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[56-2 USTC ¶9638] United States of America , Plaintiff-Appellee v. Sam Achilli, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 11575, October Term 1955, April Session 1956, 234 F2d 797, 6/5/56, Reversing in part, affirming in part, unreported Dist. Ct

[1939 Code Secs. 41 and 145(b)--similar to 1954 Code Secs. 446 and 7201]

Tax evasion: Evidence of increase in net worth: Prejudicial conduct of counsel.--In a prosecution for fraud Government counsel's overzealous advocacy of his cause could not be classified as misconduct requiring reversal of the conviction. Use of the net worth method of reconstructing income was competent to establish tax evasion, without determination by the Commissioner that use of such method clearly reflected income. Evidence obtained from books of a partnership of which the defendant was a member was not illegally seized, where the defendant consented to examination of the books by an individual who did not disclose that he was a Special Agent. The trial court did not err in refusing to admit the defendant's proffered evidence that some of his income consisted of funds embezzled from the partnership, since under applicable state law a partner could not be guilty of the crime of embezzlement because of his wrongful conversion of partnership funds. Moreover, even if there had been an embezzlement, the Government had allowed one-half of the partnership income as a deduction from net worth and the defendant could not contend that he had embezzled his own distributive share. Conceded error in the opening net worth statement for one year resulted in reversal of the conviction of tax evasion for that year.

Robert Tieken, United States Attorney, John Peter Lulinski, Anna R. Lavin, Leon Kupeck, Chicago, Ill., H. Brian Holland, Assistant Attorney General, Joseph M. Howard, Washington, D. C., for plaintiff-appellee. Carl J. Batter, Washington, D. C., Frank J. Gagen, 29 South La Salle St., Chicago, Ill., for defendant-appellant.

Before MAJOR, LINDLEY and SWAIM, Circuit Judges.

LINDLEY, Circuit Judge:

Defendant appeals from a judgment entered on a jury verdict finding him guilty on three counts of an indictment charging willful evasion of income taxes for the taxable years 1946, 1947 and 1948, in violation of Section 145(b) of the Internal Revenue Code of 1939, 26 U. S. C.

The Government employed what is commonly referred to as the net worth method of establishing deficiencies, proceeding on the theory that increases in the taxpayer's net worth over that at the beginning of the taxable year, plus nondeductible expenditures, constituted income to the taxpayer during that period unless satisfactorily explained. Employing this procedure the Government calculated the amount of defendant's net taxable unreported income during the indictment periods at $13,803.94 in 1946, $36,958.63 in 1947 and $20,623.18 in 1948. It offered evidence tending to prove that the income was derived from over-ceiling charges for automobiles sold by a co-partnership composed of defendant and one Gromer, doing business under the name and style of Highland Motor Sales, and Barney's Snooker Hall, owned by defendant until the latter part of 1946, and in interest on loans to various persons.

With respect to the operation of Highland , on the evidence the jury was justified in finding the following pertinent facts. During the three years, defendant, or his agents, made sales of automobiles at premium prices of about $600 per car above the OPA maximum price. The ceiling price of each car was entered upon the partnership books, and only this amount was reflected in the partnership returns. The black market premium was not recorded or reported. These premium sales seem to have been concealed from defendant's co-partner, Gromer; they were not reported in his individual income tax returns.

[Prejudicial Conduct of Counsel]

Defendant complains of some 19 remarks of counsel excerpted from the record, contending that misconduct of the United States Attorney requires a reversal of the judgment. The first was made during the course of reception of government testimony. Defendant's attorney objected to the use of certain records in the examination of a Government witness, asserting that they were admittedly false. The Government's attorney remarked, "And we are going to show they are false because you made them false." On objection, this remark was stricken.

The other 18 instances occurred during the course of final argument to the jury. Of these, objection was made to only two. "Counsel for the defense cannot as a rule remain silent, interpose no objections and after a verdict has been returned seize for the first time on the point that the comments to the jury were improper and prejudicial." United States v. Socony Vacuum Oil Co., 310 U. S. 150, 238. That principle must govern the sixteen asserted instances of misconduct, unless the remaining contentions disclose misconduct of a flagrant nature resulting in a pattern of prejudicial impropriety. We think no such pattern is shown.

We do not condone the prosecutor's unqualified statement that all defense witnesses were unwilling witnesses, responding only to subpoena. However, defendant's objection to the remark was sustained and the remark was stricken. And in addition to such curative action, the court instructed the jury that oral summation was no part of the evidence and was not to be considered in arriving at a verdict.

The second remark to which objection was taken related to the terms of a purchase contract. The Government introduced evidence showing that defendant had bought the entire interest of one Turpin, including the realty, equipment and stock of goods in the Red Lion, a local restaurant and bar, in 1945. In his closing argument the United States Attorney, in summing up defendant's beginning net worth, referred to this transaction as including a transfer of the capital stock of Red Lion, Incorporated, when, in fact, the agreement between Turpin and defendant included no reference to capital stock. Defendant's objection to this statement was overruled.

Although counsel's reference to the capital stock was unwarranted, it was an invited response to defense counsel's assertion and argument to the jury that the value of the corporate stock had been omitted from defendant's opening net worth statement. The record discloses the existence of a corporation known as Red Lion, Inc., of which defendant was an officer, and shows that the board of directors, in February, 1948, authorized and directed the officers of the corporation to enter into a lease with defendant of the premises on which Red Lion was located. We are directed to nothing of record which indicates when or by whom Red Lion, Inc., was incorporated, or who owned its corporate stock.

The Red Lion transactions are silent in this respect. Defendant's purchase agreement of the property recited that the seller, Turpin, agreed to convey the real estate, fixtures and stocks of liquors and goods to defendant in consideration of $18,400. In 1948, defendant transferred to one Fritzel an undivided 1/2 interest in all the chattels, fixtures, liquor and licenses. An attached schedule showed that the value of the stock of merchandise was $10,796.71 and that the sale price of 1/2 thereof was $5,398.30. Neither transaction alluded to corporate ownership of any of the property and each item was fully reflected in the Government's net worth computation.

Upon the capital gains schedule of defendant's 1948 tax return, notations as follows were entered with respect to an item listed as "Sales of stock in Red Lion": acquired 1945, at a cost basis of $4,673.18; sold 1948 at a sales price of $5,894.85. In cross-examination of Government's witness Weber, defense counsel interpolated "capital" into this entry immediately preceding the word "stock", and questioned him as to where the value of the "capital stock" was reflected upon the Government's computation of net worth at the beginning of the taxable periods. Counsel took the same approach in his summation to the jury, arguing that the cost base of this item, $4,673.18, should be set up as an asset omitted from the opening net worth computation. The context of the United States Attorney's argument shows conclusively that his reference to the value of the corporate stock as included in the $18,400 purchase price paid to Turpin was in response to the argument by defense counsel.

Each party was arguing for an inference not supported by the record. The accountant who prepared the 1948 return testified that the capital gains entries thereon were based upon the transaction between defendant and Fritzel. The word "stock" in that entry, therefore, takes its meaning from the contract of the parties to the transaction which, in this respect, purports to convey only a stock of merchandise in inventory. If counsel for the Government went outside the record in the respect noted, the excursion was in response to an opposing venture de hors the record by the defense. The error, in overruling the objection was inconsequential, especially in view of the instructions to which allusion has previously been made that oral summation is no part of the evidence.

Government counsel may, at times, have been an overzealous advocate. In most of these instances, his remarks went in without objection, as we have noted. When his argument to the jury is considered as a whole, we think that the excerpts extracted from context for our attention present for the most part nothing more than zealous advocacy, see Di Carlo v. United States, 6 Fed. (2d) 364, cert. denied 268 U. S. 706 (CA-2), and, in any event, that they can not be classified as misconduct requiring reversal. As we said in United States v. Doyle, No. 11528, decided May 23, 19 56 [56-1 USTC ¶9553], quoting from Malone v. United States, 94 Fed. (2d) 281, 288 [38-1 USTC ¶9032], cert. denied 304 U. S. 562 (CA-7): "Counsel have a right to make any argument based upon evidence proven in the case, or which may be reasonably inferred therefrom, and to make reply to that made by opposing counsel, and, in doing so, statements may be made which otherwise would be improper. Defendant's trial counsel evidently did not regard the argument as vicious or unfair as objection was made to one statement only * * *." We think the situation wholly unlike the instances of misconduct appearing in the cases relied upon by defendant. Berger v. United States, 295 U. S. 78; N. Y. Central R. Co. v. Johnson, 279 U. S. 310; Pierce v. United States, 86 Fed. (2d) 949 (CA-6); Volkmor v. United States , 13 Fed. (2d) 594 (CA-6).

[Net Worth Method of Reconstructing Income]

Defendant's contention that the net worth evidence was incompetent and inadmissible misconceives the purpose of the provisions of Section 41 of the Internal Revenue Code of 1939, 26 U. S. C. (1952) §41. He insists that, before the net worth method may be employed in any income tax case, Section 41 requires a determination by the Commissioner of Internal Revenue that use of that method "does clearly reflect the income" of the accused taxpayer; that the Commissioner did determine defendant's income for the indictment years by adjustments to the income reported, and that therefore, the net worth method of proof may not be employed in this prosecution, absent proof that the Commissioner has made the alleged requisite determination.

We think it clear that Section 41 has the limited purpose of insuring that, in an administrative deficiency assessment, the taxpayer's accounting method shall be employed by the Commissioner in the allocation of income and expense items between taxable years. Holland v. United States, 348 U. S. 121, 131 [54-2 USTC ¶9714]. But that section can have no application in a criminal proceeding which is not based and does not depend upon an administrative determination. Therefore, the cases dealing with the validity of administrative orders upon which defendant relies are inapposite. See e.g., Morgan v. United States, 298 U. S. 468; Brown v. Helvering, 291 U. S. 193 [4 USTC ¶1223]; Lucas v. American Code Co., 280 U. S. 445 [2 USTC ¶483]; Willapoint Oysters, Inc., v. Ewing , 174 Fed. (2d) 676, cert. denied 338 U. S. 860 (CA-9); Southern Garment Mfg. Assn. v. Fleming, 122 Fed. (2d) 622 (CA-DC).

These cases obviously have no application to this proceeding, based upon three counts of an indictment returned by a grand jury. It is wholly immaterial that the indictment was preceded by an administrative tax deficiency determination against defendant. Such proceeding was a civil matter, the validity of which must be determined civilly. Here the Government had the burden of proving the charges made in the indictment beyond a reasonable doubt, and, for this purpose, as in any other criminal prosecution, the admissibility of tendered evidence was to be determined by established rules of evidence. The question of admissibility is not affected by the fact, nature, or validity of a prior administrative determination touching the same subject matter.

The contention now made is not unlike that urged in Holland v. United States, 348 U. S. 121 [54-2 USTC ¶9714], that Section 41 restricts the Government's use of the net worth method of proof in criminal prosecutions to those cases where it is shown that the taxpayer has no books or that his books are inadequate, a contention rejected in this language at page 132: "To protect the revenue from those who do not 'render true accounts' the Government must be free to use all legal evidence available to it in determining whether the story told by the taxpayer's books accurately reflects his financial history." The legality of the net worth evidence is not affected by what the Commissioner has, or has not, done in a civil matter. To read such a restriction into Section 41 would thwart the intent of Congress. "The existence of unreported income may be proved by any practical method available in the circumstances of the particular case." United States v. Doyle, No. 11528, decided May 23, 19 56 (CA-7) [56-1 USTC ¶9553]; Davis v. United States, 226 Fed. (2d) 331, 336, cert. denied 350 U. S. 965 (CA-6) [55-2 USTC ¶9685].

Defendant argues also that the net worth method, as here employed, lacked probative value and should not have been presented to the jury. Government exhibit 280, the summary of the relevant net worth computations, showed an understatement of income for each of the taxable years as follows: for 1946, $13,803.94, for 1947, $36,958.63, and for 1948, $20,623.18. The probative value of this evidence is attacked, defendant asserting that certain specific assets were omitted by the Government in computing defendant's opening net worth and that other specific items were improperly included as assets in the net worth computation for the year 1948. To the extent that these contentions represent merely a suggestion that we weigh conflicting testimony, they fall within the postulate stated in United States v. Winston, 222 Fed. (2d) 323, 325 (CA-7), that "we must consider the evidence in the light most favorable to the Government and in the light of all reasonable inferences which the [jury] might draw from the evidence." United States v. Iacullo, 226 Fed. (2d) 788, 795, cert. denied 350 U. S. 966 (CA-7); United States v. Yager, 220 Fed. (2d) 795, cert. denied 349 U. S. 963 (CA-7). We can only conclude that the evidence supports the verdict; that we cannot say that the challenged evidence, as a matter of law, lacked probative weight sufficient to take the case to the jury.

The Government concedes the merit of defendant's contention that the value of a brick residence, which was sold by defendant in 1946, was erroneously omitted from the opening net worth computation. The capital gains schedule of defendant's tax return for the latter year states that that property was acquired by defendant in 1945 at a cost basis of $11,000. Since this is the only evidence of record with respect to the time when defendant acquired this property, the sum should, as the Government concedes, have been included as an asset in the computation of defendant's net worth as of December 31, 19 45. This omission, however, affects only Count I. Since the total unreported income for the year 1946 by the computation most favorable to the Government is an amount of approximately $13,800, only, we feel that this omission must have resulted in serious prejudice to defendant as to the charges of Count I. When employing the net worth method, the Government must prove, beyond a reasonable doubt, "that a substantial amount of tax liability has been willfully evaded." United States v. Doyle, 11528, decided May 23, 19 56 (CA-7) [56-1 USTC ¶9553]; Sasser v. United States, 208 Fed. (2d) 535 (CA-5) [54-1 USTC ¶9118]. The result of this omission was to interject into the proof as to Count I an erroneous figure which would reduce the evidence tending to prove "a substantial" evasion of tax liability to that which would support a maximum finding of willful evasion in an amount only slightly exceeding $2,800. The error accounts for almost 80% of the deficit shown by the Government's computation. We can only speculate as to whether the jury would have found a substantial evasion for that year. We think an error of this magnitude in a computative total of less than $14,000 necessarily prejudiced defendant. The judgment as to Count I is reversed.

The last mentioned item was fully reflected in the net worth computations going to the proof of the charges of Counts II and III; consequently, we think the other contentions of error in this respect are without merit.

Defendant asserts that certain oil well investment in the amount of $5,000, and the value of the capital stock of Red Lion, Inc., in the amount of $4,673.18 were erroneously omitted from the opening net worth computation. What we have said with respect to the Red Lion stock in reviewing the contention as to misconduct of Government counsel disposes of this item. The entries upon defendant's 1946 tax return which are said to support the assertion that defendant acquired "Capital stock" in 1945 were an obvious reference to a stock of goods in inventory. The record is silent as to the existence or ownership of Red Lion corporate shares. With respect to the oil well investments, the evidence is in conflict. The record contains positive testimony that defendant acquired these assets in 1947, and the jury could have resolved this question against defendant. The review of conflicting evidence is beyond the scope of our function.

[Items Included as Assets]

Defendant also objects to items included as assets in the closing net worth which allegedly were liabilities. There is, however, conflicting testimony with respect to each of them. We might well conclude our review on this note, but we think it wise to refer briefly to the evidence as to these transactions.

The first is a $12,000 item which grew out of a $35,000 cashier's check held by defendant at the end of the taxable year 1948. This check, issued by the Union National Bank and Trust Company of Elgin , was payable to defendant, his wife and one Gordon. The named persons signed a promissory note payable to Union in the amount of $23,000. In computing defendant's net worth at the close of 1948 the $35,000 check was included as an asset and the $23,000 note as a liability. Defendant contends that this computation does not reflect a related transaction in which defendant borrowed the $12,000 representing the difference between the Union note and the check from the First National Bank. The record includes positive testimony that Union issued the check on consideration of the $23,000 loan and $12,000 cash paid by defendant. Gordon testified that he supplied none of the funds for the purchase of the check and that the latter was used to relieve the obligation of the note. One witness testified that First National was a participant in this transaction to the extent of $12,000. The record clearly shows that Union recorded the transaction as a $23,000 obligation. Gordon testified that he had not executed a note in favor of First National, and no record of such a transaction was produced.

There was also a conflict of testimony with respect to a $7,500 transaction between defendant and one Affeld and another in which Gromer purchased a $15,000 cashier's check payable to defendant, which the latter endorsed and delivered to Gordon as a loan. Both transactions occurred in 1948. With respect to the Affeld transaction, there was a dispute as to whether the $7,500 represented a loan actually made or whether it was a mere commitment to pay on Affeld's account sums to the extent of $7,500 upon proper demand. This figure was set up as a closing net worth asset without a corresponding liability. With respect to the $15,000 check Gromer testified that he purchased it for defendant and delivered it to him. Defendant insists that there is no evidence that the check was purchased with defendant's funds. We have examined the record and believe there was sufficient evidence to submit to the jury upon each of these matters. There was substantial evidence which, if believed, supported the requisite finding that defendant willfully understated his income by substantial amounts in both 1947 and 1948, and that black market receipts received by him in the sale of automobiles were the likely source of his enhanced net worth.

[Evidence Illegally Seized]

Defendant insists further that the evidence obtained from the partnership books of Highland Motor Sales should have been excluded from evidence as illegally seized in violation of the Fourth Amendment. When the investigation began, Special Agent Weber and Revenue Agent Auld presented themselves at the office of Highland where they met defendant and asked that they be permitted to examine the partnership books. Defendant does not deny that he consented to their examination of the books, but argues that the evidence obtained should have been suppressed because Weber did not reveal that he was a Special Agent or disclose the purpose of the investigation. In this respect, Weber testified that when he met defendant at Highland, he identified himself as a Special Agent, displayed his credentials and asked to examine the books of the partnership; that defendant consented to the examination and directed his bookkeeper to supply any books and records which the agents wanted, and, that, thereafter, he sought and received the consent of defendant's co-partner that he might examine the books.

