway.

This Rule tends to discourage an advocate from making cryptic objections to the Court's instructions, and then, if the verdict goes against him, relying upon the alleged error as a deprivation of his Constitutional rights. The Rules generally are designed to prevent counsel from holding his cards close to his vest.

Rule 30 should not be whittled down to suit the individual inclinations of particular judges in particular cases. It has a salutary purpose, and should be honored more in the observance than in the breach.

Furthermore, were it to be held that the failure to give the requested instruction 12 was error, from a reading of the whole record it affirmatively appears that such failure was not prejudicial. Bihn v. United States, 328 U. S. 633.

We conclude "with fair assurance after pondering all that happened" that the judgment in this case would not have been different had the refused instruction been given. Kotteakos v. United States, 328 U. S. 750.

Finally, Specified Error No. 4 does not conform to Rule 18(2)(d) of this Court, which requires that "the specification shall set out . . . the grounds of the objections urged at the trial". Here the appellants merely state: "To the refusal to give the foregoing instruction the appellant Morris Benatar duly objected and excepted. (Instructions, pp. 38-9.)"

The especial necessity for compliance with Rule 30 of the Rules of Criminal Procedure and with Rule 18(2)(d) of this Court in attacking on appeal the giving or the refusal of an instruction "specially related to the facts at bar", has been fully discussed very recently by this Court in Kobey et al. v. United States, No. 13257, decided on November 30, 19 53 [54-1 USTC ¶9106], Slip Opinion, Section 11, pages 22-25.

9. The District Court Did Not Err In Admitting Evidence Relating To The Juggling Of The Calo Dog Food Account. As we have seen, Specified Errors Nos. 5 and 7 deal with the admission in evidence of the testimony of Furtado and Deckard in connection with the appellants' machinations regarding the account of the Calo Dog Food Co., Inc., as well as the admission in evidence of Government's Exhibit No. 49 with reference to the same account.

We have already fully reviewed the sordid story of this manipulated account and Benatar's promise to Furtado if the latter could carry out this fraud to a successful conclusion.

Whether we regard Furtado's plan as one "to actually steal from the Government the sum of $14,335.19, (sic) an objective entirely different from anything charged in the indictment as the conspiracy", as claimed by the appellants; or whether we agree with the appellee "that the payment of the tax penalty and interest for this quarter (ending December 31, 19 50) was so inseparably interwoven with the Calo Dog Food Company and the offenses charged in the conspiracy that the account could not be unscrambled"--the fact remains that this Calo transaction was at least admissible as a similar act to show intent.

Under the present record, however, it is not necessary to rely upon this Calo Dog Food swindle attempted by Furtado with Benatar's blessing, as being merely a similar act. Furtado definitely testified that he told Benatar and Potter that if he had a letter from them stating that the original check had been misplaced in the Collector's office, he could juggle the books so that the penalty and interest could either be refunded to them or credited to another account. This spurious refund claim was part and parcel of the fraud hatched around the Calo account.

The above conversation occurred on or about August 1, 19 51. It will be remembered that the conspiracy commenced on or about November 1, 19 48, and continued until April 15, 19 52, according to the indictment; and that the object of the conspiracy was to be accomplished, in part, by Furtado's "acceptance . . . of said payment of taxes so due upon the said withholding and employment tax returns without the payment or addition of accrued penalties and interest," etc.

Accordingly, both as to dates and as to subject-matter, the Calo transaction came within the ambit of the indictment.

Specified Errors Nos. 5 and 7 are without merit.

10. There Was Substantial Evidence to Connect Benatar With The Abatement Claim Fraud. We have already reviewed the evidence in connection with the conspiracy involving Benatar, Potter, and Furtado relative to the backdated request for an extension of time, which request was used as the basis for the claim for abatement that Benatar signed. Specified Error No. 6 relates to this backdated request.

Inadvertently no doubt, the appellants assert that "This entire transaction was most prejudicial to the appellant Benatar". We agree. In quite another sense, such a "transaction" would be "most prejudicial" to the appellee, since it would cause the latter improperly to abate a tax.

