Admissibility 2 Page3

---

[ Back ] [ Next ]

   

[87-1 USTC ¶9141] United States of America , Plaintiff-Appellee v. Everette A. Bohrer, Defendant-Appellant

(CA-10), U.S. Court of Appeals, 10th Circuit, 86-1445, 12/16/86 , 807 F2d 159, Affirming an unreported District Court decision

[Code Sec. 7203 ]

Constitutionality: Taxation: Evidence: Admissibility: Probable cause hearing: Suits by United States: Juries: Instructions to.--The taxpayer's conviction for willful failure to file income tax returns could not be reversed for lack of a probable cause hearing. When the summons was issued he was not subject to an extended pretrial restraint of liberty following arrest and he had not asked for a probable cause hearing. In addition, the taxpayer was not entitled to discovery of a government tax protester list which he had requested to support a defense of selective prosecution because he failed to produce any evidence which would establish a prima facie showing of selective prosecution. Further, the district court did not err in denying the taxpayer's motion for acquittal, and later for a new trial, because the government had proven the element of willfulness essential to the four income tax violations for which the taxpayer was convicted by introducing the tax returns he had filed for four years before the years in issue. Admission of an IRS contact card also was permissible, even though it had been prepared for litigation. The taxpayer had access to it before the trial and could have cross-examined the IRS agent about it. The court was satisfied that its introduction had no impact on the jury's deliberations adverse to the taxpayer. Finally, the three jury instructions were proper and not prejudicial. They stated respectively that wages are income; that the amount of taxes actually due on income need not be proved; and that disagreement with the tax law or a belief that the tax law is unconstitutional is not a good-faith defense to willful failure to file tax returns.

Robert N. Miller, United States Attorney, James K. Bredar, Assistant United States Attorney, Denver, Colo. 80294, for plaintiff-appellee. Cecil A. Hartman, Denver , Colo. , for defendant-appellant.

Before LOGAN, ANDERSON, and TACHA, Circuit Judges.

LOGAN, Circuit Judge:

Everette A. Bohrer appeals from his conviction, following a jury trial in the United States District Court for the District of Colorado, on four counts of willful failure to file income tax returns, violations of 26 U.S.C. §7203 . On appeal, Bohrer contends (1) the summons issued in this case was not supported by a showing of probable cause; (2) he was improperly denied discovery of a government tax protester list, which he requested to support a defense of selective prosecution; (3) there was insufficient evidence of the required element of willfulness, especially in view of the court's improper admission of an IRS internal memorandum; and (4) three jury instructions prejudicially placed points before the jury that were not raised by evidence or argument. We affirm the conviction on all counts.

Bohrer first contends that the action against him should have been dismissed because the information on which he was charged and a summons issued for him to appear for trial were not supported by probable cause. Although Bohrer argues that a showing of probable cause is required under Fed. R. Crim. P. 9 and 4(a) for issuance of a summons, it is explicit in those rules only that a warrant shall not issue unless the information shows probable cause. No such requirement attaches to the issuance of a summons, which issues instead of a warrant if requested by the attorney for the government. Under the Fourth Amendment, a showing of probable cause is required only when a defendant is to be subject to an extended pretrial restraint of liberty following arrest. Gerstein v. Pugh, 420 U.S. 103, 114, 125 n.26 (1975). The summons subjected Bohrer to no such restraint on his liberty and, accordingly, was proper.

Bohrer cites United States v. Millican [79-2 USTC ¶9543 ], 600 F.2d 273 (5th Cir. 1979), cert. denied, 445 U.S. 915 (1980), for the proposition that even absent pretrial arrest or detention, a probable cause hearing should be granted at a defendant's request. Id. at 275. In the present case, however, Bohrer did not ask for a probable cause hearing. Moreover, Millican makes clear that denial of a probable cause hearing is not grounds for reversal of a subsequent conviction. Id.; Gerstein, 420 U.S. at 119 (a conviction will not be vacated on the ground that a defendant was detained pending trial without a determination of probable cause). Bohrer's argument is entirely without merit.

Bohrer next contends that he was improperly denied discovery of a government tax protester list, which he requested to support a defense of selective prosecution. To demonstrate unconstitutionally selective prosecution, a defendant must show (1) he was singled out for prosecution while others similarly situated were not generally prosecuted; and (2) the prosecution was invidiously based on racial, religious, or other impermissible considerations. United States v. Amon [81-2 USTC ¶9495 ], 669 F.2d 1351, 1356-57 (10th Cir. 1981), cert. denied, 459 U.S. 825 (1982). Some initial showing of entitlement to the claim of selective prosecution is required for discovery to be ordered by the court. United States v. Ness [81-2 USTC ¶9621 ], 652 F.2d 890, 892 (9th Cir.), cert. denied, 454 U.S. 1126 (1981).

In this case, in denying Bohrer's motion the district court found that Bohrer had failed to produce any evidence which would establish a prima facie showing of selective prosecution. On the basis of our review of the record, we agree. In any event, we would not overturn the district court's finding unless it was clearly erroneous. Cf. Amon, 669 F.2d at 1356. It is not.