This argument is not essentially different from that advanced in Turner v. United States, 222 Fed. (2d) 926 [55-1 USTC ¶9489], cert. denied 350 U. S. 831 (CA-4), wherein defendants contended that evidence obtained from their books and records should have been suppressed, despite their consent to an examination of the books, for the reason that the investigating agents had not warned them that the evidence might be used in a criminal prosecution. The court there aptly stated, 222 Fed. (2d) at 931: "The agents made no investigation to which defendants did not consent. The bookkeeper was ordered by the defendants to show the books and records of the business to the agent; * * *. The evidence is silent as to whether Agent Forbes began the investigation as a routine examination to ascertain the civil liability of the defendants or intended from the beginning to search for evidence of crime. But even if the latter assumption be made, there was no violation of the taxpayer's constitutional rights. The relevant inquiry is always whether the taxpayer freely gives his consent, and as to that there is no dispute in this instance." This principle is cited with approval in Zacher v. United States, 227 Fed. (2d) 219 [55-2 USTC ¶9745], cert. denied 350 U. S. 993 (CA-8), and Eggleton v. United States, 227 Fed. (2d) 493 (CA-6) [56-1 USTC ¶9108], both evasion cases.

We note briefly defendant's charge that the trial court erred in denying, without a hearing, his motion to suppress this evidence, which was made prior to trial and supported by defendant's affidavit. We think, however, the duty of a trial court to afford a hearing upon such a motion is limited by the prayer of the motion. In this respect, defendant, in his affidavit, did not deny, but rather, at least tacitly, admitted that he consented to examination of the books, but says he did not know of Weber's official title of Special Agent. The only hearing requested was the production of manuals prescribing the duties of special agents. There was no showing to warrant the granting of a hearing, inasmuch as there was no offer to prove that the evidence was submitted to the agents other than with defendant's consent. Cf. Smith v. United States , 348 U. S. 147, 151.

The case is unlike United States v. Wolrich, 129 Fed. Supp. 528, in which there was evidence that the treasury agents secured defendant's consent upon the assurance that the investigation was merely routine, when in fact, they were seeking evidence of fraud for a criminal prosecution. There is no suggestion of deception such as the court condemned in Gouled v. United States, 255 U. S. 298. There is no suggestion of lack of consent as appeared in Fitter v. United States, 258 Fed. 567 (CA-2), and United States v. Brasley, 268 Fed. 59. The case of In re Subpoena Duces Tecum, 81 Fed. Supp. 418, involved compulsory acquisition of partnership records which were used in evidence against one of the partners. Here, both partners consented to the examination. Upon this record, we must conclude the evidence obtained from Highland 's books was properly admitted.

[Income from Embezzlement]

Defendant's remaining argument relates to the alleged defense of embezzlement. He contends that Gromer, his co-partner, filed a suit in 1951 for dissolution of the Highland partnership charging that defendant had embezzled partnership funds arising out of overceiling sales of automobiles. He asserts that the court erred in refusing to admit in evidence the stipulation of the parties settling that suit and in refusing to give defendant's tendered instructions relative to the defense of embezzlement. Argument on this phase of the appeal rests on the decision in Commissioner v. Wilcox, 327 U. S. 404 [46-1 USTC ¶9188], that moneys obtained by embezzlement do not constitute income to the embezzler. We think that decision is inapplicable to the case at bar and that the rulings of the court below were correct both as to the admission of evidence and as to instructions.

Defendant sought to introduce the stipulation in the course of the cross-examination of plaintiff's witness Gromer, and to cross-examine the witness with respect to the 1951 lawsuit. The court ruled that this evidence was beyond the scope of proper cross-examination. Gromer was not called as a defense witness, and no attempt was made to introduce evidence as to a defense of embezzlement in defendant's case in chief. This, we believe, brings this question within our holding in United States v. Bender, 218 Fed. (2d) 869 [55-1 USTC ¶9142], cert. denied 349 U. S. 920, that the control over the orderly presentation of evidence resides in the sound discretion of the trial judge.

In any event, the defense of embezzlement, under the Wilcox rule, has no application to the case at bar, since under Illinois law defendant cannot be guilty of the crime of embezzlement because of his wrongful conversion of partnership funds to his own use. I. R. S., c. 38, §208. The postulate, supported by the Illinois decisions interpreting this statute, is that one having a property interest in funds in his possession is not guilty of embezzlement if he wrongfully appropriates the whole fund to his own use. People v. Ehle, 273 Ill. 424, 112 N. E. 970; People v. O'Farrell, 247 Ill. 44, 93 N. E. 136; McElroy v. People, 202 Ill. 473, 66 N. E. 1058. A necessary element of the crime of embezzlement is the existence of an absolute property right in someone other than the alleged embezzler. McElroy v. People, supra.

Thus, in McElroy, defendant, a commission salesman, was convicted upon an indictment charging her with the embezzlement of the proceeds of certain sales. Inasmuch as it appeared from the evidence that defendant was entitled to deduct her commissions from the proceeds of such sales before paying over the balance to the prosecuting witness, the court reversed the conviction saying, 202 Ill. at 475-476: "By this statute, in order to constitute the crime of embezzlement the fraudulent conversion must be of the property of another. If the plaintiff had a right to deduct her commissions from the gross amount collected, then to that extent the money belonged to her,--that is, she and the company owned the gross sum jointly. The law is, that where a defendant has an interest in the property or money alleged to have been fraudulently converted to his or her own use there can be no conviction of the crime of embezzlement."

In Ehle, the conviction of embezzlement rested upon proof that defendant, as attorney for Burns, had settled a claim possessed by the latter, had deposited the check therefor in his own bank account and had checked the sum out for his own personal use. The court stated the applicable rule as follows, 273 Ill. at 432: "* * * in agent would not be guilty of embezzlement if such agent had an interest in or part ownership of the funds involved, or until an accounting had been had and a demand and refusal to pay the amount due from such agent to his principal." The conviction was reversed, the court saying, 273 Ill. at 433: "If he took the suit independently for himself he was clearly entitled to fees, and he was not liable to indictment for embezzlement of this money, or to disbarment, until after a demand had been made upon him for the amount and a tender made of his reasonable fees and expenses. But no demand was ever made."

People v. O'Farrell, 247 Ill. 44, 93 N. E. 136, furnishes a good illustration of the application of this principle. O'Farrell was agent for one Vickerage to collect the rents from a hotel and also to negotiate its sale. The indictment charged that O'Farrell had embezzled both the sums collected as rents and those received from one Colgrove, in effecting the sale of the real property. It appeared that O'Farrell's agency, in each instance, grew out of separate contracts. The first provided that he was to deduct his commissions from funds collected as rent and to remit the net fund to Vickerage. The agency contract for the sale of the hotel provided that O'Farrell was to receive a commission for the sale of the property, but made no provision for his retention of his commission out of the funds received for the sale. The court held there was no embezzlement of the rent funds since O'Farrell had an interest therein, but affirmed the conviction because of his conversion of the sale proceeds in which he had no interest.

Before embezzlement can arise, the funds in the hands of a fiduciary must be held under an absolute obligation to remit them to another, but taking of the whole of a fund cannot constitute embezzlement, if the fiduciary has an interest in it and a duty only to account to another for his distributive share thereof. This is a fair summary of the law of Illinois as established by the cases interpreting an act in all relevant respects identical to §208. See also People v. Becker, 414 Ill. 291, 111 N. E. (2d) 491.

Defendant had an undistributed one-half interest in the partnership funds in question. His duty to Gromer was that of accounting for the latter's distributive share, and defendant could not be guilty of embezzlement, at least until an accounting had been sought by Gromer and refused. No accounting was sought since 1951.

Even if this were an embezzlement of Gromer's distributive share of such black-market partnership income, the Government took the precautionary measure of allowing one-half of this partnership income as a deduction from net worth. We do not understand defendant's contention to be that he embezzled his own distributive shares. Unless such an absurd result were contended, embezzlement, in any event, is removed from the case.

A vague assertion is made that someone connected with Highland may have embezzled the black-market funds belonging to both partners. The difficulty with this argument is that the record is wholly devoid of any such evidence. Insofar as the instructions rejected by the trial court may have been grounded upon such a contention, they were properly refused. It was incumbent upon defendant to assert and prove such embezzlement if he wanted to rely upon such a defense. He is not entitled to instructions resting upon mere speculative assertions manufactured wholly from this air.

As to Count I the judgment is reversed. As to Counts II and III it is affirmed. Inasmuch as identical prison sentences were imposed upon each count, and inasmuch as all sentences, expressly, are to be served concurrently, our reversal of the judgment of conviction upon a single count does not necessitate a new trial.

 

 

[62-2 USTC ¶9775] United States of America , Appellee v. Grant Foster, Appellant

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 8557, 309 F2d 8, 10/9/62, Reversing and remanding, DC Md., 62-1 USTC ¶9399

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

Tax evasion: Fraudulent returns: Erroneous admission of evidence.--The admission of evidence, purporting to prove intent or consciousness of guilt, of the taxpayer's conduct in opposing disclosure of records of his own and of his employer controlled corporation to the Internal Revenue agents was erroneous. This evidence was incompetent and should not have been received. Taxpayer's resistance to impede investigation was lawful and could not generate an inference of guilt by the jury.

George Cochran Doub and Herbert H. Hubbard, Twentieth Floor, 10 Light St., Baltimore 2, Md. (Weinberg & Green, Twentieth Floor, 10 Light St., Baltimore 2, Md. on brief), for appellant. Stephen H. Sachs, Assistant United States Attorney, Joseph D. Tydings, United States Attorney, Baltimore , Md. , for Appellee.

Before SOBELOFF, Chief Judge, and BOREMAN and BRYAN, Circuit Judges.

BRYAN, Circuit Judge:

Evasion of income taxes for 1952 and 1953 by Grant Foster, a citizen of the United States residing in Venezuela, was the verdict of the jury upon which he was sentenced in the judgment of the District Court [62-1 USTC ¶9399] from which he now appeals. Int. Rev. Code of 1939, §145(b). Acquittal was returned on two counts for failing to file returns for 1955 and 1956. The errors he assigns for reversal of the conviction do not require us to assay the proof against him, for they are directed to (1) the constitutionality of the statute prescribing the taxability of income received abroad, (2) the bar of the time limitation of law upon the prosecution and (3) the admission of evidence--purporting to prove intent or consciousness of guilt--of the accused's conduct in opposing disclosure of records of his own and of his employer corporation to the Internal Revenue agents.

Error occurred, we think, in the admission of this evidence and its articulation by the Court in the charge. For this we must reverse. In the circumstances of this case we are not called upon to adjudge the constitutional question and we find no merit in the plea of limitations. The facts need be sketched only as far as necessary to indicate the settings of our rulings.

Since 1946 appellant Foster has been engaged in the building construction business in Venezuela , having organized for the purpose Foster Construction, C. A., of Venezuelan charter. He was its president. The corporation was singularly successful. The proportion of its capital stock owned by him varied throughout the years of the events in this case, but at all times Foster was its acknowledged executive, omnipotent and unrestricted in the exercise of the corporate powers. One of its bank accounts was with the Bank of London and South America , New York Agency (herein designater as the Bank). Moneys in all of the bank accounts were under the control of Foster. Thurman A. Whiteside of Miami , Florida , until a few years prior to his death in 1960, was personal attorney for the appellant, and as well represented Foster Construction, C. A. and handled various trust accounts for Foster.

The prosecution was concentrated on 27 checks written by Foster on the Bank against the account of Foster-Construction, C. A. which totalled more than $400,000 in 1952 and $200,000 in 1953. These sums were not reported on Foster's returns for these years. The United States charged they were expenditures for his own personal use and represented a distribution to him of "earnings or profits rather than a reasonable allowance as compensation for personal services actually rendered". Int. Rev. Code of 1939, §116(a)(3) post. Foster's explanation was that his salary for 1952 and 1953 was $108,000 and $102,000 respectively, and the balance of the amounts charged by the Government evidenced repayable advances or loans, corporate investments and expenses of the corporation. The parties stipulated the salary figures. Thus the issues in the case were whether or not the moneys received in excess of the salary were for Foster's personal use, and if so, whether or not he wilfully failed to report this income.

I. The income taxable to a citizen residing in a foreign country is prescribed in Int. Rev. Code of 1939, §116(a)(1) and (3), by a statement of what shall not be included in gross income, and exempted from taxation, as follows:

"§116. Exclusions from gross income.

"In addition to the items specified in section 22(b), the following items shall not be included in gross income and shall be exempt from taxation under this chapter:

"(a) Earned income from sources without the United States .

"(1) Bona fide resident of foreign country. In the case of an individual citizen of the United States, who establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts constitute earned income (as defined in paragraph (3)) attributable to such period; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this paragraph." . . .

. . .

"(3) Definition of earned income. For the purposes of this subsection, 'earned income' means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered." (Italics supplied.)

See also Int. Rev. Code of 1954, §911(a)(1) and (b). On this point the District Judge charged in the exact words of this statute.

Invalidity is imputed to these provisions--vital elements of the offense charged to the defendant--on this ground: ascertainment of the taxable income is dependent upon an uncertain determinant, that is, what compensation is "a reasonable allowance". Appellant asserts that a taxpayer could not, under the statute, know whether he was guilty of not reporting income until--subsequent to the filing of his report--a jury or court resolved the question. The statute, he stresses, gives no criterion for determination of a "reasonable" salary--this vagueness thus vitiates the law as denying the accused due process. He cites Connally v. General Construction Co., 269 U. S. 385 (1926); United States v. L. Cohen Grocery Co., 255 U. S. 81 (1921); Collins v. Kentucky, 234 U. S. 634 (1914); International Harvester Co. v. Kentucky, 234 U. S. 216 (1914). Approval of such a statutory formula, the United States responds, is found in United States v. Ragen [42-1 USTC ¶9186], 314 U. S. 513 (1942).

But, with the Government, we agree that issue was not in the case. The parties stipulated the amounts, as already noted, of the salary paid Foster each year. While the stipulation did not explicitly express agreement on the reasonableness of the compensation, it was so construed by the parties. From brief and argument we understand the Government treated these amounts as reasonable in computing the taxes due by Foster, and is willing to make this concession unreservedly in a second trial. Foster does not now contend that the disputed balances represent "other amounts received as compensation for personal services" which--combined with his salary--are governed by the standard "reasonable". The dispute is between the Government's claim of "distributions of earnings and profits"--clearly a definitive standard--and the reply of Foster that they comprise corporate loans, investments or expenses. Thus "reasonableness" is not drawn into issue. As to the taxpayer the statute is clear and constitutional; the infirmity he alleges would not result in the nullification of the entire statute. See United States v. Raines, 362 U. S. 17, 22, 24 (1960).

True, in the Court's charge there is the possible inference--apparently inadvertent--that the jury might "determine the amount of such salary and bonus . . . [and] the proper figure for the year . . .". In another trial, with the stipulation more explicit, the Court will be warranted in a peremptory statement to the jury that this conpensation was no more than reasonable.

II. The indictment was brought in on January 10, 19 61. As to the 1952 and 1953 taxes, it alleged the attempts at evasion as occurring, respectively, October 30, 19 53 and September 29, 19 54. Defendant's plea was that any prosecution was ruled out upon the lapse of 6 years, that is, after 1959 and 1960, well before the laying of any formal accusation. The Code of 1939, in pertinent part provides:

"§3748. Periods of limitation--(a) criminal prosecutions

"No person shall be prosecuted, tried, or punished, for any of the various offenses arising under the internal revenue laws of the United States unless the indictment is found or the information instituted within three years next after the commission of the offense, * * * except that the period of limitation shall be six years--

"(2) for the offense of wilfully attempting in any manner to evade or defeat any tax or the payment thereof, . . .

* * *

"The time during which the person committing any of the offenses above mentioned is absent from the district wherein the same is committed shall not be taken as any part of the time limited by law for the commencement of such proceedings." (Italics supplied.)

This was the Act as written on the date of the violation alleged in respect to the 1952 taxes for which the return was filed October 30, 19 53. On August 16, 19 54--just before the return for 1953 was filed--this statute was replaced by §6531 Int. Rev. Code of 1954, and these words added:

"The time during which the person committing any of the various offenses arising under the internal revenue laws is outside the United States or is a fugitive from justice within the meaning of section 3290 of Title 18 of the United States Code, shall not be taken as any part of the time limited by law for the commencement of such proceedings. (The preceding sentence shall also be deemed an amendment to section 3748(a) of the Internal Revenue Code of 1939, and shall apply in lieu of the sentence in section 3748(a) which relates to the time during which a person committing an offense is absent from the district wherein the same is committed, except that such amendment shall apply only if the period of limitations under section 3748 would, without the application of such amendment, expire more than 3 years after the date of enactment of this title, and except that such period shall not, with the application of this amendment, expire prior to the date which is 3 years after the date of enactment of this title.)" (Italics supplied.)

The defendant asserts that this last tolling provision applies only to a taxpayer who goes without the realm to avoid prosecution. Bona fide residence in a foreign country was not intended by the Congress to interrupt the statute's run, he urges, since such a denial to residents abroad of the benefit of a statute of limitations would only be done in "unambiguous and explicit terms". He argues from the analogy of the interpretation of Int. Rev. Code of 1939, §3748, supra, in United States v. Beard [54-1 USTC ¶9196], 118 F. Supp. 297, 302 (D. Md. 1954), the Court construing "absent from the district" as referring only to an absence to escape criminal process.

The District Judge held, and rightly, that the 1954 provision was applicable to the 1952 tax return--filed October 30, 19 53--as well as to the 1953 tax violation alleged as committed in September 1954. Accordingly, overruling the contra assertion of the appellant, the Court applies the tolling phrase of the 1954 Code--"outside the United States"--to both charges and concluded that the limitation was intermitted while the appellant was beyond the marches of the United States. This determination is uncompromisingly dictated by the terms of the later enactment.

There is no proof the Congress intended to provide a suspension of the limitation only as to those persons who had absconded or for some ulterior motive had gone beyond the jurisdiction. The saving clause puts them within the toll, and--as clearly--simultaneously withdraws the limitation from the bona fide nonresident as well. That the effect is to remove from the latter all protection of the statute in tax prosecutions does not refute our construction here, for the Congress had the power to do so. The plea of the statute of limitations was correctly overruled.

III. Evidence of events commencing in 1957--three and four years after the offenses charged to Foster--was offered to prove either specific wilfulness or general consciousness of guilt. Over defendant's objection incidents were proved which the Government argued "impeded" it in investigating the offenses.