There was substantial evidence to involve both appellants in this part of the general conspiracy to pay "taxes so due upon the said withholding and employment tax returns without the payment or addition of accrued penalties and interest," etc.

11. Conclusion. There was no reversible error committed by the Court below in its rulings, and there was substantial evidence to support the verdict and the judgments.

Accordingly, the judgment as to each appellant is affirmed.

¹ See also McCoy v. United States, 9 Cir., 1948, 169 Fed. (2d) 776, 785, certioari denied, 1948, 335 U. S. 898; Himmelfarb v. United States, 9 Cir., 1949, 175 Fed. (2d) 924, 951 [49-1 USTC ¶9313], certiorari denied, 1949, 338 U. S. 860; Remmer v. United States, 9 Cir., 1953, 205 Fed. (2d) 277, 290-291 [53-1 USTC ¶9421].

[Dissenting Opinion]

DENMAN, Chief Judge, dissenting:

I dissent from the affirming of the judgment against Benatar. The court justifies the refusal to give the most important instruction 12 by reliance on a technical failure in the form of the objection to it to comply with Rule 30, Federal Rules of Criminal Procedure. The court completely ignores Rule 52(b) concerning plain error, though vigorously pressed in this dissent. ¹ Rule 52(b) provides:

"Plain Error. Plain errors or defects affecting substantial rights may be noticed although they were not brought to the attention of the court." ²

Here, apart from the criticized objection ³ pointing out the need for the instruction, ⁴ it protrudes like the sore thumb of conventional speech. It consists of evidence, inadmissible as to Benatar, of over 100 pages of the record, required to be summarized in over 7 pages of the opinion, of hearsay statements of other co-conspirators concerning Benatar's participancy in the conspiracy. This is in clear violation of Glasser v. United States, 328 U. S. 750, 765 and many other cases. ⁵

There could not be a clearer case in which the plain error Rule 52(b) outweighs Rule 30. The principal witness and, indeed, the necessary witness to convict Benatar was the informer Furtado. To the jury it was Furtado versus Benatar. Here the evidence of the felon Furtado, serving a ten-year sentence, with the jury's knowledge that in aiding the prosecution he might hope to shorten his imprisonment by an early parole or by a pardon, is weighed by the jury against that of Benatar with his presumption of innocence. This is a situation in which a normal juror would scrutinize the veracity of the felon's testimony against that of Benatar with the gravest care. However, in this situation the jury considered Furtado's testimony so wrongfully weighted with the over 100 pages of his description of Potter's acts and statements in Benatar's absence showing the existence of the conspiracy.

Without mentioning either the jury's weighing of the comparative veracity of these two witnesses or the effect of these 100 pages of adverse testimony so wrongfully before them to determine whether Benatar was a party to the conspiracy, this court states that "We conclude 'with fair assurance after pondering all that happened" that the judgment in this case would not have been different had the refused instruction been given. Kotteakos v. United States, 328 U. S. 750[765]."

Significantly the court omits the following phrase from its "pondering." It is "without stripping the erroneous action [100 pages] from the whole." In so ignoring the character of Furtado and his wrongfully considered mass of evidence, I cannot agree with the court. Unless "stripping" from the whole record Furtado's felonious character and the 100 pages could I say in compliance with the Kotteakos case that it is possible "to conclude that [Benatar's] substantial rights were not affected."

Only by assuming the function of a jury's appraisal, can one say the mass of wrongful testimony would not affect the decision. Yet we are forbidden to do this not only in the Kotteakos case but also in Bollenbach v. United States, 326 U. S. 607, where the court at page 615 states:

". . . In view of the place of importance that trial by jury has in our Bill of Rights, it is not to be supposed that Congress, intended to substitute the belief of appellate judges in the guilt of an accused, however, justifiably engendered by the dead record, for ascertainment of guilt by a jury under appropriate judicial guidance, however cumbersome that process may be." (Italics supplied.)