Bohrer also contends that the district court erred in refusing to grant his motions for acquittal and, later, for a new trial, because the government failed to prove the element of willfulness essential to the four violations of 26 U.S.C. §7203 . Specifically, he first contends that the government's introduction of evidence that he filed tax returns for the four years before 1980 is not evidence of his state of mind in 1980 and after. But it is well established that filing tax returns in prior years is evidence of willfulness. See United States v. Weninger [80-2 USTC ¶9560 ], 624 F.2d 163, 167 (10th Cir.), cert. denied, 449 U.S. 1012 (1980). Bohrer's argument to the contrary is meritless. The government also introduced evidence of Bohrer's substantial gross income during the years in which he failed to file tax returns. This too is evidence of willfulness. United States v. Johnson [78-2 USTC ¶9786 ], 585 F.2d 374, 377 (8th Cir. 1978), cert. denied, 440 U.S. 921 (1979).

The chief focus of Bohrer's contention of error with respect to the element of willfulness and his motions for acquittal and new trial is a conversation the government alleges took place between Bohrer and IRS agent Jean Van De Sande. Agent Van De Sande testified that he telephoned Bohrer at a number obtained from directory assistance, to request that Bohrer file tax returns, and that Bohrer told him that he had not filed because "the Internal Revenue Department was not a legal entity of the United States Government according to some amendment of the Constitution, and that he did not have to file." R. II, 74-75. Bohrer testified, as the only defense witness, that he had no recollection of any telephone conversation with Agent Van De Sande.

On rebuttal, the government offered into evidence the IRS contact card, containing Van De Sande's version of the alleged telephone conversation. Over defense counsel's objection that it was improper rebuttal, and could not be authenticated except by Van De Sande, the court admitted the record under Fed. R. Evid. 803(6), as a business record of the IRS, authenticated by the testimony of its custodian, Agent John Ottinger. Bohrer then resumed the stand and testified that his telephone number was unlisted, a different number than the one listed on the contact card, and that he had not talked with Van De Sande. On appeal, Bohrer contends specifically that Van De Sande's testimony was false, and that the district court erred in admitting the contact card.

We have serious problems with the admission of the IRS contact card under the business records hearsay exception. Records kept in the regular course of business of public agencies may be admissible under the business records exception, Fed. R. Evid. 803(6), as well as under the public records exception, Fed. R. Evid. 803(8). See, e.g., United States v. Bowers, 593 F.2d 376, 380 (10th Cir.), cert. denied, 444 U.S. 852 (1979); United States v. Oates, 560 F.2d 45, 63-84 (2d Cir. 1977); United States v. Smith, 521 F.2d 957, 962-71 (D.C. Cir. 1975). Records of observations of law enforcement personnel, however, are not admissible in criminal cases under the public records exception. Fed. R. Evid. 803(8)(B). The Second Circuit in Oates construes law enforcement personnel to include, "at the least, any officer or employee of a governmental agency which has law enforcement responsibilities," and concludes that the reports of such employees are not admissible against criminal defendants under any hearsay exception. 560 F.2d at 68, 77. But see 4 J. Weinstein and M. Berger, Weinstein's Evidence ¶¶803(6)[07] at 803-207 (1984); id. §803(8) [04] at 803-262 (criticizing Oates conclusion as unduly broad).

IRS agents appear to be law enforcement personnel under the test proposed in Oates. We need not go so far as the court did in Oates, however, to find the admission of the contact card improper in this case. Admission under the business records exception is not available to documents prepared for ultimate purposes of litigation, when offered by the party maintaining the documents. Palmer v. Hoffman, 318 U.S. 109, 113-15 (1943); Smith, 521 F.2d at 965-67. The contact card was maintained as part of Bohrer's IRS case file. The IRS contact card thus appears to have been maintained, at least in part, for the purpose of prosecuting Bohrer for willfully refusing to file federal income tax returns. Introduction of such a record via a hearsay exception to establish willfulness raises the possibility of the "collision with confrontation rights" of a criminal accused that Congress intended to avoid by the specific language of Rule 803(8). Advisory Committee's Note, 56 F.R.D. 183, 313 (1973); Oates, 560 F.2d at 68-69, 78-80. Circumstantially, the admission of the IRS contact card poses a situation "dripping with motivations to misrepresent." Smith, 521 F.2d at 966 (quoting Hoffman v. Palmer, 129 F.2d 976, 991 (2d Cir. 1942), aff'd, 318 U.S. 109 (1943)).

Even if admission of the IRS contact card was error, that error was harmless. Bohrer had access to the contact card before trial, and could have cross-examined Van De Sande about it. If the contact card added anything to the controversy over the alleged conversation it helped Bohrer by showing the discrepancy between his telephone number and that called by Van De Sande. Defendant's cross-examination of Van De Sande is a more lengthy portion of the record than Van De Sande's very brief direct testimony; and, following introduction of the IRS contact card over defendant's objection, Bohrer once more took the stand to deny that the telephone conversation had taken place. There was other evidence of willfulness in Bohrer's filing of tax returns in prior years and his substantial income during the years he did not file returns. That evidence, if believed, would clearly establish the element of willfulness. On this record, we are satisfied that introduction of the contact card had no impact on the jury's deliberations adverse to Bohrer.