At the outset, we think none of them inadmissible simply because they occurred several years subsequent to the date of the alleged crimes. United States v. Taylor [62-2 USTC ¶9590], Docket Nos. 8538, 8541 (4 Cir. June 15, 19 62); Morrison v. United States [59-2 USTC ¶9657], 270 F. 2d 1, 4-5 (4 Cir. 1959). If the behavior is to prove consciousness of guilt, it obviously must have occurred subsequent to the offense. In assessing their admissibility on still other grounds we examine the circumstances of each instance. Throughout it must be remembered, as the appellant stresses, that all of these events took place after the inception of the criminal investigation. Foster's tax problems had been placed in the hands of a Special Agent of the Intelligence Division. Assignment of a case to a Special Agent is generally known to mean that investigation is afoot for a criminal prosecution.

In July, 1957 pursuant to Int. Rev. Code of 1954, §7602, the Special Agent summoned the Bank to produce its books and records in connection with the account of Foster Construction, C. A. and Grant Foster. The Bank immediately notified Foster of the summons. Foster both telephoned and cabled the Bank questioning the authority of Internal Revenue to investigate, and insisting that the investigation be delayed until his arrival with a legal representative. A threat to hold the Bank responsible was added. The Bank followed his directions.

On August 27, 19 57 a conference was held by Foster and his accountant with the Revenue Agents. He was told of his privilege against self-incrimination. Repeated was the request for the corporate records in the Bank. Foster advised them he desired to consult his attorneys and would give a reply later. The agents subsequently learned through the accountant of the advice of Foster's lawyers that in view of Intelligence Division interest in the case, no records would be made available.

On August 29 another summons was received by the Bank for the same records as before. A letter of general objection was sent the Bank by Foster. At his instance the Bank refused production, first obtaining from him an agreement indemnifying it against penalties. On September 18, 19 57 a court order was received by the Bank. Int. Rev. Code of 1954, §7604. Still the Bank on the insistence of Foster and his attorneys did not comply.

In the litigation that followed Foster and Foster Construction, C. A. intervened; on January 22, 19 58 final judgment in the dispute went for the Government, 159 F. Supp. 444 (S. D. N. Y. 1958), and on appeal was affirmed, [59-1 USTC ¶9330] 265 F. 2d 183 (2 Cir. 1959). Foster's attorney then advised the Bank of his petition for review by the Supreme Court, insisting that meanwhile the Bank not permit Internal Revenue to see the records. Review was denied later in 1959, 360 U. S. 912, and the records were released.

Foster asserts the admission of his communications with the Bank and testimony as to the litigation in the Second Circuit were prejudicial. It must be noted that the resistance to production of the records was not pitched on the safeguards against self-incrimination of the Fifth Amendment. Indeed, corporate records are not so protected. United States v. White, 322 U. S. 694 (1944). Even the custodian of such records may not withhold them on the basis that their production might incriminate him or a third party, though the custodian is a corporate officer. Essgee Co. v. United States , 262 U. S. 151 (1923); Wilson v. United States , 221 U. S. 361 (1911). If some of Foster's personal records were involved, they too would not be immune from inspection when not in his or his attorney's possession but held by the Bank in regular course of business. The sole question here then is whether proof of the resistance was competent to establish Foster's intent or consciousness of guilt.

In our opinion this evidence was incompetent and should not have been received. Under Int. Rev. Code of 1954 §§ 7602, 7604, supra, a hearing to test the legality of the summoned production is afforded. The record discloses no evidence from which the jury could draw a conclusion that Foster's participation in the test was in bad faith. That it incidentally delayed the investigation would not alone warrant such an inference. Unsuccessful recourse to remedies provided by law should not carry a connotation different from that of successful resort. This is not to say that admissions in testimony or pleadings attributable to the defendant in that proceeding may not be introduced as substantive proof of intent to evade the tax. We merely hold that lawful resistance to investigation does not generate an inference of guilt. The District Court in New York made no finding that Foster's contentions were altogether frivolous or dilatory. One of the grounds of defense was termed by the court "in the abstract, sound." We do not think a jury able or entitled to appraise the nature and effect of a judicial proceeding.

On January 7, 19 58 Foster cabled Thurman Whiteside, his former attorney as follows, as received in evidence:

"I respectfully request you treat all phases of my business with you company business and trust funds as confidential and will expect you to honor attorney client relations and withhold all information."

Unquestionably the accused was entitled to have Whiteside honor the client-attorney privilege. His invocation of the privilege could not be the subject of debate before the jury. It is an ancient and venerated right. If the privilege itself was not open to comment, obviously the injunction to the attorney to invoke it is not open to condemning inference. Halsband v. Columbian Nat. Life Ins. Co., 67 F. 2d 863 (2 Cir. 1933); United States v. Cotter, 60 F. 2d 689 (2 Cir. 1932); Pennsylvania R. R. v. Durkee, 147 Fed. 99 (2 Cir. 1906), citing Wentworth v. Lloyd, 10 H. L. Cas. 589 (1864) (Lord Chelmsford); A. B. Dick Co. v. Marr, 95 F. Supp. 83 (S. D. N. Y. 1950).

This conclusion is not altered by the fact that Whiteside had ceased to be Foster's attorney. The information and data in his possession had been obtained in that relationship with Foster. Of course, the admonition would have to be construed as embracing only materials which were within the privilege. The evidence showed Foster's personal affairs to be inextricably involved with nonprivileged matters. Thus the warning itself was still not admissible though on further interrogation some of the desired items be found not protected.

No objection was interposed when the cable to Whiteside was proffered. We need not say whether the omission was excusable or should in any event be noticed--Rule 52(b) F. R. Crim. P.--for as the case will have to be retried for other reasons the objection will doubtless then be made.

Finally, the charge of the Court is said by the appellant to have compounded the error in respect to the admission of proof indicating evil intent and acknowledgment of guilt. The point made is that the submission allowed the jury to consider--as inferential of wrongdoing--any move of the appellant to "impede" Internal Revenue's investigation of the records of Foster Construction, C. A. and that this would include appellant's lawful acts of resistance. On this subject the Court said:

"There is evidence in this case that attempts were made to impede the Bureau of Internal Revenue's investigations of the business affairs and records of certain corporations in which the Defendant had an interest. There is also evidence that the Defendant wished to cooperate with the Internal Revenue agents. If you find that an attempt to impede the investigation was made by the Defendant, you may consider the fact as bearing on the intention of the Defendant. You should not attribute to the Defendant acts of his lawyers which he is not shown to have authorized." (Italics supplied)

What the appellant did, in the instances already enumerated, undoubtedly impeded the investigation. But as the impeding was entirely permissible, the jury should not be allowed to draw from it an inference of misdoing on the part of the accused. In the circumstances we think the charge in that regard was erroneous.

Foster's refusal was in a statutory proceeding where the statute gave a clear right to a hearing. Outside this proceeding all he did was to delay decision to produce the bank records until he had conferred with his attorneys, certainly not an unreasonable insistence. Because of the specificity of the questions here presented, we have no occasion to declare generally the obligations of a taxpayer in responding to the inquiries of Internal Revenue. Thus we do not entertain the appellant's request to reconsider our decision in Beard v. United States [55-1 USTC ¶9400], 222 F. 2d 84 (4 Cir. 1955). See 10 Mertens, Law of Income Taxation, §55A.21 (1958 and Supp.).

The judgment of conviction will be reversed and the case remanded for a new trial not inconsistent with this opinion.

Reversed and remanded.

 

 

[58-2 USTC ¶9669]Sydney Ginsberg, Appellant v. United States of America , Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 16544, 257 F2d 950, 6/30/58, Reversing and remanding unreported District Court decision

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

Tax evasion: Jury trial: Inadmissible evidence: Matters of discovery and bills of particulars.--The taxpayer was convicted by a jury of tax evasion where the government's case was based upon the theory of specific omissions of income received from the sale of used automobiles. The admission into evidence of testimony concerning certain deposits made in a joint bank account of the taxpayer and his deceased brother, who was in other businesses with the taxpayer besides the used car business, compounded by the prominence given by the prosecuting attorney in his closing argument to taxpayer's inability to adequately explain the deposits, and the refusal of the trial judge to give a requested instruction to soften the impact of the testimony, was prejudicial error. Also, where the taxpayer had introduced four witnesses who had testified to his good character, and the Government had offered none to the contrary, it was reversible error when the prosecuting attorney stated in his closing argument that he "could probably have fifty people in here who would show that [the taxpayer] isn't a good character." Accordingly, in view of the above inadmissible evidence and improper argument, coupled with the trial court's denial of motions for discovery and inspection which, though not reversible error of themselves, prevented the taxpayer from obtaining advance information of the items which were to be used in the prosecution against him, the conviction was reversed and the case remanded for a new trial.

Arthur B. Cunningham, Philip T. Weinstein, Daniel L. Ginsberg, Miami , Fla. , for appellant. O. B. Cline, Jr., Assistant United States Attorney, James L. Guilmartin, United States Attorney, Miami , Fla. , Charles K. Rice, Assistant Attorney General, Joseph M. Howard, Department of Justice, Washington , D. C., for appellee.

Before CAMERON, JONES and BROWN, Circuit Judges.

CAMERON, Circuit Judge:

The appellant, Sydney Ginsberg, was convicted and sentenced on two indictments, consolidated for trial by the court, charging income tax evasions under §145(b) of the Internal Revenue Code of 1939, for the years 1946, 1947 and 1948. The tax evasions charged and established by the Government's evidence were based upon specific omissions of income received.

[Facts]

The appellant was engaged in the wholesale purchase and sale of used automobiles in Miami , Florida , conducting some operations individually, others in partnership with his brother and others as an official of Nash Miami Motors, Inc. The proof of the Government, as presented by its attorney's final argument, showed that appellant had participated in the sale of 392 used cars during the years involved, and that he caused the books of the businesses in which he was engaged to reveal that a total of $224,958.56 had been received therefor, whereas the books of the purchasers of the cars showed that the amount received was $331,915.06, resulting in a tax evasion aggregating $106,976.50.

The Government placed upon the stand several witnesses who testified that their concerns had paid appellant the amount shown on his books as having been received, but had made additional payments "under the table" to appellant which did not appear on the books.

Appellant took the stand and denied categorically each and all of the statements of these witnesses, but the jury resolved these issues against him, convicting him on both counts of one indictment and one count of the other. He appeals from the judgments based thereon and raises, upon this appeal, six questions which are properly covered by specifications of error. ¹ We find no merit in the issues discussed under questions 1, 4 and 6 as set forth in Footnote 1. Appellant's argument in his answers to questions numbered 2, 3 and 5, however, convinces us that the convictions should be reversed and the cases tried again.

[Inadmissible Evidence]

Under his question No. 2, appellant presents the issue whether the admission of evidence concerning deposits made in a joint bank account of the appellant and his deceased brother, was prejudicial error. Appellant and this brother had been engaged in other businesses besides the used car business, including dealing in real estate in various cities. While appellant was on the witness stand, the attorney for the Government questioned him at length concerning a number of individual deposits appearing in the joint bank account, some of them of large amounts of money. The Government had made a detailed examination of appellant's books and apparently had full information concerning those items. But appellant was clearly taken by surprise and was wholly unable to explain the source of some of the amounts shown on the account after the lapse of some eight years between the deposits and the time of trial. One item covered a deposit of $40,000.00 in the year 1947, and the Government's attorney asked if the deposit was not made in currency and the form of his questions assumed that such was the case. But appellant was never able to answer the questions concerning the source of this money. ²

Another item was a deposit of $10,000.00, which the Government attorney also indicated had been made in currency. Appellant was later able to trace this $10,000.00 to his brother. After utilizing a recess of several days in the trial for investigation, appellant testified to the probability that the $40,000.00 had been deposited by the brother based upon his discovery that a short time thereafter, the brother withdrew from the account $52,000.00 for the purchase of a home.

The Government attorney made full use of appellant's inability to explain adequately these large deposits, as is illustrated by the excerpt from his argument copied in the margin. ³ Appellant sought to soften the impact of this testimony by requesting an instruction, ⁴ which the trial judge marked "Refused" over his signature.

We think that the admission of this evidence, compounded by the prominence given it in the argument, and the refusal of the requested instruction constituted prejudicial error under our recent decision in Blumberg v. United States, 1955, 222 Fed. (2d) 496 [55-1 USTC ¶9437]. That was a case involving also specifically accounted for income which had not been reported, and we held that it was improper to admit proof that Blumberg's wife had spent money lavishly on a wedding of a member of the family in New York and that she had taken $30,000.00 in cash in a hand satchel and deposited part of it in a bank in New York and made a large loan to a named person. Here is a part of the language of that decision (P. 500):

"Under the theory upon which the case was tried, that specifically accounted for income had not been reported, . . . no legitimate purpose could have been served by the proof that the defendant's wife took to New York in a hand satchel $30,000 in cash . . . and that they had a tremendous wedding in one of the big hotels in the town at the cost of many thousand dollars. With that evidence before the jury, and no corrective charge given in respect of it, there was no possibility of defendant's securing an unprejudiced consideration by the jury of his claim that the omissions were due to oversight rather than intention. In addition, with no instruction given them in the matter, the jury is bound to have thought that this money was additional income which had been concealed and not reported."

We think what was there said is quite persuasive here. ⁵ And cf. Spies v. United States, 317 U. S. 492, 1943 [43-1 USTC ¶9243]; Ford v. United States, 5 Cir., 1954, 210 Fed. (2d) 313 [54-1 USTC ¶9233]; Jones v. United States, 5 Cir., 1947, 164 Fed. (2d) 398 [47-2 USTC ¶9402]; and Hartman v. United States, 8 Cir., 1954, 215 Fed. (2d) 386 [54-2 USTC ¶9522].

[Improper Argument]

We skip, for the time being, appellant's argument under his question 3, and take up that presented under question No. 5 dealing with the alleged improper argument of Government counsel. The appellant had taken the witness stand in his own behalf and had introduced four witnesses who had testified to his good character, and the Government had offered none contra. Near the end of his closing argument, the Government's attorney made this statement:

"Now, with respect to the character witnesses. Mr. Fowler has stated that Mr. Worton [who was making the argument] didn't produce anybody who would say that he is a bad man. Now, I don't go for that. I could probably have fifty people in here who would show that he isn't a good character. I am not trying Mr. Ginsberg's character. I am not trying his character or his reputation. I am trying him for income tax evasion. . . ."

In condemning this argument, we could not do better than to quote what was said by this Court in the recent case of Handford v. United States, 1957, 249 Fed. (2d) 295:

"A United States district attorney carries a double burden. He owes an obligation to the government, just as any attorney owes an obligation to his client, to conduct his case zealously. But he must remember also that he is the representative of a government dedicated to fairness and equal justice to all and, in this respect, he owes a heavy obligation to the accused. Such representation imposes an overriding obligation of fairness so important that Anglo-American criminal law rests on the foundation: better the guilty escape than the innocent suffer. In this case zeal outran fairness. The argument of the United States attorney in the district court was improper, prejudicial, and constituted reversible error." ⁶

We recently reversed the conviction of a defendant upon a narcotics charge for a much less offensive statement than the one involved here, Joye Stanford Nalls v. United States, 1957, 240 Fed. (2d) 707, and authority is not wanting for enforcement of the fundamental rules of fairness even where no exception is taken to the argument. ⁷

We hold that this statement of the prosecuting attorney constituted "plain error[s] . . . affecting substantial rights" under Rule 52(b) governing criminal procedure. It was such an error, also, as would have been magnified in its influence on the jury by an objection and motion for mistrial. It made it so unlikely that the appellant could be given a fair trial, as the term is understood in our jurisprudence, that we hold it to be reversible error. This makes it unnecessary to decide whether the other errors discussed would, standing alone, justify a reversal of the case.

[Motions for Discovery]

Under his third question appellant argues that the court below committed error which, he showed on his motion for new trial, resulted in manifest prejudice, in failing to require full responses to his two motions for bills of particulars, his motions for discovery under Rule 16, and in quashing his motion for subpoena duces tecum. The indictments against appellant were in general terms charging that his reported net income was a certain amount when in fact it was a larger specified amount. Without the aid of bills of particulars appellant was completely in the dark as to the details of the charges against him. The court ordered a bill of particulars in each case and one was filed, and appellant sought, by a second motion, additional information, which was denied. He thereupon sought to obtain the desired information by the other means mentioned.

The Government knew all the time that it was going to prosecute appellant for understating his income from the sale of a certain number of used cars to certain purchasers for certain amounts. The information chiefly sought by appellant's efforts at discovery was the names of these purchasers, the number of cars involved, and the tax deficiency claimed on each transaction. To have furnished this information to appellant would not have weakened the Government's case to any extent.

The testimony introduced by the Government related to nine purchasers and three hundred ninety-two cars. In some instances, the books of the purchasers were introduced in evidence, but, by and large, the Government relied upon the testimony of its agents as to what these books showed as to these transactions in relationship to what appellant's books disclosed.

Appellant took the books which were introduced in evidence, after such introduction, and placed them in the hands of accountants for analysis. But this was not completed before the jury had returned its verdicts. Thereupon appellant filed motions and amended motions for new trial, attaching the reports of the auditors containing information calculated to discount considerably the evidence which had been given by the employees of these purchasing concerns.

As heretofore stated, the case turned into a swearing match between these employees of the purchasers on one side--bolstered by the testimony of the Government agents--and appellant on the other. The testimony of the appellant's auditors, set out in the motions for new trial, would have been of great benefit to appellant if it had been available for introduction in evidence or for purposes of cross-examination during the trial.

Matters relating to discovery, to the details of proof and to rulings on motions for new trial are essentially committed to the sound discretion of the trial court, and its rulings ought to be disturbed only in rare cases. We would not predicate a reversal upon these rulings of the trial court here under discussion, if they stood alone.

[Conclusion]

As matters turned out, however, appellant was subjected to the series of procedures here discussed which were, without question, highly prejudicial. The weight of his testimony was greatly discounted, if not destroyed, by the effective use made by the prosecution of his inability to explain the source of the several large deposits in the joint bank account he had with his deceased brother. His legitimate effort to bolster his standing before the jury by character witnesses was largely nullified by the bald and completely unjustifiable statement of the prosecuting attorney that fifty witnesses were available to contradict the four who had testified for appellant. And, finally, appellant was cramped in defending against the large number of automobile sales disclosed by the Government's proof and in cross-examining the witnesses against him, by being denied some sort of advance showing on the part of the Government of the items which were to be used in the prosecution against him.