Following in the same term in Bihn v. United States, 328 U. S. 633, a conspiracy case, in reversing the court because it did not affirmatively appear from the whole record that the wrong done was prejudicial, the Court stated at page 638:

". . . as stated in McCandless v. United States, 298 U. S. 342, 347-348, 'an erroneous ruling which relates to the substantial rights of a party is ground for reversal unless it affirmatively appears from the whole record that it was not prejudicial.'" (Italics supplied.)

Not only does the court's assuming of the function of the jury so violate these Supreme Court decisions but it overrules sub silentio a long line of cases of the Ninth Circuit. In the instant case the district judge ignored all the requested instructions of both parties. ⁶ The en banc case of Samuel v. United States, 169 Fed. (2d) 787 (Cir. 9) in which Judge Orr joined, holds in reversing, in accord with Rule 52(b), that the court in a criminal case must instruct on all the essential questions of law involved, whether or not requested. Its language, at page 792, is: "In a criminal case the court must instruct on all essential questions of law involved, whether or not it is requested to do so. Kreiner v. United States, 2 Cir., 11 Fed. (2d) 722; Kinard v. United States, 68 App. D. C. 250, 96 Fed. (2d) 522; Morris v. United States, 9 Cir., 156 Fed. (2d) 525; United States v. Levy, 3 Cir., 153 Fed. (2d) 995; Corson v. United States, 9 Cir., 147 Fed. (2d) 437; Miller v. United States, 10 Cir., 120 Fed. (2d) 968; Screws v. United States, 325 U. S. 91, 107, 65 S. Ct. 1031, 89 L. Ed. 1495, 162 A. L. R. 1330; United States v. Noble, 3 Cir., 155 Fed. (2d) 315; United States v. Pincourt, 3 Cir., 159 Fed. (2d) 917; see 169 A. L. R. 305-355 on the subject generally. We think giving the wrong law in this case was certainly not less prejudicial than omission to give the law at all." (Italics supplied.)

The judgment should be reversed and a new trial ordered.

¹ The practice in the Ninth Circuit is to await the distribution and consideration of a dissent before filing a majority opinion.

² There is nothing novel in the rule, the revisers stating that it is based upon Wiborg v. United States, 163 U. S. 632, 658. There, in reversing, the Supreme Court invoked it, where "the question was not properly raised."

³ "Now, I would like to note an exception on behalf of each of the defendants for the failure of the Court to give defendants' Instruction No. 13--No. 12 first, which is to the effect that the guilt of Morris Benatar could not be established--that the existence of the conspiracy charged so far as Morris Benatar was concerned and his connection therewith could not be established by the act and declarations of any other alleged co-conspirator in the case."

⁴ The applicability and form of instruction 12 to disregard such evidence is not questioned by the court nor, read as a whole, could it be. It is:

"In determining whether or not a conspiracy existed as charged in the indictment and that the defendant Morris Benatar was a member of such conspiracy, you are instructed that you cannot take into consideration and must disregard and put out of your mind any and all testimony and evidence relating to any acts done or declarations made by any other alleged co-conspirator out of the presence of the defendant Morris Benatar and which acts or declarations were not authorized by Morris Benatar. In other words, so far as the defendant Morris Benatar is concerned, the existence of the conspiracy charged in the indictment and his connection therewith as a member must be established by evidence independent of the acts and declarations of any other alleged co-conspirator done or made out of the presence of Morris Benatar and which were not authorized by the said Morris Benatar." (Italics supplied.)

⁵ It was early so held in this circuit in reversing the conspiracy cases of Dolan v. United States, 123 Fed. (2d) 52, 54 and Kuhn v. United States, 26 Fed. (2d) 463, 464 (Cir. 9). So also in the Tenth Circuit, in reversing in the conspiracy cases of Minner v. United States, 57 Fed. (2d) 506, 511 and Thomas v. United States, 57 Fed. (2d) 1039, 1042.

⁶ Cf. Opinion Judge Groner in reversing for failure to give an instruction in this situation. Colber v. United States, 146 Fed. (2d) 10, 13.