Finally, Bohrer contends that three jury instructions prejudicially placed matters before the jury that were not raised by evidence or argument. The instructions stated respectively that wages are income; that the amount of taxes actually due on income need not be proved; and that disagreement with the tax law or a belief that the tax law is unconstitutional is not a good-faith defense to willful failure to file tax returns. The record reveals that each of these instructions was relevant to the evidence raised at trial and discussed above. Bohrer's contentions with respect to the instructions are meritless.

AFFIRMED.

 

 

[89-1 USTC ¶9381] United States of America , Appellee v. Antonios Koskerides, Defendant-Appellant

(CA-2), U.S. Court of Appeals, 2nd Circuit, 88-1417, 6/14/89 , 877 F2d 1129, Affirming an unreported District Court decision

[Code Sec. 7201 ]

Crimes: Income tax evasion: Violation of IRS procedures: Denial of access to information: Admissibility of evidence: Limitation of cross-examination of witnesses: Burden of proof.--Convictions for three counts of income tax evasion were upheld against a restaurant owner. His claims that the district court erred in admitting evidence of oral and written statements he believed had been obtained in violation of IRS procedures, in denying him access to handwritten notes of interviews IRS agents had with him, in admitting summary charts prepared by the government that had not been disclosed before trial, in admitting alleged hearsay testimony of an IRS agent and in limiting his cross-examination of witnesses were all rejected by the court. His last argument that the evidence presented by the government as to the likely source of his taxable income was insufficient was also unpersuasive.

Barbara A. Bailey, New Haven , Conn. , for appellee. Robert M. Davidson, Kurt F. Zimmerman, Davidson, Driscoll & Naylor, 535 Connecticut Ave. , Norwalk , Conn. 06854 , for defendant-appellant.

Before PIERCE and ALTIMARI, Circuit Judges, and KELLEHER, District Judge. ^*

KELLEHER, District Judge:

INTRODUCTION

Defendant-appellant Antonios Koskerides appeals from the judgment of conviction on three counts of federal income tax evasion in violation of 26 U.S.C. §7201 .

Appellant was sentenced on count one to a term of imprisonment of eighteen months and a fine of $10,000. On count two appellant received a term of imprisonment of eighteen months and a fine of $10,000, sentence to run concurrently with count one. On count three he was sentenced to a term of five years, execution suspended, and five years' probation, to run consecutively with the sentences imposed on counts one and two. The court also imposed on appellant costs of prosecution and special conditions of probation requiring appellant to pay back taxes for the years 1981-83 and to file lawful federal tax returns during the period of probation.

Appellant seeks reversal on the following grounds: (1) the IRS violated its own procedures in its interviews with appellant, and therefore any statements or documents resulting from such interviews should have been suppressed; (2) the district court erred in denying appellant access to handwritten notes of the agent's interviews with him and the unredacted special agent's report; (3) the district court erred in admitting three of the government's summary charts into evidence; (4) admission of the testimony of agent Gambino violated hearsay rules; (5) the district court improperly limited appellant's cross-examination of three government witnesses; and (6) the government's net worth computation and proof of willfulness were insufficient. We affirm.

Appellant came to the United States from Greece in 1966 and was naturalized as a United States citizen in 1977. Appellant's native tongue is Greek. Although appellant speaks English, appellant has some difficulty with the language and made some use of the interpreter provided for him at the suppression hearing and at trial.

In 1968, appellant purchased a restaurant in Norwalk, Connecticut which became known as Penny's I. Between the years 1977 and 1980, he purchased several investment real estate properties, including the cluster of shops where Penny's I is located and four residential rental properties in Norwalk. In 1982, appellant purchased a diner in Fairfield , which he remodeled and renamed Penny's II. Appellant then purchased a third diner located in Norwalk in 1983, which became known as Penny's III. The business of these diners was conducted on a strictly cash basis. Based on the net worth plus expenditures method of proof, the evidence established that appellant had unreported taxable income of $141,831.44 for 1981, $220,436.45 for 1982, and $300,219.47 for 1983. This understatement of income resulted in the payment of only $2,285 in income tax in 1981, payment of no tax in 1982, and none in 1983. The additional tax calculated by the government to be due and owing was $71,561.00 for 1981, $89,879.00 for 1982, and $121,909.68 for 1983.

Appellant's defense at trial was that he received nontaxable funds from relatives and other individuals in Greece . Because Greece has laws strictly limiting the amounts of money that can be taken out of the country, appellant contended that he employed a scheme with various friends and relatives whereby individuals planning to travel to Greece would give U.S. currency to appellant prior to their trips to Greece . Once in Greece , the travelers would receive a like amount in Greek drachmas from appellant's relatives.

The government presented evidence that IRS agents interviewed various individuals in Greece named by appellant as persons from whom he had received funds. In its calculations, the government credited appellant for having received funds from Greece . The government also presented evidence regarding the informal loans within the Greek community and how they would be treated in the net worth calculation. The government also presented evidence that many of the funds received by appellant from Greece were repaid by appellant in a short period of time.

DISCUSSION

I. MOTION TO SUPPRESS

Appellant contends that the district court erred in denying his motion to suppress his written or oral statements, admissions, confessions or documents obtained in the course of the IRS investigation, along with any other evidence derived therefrom. Appellant argues that the IRS violated its own regulations by its conduct of the initial interrogation of defendant and its failure to inform appellant's accountant, George Aretakis, that it was engaged in a criminal investigation. The district court's findings of fact in ruling on a motion to suppress may not be disturbed unless the findings are clearly erroneous. United States v. Mast, 735 F.2d 745, 749 (2d Cir. 1984).