It is doubtful if exceptions to some of the rulings were properly taken, but a careful reading of this whole record leaves us in doubt whether the jurors were not so prejudiced by the unwarranted assault upon appellant by the Government and the rulings of the court which we have discussed, that they were not able to reach their verdicts based alone on the evidence properly before them.

We are constrained to hold, therefore, that under the circumstances herein discussed, the judgment should not be permitted to stand; cf. Tomley v. United States, 5 Cir., 1957, 250 Fed. (2d) 549, 551; Dillingham v. United States , 5, Cir., 1935; Boyett v. United States , 5 Cir., 1931, 48 Fed. (2d) 482. They are therefore reversed and the cases are remanded for a new trial.

Reversed and remanded.

¹ His brief thus states these questions:

1. "Did not the trial court err in refusing to grant a new trial (1) where the trial court on different occasions made conflicting statements as to whether or not two of the jurors, during the jury's deliberations had come to his chambers to consult about the case, and (2) subsequent evidence showed, on at least two occasions during deliberations, certain of the jurors separated from the others, one separation of which was unexplained, and the presumption of prejudice arising therefrom was unrebutted by the government?"

2. "Where in a tax evasion case the government relied upon the theory of specific omissions of income from sales of automobiles, was it not plain and prejudicial error for the trial court to permit the United States Attorney, over objections, to question the appellant concerning a deposit of cash, made in a joint bank account of the appellant and his deceased brother, and to make an inflammatory and prejudicial argument to the jury on such inadmissible evidence?"

3. "Did the trial court commit prejudicial and reversible error by (1) denying appellant's motions for discovery and inspection, and quashing a subpoena duces tecum, and (2) denying a motion for new trial on newly-discovered evidence which evidence would have been available to appellant at the time of trial had the trial court granted appellant's motions for discovery and inspection?"

4. "Did the trial court err by refusing specifically to instruct the jury on appellant's principal defense?"

5. "Did the trial court commit plain error by permitting the United States attorney apparently to argue as if he were testifying as to facts within his special knowledge as such United States attorney:

"(a) That he could have had 'fifty' people to show the appellant is not of good character, and

"(b) As to why the government sought to prosecute Nash rather than R. S. Evans?"

6. "Did the trial court commit plain and prejudicial error in that one portion of his charge had the effect of directing a verdict against the appellant?"

² Appellant objected to one question along this line in these words: "If the Court please, I think that is entirely immaterial. There is nothing in the evidence that it was made in cash, only the statement of the District Attorney." The objection was overruled by the trial court, and the attorney kept pressing the appellant as to where such an amount of currency came from.

³ "One of my last questions to Mr. Ginsberg was with respect to the $40,000 cash deposit in the bank account known as C & S bank account, here in the First National Bank. A $40,000 cash deposit. Now, that was Friday at 1 o'clock. Have you ever seen a ship flounder at sea? Have you ever seen somebody immediately taken by surprise? I am sure you noticed his demeanor on the stand and how hopelessly he looked. He answered that it was for a piece of property that he sold. I said, 'All right, show us on your income tax return for 1947 where you sold a piece of property.' He looked, and he did not find it. And he stated that he remembered that in 1948 he filed an amended return for that piece of property, that piece of property up in Detroit and a number of lots, amounting to $46,000. I think that is in substance what he answered. He showed no piece of property sold in 1947 on his income tax return, he couldn't find it. . . .

". . . But I asked him where the $40,000 came from and he said he didn't know. I submit to you that there is a circumstance which would indicate to you that money can be traced. $40,000 in cash is a considerable amount of money. I have never seen that kind of money. I don't know if I ever expect to. At least, if I do, it will never be in cash. That is quite a bundle--$40,000. . . ."

⁴ "Now in reference to the second or individual indictment, the defendant is there charged with willfully and knowingly attempting to defeat and evade income taxes due and owing by himself to the United States of America by filing a false and fraudulent income tax return. There are three counts in this individual indictment.

"The first count of the individual indictment alleges that the defendant failed to report his share of all of the income received from the sale of used cars by a partnership in which he was a partner. You cannot convict the accused on this count unless the government establishes beyond a reasonable doubt that the partnership had income from the sale of used cars during the taxable period from November 1, 19 45, to May 31, 19 46, and that the defendant knowingly, willfully and fraudulently failed to report his share of all such partnership income in his income tax return for 1946. In order for the government to establish that the partnership had income the government must establish beyond a reasonable doubt, not only that one of the partners received certain money, but also that the money was received for the benefit of the partnership and not for the sole benefit of the individual partner."

⁵ The Government contends in the case before us that this case is differentiated from the Blumberg case in that the evidence was there offered as a part of the Government's case, whereas here the questions were asked only on cross-examination of the appellant and with the view of showing his intent. The argument is not without some convincing force. But, in Blumberg, it was specifically stated in the record that the evidence was not offered to prove that the money possessed and spent by the wife represented the concealment or evasion of income tax, but that the evidence was admissible on the issue of willful intent. That is the same argument made here. We rejected it categorically in Blumberg, and we do not think it is sufficient to demonstrate that what happened here did not constitute harmful error.

⁶ To that text was cited the case of Berger v. United States, 1935, 295 U. S. 78, 88, and this language was quoted from it:

"The United States Attorney is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all; and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done. As such, he is in a peculiar and very definite sense the servant of the law, the twofold aim of which is that the guilty shall not escape or the innocent suffer. He may prosecute with earnestness and vigor--indeed he should do so. But, while he may strike hard blows, he is not at liberty to strike foul ones. It is as much his duty to refrain from improper methods calculated to produce a wrongful conviction as it is to use every legitimate means to bring about a just one."

⁷ See, e.g., the criminal case of Read v. United States, 8 Cir., 1930, 42 Fed. (2d) 636, 645, and the civil case from the Supreme Court of the United States, New York Central Railroad Co. v. Johnson, 279 U. S. 310, 1929.

[Dissenting Opinion]

CAMERON, Circuit Judge, Dissenting:

I agree with my brethen upon the factual premises upon which the majority decision rests, but not with the conclusions. The most damaging error upon which the reversal is predicated is that relating to the breadth of cross-examination to which the Government attorney was permitted to go in exploring appellant's knowledge of deposits in the joint bank account he had with his brother. I think the unexplained receipt of large sums of money, under the facts of this case, was probably a proper matter for cross-examination if held within reasonable bounds. Doubtless the judge below would have narrowed the scope of this examination if he had been given a chance. But the only objection made during the extended cross-examination is that set forth in Footnote, 2, supra. That objection was addressed solely to the contention that it was immaterial whether or not the $40,000.00 deposit was made in cash. The argument of the Government's attorney set forth in Footnote 3 was not objected to at all, and the instruction copied in Footnote 4, even if it was calculated to benefit appellant in the manner claimed, was not covered by a sufficient objection under Rule 30 ¹ of the Rules of Criminal Procedure.

The very reprehensible argument made by the attorney for the Government concerning his ability to produce fifty character witnesses was not objected to at all.

The matter of discovery, of bills of particulars and the like must be left to the discretion of the trial court. United States v. Socony Vacuum Oil Co., 1940, 310 U. S. 150; Goldman v. United States, 1942, 316 U. S. 129; Indiviglio v. United States, 5 Cir., 1957, 249 Fed. (2d) 549, 554 et seq. Aside from this, the stenographic report of the pretrial conferences shows that the parties discussed the Evans books, which constituted the largest proportion of the items relied upon by the Government.

In my opinion, by far the most serious deviation from accepted procedure, committed by the Government in the trial of the case, had to do with the use made of the dozen or more charts introduced in connection with the testimony of the revenue agents. The "take-offs" made by these agents from the books of the nine concerns which had purchased cars from appellant constituted the only actual evidence of these transactions placed before the jury, although the books of four of the nine were offered in evidence en masse. Agent Weir, who had done the greater part of the work on the Evans books, died before the trial, and his work sheets and the summaries made therefrom were received in evidence as if the dead man had been there to prove their correctness.

More important, the agents were permitted to use these take-off sheets and the work papers of the agents--secondary evidence at best--to construct charts made up of a composite of these work sheets covering the various purchases and contrasted with figures taken by the agents from the books of appellant, his partnership and the corporation of which he was an officer.

One or more agents, authors of the foregoing charts, were permitted to remain in the courtroom and, listening to the testimony of witnesses, to place upon those charts their concepts of what the witnesses had testified, and to add to the whole assembly their own opinions as to what conclusions ought to be reached from the various processes of comparison, addition, subtraction, and deduction. ²

In my opinion, this damaging discussion, based essentially upon analysis and opinion, was not testimony at all, but summation, argument, pure and simple. It is doubtful if the agents testified to any fact which could be called testimony--if so, it was an infinitesimal part of the whole. If the Government is to be permitted to resort to such methods in developing its cases, the court should, in my opinion, tell the jury that the witness is not essaying to give any facts, testimony in its only true sense, but is summing up the case, is making an argument as essentially partisan as the closing argument of the United States attorney--with a corresponding reduction in the latter's time for argument.

[No Objection to Method of Proof]

The point is that the appellant did not object to this method of proof. Various objections were interposed as to the minutiae of the statements the agents were making, but appellant did not ask the court to take any action which would protect him from such prejudicial methods, ³ and no error is argued based upon them.

Every trial lawyer is faced, at every stage of a case, with the problem whether he should risk the ill will of the jurors by interposing frequent objections, or should cultivate their good will by seeming to cooperate in the fullest development of the truth. But this is an election which must be made. Appellant was represented by eminent and astute counsel and throughout the trial he elected to withhold the making of objections and take his chances with the jury. Concerning a situation resembling this one, we said recently, in De Fonce Construction Co., Inc. et al v. The City of Miami etc., June 18, 19 58, . . . Fed. (2d) . . .:

"All that the record shows is that both parties, exercising a self-imposed restraint as remarkable as it is unusual in making objections and exceptions, each no doubt speculating on a jury verdict, have committed the trial of the case to the district judge without substantial objection or other form of interposition. Having thus chosen their course, it is too late for the losing parties, after the speculation has turned out badly for them, to depart from it by seeking for the first time here to put the court in error and invalidate the results of this long trial by making large and unsupported claims of injury sustained by them, claims which were not made and preserved below."

In my opinion, "Sitting as we do as an appellate court, we are justified in finding error in the actions of the trial court only with respect to matters presented to that court, and limited to the contentions made to it as the basis for the requested action." ⁴

Where, as here,--and it must be recalled that appellant does not contend that the evidence was insufficient to convict him--"the record fairly shrieks the guilt of the" appellant, Lutvak v. United States, 344 U. S. 604, 619-620, I do not think we should apply Rule 52(b) and notice the errors mentioned. ⁵ Therefore, I respectfully dissent.

¹ "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 added.]

² Some of the answers of the agents would run into several pages. The following excerpt from one of them will show the method of proof resorted to by the Government:

"This is during the taxable year . . . during which there was in existence the partnership and the corporation, and that is why we have three separate net worths. [As if net worth had any place in a prosecution based upon specific omissions.] You will see that there are two corporation figures which will be united into one, later. However, the total is all we are concerned with now. During the period . . . R. S. Evans, by the testimony, in the Nash records it shows that they sold Evans $64,765; that was testified to in Exhibit 43. The Evans records show that they paid $115,310.50, and the mathematical difference between the two is $40,545.50 in this particular instance, as testified to in Exhibit 8, by Mr. Zuckerman. Julius Stern, ten cars, for $4,890, was testified to in Exhibit 43 by Mr. Zuckerman, and the cost by Mr. Stern, as testified to in Exhibit 19 that he paid, is $7,465. He also testified that he paid in cash $2,575. Gem Motors, fourteen cars for $5,765, as testified to by Mr. Zuckerman in Exhibit No. 43, as appears in the testimony in Exhibit 21, Gem Motors paid $11,196 for these cars. And also in Exhibit 21 they paid in cash $5,431. There again, is a mathematical difference between the two (indicating). Regil Motors, the Nash records show, by the testimony of Mr. Zuckerman in Exhibit 43, as per the Nash records as testified to by Mr. Zuckerman on Exhibit 43, shows $875, and as per the Regil Motors records on Exhibit 15, it shows $1,475. And in the category, 'others,' according to the Nash records, Nash received $6,097.62, and there is no testimony on that, and inasmuch as there is no difference there, there is no result in the difference here. There is a total of $82,392.62, as the total of the five above, indicating sales by Nash during this period. A total of $141,544.12 representing the total paid for these cars, as testified in four instances, and there is no change relating to the 'others.' That is during the time of the partnership. It was incorporated on February 1947, and so during that time the testimony is that Nash sold to R. S. Evans 120 cars, as testified to by Mr. Zuckerman in Exhibit No. 42, for $66,030. And the testimony in Exhibit 9, of the Evans records, shows that Evans paid $95,525 for these cars, against the testimony in Exhibit 9. And it also shows that $29,495 was paid in cash. However, that again also is a mathematical difference. Regil Motors, the Nash records testified to by Mr. Zuckerman, Exhibit No. 42, 27 cars for $10,272. Exhibit No. 15 shows that they paid $17,870 for these cars, and there is a $7,145 mathematical difference. The A. A. Auto Sales for the same period, according to the Nash records, as testified to by Mr. Zuckerman in Exhibit No. 42, was for 20 cars at $16,900; and as testified to in Exhibit 29, the cost to A. A. Motor Sales, according to Muir's testimony, was $22,275, and also as testified, $5,375 in cash. This again is the mathematical difference (indicating)."

³ The court finally intervened with this statement relating to one small segment of the case: "I do not think that there ought to be any charts exhibited to the jury, in view of the feeling that I have about the case, which purports to split fifty-fifty the diverted income. You can argue it to the jury, but they have got to make a finding on that themselves. They have got to infer that from the evidence of the case, and I do not think any expert can infer it for them."

This, in my opinion, was a correct and clear statement of the law, but it came after many charts had been presented before the jury in bold letters and after the damage to the appellant had been done. Doubtless the court would have ruled earlier on the question if it had been called upon to do so.

⁴ Indiviglio v. United States , supra, at p. 553. In that case, we discussed the whole question fully and cited and considered the authorities at pages 560-563.

⁵ Cf. the cases listed in Footnote 2 of De Fonce v. Miami , supra.

 

 

[62-2 USTC ¶9718]J. Monroe Dunn, Appellant v. United States of America , Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 19206, 307 F2d 883, 9/12/62, Reversing and remanding unreported District Court decision

[1954 Code Sec. 7203]

Failure to report income: Criminal conviction: Improper comments and admission of evidence.--Comments by the U. S. attorney were improper and prejudicial. Certain evidence was erroneously admitted. Defendant's conviction was reversed and remanded.

Charles L. Gowen, Atlanta , Ga. , for appellant. William T. Morton, Assistant United States Attorney, Augusta, Ga., Norman Sepenuk, Department of Justice, Washington 25, D. C., for appellee.

Before JONES, WISDOM and GEWIN, Circuit Judges.

GEWIN, Circuit Judge:

J. Monroe Dunn appeals from a conviction and sentence under a two count indictment charging willful attempts to evade his income tax for the calendar years 1955 and 1956. ¹

The Government contends that Dunn, who was then Mayor of the City of Baxley , Georgia , received funds from the City of Baxley and from contractors and suppliers performing work and furnishing goods to Baxley, Appling County and the City of Surrency , which he did not report for the years involved. ² The Government claims that the unreported funds were received by Dunn in the form of "kickbacks" or for construction work performed by him, but payment for which was made to other contractors and city employees, who in turn delivered cash to Dunn. Dunn denied receiving the cash sums claimed and he contends that certain unreported funds paid to him by check of the City of Baxley were used for the sole purpose of defraying expenses incurred in making trips to Atlanta and other places to secure public works projects. Dunn was a construction contractor and owned and operated heavy equipment used to move earth and for other purposes.

The appellant Dunn complains of error with respect to alleged prejudicial statements or arguments made by the United States Attorney; the improper admission in evidence of Government's Exhibits No. 3, hereinafter mentioned; the refusal of certain requested charges; and errors in the instructions given by the court.

In his opening statement to the jury, the District Attorney made the following assertion:

"This case is replete with fraud and is one of the most flagrant cases we have ever tried in the Southern District of Georgia." ³

In his closing argument, the United States Attorney was commenting upon an alleged arrangement between Dunn and a contractor named DeLaigle, who was a Government witness, who admittedly had converted checks to cash and claimed to have given certain cash to the defendant Dunn, which Dunn denied receiving, when the following argument was made:

"how was Mr. DeLaigle going to get the job? Mr. Dunn was the Mayor. He got them from Mr. Dunn. Whether those accounts (amounts?) were reimbursement for expenses or kick backs--any of you gentlemen that know anything about politics, when you throw out that much money, why, somebody is going to have to take (pay)? somebody else."

The defendant objected and made a motion for a mistrial. ⁴

The duty of a United States Attorney in a criminal prosecution is succinctly stated in Handford v. United States, (5 Cir., 1957) 249 F. 2d 295 as follows:

"A United States district attorney carries a double burden. He owes an obligation to the government, just as any attorney owes an obligation to his client, to conduct his case zealously. But he must remember also that he is the representative of a government dedicated to fairness and equal justice to all and in this respect he owes a heavy obligation to the accused. Such representation imposes an overriding obligation of fairness so important that Anglo-American criminal law rests on the foundation: better the guilty escape than the innocent suffer. In this case zeal outran fairness. The argument of the United States Attorney in the district court was improper, prejudicial and constituted reversible error."

In the instant case "zeal outran fairness" in our judgment. At the outset, the jury was told that in the prosecutor's opinion the case was the most flagrant he had ever tried and was replete with fraud. At this point, it would have been relatively simple for the Court to have discharged the jury who heard the prejudicial remarks and impaneled another one. It is improper for counsel to express his personal opinion or to state facts of his own knowledge, not in evidence, and not part of the evidence to be presented; or to make unwarranted inferences or insinuations calculated to prejudice the defendant. Taliaferro v. United States , (9 Cir., 1931) 47 F. 2d 699. There can be no doubt that the statement in the closing argument to the effect that all politicians take kickbacks on contracts such as these was prejudicial. At the time Dunn was the elected Mayor of the City of Baxley . The case against Dunn on this point rested on the veracity of DeLaigle. To insinuate that Dunn must have gotten the money from DeLaigle because Dunn was a politician and that their relationship was a nefarious political deal, was improper and prejudicial.

The fact that the Court told the jury to "disabuse your minds of that statement" cannot remove the prejudice. This Court reversed a conviction for improper argument in Ginsberg v. United States, (5 Cir., 1958) [58-2 USTC ¶9669] 257 F. 2d 950, where there was no objection to the argument and no corrective charge given. The Court said:

"We hold that this statement of the prosecuting attorney constituted 'plain error . . . affecting substantial rights' under Rule 52(b), 18 U. S. C. A., governing criminal procedure. It was such an error, also, as would have been magnified in its influence on the jury by an objection and a motion for mistrial."

This Court also reversed a conviction on a narcotics charge for a statement much less prejudicial than the one here involved, ⁵ without an objection or motion for mistrial in Nalls v. United States, (5 Cir., 1957) 240 F. 2d 707. In this case, the point was raised by motion for mistrial and motion for a new trial. ⁶

The paths of justice must be cut through a wilderness of facts in every case. Opinions of prosecutors or defense counsel are not issues to be submitted to the jury. The statements made by the District Attorney could not be based on evidence to be presented or actually presented. Evidence to support his statements, if tendered, could not be received. We are always concerned with guilt and innocence in criminal cases; but of equal importance is a fair trial to guilty and innocent alike. Trials are rarely, if ever, perfect, but gross imperfections should not go unnoticed. In every case involving improper argument of counsel, we are confronted with relativity and the degree to which such conduct may have affected the substantial rights of the defendant. It is better to follow the rules than to try to undo what has been done. Otherwise stated, one "cannot unring a bell"; "after the thrust of the saber it is difficult to say forget the wound"; and finally, "if you throw a skunk into the jury box, you can't instruct the jury not to smell it".

The Government relied heavily on witness DeLaigle and Government Agent Abbott to prove its case. For a year or more, Agent Abbott made an investigation of defendant Dunn's income. At a conference attended by several Government agents, including Agent Abbott, the defendant Dunn and a Mr. Atwood, ⁷ who was an accountant for Mr. Dunn, Agent Abbott submitted a list of items of claimed income to Accountant Atwood which he, Abbott, claimed had been received as income by Dunn and not reported. Accountant Atwood took the list and tried to determine whether the alleged unreported items had in fact been reported. He was successful in establishing that several thousand dollars from the list furnished by Abbott had been reported, but he was unable to find any record of many items on the list. He prepared a work sheet which reflected the items he had not been able to find in the records and this list was voluntarily delivered to Agent Abbott with the consent of Dunn. Dunn made no statement except to deny that he had failed to report his income and at no time did Dunn or anyone on his behalf admit the correctness of the list prepared by Agent Abbott. Most, if not all, of the items on the list prepared by Abbott were based on information furnished to him by witness DeLaigle out of the presence of the defendant.

The Government called Accountant Atwood as a witness and requested him to bring a copy of the statement submitted to Agent Abbott. This statement was admitted in evidence over the objection of the defendant. The defendant claims prejudicial error because the defendant contends that the statement was received in evidence for the purpose of proving that Dunn had admitted that the items of claimed income on the list prepared by Abbott and claimed by Abbott and DeLaigle to have been received by Dunn, for which Accountant Atwood could find no record, constituted an admission of the correctness of the items listed as unreported income. For example, the following question was propounded to witness Atwood by the District Attorney:

"Q. Therefore, that statement is a record of undeposited cash received by Mr. Dunn for the years 1955 and 1956, is that right?

"A. I don't know whether he received it or not. It is what Mr. Abbott said he received."

When Agent Abbott was on the stand, some effort was made to lay a predicate for the introduction of a confession. The following question was propounded by the District Attorney to Agent Abbott:

"Q. Now, Mr. Abbott, did you threaten Mr. Dunn or his representatives or offer them any hope of reward if they would submit you that statement?"

In his amended motion for a new trial, defendant makes the following assertion which the distinguished trial judge certified to be facts of record on appeal:

"In this connection, defendant shows that the United States Attorney in his concluding argument to the jury argued that said Government Exhibit No. 3 was an admission by defendant of his guilt and constituted an admission by defendant that he had received the income shown on Exhibit No. 3."

When Exhibit No. 3 was offered by the Government, the defendant objected, contending that it was based on statements made by Agent Abbott to Accountant Atwood asserting that he, Abbott, knew of certain unaccounted for cash. The Exhibit was admitted subject to the objection, but the court suggested that when the evidence was closed, the defendant could further object. This was done by a motion to exclude Exhibit No. 3 upon the grounds previously stated and because the District Attorney had argued that it was evidence of an admission of guilt on the part of the defendant. The defendant claims that the statement was not admissible in view of the fact that witness DeLaigle, who furnished the information to Abbott; and Abbott himself had testified; and the defendant further argues that the evidence clearly showed that the statement was not admissible under the theory that it constituted an admission of guilt. The Court made the following ruling:

"The Court:

"Well, I think your evidence clearly demonstrated, that and I think you thoroughly explained it in your argument to the jury, and your witnesses also testified to that that it was not an admission of guilt. Of course, the government contends that it was and you contend that it wasn't, and that is a question of fact for the jury. Bring the jury back in, Mr. Marshal."

In its brief, the Government argues that the comment by the prosecuting attorney is inconsequential considering the fact that the record clearly proved the defendant's contention that Exhibit No. 3 ". . . was never meant to constitute an admission by appellant." We cannot accept the Government's contention. The document should never have been admitted under the contentions and insinuations of the Government that it constituted an admission of guilt. Even if the defendant carried the burden of showing that it was not an admission of guilt, the Government was permitted in final argument to assert that it was such an admission. If the Government's contention is accepted, the District Attorney's argument is clearly improper. At most, Exhibit No. 3 constituted a list of items of income which DeLaigle told Agent Abbott he paid to Dunn and which Agent Abbott concluded Dunn received and did not report. Accountant Atwood could show that some of the items had been reported, but not all of them. In no sense did the list constitute an admission by Dunn that he did receive the items claimed. DeLaigle testified that Dunn did receive such items, Abbott believed DeLaigle, but Dunn denied DeLaigle's testimony. Both DeLaigle and Agent Abbott testified.

The statement was admissible to show that Dunn's accountant was unable to find a record of the income listed which DeLaigle claimed he paid to Dunn, but it should not be used as proof that Dunn admitted receipt of such items. It was so used by the Government and the prosecuting attorney argued to the jury that it was an admission of guilt. The distinguished trial judge stated that such was the contention of the Government. Error was committed when the court admitted the statement into evidence and permitted the jury to decide whether or not it constituted an admission of guilt. Phoenix Assur. Co. Limited of London , England v. Davis , (5 Cir., 1933) 67 F. 2d 824; State v. Johnson, ( Mo. ) 252 S. W. 623; Wigmore on Evidence, Vol. 10, §2550, p. 501. The Court should have excluded Exhibit No. 3 or instructed the jury that it did not constitute an admission of guilt on the part of the defendant. It constituted evidence to support the Government's contention as to what Dunn's records showed with respect to the items claimed by the Government to be unreported income, but not to prove an admission of guilt.

We have examined the defendant's other specifications of error and conclude that it is unnecessary to discuss them.

For the reasons set out above, the case is REVERSED and REMANDED for a new trial.

¹ "Internal Revenue Code of 1954:

SEC. 7201. ATTEMPT TO EVADE OR DEFEAT TAX.

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both together with the costs of prosecution.

(26 U. S. C. A., Sec. 7201.)"

² Dunn reported $14,922.98 as net income in 1955 and the Government claims he knew his net income for that year was $22,067.23. For the year 1956 he reported net income of $20,223.68 and the Government claims he knew that his net income for that year was $36,576.24.

³ The defense counsel moved for a mistrial and the Court responded in part: "Just disabuse your minds of that statement, gentlemen, and don't let it influence you in any way. I am sure Mr. Calhoun did not intend to say it, and he should not have said it, but just remove that from your mind in the trial of this case, and with that I overrule your motion. All right you may proceed."

⁴ Whereupon, counsel for the defendant told the Court that he (the United States Attorney) had said, "That everybody that knew anything about politics knew that when a contract of that kind is let out a man expects to get his share as a kick back," and again respectfully moved for a mistrial. Whereupon, the Court said, "Well if he did say that, gentlemen of the jury, just disabuse your minds of that. You do get honest politicians. I overrule the motion for a mistrial." Whereupon Mr. Calhoun said, "Now, gentlemen, as I said, the State is trying to get the money back whether it is kick-backs or what not." Whereupon defendant, through counsel, said, "Your Honor, I object to the reference as to whether the State is undertaking to get the money back or not. That has nothing to do with this case. It is irrelevant and immaterial." Whereupon the Court said, "Well just disregard all of that, gentlemen. You get honest lawyers, honest politicians just like you do honest business men. That all hasn't got anything to do with this case. All of that is a question for you gentlemen to determine anyway. You gentlemen of the jury will remember the evidence. All right, you may proceed."

⁵ The Government at the end of its case announced that it had three additional witnesses but would not put them on because their testimony would be cumulative.

⁶ For an enlightening discourse on the subject under consideration, see Wigmore on Evidence (3rd Ed. 1940) §1806 et seq. p. 259.

⁷ If Atwood was not personally present, a member of his firm was present; Atwood is the accountant who examined the list of items mentioned.

 

 

[90-1 USTC ¶50,188] United States of America , Appellant v. Peter Collorafi, Defendant-Appellee

(CA-2), U.S. Court of Appeals, 2nd Circuit, 88-1281, 5/31/89 , 876 F2d 303, Reversing an unreported District Court decision

[Code Sec. 7203 ]

Tax evasion: Willfulness: Admissibility of prior court rulings.--Decisions by a district court dismissing an individual's challenges to the federal income tax on wages were admissible in his subsequent trial for tax evasion. In order to prosecute an individual successfully for failure to file returns and pay taxes, the government must prove that such failures were willful. The fact that the individual had challenged the tax on wages in court and had received rulings that his position was frivolous was evidence of his state of mind. A ruling of the district court excluding the decisions from evidence was therefore improper.

Andrew J. Maloney, United States Attorney, John Gleeson, Kevin O'Regan, Assistant United States Attorneys, Brooklyn, N.Y. 11201, for appellant. William C. Waller, Jr., Waller, Mark & Allen, P.C., 707 17th St. , Denver , Colo. 80202-3428 , for defendant-appellee.

Before LUMBARD, VAN GRAAFEILAND and ALTIMARI Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

The United States appeals, pursuant to 18 U.S.C. §3731, from an in limine order of the United States District Court for the Eastern District of New York (Mishler, J.) holding inadmissible in this tax evasion prosecution two memorandum decisions and orders which had dismissed defendant's earlier civil challenges to the federal income tax on wages. We reverse.

Peter Collorafi was indicted on four counts of willfully failing to file income tax returns for the tax years 1982 and 1983 and of willfully attempting to evade income taxes by filing W-4 forms with his employer in which he claimed that he was exempt from tax withholdings. 26 U.S.C. §§7203 and 7201 . During the relevant tax years, Collorafi was employed by, and received wages from, American Airlines. Collorafi does not deny that he failed to pay income taxes for the years 1982 and 1983. Instead, his defense at trial will be that his failure to file was not willful because he had a good faith belief, supported by advice of counsel, that wages are not income.

In 1983, Collorafi and twenty-five other taxpayers, represented by attorney Adrienne Flipse, brought two actions against the United States in the United States District Court for the Eastern District of New York, in each of which the claim was made that wages are not taxable income. In the first action, CV 83-1033, the plaintiffs sought a refund of income taxes previously paid. In the second, CV 83-1034, they sought a declaratory judgment that their wages were not subject to withholding for the benefit of the Internal Revenue Service. These cases were assigned to Judge Mishler.

On December 2, 1983, Judge Mishler granted the Government's motions to dismiss both complaints for failure to state a claim upon which relief could be granted. Judge Mishler was unequivocal in his decisions. In dismissing CV 83-1033, he stated, "we hold that the complaint filed in the instant case is wholly without merit. It is another rehash of an issue that was decided long ago. . . . These assertions have no legal foundation and are frivolous." He then assessed attorney's fees against Collorafi and Flipse pursuant to 28 U.S.C. §§2412 and 1927, stating that "[m]ost law students would probably recognize the frivolity of this action. There is no justifiable excuse for these actions. Plaintiffs were apparently using the federal courts to further contentions announced in the media. Such use of the federal courts is improper." In similar fashion, Judge Mishler dismissed CV 83-1034 and awarded fees to the Government. "We find this action wholly without merit. . . . We again question the competence of plaintiff's [sic] attorney in bringing this action."

Judgments were entered in the two actions on December 13, 1983, and Collorafi filed notices of appeal on February 10, 1984. On March 6, 1984, six weeks before the April 15 deadline for filing 1983 tax returns, Collorafi's appeal in CV 83-1034 was dismissed for failure to comply with the rules of this Court. On April 26, 1984, the appeal in CV 83-1033 was withdrawn by stipulation. Subsequently, Collorafi pursued some non-litigious remedies, consulted new counsel, filed all his delinquent returns and paid his back taxes.

In February 1988, Collorafi was indicted on the current charges. This criminal case also was assigned to Judge Mishler. Prior to trial, the Government made known its intention to introduce Judge Mishler's two decisions into evidence with his name redacted, the purpose being to show that after reading these decisions Collorafi could no longer believe in good faith that his wages were not income and that therefore his failure to pay taxes was willful. At a pretrial hearing, Judge Mishler sua sponte announced that he would not allow the Government to put the decisions in evidence. This was error.

In order for the Government to prosecute successfully for violations of sections 7201 and 7203 , it must prove more than mere failure to file and pay. It must prove that these acts were done willfully, i.e., in bad faith or with evil intent. United States v. Bishop [73-1 USTC ¶9459 ], 412 U.S. 346, 359-61 (1973). Since bad faith and evil intent involve intangible mental processes, proof of willfulness usually must be accomplished by means of circumstantial evidence. United States v. Brown [79-2 USTC ¶9523 ], 591 F.2d 307, 311 (5th Cir.), cert. denied, 442 U.S. 913 (1979). This being so, trial courts should follow a liberal policy in admitting evidence directed towards establishing the defendant's state of mind. No evidence which bears on this issue should be excluded unless it interjects tangential and confusing elements which clearly outweigh its relevance. Vinieris v. Byzantine Maritime Corp., 731 F.2d 1061, 1064 (2d Cir. 1984), and cases cited therein.

Thus, proof that knowledgeable persons warned the defendant of tax improprieties has been admitted in numerous cases as proper circumstantial evidence of knowledge and wrongful intent. See, e.g., United States v. Gustafson, 728 F.2d 1078, 1081-84 (8th Cir.) (letter from bank examiner criticizing banking transaction), cert. denied, 469 U.S. 979 (1984); United States v. Durant [63-2 USTC ¶9802 ], 324 F.2d 859, 862-64 (7th Cir. 1963) (warning by tax examiners that practice of taking corporate tax deductions for personal expenditures was improper), cert. denied, 377 U.S. 906 (1964). Similarly, proof that a defendant continued a tax practice that already had been held unlawful by a federal judge is strong circumstantial evidence of wrongful intent. United States v. Ebner [86-1 USTC ¶9215 ], 782 F.2d 1120, 1125-26 (2d Cir. 1986); United States v. Schiff [86-2 USTC ¶9684 ], 801 F.2d 108, 112 (2d Cir. 1986), cert. denied, 480 U.S. 945 (1987).

It is not clear to us why the district court held that evidence of its prior rulings was inadmissible. The district court stated at one point that its decision in CV 83-1033 "wasn't a final judgment. There was an appeal pending." At another point, the district court said:

It seems the appeal was withdrawn before he filed his W-4. But it certainly isn't the law of the case until the judgment becomes final and that would be the basis of binding the taxpayer to what I said.

These statements misconstrue the Government's argument for admissibility, which is based, not on the law of the case, but on the probative value of the prior district court opinions as evidence of knowledge and wrongful intent. The evidence was clearly relevant for this purpose. "Evidence of warnings by government agents, followed by continued activity of the same character, is certainly relevant." United States v. Angelini, 607 F.2d 1305, 1311 (9th Cir. 1979).

The district court also erred in holding that Collorafi did not have "notice of the law" as set forth in the district court's earlier opinions until April 24, 1984 [sic], the date on which his appeal in CV 83-1033 was withdrawn by stipulation. The district court failed to take into account the fact that the appeal from the dismissal of Collorafi's declaratory judgment action, which the district court had found to be "completely without merit", was dismissed on March 6, 1984, six weeks before the April 15 filing deadline. Moreover, the district court's decision negates completely the authoritative effect of the district court's earlier reasoned and judicious statements of the laws.

The decision here had been rendered by a federal court. As we noted in Ebner, such a prior decision is an "authoritative statement" on the law. 782 F.2d at 1125-26. It was thus powerful evidence that [Collorafi] could no longer reasonably believe that his contrary view of the law was correct.

United States v. Schiff, supra, 801 F.2d at 112. Under the circumstances, we have no alternative save to treat the district court's holding as an abuse of discretion.

Although the district court made a passing reference to the possibility of confusion, this did not satisfy the requirements of Fed. R. Evid. 403, which permits the exclusion of relevant evidence if its probative value is substantially outweighed by the danger of prejudice and confusion. "When a trial court excludes evidence under Rule 403, it should provide a clear statement of its reasons for doing so on the record, . . ." and should make a "conscientious assessment" of whether unfair prejudice or confusion outweighs the proffered evidence's probative force. United States v. Jamil, 707 F.2d 638, 642 (2d Cir. 1983). A mere statement that evidence would be confusing is not enough; factual controversy breeds confusion. The purpose of section 403 is to eliminate misleading and prejudicial confusion.

The errors in the district court's ruling were neither eliminated nor mitigated by the court's allusion to the remote possibility that it might permit its prior opinions to be used in the cross-examination of Collorafi's former counsel, Ms. Flipse. The Government was required to prove Collorafi's state of mind, not Ms. Flipse's. Moreover, the district court gave no assurance that even Ms. Flipse could be questioned concerning the opinions at issue. The "practical effect" of the district court's order was the suppression of relevant and proper evidence. See United States v. Horwitz, 622 F.2d 1101, 1105 (2d Cir. 1980), cert. denied, 449 U.S. 1076 (1981) (quoting United States v. Beck, 483 F.2d 203, 206 (3d Cir. 1973), cert. denied, 414 U.S. 1132 (1974).

The decision and order appealed from must be, and is, reversed. Mandate shall issue forthwith.