The Criminal Investigation Division of the IRS targeted appellant for investigation in 1984. Thereafter, on several occasions in 1984 and 1985, special agents Donald Kramer and Anthony Pavlich interviewed and had other contacts with appellant. The first interview took place on October 24, 1984. On that day, Kramer and Pavlich went to Penny's II, one of the diners operated by appellant. Upon meeting appellant, Kramer introduced himself as a special agent of the IRS Criminal Investigation Division and presented his credentials to appellant, which appellant viewed. After appellant led Kramer and Pavlich to a booth in the restaurant, Kramer again introduced himself and Pavlich as special agents of the Criminal Investigation Division. Kramer read to appellant the statement of rights from a card known as Document 5661. ¹ Appellant responded that he understood and wished to cooperate with the agents. Appellant appeared to comprehend the agent's questions and provided responsive answers to their inquiries in English. Neither at the initial interview nor during any later interview or contact did appellant ask for clarification of his rights or for an interpreter to be present. However, appellant testified that, because his English was "not too good" and he did not understand Kramer's questions, he referred Kramer to his accountant, Aretakis. That afternoon, the agents met a second time with the appellant, who permitted Kramer and Pavlich to inventory the contents of his safe deposit box.

On the same day, Kramer and Pavlich went to the office of appellant's accountant, George Aretakis. They testified that they displayed their credentials and identified themselves as IRS special agents from the Criminal Investigation Division. Pavlich also gave Aretakis a business card which identified him as a special agent with the Criminal Investigation Division. Appellant contends that the agents never informed Aretakis of the true nature of the investigation which had targeted appellant for potential criminal tax charges. Aretakis testified that if he had known of the true nature of the proceedings, he would have called an attorney. The district court found that any misunderstanding on the part of Aretakis as to the nature of the investigation was not a result of any misrepresentation or deception by the agents.

The IRS regulations relied upon by appellant are set forth in the IRS Handbook for Special Agents §342.132. The regulations provide that at the beginning of the first official interview with the subject of an investigation, the special agent will identify himself as a special agent of the IRS, produce his credentials, and inform the subject that one of the functions of a special agent is to investigate the possibility of criminal violations. The agent must then advise the subject that he cannot be compelled to answer any question or submit any information if the answer might tend to incriminate the subject. The subject must also be advised that any statement he makes or any information he turns over may be used against him in a criminal proceeding and that he may seek the assistance of an attorney. If the subject indicates that he wishes to withhold his testimony or records or consult with an attorney, the agent must terminate the interview. If the subject requests clarification of these rights or the purpose of the investigation at any time, the agent must provide an explanation. The regulations also require that the agent may not use trickery, misrepresentation or deception in obtaining any evidence or information.

The district court, in denying appellant's motion to suppress, found that the IRS followed its regulations and that no due process violation occurred. We agree. As noted above, appellant was advised of his rights from the outset by the reading of Document 5661, and he appeared to understand. The record discloses no misrepresentations or deception on the part of the agents. The district court's denial of appellant's motion to suppress was proper.

II. ACCESS TO HANDWRITTEN NOTES OF INTERVIEWS AND SPECIAL AGENT'S REPORT

Appellant contends that the district court erred in denying access to agent Kramer's handwritten notes of interviews with him and in denying access to the full Special Agent's Report ("SAR"). By pretrial motion, pursuant to Fed.R.Crim.P. 16(a)(1)(A), appellant requested all of his statements obtained by the government during the investigation. After agent Kramer's testimony at the hearing on the motion to suppress and after his testimony on direct examination at trial, the defense requested agent Kramer's handwritten notes of the interviews with appellant and the SAR pursuant to the Jencks Act, 18 U.S.C. §3500 et seq.

The defense was provided with typewritten IRS memoranda of the interviews with appellant prepared after the interviews from handwritten notes. The handwritten notes were preserved by the agent and submitted to the district court for in camera inspection. The court compared the handwritten notes with the memoranda of interview and denied disclosure of the notes, finding that everything in the notes was contained in the memoranda given to appellant. The court also found that the notes did not pertain to anything discussed by the agent in his testimony on direct examination.

Under Fed.R.Crim.P. 16(a)(1)(A), the government must permit the defendant to inspect and copy or photograph "the substance of any oral statement which the government intends to offer in evidence at the trial made by the defendant whether before or after arrest in response to interrogation by any person then known to the defendant to be a government agent." Here, the government fully complied with Rule 16(a)(1)(A) by providing appellant with the typewritten memoranda of interviews prepared from the agent's handwritten notes. See, e.g., United States v. Elusma, 849 F.2d 76, 79 (2d Cir. 1988), cert. denied, 109 S. Ct. 1570 (1989); United States v. Konefal, 566 F. Supp. 698, 708 (N.D.N.Y. 1989).