 

 

[90-1 USTC ¶50,204] United States of America, Plaintiff-Appellee v. Louis Defazio, ¹ Defendant-Appellant

(CA-7), U.S. Court of Appeals, 7th Circuit, 89-1953, 4/9/90, 899 F2d 626, 899 F2d 626. Affirming an unreported District Court decision

[Code Sec. 7402 ]

District Court: Review of decisions by Court of Appeals.--The district court did not compromise a taxpayer's Sixth Amendment right to counsel when it disqualified his chosen attorney from representing him against various charges of tax code violations and bankruptcy fraud charges. Since his chosen attorney also acted as his counsel in filing his Chapter 7 bankruptcy petitions and was present during subsequent bankruptcy examinations during which the taxpayer allegedly lied about his finances, the trial judge properly concluded that there was a strong possibility the attorney would become a defense witness should the taxpayer defend any of the charges based upon the advice given him by his attorney during the bankruptcy proceedings. Moreover, if an advice of counsel defense had been raised, the content of the attorney's testimony was not available through sources other than himself, and the parties could not have stipulated to what the attorney knew about the taxpayer's state of mind or what he advised the taxpayer, since such information would be known only by the taxpayer and his attorney.

[Code Sec. 7203 ]

Evidence: Admissibility.--Absent a good faith belief by a taxpayer in the right to legally carry forward losses, the testimony of an accountant and hypothetical returns prepared by him were properly excluded from the taxpayer's trial on various charges of tax code violations. Moreover, the taxpayer's demonstrative returns were based in large part on figures produced by an accounting firm that worked on his records in years after he was indicted, and, in part, on the accountant's computations. There was nothing to show that, at the time his returns were due, the taxpayer had in mind those figures or one similar to them when deciding what returns he would file, and the taxpayer did not believe he could omit depreciation in one year and claim it in a later one. In addition, there was no abuse of discretion in excluding excerpts of the taxpayer's testimony given in bankruptcy examinations to prove the taxpayer's prevailing state of mind during the proceedings. Despite the taxpayer's contention that these excerpts explained his side of a running dispute with a creditor, that dispute did not excuse his lying during the bankruptcy proceedings.

[Code Sec. 7203 ]

Attorneys: Privileged communications.--The content of testimony, contained in a memorandum that summarized a taxpayer's attorney's meeting with the IRS and during which the attorney learned firsthand of the IRS's recommendation of prosecution, was nonprivileged because it did not reveal, either directly or implicitly, legal advice given by the attorney or any client confidences. Despite the taxpayer's attempt to focus on the part of the memorandum recounting the IRS agent's invitation to present defenses, this single reference at his trial on tax evasion charges could not have had any influence on the jury's understanding of the government's burden of proving guilt beyond a reasonable doubt. Moreover, it was agreed that in any further reading of the memo, the reference to defenses would be omitted.

[Code Sec. 7203 ]

Juries: Instructions to juries: Criminal penalties: Lesser offense rule.--The giving of an "ostrich" instruction to the jury was not inappropriate given the apparently disorganized records of a taxpayer and that he could not ignore what his records would disclose if they were organized. Furthermore, despite the taxpayer's argument that the instruction improperly imposed a negligence standard on a specific-intent crime, there were other instructions that adequately protected the taxpayer from being convicted for negligently failing to realize his income tax responsibilities. Moreover, this instruction had already been approved in a prosecution involving a crime that requires guilty knowledge. In addition, the taxpayer's claim that the offense of failure to file a tax return is included within the broader offense of tax evasion so as to render improper the district court's judgment of conviction and impose cumulative penalties on both offenses for the same tax years was foreclosed by other court rulings in the Seventh Circuit.

Thomas M. Durkin, Assistant United States Attorney, Chicago , Ill. 60604 , for plaintiff-appellee. William Hedrick, 9239 Gross Point Rd. , Skokie , Ill. 60077 .

Before CUDAHY and POSNER, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

FAIRCHILD, Senior Circuit Judge:

The defendant appeals from his conviction under a multi-count indictment for filing a false income tax return, failing to file tax returns, attempting to evade income taxes, and bankruptcy fraud. The chief question is whether the district court compromised the defendant's sixth amendment right to counsel when it disqualified his chosen lawyer from representing him. The defendant also challenges (1) the exclusion of evidence allegedly bearing on his state of mind, (2) the admission of a communication from his attorney to him, (3) the giving of an "ostrich" instruction to the jury, and (4) his conviction of both tax evasion and failure to file a tax return for the same tax years.

I.

Louis Defazio is a self-employed builder and developer of real estate. The Internal Revenue Service began an audit of Mr. Defazio's income tax liabilities in 1984. Mr. Defazio consulted an accountant, Carol Anderson, for advice about the audit, and Ms. Anderson accompanied Mr. Defazio to two meetings with an IRS agent to discuss Mr. Defazio's businesses and finances. The IRS audit continued through 1985. In the spring of 1986, the IRS referred Mr. Defazio's case to the United States Attorney's office for criminal prosecution. On June 6 of that year, Mr. Defazio filed a petition in bankruptcy under Chapter 11, and in July and August gave sworn testimony in three examinations in his bankruptcy case. The Chapter 11 petition was dismissed on October 7 on the motion of a creditor. In April of 1987, Mr. Defazio filed a second bankruptcy petition, this time under Chapter 7. Mr. Defazio gave statements under oath in examinations in this case, also.

A grand jury indicted Mr. Defazio on September 16, 1987. A superseding indictment of eleven counts was filed August 24, 1988. Tax code violations were charged for the tax years 1981 through 1984, along with bankruptcy fraud charges based on Mr. Defazio's testimony at the examinations during two bankruptcy cases. More specifically:

As to tax year 1981, Count One charged Mr. Defazio with filing a return which he did not believe to be true and correct as to every material matter. 26 U.S.C. §7206(1) .

As to tax year 1982, Count Two charged an attempt to evade and defeat income tax by filing a false return and by other false statements and acts of concealment of assets. 26 U.S.C. §7201 .

As to tax year 1983, Count Three charged an attempt to evade and defeat income tax by failing to file a return and by false statements and acts of concealment. Count Four charged willful failure to file a tax return. 26 U.S.C.§7203.

And for tax year 1984, Count Five similarly charged an attempt to evade and defeat income tax. Count Six charged willful failure to file.

Counts Seven, Eight, and Nine charged false declarations under oath in the 1986 bankruptcy case. Counts Ten and Eleven made similar charges regarding the 1987 case. 18 U.S.C. §152 .

The proof at trial showed the following:

For tax year 1981, Mr. Defazio's joint return had shown an adjusted gross income and taxable income of negative $24,085, and a tax of $0. The government proved he actually had an adjusted gross income of negative $20,247, taxable income (after deductions and exemptions which Mr. Defazio had not taken) of negative $38,628, and a tax of $0. (This is the reason why the government did not charge Mr. Defazio with attempting to evade taxes for that year.) What was significant, though, was that Mr. Defazio's tax return had omitted interest income of $2,546, and gross income from four sources totalling $65,517. Income from these same sources was omitted from Mr. Defazio's 1982 return as well, and some of the false statements Mr. Defazio made in the bankruptcy cases tended to conceal his interest in these sources.

For tax year 1982, Mr. Defazio's joint return had shown an adjusted gross income of $1,050, taxable income of negative $949 and a tax of $0. The government proved he actually had an adjusted gross income of $94,229, taxable income of $75,369, and a tax of $25,236. Interest received but omitted was $29,248. The 1982 gross income from the other sources omitted from the 1981 and 1982 returns was $95,181.

As to 1983, Mr. Defazio did not file a return, although he did obtain an extension of time to file, and in applying for the extension had estimated his tax at $15,000 and paid that amount. The government proved an adjusted gross income (assuming a joint return) of $121,476, taxable income of $95,067, and a tax liability of $63,152 (of which Mr. Defazio had paid $15,000). Unreported interest was $18,952. The gross income from the other sources omitted from the earlier returns totalled $179,052.

As for 1984, Mr. Defazio filed no return. The government proved an adjusted gross income (assuming a joint return) of $61,796, taxable income of $58,877, and a tax of $14,741. Interest received was $15,118. The gross income from other sources omitted from the earlier returns totalled $28,086.

As to the bankruptcy fraud charges, the evidence showed that Mr. Defazio gave evasive, misleading, and untrue answers to questions concerning his ownership of assets at examinations during his two bankruptcy proceedings.

The jury found Mr. Defazio guilty on all counts, and the district court entered judgment according to the verdict. He was sentenced to concurrent three year terms of imprisonment on Counts One, Two, and Three, followed by five years of probation on Counts Four through Eleven, probation being conditioned on his honoring all future tax obligations, filing and paying all back taxes due, paying the costs of prosecution ($7,548.24) and paying a $10,000 fine on each of Counts Two and Three.

II.

The Sixth Amendment guarantees a criminal defendant the right to counsel and, within limits, the right to counsel of the defendant's own choosing. Wheat v. United States , 486 U.S. 153, 158-59 (1988). Disqualification of chosen counsel can have severe consequences, especially when the representation has already begun. The defendant starts with a presumption favoring his or her right to chosen counsel. The government can defeat this presumption by showing that representation by the chosen counsel poses either an actual conflict of interest, or a serious potential for such a conflict. Id. at 164. Although judges should hesitate before granting disqualification, "[t]he evaluation of the facts and circumstances of each case . . . must be left primarily to the informed judgment of the trial court." Id. Therefore, we review a district court's decision to disqualify defense counsel only for abuse of discretion. United States v. Micke [88-2 USTC ¶9553 ], 859 F.2d 473, 481 (7th Cir. 1988). Underlying factual determinations relied on by the district court to support its decision to disqualify are reviewed under the clearly erroneous standard. United States v. O'Malley, 786 F.2d 786, 792 (7th Cir. 1986).

At Mr. Defazio's arraignment on the initial indictment, on September 23, 1987, Nicholas Spina appeared on behalf of the defendant. Two other attorneys previously retained by the defendant were also there, and asked permission to withdraw. The prosecutor informed the court that Mr. Spina had represented Mr. Defazio in bankruptcy and was present at the time Mr. Defazio was examined. Responding to questions from the court, she said she did not believe that Mr. Spina would be needed as a witness, apparently because Mr. Defazio's testimony had been transcribed and could readily be proved. She made no objection to Mr. Spina's appearance "if there is no problem" and indicated that she then knew of no problem. The court permitted Mr. Spina to proceed as counsel for Mr. Defazio.

Ten months later, the government filed a motion to disqualify Mr. Spina. In its motion, the government asserted that in 1985 Mr. Defazio sought counsel from Mr. Spina on how to avoid a foreclosure sale at what Mr. Defazio considered an unfair price. Mr. Spina advised him to see an attorney named Barry Yacker, a bankruptcy specialist, who then represented Mr. Defazio in his 1986 Chapter 11 case. The government asserted that Mr. Yacker had obtained Defazio's signature in blank on the Chapter 11 petitions, filled them in and filed them without reviewing their contents with Mr. Defazio. ² The government claimed that substantial assets were not disclosed in the petition, and that its evidence would show that during every examination under oath in that proceeding, Mr. Defazio lied. The government's motion noted that the Chapter 11 proceeding was dismissed on a judgment creditor's motion, and continued as follows:

the evidence will show that on May 15, 1987, with now-defense counsel Nicholas Spina acting as his attorney, Defazio filed for personal bankruptcy under Chapter 7 of Title 11. On these second petitions, presumably prepared by Nicholas Spina on the basis of information provided by Defazio, Defazio essentially denied having any assets, stating he lived on handouts from his wife and children. The government's evidence will show these representations were false. At the succeeding examinations under oath by [creditors], Defazio was represented by Spina. The evidence will show that he again lied in answers to questions about vehicles and boats, real estate, stock transfers, bank accounts and sources of income. . . .

. . . it is apparent that Attorney Nicholas Spina participated in essential contested events and is likely to be a material witness in this case. If Defazio invokes the defense of advice of counsel, as he has done with respect to the Chapter 11 filing, then Spina is either a witness for Defazio or a witness for the government against Defazio.

The defendant's response, prepared by Mr. Spina, was somewhat equivocal. It acknowledged that Mr. Spina had referred the defendant to Mr. Yacker, and had later represented the defendant in his Chapter 7 case. The response asserted, though, apparently as a reason against disqualification, that Mr. Spina "is also in a unique position to comment upon the actual proceeding, the actual questions and answers elicited during the proceedings . . . ."

The response made no estimate of the probability of Mr. Spina being a witness. It did argue that "[e]ven though Attorney Spina has had conversations with the government concerning the potentially acting [sic] as a witness or not, the mere fact that he may be called as a witness should not deter or be utilized as a means by which to disqualify him as Defendant's counsel." The response then noted the extensive preparation Mr. Spina had performed, his awareness of the evidence likely to be offered, and the resulting advantage to his client. It went on to concede that no attorney "should act as a witness against his own client." Concluding, the response reasserted that the defendant preferred to have Mr. Spina represent him, but conceded that the "Court is in a better position to weigh the interests of all parties concerned and rule accordingly."

Judge Kocoras granted the motion to disqualify without hearing evidence or oral argument, giving his reasons orally at a status conference. He noted the government's claim that the papers filed in the Chapter 7 case were false and Mr. Spina's assertion that he prepared the schedule based on information Mr. Defazio supplied. Judge Kocoras inferred a strong possibility that the government might want to call Mr. Spina to show that the information as filed came from the defendant. The judge interpreted the assertion that Mr. Spina "is in a unique position to comment upon the actual questions and answers elicited" as an indication that Mr. Spina was a probable witness and perhaps an essential one. Judge Kocoras suggested that if Mr. Spina tried the case, the jury would wonder why, if he was a participant in the bankruptcy, he wasn't telling the jury about it directly, rather than through witnesses.

If the defendant was arguing before the district court that a party's attorney could properly be a witness in favor of his client on a disputed matter, he was mistaken, absent extreme circumstances. See Model Code of Professional Responsibility DR 5-102(A) & (B); DR 5-101(B)(4); Model Rules of Professional Conduct Rule 3.7(a). We needn't decide if such circumstances existed, since the defendant does not argue on appeal that Mr. Spina could have both acted as his counsel at trial and testified. He argues instead that any unsworn witness problem could have been solved without disqualification, that Judge Kocoras was mistaken in his assessment of the likelihood that Mr. Spina would become a material witness, that the judge should have considered measures less drastic than disqualification, and that at the very least, he should have held a hearing before disqualifying the defendant's chosen attorney.

The defendant's response conceded in general the existence of an "unsworn witness" problem, saying that "an attorney's failure to testify regarding matters of which the jury was aware he had intimate knowledge of could create an improper inference in the juror's minds." We are not aware of any facts in this case which would have made it necessary at trial (in the absence of an advice of counsel defense) for the jury to be told that Mr. Spina acted as Mr. Defazio's counsel in his Chapter 7 proceeding. We agree that if the problem were limited to the jury's knowledge that Mr. Spina had acted as Mr. Spina's counsel in filing his Chapter 7 papers, and was present as counsel at the subsequent examinations, redaction would have solved it. United States v. Diozzi, 807 F.2d 10, 14 n.8 (1st Cir. 1986). See United States v. Levine, 794 F.2d 1203, 1206-07 (7th Cir. 1986).

More compelling, and harder to address without disqualification, was the problem posed by the possibility of Mr. Spina becoming a sworn witness, testifying either to what advice he gave Mr. Spina, or what he knew about Mr. Defazio's state of mind during the Chapter 7 examinations. The parties agree that the likelihood of Mr. Spina becoming a material witness turned on whether Mr. Defazio defended any of the charges based upon the advice given him by Mr. Spina during the Chapter 7 representation. (Indeed, it seems the only way Mr. Spina could have testified concerning privileged communications would be if Mr. Defazio waived his attorney-client privilege by raising an advice of counsel defense.)

Such a defense might pit Mr. Spina's word against his client's. Or, it might discourage spirited advocacy, since an attorney has a personal and professional interest in not having a client claim the attorney advised lying under oath. Also, the justice system has an interest in not having a defense attorney be both advocate and witness regarding material issues. See, e.g., Model Rules of Professional Conduct, Rule 3.7 Comment. The district court has discretion to refuse a defendant's proposed waiver of conflict of interest, if the waiver will not protect other interests threatened by the defendant's lawyer testifying. O'Malley, 786 F.2d at 790-92. See Wheat, 486 U.S. at 160.

At the time Judge Kocoras disqualified Mr. Spina, how likely was it that Mr. Defazio would raise an advice of counsel defense? Of course, as it turned out, Mr. Defazio did not raise the defense at trial, and Mr. Spina did not testify. ³ But this is unimportant, since we do not review the district court's decision with the advantage of hindsight. See Wheat, 486 U.S. at 162-63. The defendant did have Mr. Spina under subpoena during trial, though, which helps corroborate the trial judge's conclusion that his becoming a defense witness was a strong possibility.

There is no question that Mr. Defazio might have asserted at least a partial defense based upon the content of Mr. Spina's Chapter 7 guidance. As the defendant conceded, Mr. Spina was consulted "relative to numerous and various judgments and other financial matters engendered by the dismissal of [the defendant's] Chapter 11 proceeding," he prepared Mr. Defazio's Chapter 7 bankruptcy petitions, and he prepared certain schedules "based upon information supplied by this defendant." Mr. Spina was present as Mr. Defazio's lawyer at the Chapter 7 examinations during which Mr. Defazio allegedly lied about his finances.

It is reasonable to infer, given Mr. Spina's prior representation of the defendant, that he was familiar with the subjects of Mr. Defazio's testimony at his Chapter 7 examinations (and perhaps had reviewed the content of his testimony in the Chapter 11 case), and may have prepared him for the Chapter 7 examinations. And, while the Chapter 7 filings prepared by Mr. Spina were not the subject of any charge against Mr. Defazio, the government did claim they contained false statements, and they might well have been relevant and admissible at trial to show, for example, their effect upon Mr. Defazio's oral testimony, or whether he intended to mislead his examiners.

Only Mr. Spina and the defendant knew whether Mr. Spina's prior advice could support an advice of counsel defense, and whether the defendant planned to raise it. The only guidance the defendant gave Judge Kocoras in deciding the disqualification issue was the defendant's response to the government's motion to disqualify. This surely gave Judge Kocoras little comfort that Mr. Spina would not be taking the stand at trial. Not only did the response suggest that it was permissible for Mr. Spina to testify while still representing Mr. Defazio, it asserted that Mr. Spina should be allowed to represent the defendant because he was in a "unique position to comment upon the actual questions and answers elicited" in the Chapter 7 proceedings. Perhaps this statement was a clumsy attempt to argue that Mr. Spina's prior work with Mr. Defazio made him an especially valuable attorney (a point made separately elsewhere in the response), but we cannot fault Judge Kocoras for reading it differently.

Mr. Defazio relies heavily on United States v. Diozzi, 807 F.2d 10 (1st Cir. 1986), but the facts of that case are sufficiently different to warrant a different outcome. There, six days before the defendants' scheduled trial on income tax evasion, the government moved to disqualify both defense attorneys, claiming it intended to call them as material witnesses. The two lawyers had serially represented the defendants during their IRS investigation, and had each hired accountants to prepare memoranda of the defendants' finances, reviewed them with the defendants, and filed them with the IRS and Justice Department. The government, arguing for disqualification, claimed that it needed the lawyers' testimony as the "best evidence" to prove the contents of the defendants' statements, made through counsel via these financial memoranda. The lawyers were disqualified, testified at trial, and the defendants were convicted. The First Circuit reversed, because there was no pressing need for the lawyers' testimony to prove the content of the defendants' statements to the IRS and Justice Department. The defense offered stipulations which the court felt were equally valuable to the government, so it was unnecessary and improper to disqualify the attorneys simply to have live witnesses. Id. at 13-14. In this case, by contrast, if an advice of counsel defense was raised, the content of Mr. Spina's testimony was not available through sources other than himself--the parties could hardly have stipulated to what Mr. Spina knew about Mr. Defazio's state of mind, or what advice he gave the defendant, since that knowledge was only in the ken of Mr. Spina and the defendant.

Nor do we think it was reversible error for Judge Kocoras not to hold an evidentiary hearing to decide the disqualification issue. There were no material issues of historic fact to be determined, only the question whether the defendant would raise an advice of counsel defense--which easily could have been addressed by memorandum. Cf. O'Malley, 786 F.2d at 793 (hearing on attorney disqualification not constitutionally necessary, but may be advisable). We do think, however, it would have been better practice for the court to have conducted at least a colloquy with counsel to clarify the positions of the parties before reaching a decision. Such a discussion might have developed any number of predicates for making for a more informed decision, such as the probability of an advice of counsel defense or other need for Mr. Spina's testimony, or the effectiveness of redacting Mr. Spina's name from relevant exhibits, a limited disqualification, ⁴ or other less drastic alternatives to address the conflict problem. However, as the defendant did not suggest any such alternatives, Judge Kocoras did not err by not considering them sua sponte. Diozzi, 807 F.2d at 14 n.8. The district court did not abuse its discretion in disqualifing Mr. Defazio's chosen counsel.

III.

The defendant next complains of the exclusion of the testimony of an accountant, Frank Panno, and hypothetical income tax returns prepared by him for tax years 1981 through 1984.

Defense counsel claimed at trial that there was evidence in the record that Mr. Defazio believed that the law permitted him to carry losses forward. Although all parties now agree that he was not legally in a position to do that, defense counsel sought to show, through Mr. Panno and his demonstrative tax returns, what the effect of the carrying forward of Mr. Defazio's 1981 overall loss (and also, apparently, depreciation not claimed before) would have had on his tax liability, if the law did permit the carrying forward. The defendant contended that such proof would bear upon the question whether he was willful in failing to file, or in attempting to evade the tax.

Judge Kocoras excluded Mr. Panno's testimony and the demonstrative returns, concluding that there was no evidence of Mr. Defazio's good faith belief in the right to carry forward losses. Defense counsel then made an offer of proof which included the demonstrative returns and some work papers, but not Mr. Panno's testimony. The demonstrative returns show a tax liability for 1981 of $0 (as the government also proved) and an overall loss for that year of $43,235. The 1982 return shows this 1981 loss carried forward, resulting in a tax of $2,355 for that year (compared to the tax liability of $25,236 proved by the government). The 1983 return shows a tax liability of $47,157, and the one for 1984 no tax due (compared to the government's proof of a joint $14,741 tax liability), and an overall loss of $75,833.

The evidence supporting Mr. Defazio's belief in his ability to legally carry forward losses is equivocal, at best. When in 1984 he became aware that his 1981 return was being audited, he consulted an accountant, Ms. Anderson. According to her testimony at trial, she advised Mr. Defazio to file amended returns for 1981 and 1982, and helped him apply for an extension for 1983. She worked with him for about a year, was unable to persuade him to bring in adequate records, and ultimately advised him to take his problems to an attorney. She prepared no returns for him.

She testified to an April 4, 1984 conversation with Mr. Defazio concerning his planned 1983 return. Mr. Defazio told her he had sold bank stock for $500,000, but said he had losses to offset the gains he realized. He wrote out a rough memorandum which is in the record. It indicated he had purchased stock in Apron String Restaurant I for $105,000 in 1976 and in Apron String Restaurant II for $80,000 in 1978 to 1981. He had told Ms. Anderson the stock was "defunct" and the loss had never been claimed. The memorandum noted a loss of $185,000. It then noted the difference between the sale price and purchase price of bank stock and computed a long term capital gain of $111,850.

At trial Mr. Anderson was shown Mr. Defazio's 1978 return on which a loss of $187,738.58 had been taken on the Apron Strings Restaurant. Her testimony made it clear that she had understood Mr. Defazio as telling her about a loss he suffered within 1983. The defense would analyze the evidence as showing that Mr. Defazio had experienced a loss in 1978, had forgotten that he had taken the tax benefit of it in 1978, and that his assertion to Mr. Anderson that he could offset the loss against gain in 1983 must mean he believed that a loss realized but not taken in one year can be taken in a later year. On the other hand, if he had really forgotten that he had determined the stock to be worthless in 1978, his assertion that it was worthless in 1983 would not tend to prove a belief that a loss experienced in one year could be claimed in a later year. We think Judge Kocoras' rejection of the Panno testimony and demonstrative returns can be sustained on the reason he gave.

In any event there is another reason why this evidence was not shown to be admissible. The demonstrative returns were based in large part on figures produced by an accounting firm which worked on Mr. Defazio's records in 1987 and 1988, after he was indicted, and in part on Mr. Panno's computations. There is nothing to show that at the time the 1981-1984 returns were due, years before, Mr. Defazio had in mind those figures or ones similar to them when deciding what, if any, returns he would file. And there was certainly no evidence at all that Mr. Defazio believed he could omit depreciation in one year and claim it in a later one.

Moreover, if there were any error, it was harmless. The record shows that the proof of deception and concealment is overwhelming, and the presence of the demonstrative returns did not have a substantial influence on the jury's view of Mr. Defazio's guilt. See, e.g., United States v. Hill, No. 89-1724, Slip Op. at 7 (7th Cir. March 19, 1990 ).

The defendant also objects to the exclusion of portions of his testimony given in examinations in the 1986 Chapter 11 proceeding. The government offered excerpts from these proceedings to prove the substance of Mr. Defazio's allegedly false statements, and the court admitted them. The defense offered other excerpts, not in explanation or qualification of the content of the government's submissions, but as proof of the defendant's prevailing state of mind during the proceedings. In these excerpts, Mr. Defazio refers to and explains his side of a running dispute he had with a creditor, Summit First Federal.

Summit had a mortgage on a building on which Mr. Defazio was a guarantor. Summit had foreclosed, and the property had been sold for a price Mr. Defazio contended was grossly unfair. The sale had been confirmed and a substantial deficiency judgment entered against Mr. Defazio. In the proffered excerpts, Mr. Defazio testified at length about various appraisals of the property, and of his view of the unfairness of the confirmation of the sale and resulting deficiency. He said "I figured my only recourse and salvation is to come and file a Chapter 11 in order to protect myself." He also said "I've got enough equity in these properties to take care of everybody concerned, including Summit First Federal."

In this court, Mr. Defazio argues that the testimony "undercut the contention that he spoke with a fraudulent intent to conceal. . . . Hence it could have been argued that Defendant was not purposely engaging in a concealment to defeat the bankruptcy laws, but rather that he was being combative in his answers as a result of his continuing struggle with Summit First Federal."

Yet, Mr. Defazio's dispute with Summit First Federal does not excuse lying during his bankruptcy examinations; the merits of his fight with a creditor are irrelevant to whether his false declarations were fraudulent. Even if Mr. Defazio's "combative" attitude at the bankruptcy proceedings had some marginal relevance to his intent to defraud, our review of the offered testimony leads us to agree with the district court that the probative value of these statements was far outweighed by their potential to confuse the jury with the facts of a collateral dispute. Fed. Rule Evid. 403. There was no abuse of discretion.

IV.

Some of the tax evasion charges against Mr. Defazio were based in part on his sudden transfer, for nominal consideration, of various personally held assets (such as a house in Florida ) into a newly-created corporation called Defazio, Inc. To prove that these transfers were part of Mr. Defazio's willful attempt to evade income taxes, the government called Attorney Silets, who had represented Mr. Defazio in connection with the IRS's audit. The purpose was to show that the transfers of assets followed closely upon Mr. Defazio's learning he would likely be facing criminal tax evasion charges. At trial, Mr. Silets identified and read to the jury a memorandum his partner had sent him. The memo said that an IRS agent had called for Mr. Silets "to tell you that they [the IRS] had completed their investigation and are ready to refer the case [for prosecution] and that if you have any defenses you would like to present, he would be glad to listen to them." Mr. Silets testified that he initially met with the IRS agent without Mr. Defazio, and learned firsthand of the IRS's recommendation of prosecution. (The record is silent as to what he presented.) He testified that after the meeting, he tried unsuccessfully to call Mr. Defazio, sent him a letter informing him of the meeting with the IRS, and later met with him in person. At that time, he gave Mr. Defazio a memorandum summarizing his meeting with the IRS. The defendant argues that the substance of this testimony was protected by his attorney-client privilege, and should not have been admitted.

The attorney-client privilege normally shields only confidential communications from client to attorney. Communications from attorney to client are privileged only if they constitute legal advice, or tend directly or indirectly to reveal the substance of a client confidence. In re Sealed Case, 737 F.2d 94, 99 (D.C. Cir. 1984); Matter of Fischel, 557 F.2d 209, 211 (9th Cir. 1977); Schenet v. Anderson , 678 F.Supp. 1280, 1281-82 (E.D. Mich. 1988).

Mr. Silets testified only to what the IRS agent said to him, and that he later relayed those statements to Mr. Defazio. The content of this testimony is unprivileged because it did not reveal, either directly or implicitly, legal advice given Mr. Defazio or any client confidences. United States v. Gray, 876 F.2d 1411, 1415-16 (9th Cir. 1989) (Attorney's notification to client of sentencing hearing date was not privileged); United States v. Clemons, 676 F.2d 124, 125 (5th Cir. Unit B 1982) (Attorney's message to client regarding trial date not privileged). Admitting Mr. Silets' testimony did not violate the defendant's attorney-client privilege.

The defendant goes further, though, focusing upon the part of the memorandum recounting the IRS agent's invitation to present defenses. He argues that it conveyed to the jury the impression, contrary to the burden placed on the government to prove guilt, that it was incumbent upon him to present defenses to the government's accusations of wrongdoing.

When the memorandum was read at trial, defendant's trial counsel objected to the portion relating to the presentation of defenses. At a sidebar, Judge Kocoras said he also had some question about that sentence in the memorandum, and that he could have it stricken, but felt that would just "highlight" the reference. The government suggested redaction of the memorandum were it sent to the jury room. It was apparently agreed that in any further reading, the reference to defenses would be omitted. Defense counsel did not make a motion to strike, and there was no further reference before the jury to the invitation to present defenses. The impact of the brief statement was therefore minimized. Furthermore, the jury was instructed by the court that the defendant is presumed innocent, that the government has the burden of proving guilt beyond a reasonable doubt, and that "the defendant is not required to prove his innocence or produce evidence." We are unpersuaded that a single reference during trial to the defendant's opportunity to present defenses to an IRS agent could have had any influence on the jury's understanding of the government's burden of proof.

V.

When instructing the jury, the district court first defined the term "knowingly," saying that "it means that the defendant realized what he was doing and was aware of the nature of his conduct and did not act through ignorance, mistake or accident. Knowledge may be proven by defendant's conduct and by all the facts and circumstances surrounding the case." He then said

You may infer knowledge from a combination of suspicion and indifference to the truth. If you find that a person had a strong suspicion that things were not what they seemed or that someone had withheld some important facts, yet shut his eyes for fear of what he would learn, you may conclude that he acted knowingly, as I have used the word.

This "ostrich" instruction came verbatim from United States v. Ramsey, 785 F.2d 184, 190-91 (7th Cir.), cert. denied, 476 U.S. 1186 (1986).

Ramsey approves the use of this instruction in cases where it is provident not to leave the matter to argument. Id. at 191. In deciding to give the instruction, Judge Kocoras referred to Mr. Defazio's evidently disorganized records, and indicated his view that Mr. Defazio could not close his eyes to what his records would disclose if they were organized. From our own examination of the testimony, we gather that Mr. Defazio possessed the relevant original records of his transactions. He resisted bringing them together, or giving them to Ms. Anderson, to determine his tax obligations. The jury could well infer that he feared what they would show. The case relied on by Mr. Defazio, United States v. Beckett, 724 F.2d 855 (9th Cir. 1984), is easily distinguished: unlike this case, there was no evidence in Beckett that the defendant was deliberately remaining ignorant in the face of his own suspicions. The evidence pointed only to innocent ignorance or actual knowledge of the criminal activity. Id. at 856. We find no abuse of discretion in deciding this was an appropriate case for the ostrich instruction.

Ramsey forecloses the defendant's other two arguments regarding this instruction. While the ostrich instruction is not a favorite of the law, its use is not limited to cases where a defendant is associated with a group of others involved in criminal activity. "If a person with a lurking suspicion goes on as before and avoids further knowledge, this may support an inference that he has deduced the truth and is simply trying to avoid giving the appearance (and incurring the consequences) of knowledge." Ramsey, 785 F.2d at 189. Nor do we accept the defendant's argument that the instruction improperly imposed a negligence standard on a specific intent crime. We have already approved this instruction in a prosecution involving a crime which requires guilty knowledge. See Ramsey, 785 F.2d at 190. Moreover, other instructions adequately protected Mr. Defazio from being convicted for negligently failing to realize his income tax responsibilities: the jury was told that a person harboring a reasonable, good faith belief that no taxes were owed could not be found guilty of intent to evade taxes, ⁵ and was provided with several offense-specific definitions of willfulness, each of which pointedly distinguished between knowledge on one hand, and accident, inadvertence, or negligence on the other.

VI.

Finally, Mr. Defazio claims that the offense of failure to file a tax return (26 U.S.C. §7203 ) is included within the broader offense of tax evasion (26 U.S.C. §7201 ), so it was improper for the district court to enter judgment of conviction and impose cumulative penalties on both offenses for the same tax years. This argument was foreclosed in this circuit by United States v. Foster [86-1 USTC ¶9327 ], 789 F.2d 457, 460 (7th Cir. 1985), cert. denied, 479 U.S. 883 (1986). Accord , United States v. Davenport [87-2 USTC ¶9422 ], 824 F.2d 1511, 1519 (7th Cir. 1987); United States v. Buckner [87-2 USTC ¶9591 ], 830 F.2d 102, 104 (7th Cir. 1987). The Supreme Court's recent opinion in Schmuck v. United States, 109 S.Ct. 1443, 1450 (1989) confirms the propriety of comparing the elements of each crime, as we did in Foster and Davenport , to define lesser included offenses.

VII.

The judgment appealed from is AFFIRMED.

¹ The defendant's name appears in the record both as "DeFazio" and "Defazio." We use "Defazio" because the record contains several of his signatures in that form.

² Apparently these facts led the government to drop two counts of the original indictment, charging the filing in 1986 of a false bankruptcy schedule and a false statement of financial affairs. The superseding indictment was filed one month after the motion to disqualify Mr. Spina.

³ Mr. Defazio called only one witness (although he attempted to call the accountant, Mr. Panno). His defense, such as it was, consisted of contesting whether the government had proved that he willfully failed to file returns and attempted to evade taxes, and that he had the intent to defraud during the bankruptcy examinations.

⁴ See United States v. Cunningham, 672 F.2d 1064,1075 (2d Cir. 1982).

⁵ We note, in passing, that the Supreme Court has recently decided to review this court's decision in United States v. Cheek [89-2 USTC ¶9509 ], 882 F.2d 1263, 1267 (7th Cir. 1989), cert. granted, 58 U.S.L.W. 3526 (Feb. 20, 1990), that a good faith, but objectively unreasonable, misunderstanding of the tax law is no defense to charges of tax evasion.

 

 

[89-1 USTC ¶9203] United States of America , Plaintiff-Appellee v. William L. Hayes, Defendant-Appellant

(CA-10), U.S. Court of Appeals, 10th Circuit, 87-1499, 11/23/88 , 861 F2d 1225, Affirming an unreported District Court decision

[Code Sec. 7203 ]

Evidence: Admissibility: Hearsay: Failure to file returns: Evasion of taxes: Motions: Severance.--IRS computer data evidence was admissible in proving that a taxpayer failed to file a tax return. Since the IRS tax examiner who checked the records testified at trial and the records were not shown to be untrustworthy, the evidence was not excluded under the hearsay rule. The district court properly denied the taxpayer's motion to sever the two counts of his indictment on willful tax evasion. Given the other evidence, the taxpayer was not prejudiced by giving testimony relating to the failure to file count while trying to disprove the element of willfulness in the tax evasion count.

Robert N. Miller, United States Attorney, James K. Bredar, Assistant United States Attorney, Denver, Colo. 80294, for plaintiff-appellee. William A. Cohan, Cohan, Greene & Kilmer, P.C., 1801 York St., Denver, Colo., Darold W. Killmer, Feiger & Hyman, 1860 Blake St., Denver, Colo. 80202, for defendant-appellant.

Before HOLLOWAY, Chief Judge, and SETH and MCKAY, Circuit Judges.