In addition, the refusal of the court to order disclosure of the handwritten notes did not violate the Jencks Act. The Jencks Act provides that a defendant in a federal criminal trial, after a government witness has testified on direct examination, is entitled to receive for purposes of cross-examination any written statement of the witness in the government's possession "which relates to the subject matter as to which the witness has testified." 18 U.S.C. §3500(b); United States v. Pacelli, 491 F.2d 1108, 1118 (2d Cir.), cert. denied, 419 U.S. 826 (1974). If the government's representations as to relevancy are challenged, the government must make the disputed statement available to the district court for an in camera inspection and ruling. 18 U.S.C. §3500(c); see Goldberg v. United States, 425 U.S. 94, 109 (1976). The district court's ruling that documents do not contain Jencks Act material cannot be overturned absent a clear showing of abuse of discretion. United States v. Singh, 628 F.2d 758, 765 (2d Cir.), cert. denied, 449 U.S. 1034 (1980). Here, the district court reviewed the handwritten notes in camera and determined that the notes did not pertain to anything said by the agent on direct examination. We find no error in the district court's determination.

Appellant also argues that he was entitled to the full SAR rather than the redacted version provided by the government, under Fed.R.Crim.P. 16(a)(1)(A) and the Jencks Act. The district court found that the materials relating to the net worth computations of appellant's taxable income and to the computations of tax due and owing were "reports, memoranda, or other internal government documents" under Fed.R.Crim.P. 16(a)(2) and were therefore exempt from discovery.

Rule 16(a)(2) provides that reports, memoranda, or other internal government documents made by the attorney for the government or other government agents in connection with the investigation or prosecution of the case are not subject to disclosure. Since Rule 16 clearly recognizes "the prosecution's need for protecting communications concerning legitimate trial tactics," United States v. Pfingst, 490 F.2d 262, 275 n.14 (2d Cir. 1973), cert. denied, 417 U.S. 919 (1974), we hold that the district court did not abuse its discretion in ruling that the analysis of tax liability was not discoverable under Rule 16, see 2 C. Wright, Federal Practice and Procedure §261 (1982).

Defendant also claims that the entire SAR should have been disclosed under the Jencks Act. The district court conducted an in camera inspection of the redacted SAR and the full SAR. The court determined that the redacted SAR was producible under the Jencks Act and ordered it provided to the defense for the purpose of its cross-examination of Agent Kramer. The court also compared the redacted SAR with the full SAR and determined that nothing else contained in the full SAR related to Agent Kramer's direct testimony. The district court's determination, after an in camera inspection, that the full SAR need not be disclosed was within the court's discretion. Singh, 628 F.2d at 765; Pacelli, 491 F.2d at 1118.

III. ADMISSION OF SUMMARY CHARTS

Appellant claims error in the district court's decision to admit summary charts prepared by the government. We will not overturn the court's decision to admit summary charts in the absence of abuse of discretion. United States v. Pinto, 850 F.2d 927, 935 (2d Cir.), cert. denied, 109 S.Ct. 174 (1988) and 109 S.Ct. 323 (1988).

Appellant contends that the district court erred in admitting three large charts on which were set out net worth tax computations. Appellant claims that the charts should not have been admitted at trial because they had not been disclosed during pretrial discovery. In its pretrial motions for discovery, appellant requested access to the IRS' net worth computations as well as access to any and all papers, documents or tangible objects which were in the possession of the government, which were material to the defense, or which were intended for use by the government as evidence at trial. The district court ruled that the actual computations and analysis of appellant's tax liability constituted government reports, memoranda, or other internal documents not discoverable under Rule 16(a)(2). Prior to trial, the defense specifically requested, pursuant to Rules 16(d)(1) and (2), that the court preclude the government from introducing evidence in its case in chief any Rule 16 materials which had not been disclosed. The court denied this request, based upon its prior ruling that the computations were exempt by Rule 16(a)(2). We find no error in the district court's ruling.

Appellant also contends that no proper foundation was established for admission in evidence of the three large charts at trial. According to appellant, the primary evidence upon which these exhibits were based was not available for the purpose of testing its accuracy. Summary charts may be admitted upon a proper foundation connecting the numbers on the chart with the underlying evidence. United States v. Citron [86-1 USTC ¶9228 ], 783 F.2d 307, 316 (2d Cir. 1986). The district court must determine as part of the foundation that the summary charts "fairly represent and summarize the evidence on which they are based." United States v. O'Connor [56-2 USTC ¶9936 ], 237 F.2d 466, 475 (2d Cir. 1956); see Citron, 783 F.2d at 316. Here, that was done by the district court. Moreover, the court instructed the jury that the charts were admitted as summaries and should be disregarded if they did not reflect the facts as shown by the other evidence in the case. We find no error in the district court's decision that a proper foundation had been made for admission of the summary charts.

IV. TESTIMONY OF AGENT GAMBINO

Appellant contends that the trial court erred in admitting the testimony of agent Vincent Gambino over hearsay objections. Gambino testified about statements made through an interpreter by appellant's father-in-law in Greece concerning funds given to appellant. Gambino interviewed George Kiriakides and his wife, Eleni, in Greece . Gambino conducted the interview through an interpreter who was employed at the American Embassy in Athens . Kiriakides was deceased and unavailable to appear at the trial. However, Eleni Kiriakides appeared and testified for the government regarding her recollection of the interview. The government made no showing that the interpreter was unavailable.