HOLLOWAY, Chief Judge:

Defendant Hayes was charged in a two count indictment with willful income tax evasion, a violation of 26 U.S.C. §7201 (1982). The jury acquitted him of the charge contained in count I, but found him guilty on count II of the lesser included offense of willful failure to file an income tax return for 1981, a violation of 26 U.S.C. §7203 (1982). ¹ He argues: (1) that the trial court erred in admitting computer data evidence which showed that he failed to file an income tax return for the 1981 tax year; and (2) that he was prejudiced when the trial court denied his motion to sever. We affirm.

I

Factual Background

Considered in the light most favorable to the government, as it must be after a guilty verdict, the evidence shows the following. In 1978, 1979 and 1980 defendant Hayes filed individual income tax returns. He had income again in 1981, see V R. 22, but did not file an income tax return. III R. 49; V R. 21-22. Instead, he indicated to the Internal Revenue Service (I.R.S.), in response to a delinquency notice, that he was "not liable this period." III R. 49-50.

There is a dispute regarding the admissibility of the evidence which indicates that Hayes failed to file a return for the 1981 tax year. Dorothy Vest, an I.R.S. tax examiner, testified that she had searched Hayes' tax records for the 1978, 1979, 1980, and 1981 tax years and had determined that while Hayes had filed returns for the 1978, 1979, and 1980 tax years, he had not filed a return for the 1981 tax year. III R. 45, 49. Vest was the custodian of the records and she testified that they were kept in the ordinary and regular course of business. III R. 41-43, 48. During her search Vest obtained Certificates Of Assessments and Payments for the 1978, 1979, 1980, and 1981 tax years. Those certificates reflected Hayes' tax information for the years in question and were admitted at trial as Government's exhibit 5. Hayes strenuously objected to the admission of the certificates (the computer data evidence) both prior to and during trial. They show that he failed to file a return for the 1981 tax year. III R. 49.

Later, during his cross examination, Hayes testified that he had not filed a return for 1981. He also admitted that he had had income during the 1981 tax year. Hayes disagreed with the way the "federal income tax was administered" and did not believe he was required to pay taxes. V R. 21-23.

Before the 1981 tax year, Hayes had relied on the advice of several "tax experts," including Don Perry, Don Bearnson, and Lowell Anderson. In 1980 he invested $5,000 in foreign trust organizations on the advice of Perry and Bearnson. Anderson had assured him that the trust organizations were a legal way to reduce his tax liability. IV R. 29-30. These investments form the basis of Hayes' defense to count I, that he did not willfully seek to evade taxes.

Bearnson referred Hayes to another "tax expert," John Grandbouche, who advised Hayes that "he had the basis to believe that certain individuals, private people of this country, had no constitutional--or had no basis to pay income tax depending upon how they were situated in their lives." IV R. 83. Hayes paid $120 for a year's membership in a "Commodity Exchange," and in return was given a number of books about the legalities of taxation as well as the right to use the Exchange. IV R. 85-88. Grandbouche also gave Hayes a number of United States Supreme Court cases to read regarding the constitutionality of taxation. IV R. 94-115. After reading these materials Hayes decided he was not a person constitutionally required to file income taxes. IV R. 121.

Before trial Hayes filed a motion to sever under Fed. R. Crim. P. 14. Hayes wanted a separate trial on count II so that he could testify at trial on count I (that he relied upon "tax experts" and did not willfully evade taxes) and exercise his right not to testify on count II (leaving the Government to its own proof on the issue of failure to file). The trial court denied Hayes' motion to sever in a minute order.

Hayes also filed a pre-trial motion to suppress the computer data evidence. The trial court denied that motion, relying on Fed. R. Evid. 803(6) and noting that Government Exh. 5 would only corroborate the testimony of I.R.S. employees. I R. Exh. 4. The defendant renewed the motion to suppress the computer data evidence on the morning of trial and a lengthy suppression hearing was held. At the hearing the defendant presented some evidence intended to show that the I.R.S. record keeping system is unreliable and untrustworthy. The evidence, much of which was compiled by Arthur Howe of the Philadelphia Inquirer and published in a series of articles in 1985, detailed large numbers of failures of the I.R.S. record keeping and computer system generally, such as a loss of tax filings in 1985, the deliberate destruction of records, the mistaken destruction of tax returns, the erroneous granting of refunds, and typographical errors. See II R. 8-20. Upholding its earlier ruling, the court reasoned that before the entire I.R.S. record keeping system could be shown unreliable or untrustworthy, some comparative evidence would have to be offered to show, for example, the percentage of lost documents. II R. 23.

An objection to the computer data evidence was raised a third time during the testimony of Vest. By that time I.R.S. employee Steven Ray had testified generally about the procedures followed at the Ogden , Utah Regional Service Center, the place where Hayes' returns had been sent. On cross examination Ray testified that it would be "very unlikely" for a tax return to just disappear, that he was not aware of any docments that had been destroyed by employees, that he was not aware of any data entry problems, and that he was not aware of computer programs running incorrectly. See III R. 22, 35-36. Based upon this testimony and the foundation which had been laid, the trial court overruled the objection and admitted the evidence.

II

Analysis

A

Admissibility Of The Computer Data Evidence

The trial court admitted the computer data evidence under Fed. R. Evid. 803(6). Hayes does not dispute the well established proposition that "computer data compilations may constitute business records for purposes of Rule 803(6), ² and may be admitted at trial if a proper foundation is established." United States v. Croft, 750 F.2d 1354, 1364 (7th Cir. 1984) (citing United States v. Young Brothers, Inc., 728 F.2d 682, 694 (5th Cir.), cert. denied, 469 U.S. 881 (1984)). Vest attested to the authenticity of Government Exhibit 5 and laid the foundation for its admission. Young, 728 F.2d at 694. Both Vest and Ray testified that Hayes' tax records were kept in the ordinary course of business and that it was the regular practice of the I.R.S. to keep such records. See United States v. Bowers, 593 F.2d 376, 380 (10th Cir. 1979), cert. denied, 444 U.S. 852 (1979) (records must be kept in the regular course of business activity). A proper foundation for the admission of the evidence was laid.

Hayes argues, however, that the computer data evidence is untrustworthy and therefore inadmissible under Rule 803(6). It is true that business records are inadmissible if the source of information or the method or the circumstances of preparation indicate a lack of trustworthiness. Croft, 750 F.2d at 1364. Accord United States v. Hines, 564 F.2d 925 (10th Cir. 1977), cert. denied, 434 U.S. 1022 (1978). Here the trial court found that the general evidence presented by the defendant at the suppression hearing, even if it is all accepted as true, does not lead to the conclusion that the I.R.S. record keeping system is unreliable or untrustworthy. II R. 23. Comparative data (e.g., the number of incorrect refunds compared to the number of correct refunds) is needed before such general evidence can have any force and no comparative data was offered at trial. The testimony of Vest and Ray, which related specifically to the procedures at the Ogden, Utah Center and the search done in this case, provided an ample factual basis for the trial court to find that the source of information and method and circumstances of preparation were not untrustworthy. We find no abuse of discretion in the admission of the computer data evidence. See United States v. Turner [86-2 USTC ¶9647 ], 799 F.2d 627, 630 (10th Cir. 1986).

The real question regarding the computer data evidence is whether it should have been excluded under the rationale of United States v. Oates, 560 F.2d 45 (2nd Cir. 1977). There the court held that "police and evaluative reports not satisfying the standards of FRE 803(8)(B) and (C) may not qualify for admission under FRE 803(6) or any of the other exceptions to the hearsay rule." Id. at 77. The court admitted exhibits purporting to be the official report of a United States Custom Service Chemist, who had concluded that the white powdery substance which he had analyzed was heroin. Id. at 63. The chemist did not testify, but the documents were admitted as business records under Rule 803(6), with reliance also placed on Rule 803(8) ³ and 803(24). The Second Circuit held that the chemist's report and worksheet constituted a factual finding resulting from an investigation made pursuant to authority granted by law under Rule 803(8)(C). Id. at 67. After a discussion of legislative history the court concluded that the restrictions of rule 803(8)(B) and (C) precluded admission of the report under Rule 803(6) and all other hearsay exceptions as well. Id. at 77, 83-84.

Relying on United States v. Ruffin [78-1 USTC ¶9269 ], 575 F.2d 346 (2nd Cir. 1977), which in dicta discussed Oates in the tax context, Hayes argues that the computer data evidence is inadmissable under Rule 803(8)(B). In dicta the court reasoned that I.R.S. personnel who gather information routinely used in criminal prosecutions are performing what can legitimately be characterized as a law enforcement function within the meaning of Fed. R. Evid. 803(8)(B). Id. at 356. Contending that Ruffin establishes that I.R.S. personnel perform a law enforcement function within the meaning of Rule 803(8), Hayes argues that the computer data evidence should have been excluded under the rationale of Oates, notwithstanding its admissibility under Rule 803(6).

Oates has been criticized by both courts and commentators as an unduly broad interpretation of Rule 803(8). See e.g., United States v. Picciandra [86-1 USTC ¶9322 ], 788 F.2d 39, 44 (1st Cir. 1986), cert. denied, 479 U.S. 847 (1986); United States v. Metzger, 778 F.2d 1195, 1201 (6th Cir. 1985), cert. denied, 477 U.S. 906 (1986); 4 J. Weinstein & M. Berger, Weinstein's Evidence ¶803(8)[04] at 258-262 (1985). The Fifth and Ninth Circuits have rejected the breadth of Oates, and reason that the exclusionary provision of Rule 803(8)(B) was only intended to apply to observations made by law enforcement officials at the scene of a crime or in investigating a crime, and not to reports of routine matters made in nonadversarial settings. United States v. Quezada, 754 F.2d 1190, 1193-94 (5th Cir. 1985); see also United States v. Wilmer, 799 F.2d 495, 500-501 (9th Cir. 1986), cert. denied, 107 S.Ct. 1626 (1986) (citing United States v. Hernandez Rojas, 617 F.2d 533, 534-535 (9th Cir. 1980), cert. denied, 449 U.S. 864 (1980)). And the Second Circuit itself confined Oates in United States v. Yakobov, 712 F.2d 20, 24-27 (2nd Cir. 1983), where it held that "Oates should not be extended to [exclude materials admissible under] Rule 803(10)." Id. at 26. These criticisms aside, Oates simply does not apply here because Vest, the I.R.S. employee who searched Hayes' files and obtained the computer documents, testified at trial.

Rule 803(8)(C) does not compel the exclusion of documents properly admitted under Rule 803(6) where the authoring officer or investigator testifies. See United States v. King, 613 F.2d 670, 672-673 (7th Cir. 1980); United States v. Sawyer [79-2 USTC ¶9537 ], 607 F.2d 1190, 1193 (7th Cir. 1979), cert. denied, 445 U.S. 943 (1980). Cf. Chaney v. Brown, 730 F.2d 1334, 1354 n. 26 (10th Cir. 1984), cert. denied, 469 U.S. 1090 (1984). This is because such testimony protects against the loss of an accused's confrontation rights, the underlying rationale for Rule 803(8) and the basis of the court's concern in Oates. See Oates, 560 F.2d at 78 (the fear of the draftsmen that interference with an accused's right to confrontation would occur was the reason why in criminal cases evaluative reports and law enforcement reports were expressly denied the benefit to which they might otherwise be entitled).

In Oates, the Custom Service Chemist who analyzed the heroin and prepared the report did not testify (although another chemist did) and could not, therefore, be questioned about the source of information or the specific circumstances of preparation. Id. at 64. Here, Vest testified and was cross examined at some length. III R. 54-69. She checked Hayes' records personally and prepared Government exhibit 5. III R. 45-48. The circumstances surrounding the preparation of Government exhibit 5 were probed, see III R. 49-50, and there was no loss of confrontation rights.

Citing United States v. Bohrer [87-1 USTC ¶9141 ], 807 F.2d 159, 162-163 (10th Cir. 1986), Hayes argues that I.R.S. agents are law enforcement personnel under the holding in Oates so that the computer data evidence must be excluded under Rule 803(8)(B). In Bohrer we did say that IRS agents appear to be law enforcement personnel under the test proposed in Oates. Id. at 162. There, however, an I.R.S. "contact card" which contained evidence of the defendant's failure to file was admitted at trial. We held that the admission of the contact card was improper, but not under Oates, but rather, because it had been maintained for the purpose of litigation by the party offering it, in violation of the rule enunciated in Palmer v. Hoffman, 318 U.S. 109, 113-115 (1943). Id. at 162. We specifically held that "we need not go so far as the court did in Oates . . . to find the admission of the contact card improper in this case." Bohrer, 807 F.2d at 162. Thus, Bohrer is not persuasive here.

Bohrer is distinguishable in another important respect. In Bohrer there was evidence that the contact card was untrustworthy, that the I.R.S. agent who testified that Mr. Bohrer had told him that he had not filed a return had fabricated his testimony. Id. We noted that we had "serious problems" with the admission of the contact card under the business records hearsay exception. Id. In this respect Bohrer is analogous to Oates, where the chemist's report also lacked trustworthiness. Oates, 560 F.2d at 64-65. As noted earlier, a document that is untrustworthy should not be admitted under Rule 803(6). See Croft, 750 F.2d at 1364. Here, however, there was no specific evidence that Government Exhibit 5 was untrustworthy. There was only the general evidence about the asserted unreliability of the IRS records, evidence the trial court rejected as insufficient, as we have already explained.

Here the trial court properly admitted the evidence under Rule 803(6) and we affirm on that basis. The government also offered the evidence under Rule 803(10) as a certification of the absence of public record or entry, and argues on appeal that it is admissible under that rule as well. However, the trial court did not determine whether the evidence was admissible under Rule 803(10). ⁴ We therefore do not go into the merits of the admissibility of the exhibit on this further ground.

B

Denial of the Motion to Sever

The trial court denied Hayes' motion to sever in a minute order. I R. Ex. 7. Hayes wanted a separate trial on the two counts so that he could testify in the trial on count I (and explain his reliance on the "tax experts" to disprove the element of willfullness), but not on Count II (leaving the Government on its own to prove failure to file). When the motion was denied and Hayes took the stand to testify that he had relied upon the "tax experts" to set up trusts in order to reduce his tax liability, he was cross examined about his failure to file a 1981 return and had to admit that he had in fact not filed. V.R. 21-22.

Rule 14 of the Federal Rules of Criminal Procedure allows the trial court to order separate trials of counts otherwise properly joined under Rule 8 if joinder would prejudice the defendant. ⁵ The decision to grant severance and order separate trials is "within the sound discretion of the trial court and its decision will not ordinarily be reversed in the absence of a strong showing of prejudice." United States v. Valentine, 706 F.2d 282, 289-290 (10th Cir. 1983) (citing United States v. Strand [80-1 USTC ¶9309 ], 617 F.2d 571, 575 (10th Cir. 1980), cert. denied, 449 U.S. 841 (1980)). The defendant's burden to show an abuse of discretion is a difficult one. Id. at 290 (citing United States v. Van Scoy, 482 F.2d 347 (10th Cir. 1973)).

We have laid down guidelines for a trial court to consider when a defendant wishes to testify on one count and remain silent as to another:

[N]o need for a severance exists until the defendant makes a convincing showing that he has both important testimony to give concerning one count and strong need to refrain from testifying on the other. In making such a showing, it is essential that the defendant present enough information--regarding the nature of the testimony he wishes to give on one count and his reasons for not wishing to testify on the other--to satisfy the court that the claim of prejudice is genuine and to enable it intelligently to weigh the considerations of "economy and expedition in judicial administration" against the defendant's interest in having a free choice with respect to testifying.

Valentine, 706 F.2d at 291 (quoting Baker v. United States [68-2 USTC ¶9520 ], 401 F.2d 958, 977 (D.C. Cir. 1968), cert. denied, 400 U.S. 965 (1970)).

Our resolution of the evidentiary issues in this case substantially undercuts Hayes' argument that the trial court abused its discretion. Had separate trials been granted, and had Hayes not testified on Count II, the testimony of Vest and the computer data evidence would have been sufficient for a jury to find that Hayes had failed to file a return in 1981. Since the computer data evidence was properly admitted, there was no need for separate trials.

While separate trials might have increased Hayes' chances of acquittal by avoiding the damaging admission that Hayes failed to file, a better chance for acquittal by separate trials of charges is not sufficient to require severance. Strand , 617 F.2d at 575. Given the other evidence of Hayes' failure to file, the trial court did not abuse its discretion in denying the motion.

AFFIRMED.

¹ Hayes' sentence was suspended and he was placed on probation for five years with this condition: that within 60 days he file a U.S. tax return with the I.R.S. and the probation department for each year that no return was filed to the time of his conviction. Hayes filed a timely notice of appeal. On July 1, 1987, defendant's Hayes' probation was revoked for failure to file the returns and he was sentenced to one year's imprisonment and fined $10,000.00. He was granted bail pending appeal.

² In pertinent part, Fed. R. Evid. 803 provides that:

The following are not excluded by the hearsay rule, even though the declarant is available as a witness:

. . .

(6)Records of regularly conducted activity. A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, unless the source of information or the circumstances of preparation indicate lack of trustworthiness.

³ Rule 803(8) provides that:

The following are not excluded by the hearsay rule, even though the declarant is available as a witness:

. . .

(8) Public records and reports. Records, reports, statements, or data compilations, in any form, of public offices or agencies, setting forth (A) the activities of the office or agency, or (B) matters observed pursuant to duty imposed by law as to which matters there was a duty to report, excluding, however, in criminal cases matters observed by police officers and other law enforcement personnel, or (C) in civil actions and proceedings and against the Government in criminal cases, factual findings resulting from an investigation made pursuant to authority granted by law, unless the sources of information or other circumstances indicate lack of trustworthiness.

⁴ It is within the trial court's province to make preliminary determinations regarding the admissibility of evidence. Fed. R. Evid. 104(a) ("Preliminary questions concerning the . . . admissibility of evidence shall be determined by the court . . . ."). Here the court admitted the evidence only under Rule 803(6) and it did not pass on the admissibility of the exhibit under Rule 803(10) or consider the diligence of the search under the circumstances. United States v. Yakobov, 712 F.2d 20, 24 (2d Cir. 1983) (diligence requirement is one of substance, not form).

⁵ In pertinent part, Rule 14 provides:

Rule 14. Relief from Prejudicial Joinder

If it appears that a defendant or the government is prejudiced by a joinder of offenses or of defendants in an indictment or information or by such joinder for trial together, the court may order an election of separate trials of counts, grant a severance of defendants or provide whatever other relief justice requires.