Appellant makes two claims of error in the admission of Gambino's testimony. First, appellant claims that Gambino's testimony contained multiple hearsay and was inadmissible because the testimony of the interpreter did not qualify as an exception to the hearsay rule. Second, appellant contends that the statements of declarant Kiriakides were inadmissible hearsay. Appellant contends that Kirakides' statements were crucial to the government's case because the statements were part of the government's evidence that it satisfied its duty to pursue leads to nontaxable sources of funds.

When offered for this purpose, the testimony of Gambino about Kiriakides' statements was admissible non-hearsay. Under Fed.R.Civ.P. 801(c), a statement is hearsay only when "offered in evidence to prove the truth of the matter asserted." When it offered Gambino's testimony to prove that it investigated all leads given by Koskerides to non-taxable income, the government did not seek to prove the truth of Kiriakides' statements, but rather to prove that the interview took place.

Appellant indicates that the government also offered Kiriakides' statements for their truth. Appellant claims that the government offered Kiriakides' statements to disprove appellant's alleged source of non-taxable funds from his relatives in Greece . To the extent that the statements of Kiriakides were offered for the truth of the amount of funds transferred to appellant, the error was harmless. Eleni Kiriakides, who was present at the interview, testified at trial. In addition, the overwhelming evidence against appellant rendered the error harmless beyond a reasonable doubt. See United States v. Castro, 813 F.2d 571, 577 (2d Cir.), cert. denied, 108 S. Ct. 137 (1987). In any event, we will examine whether this admission violated hearsay rules.

We reject appellant's contention that Gambino's testimony was inadmissible as multiple hearsay. The interpreter was no more than a language conduit and therefore his translation did not create an additional layer of hearsay. See United States v. Ushakow, 474 F.2d 1244, 1245 (9th Cir. 1973). The interpreter translated Kiriakides' statements concurrently as made. There is nothing in the record to suggest that the interpreter had any motive to mislead or distort, and there is no indication that the translation was inaccurate. See United States v. Da Silva, 725 F.2d 828, 831-32 (2d Cir. 1983). In addition, Eleni Kiriakides, who was also present at the conversation, testified at trial and was fully subject to cross-examination.

Kiriakides' statements were admissible as statements against interest. Fed. R. Evid. 804(b)(3). The evidence offered by the government satisfies the conditions set forth in United States v Stratton, 779 F.2d 820, 828 (2d Cir. 1985), cert. denied, 476 U.S. 1162 (1986):

A declaration against interest is not excludable as hearsay if three conditions are met: (1) the declarant is unavailable as a witness; (2) the statement is sufficiently contrary to the declarant's pecuniary or penal interests that a reasonable person in his position would not have made the statement unless he believed it to be true; and (3) corroborating circumstances indicate that the statement is trustworthy.

In this case, Kiriakides was unavailable as a witness due to his death in 1987. His statements were against his penal interest because they implicated him in a serious crime under Greek law, the expatriation of funds from Greece . Corroboration by Eleni Kiriakides, who was present during the conversation and who testified at trial, indicate that the statements were trustworthy. ²

Appellant further argues that the admission of Kiriakides' statements violated the confrontation clause of the Sixth Amendment because the declarants were unavailable for cross-examination. We disagree. A higher standard of reliability is imposed if the hearsay statements were "crucial" to the government's case. Stratton, 779 F.2d at 830 (citing Dutton v. Evans, 400 U.S. 74, 89 (1970). Kiriakides' statments were not of this nature. The statements were offered by the government as part of its evidence that the IRS fulfilled its duty to investigate leads to non-taxable sources. Moreover, Eleni Kiriakides, who was also present at the conversation, testified at trial and was fully subject to cross-examination. Kiriakides' statements were also reliable. We have held that "a finding of reliability sufficient to admit a statement against penal interest will normally satisfy Sixth Amendment concerns." Stratton, 779 F.2d at 830; see also United States v. Kusek, 844 F.2d 942, 951 (2d Cir.), cert. denied, 109 S. Ct. 157 (1988).

V. LIMITATION OF CROSS-EXAMINATION OF WITNESSES KRAMER, FAUSTINE, AND HIRSCH

Appellant contends that the district court erred in limiting cross-examination of witnesses Kramer, Faustine and Hirsch. Agent Kramer testified on direct examination about appellant's admissions during the course of the investigation and his efforts in following the leads provided by appellant concerning non-taxable sources of funds. The government's charts and the underlying summaries, memos and reports upon which they were based reflected the work of agent Kramer. Although Kramer was the investigating agent on the case, he had retired from the IRS. Agent Faustine, Kramer's supervisor, and agent Genova testified that they had replaced Kramer as case agents and had assumed reponsibility for the case. Kramer did not testify about net worth computations. Agent Faustine testified about the net worth plus expenditures computation, and revenue agent Sandel testified concerning the actual calculation of tax due and owing.

Defense counsel attempted to cross-examine Kramer regarding the part of his investigation leading to the net worth computations. The district court determined that this area of inquiry was beyond the scope of direct examination and therefore was foreclosed under Fed. R. Evid. 611(a) and (b). Rule 611(b) provides that "cross-examination should be limited to the subject matter of the direct examination and matters affecting the credibility of the witness." The district court has broad discretion to determine the scope of cross-examination. United States v. Bari, 750 F.2d 1169, 1178 (2d Cir. 1984), cert. denied, 472 U.S. 1019 (1985). We will not overturn an exercise of the district court's discretion absent a clear showing of abuse. Id. at 1178-79.

Here, we find no such abuse of discretion. Appellant's attempted cross-examination with respect to net worth computations was outside the scope of agent Kramer's direct testimony. In addition, the court indicated that the government would be required to make agent Kramer available if the defense chose to call him as a witness.

Appellant also claims that the district court erred in limiting the cross-examination of two rebuttal witnesses, IRS agent Kenneth Faustine and Michael Hirsch. The government recalled agent Faustine for the limited purpose of testifying regarding adjustments made in the computations for non-taxable funds transferred from Greece . Defense counsel attempted to cross-examine agent Faustine concerning loans which were treated in the net worth computation not as adjustments for funds from Greece , but as personal loans payable. We find no abuse of discretion in the district court's limitation of this line of cross-examination. On direct, Faustine had not been asked about informal loans from friends or relatives or personal loans payable of any kind.

We also find no abuse of discretion in the district court's limitation of the cross-examination of rebuttal witness Michael Hirsch. Hirsch had testified in the government's case-in-chief about his sale of the Fairfield diner to appellant in 1982. On rebuttal, the government called Hirsch to elicit his gross receipts from that diner for 1981 and 1982. Defense counsel on cross-examination attempted to question Hirsch about the nature of the diner and about the circumstances of the sale to appellant. In view of the limited scope of Hirsch's testimony on rebuttal, the district court's refusal to allow defense counsel to pursue this line of questioning was within its discretion.

There was no error by the district court in refusing to allow defense counsel to make a motion outside the presence of the jury with regard to the cross-examination of Hirsch. Appellant contends that the area sought to be proffered and explored on cross-examination was Hirsch's operations of the diner and Hirsch's personal observations of the diner under appellant's ownership. It is evident that defense counsel's proffer was beyond the scope of Hirsch's limited testimony as a rebuttal witness. The appellant had sufficient opportunity during the government's case-in-chief to question Hirsch concerning these matters.

VI. SUFFICIENCY OF THE EVIDENCE

Appellant claims that the government's evidence was insufficient to support a conviction for tax evasion. A defendant challenging the sufficiency of the evidence bears a heavy burden. United States v. Young, 745 F.2d 733, 762 (2d Cir. 1984), cert. denied, 470 U.S. 1084 (1985). "The verdict of the jury must be sustained if there is substantial evidence, taking the view most favorable to the Government, to support it." Glasser v. United States , 315 U.S. 60, 80 (1942). On appeal, a jury verdict must be affirmed if "any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." Jackson v. Virginia , 443 U.S. 307, 319 (1979).

The elements of tax evasion under 26 U.S.C. §7201 are (1) willfulness, (2) the existence of a tax deficiency, and (3) an affirmative act constituting an evasion. Citron, 783 F.2d at 312. Also, the deficiency must be substantial. Id. Appellant claims that the government's net worth computation and its proof of willfulness were insufficient.

To establish the existence of a tax deficiency, the government used the net worth method of proof. In order to prove a tax deficiency under this method, the government must establish the defendant's opening net worth with reasonable accuracy and increases in net worth for each year in question, excluding any increase which is attributable to reported or known non-taxable income. United States v. Grasso [80-2 USTC ¶9593 ], 629 F.2d 805, 807 (2d Cir. 1980); United States v. Sorrentino [84-1 USTC ¶9196 ], 726 F.2d 876, 879 (1st Cir. 1984). The government must also establish either (1) a likely source of the unreported income or (2) it has negated all possible sources of non-taxable income. United States v. Massei [58-1 USTC ¶9326 ], 355 U.S. 595, 595 (1958); Holland v. United States [54-2 USTC ¶9714 ], 348 U.S. 121 (1954); United States v. Costanzo [78-2 USTC ¶9575 ], 581 F.2d 28, 32 (2d Cir. 1978), cert. denied, 439 U.S. 1067 (1979).

Appellant contends that the government presented insufficient evidence both of the likely source for appellant's taxable income and of a bona fide attempt by the IRS to verify leads to possible non-taxable sources. We disagree. The government offered evidence that the appellant's business was a likely source of unreported taxable income. Appellant operated two diners as cash businesses. Appellant testified that he exercised almost exclusive control over the businesses and that he made large cash deposits when necessary to cover checks. Testimony also indicated that appellant's method of keeping his books permitted the possibility of skimming. In addition, Michael Hirsch, the former owner of the Fairfield diner, testified that his gross receipts were $728,042 in 1981, as compared to appellant's gross recepts of $419,036 for his first full year of operation. This evidence, viewed in the light most favorable to the government, is sufficient to establish a likely source of taxable income. See Costanzo, 581 F.2d at 33.

The government also sufficiently investigated all reasonable leads to non-taxable sources. The government meets its burden when "it investigates reasonably possible sources of non-taxable income and explores whatever leads the taxpayers or others may proffer," United States v. Mastropieri [82-2 USTC ¶9484 ], 685 F.2d 776, 785 (2d Cir.), cert. denied, 459 U.S. 945 (1982), and thus, by showing that non-taxable income did not derive from those sources, "negat[es] . . . [all] reasonable explanations by the taxpayer inconsistent with guilt." Holland , 348 U.S. at 135.

IRS agents interviewed each individual whose name had been provided by appellant, including three individuals in Greece . Agent Kramer testified about his efforts to obtain detailed information regarding the names, dates, and amounts of funds appellant claimed to have received from Greece . Appellant and others testified regarding numerous loans of up to $75,000 made informally between members of the Greek community with no interest charged, no terms of repayment, and no documentation.

The government provided evidence at trial that it took reasonable steps to learn the names, dates, and amounts concerning these loans. Testimony showed that in many instances, the loans were short term and were paid back within a matter of weeks or months. The government took into account in its net worth computation the informal personal loans outstanding and funds from Greece . The government's investigation of non-taxable sources of income was sufficient to negate all reasonable explanations by the taxpayer inconsistent with guilt.

Appellant also claims that the evidence at trial was insufficient to support a conclusion that he willfully and knowingly evaded income taxes. We disagree. Appellant's pattern of evasion over a three year period, the magnitude of the evasion in this case, and appellant's understanding and involvement in the filing of his income tax returns were sufficient to infer willfulness. See United States v. Levy [71-2 USTC ¶9684 ], 449 F.2d 769, 770 (2d Cir. 1971); United States v. Stone [85-2 USTC ¶9652 ], 770 F.2d 842, 845 (9th Cir. 1985).

CONCLUSION

 

For the foregoing reasons, the judgment is affirmed.

^* Honorable Robert J. Kelleher, United States District Court for the Central District of California, sitting by designation.

¹ Document 5661 reads as follows:

As a special agent, one of my functions is to investigate the possibility of criminal violations of the Internal Revenue laws, and related offenses.

In connection with my investigation of your tax liability (or other matter) I would like to ask you some questions. However, first I advise you that under the 5th Amendment to the Constitution of the U.S. I cannot compel you to answer any questions or to submit any information if such answers or information might tend to incriminate you in any way. I also advise you that anything which you say and any documents which you submit may be used against you in any criminal proceeding which may be undertaken. I advise you further that you may, if you wish, seek assistance of any attorney before responding.

Do you understand these rights?

² Because we conclude that Kiriakides' statement was admissible under Fed. R. Evid. 804(b)(3), we need not discuss Rule 804(b)(5), the residual exception to the hearsay rule and the other ground upon which the district court admitted the testimony.

 

 

[98-2 USTC ¶50,560] United States of America , Appellee v. Eugene H. Mathison, Appellant

(CA-8), U.S. Court of Appeals, 8th Circuit, 97-2986, 7/14/98, Affirming an unreported District Court decision

[Code Sec. 7201 ]

Crimes: Tax evasion: Placement of assets in name of nominee: Pro se taxpayer: Evidence, admission of: Harmless error.--A taxpayer's pro se challenges to his conviction on multiple counts of tax evasion involving the concealment of assets from the IRS by placing them in the name of nominees were rejected. Concealment qualified as evasion of payment under Code Sec. 7201 . The taxpayer's argument that evidence of a false answer to an IRS official concerning the liabilities at issue had been improperly admitted was rejected since the answer was probative of willfulness, an element of the offense being tried. Likewise, the trial court's refusal to allow a defense witness to testify was harmless error in light of the other evidence against the taxpayer.

[Code Sec. 7201 ]

Crimes: Tax evasion: Pro se taxpayer: Discharge of counsel: Lesser-charge instruction.--A taxpayer's pro se challenges to his conviction on multiple counts of tax evasion was rejected. The trial court did not abuse its discretion by refusing the taxpayer's request to discharge his counsel and present his closing argument pro se. The trial court's concern about jury confusion was entitled to deference. Moreover, the taxpayer's related argument that he withdrew his request for a lesser-charge instruction based on the belief that he could present a closing argument pro se was also rejected.

[Code Sec. 7201 ]

Crimes: Tax evasion: Pro se taxpayer: Sentence enhancement: Sophisticated means to impede discovery of offense.--A taxpayer's pro se challenges to his sentencing in connection with multiple tax evasion convictions, which centered around the contention that he had accurately reported taxes due and simply did not pay them, were rejected. Also, a two-level sentencing enhancement for his use of sophisticated means to impede discovery of the offense was properly assessed by the trial court.

[Code Sec. 7402 ]

Crimes: Tax evasion: Pro se taxpayer: Jurisdiction: Failure to preserve issues for appeal: Ineffective assistance of counsel: Illegal search.--An appellate court lacked jurisdiction to consider the pro se arguments of a taxpayer convicted of tax evasion regarding jury instructions and the prosecution's closing remarks because the taxpayer failed to preserve those issues by objecting at trial. Additionally, his argument that certain evidence should have been suppressed because it was based on an illegal search was rejected since no motion to suppress or objection to the evidence was made at trial. Claims of ineffective assistance of counsel were outside the scope of the proceedings.

David L. Zuercher, Mara M. Kohn, Pierre , S.D. 57501-2489 , for plaintiff-appellee. Eugene H. Mathison, Federal Correctional Institution, P.O. Box 1000 , Sandstone , Minn. 55072-1000 , for defendant-appellant.

Before: MCMILLIAN, NOONAN ¹ and ARNOLD, Circuit Judges.

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

Per Curiam"

EC: Eugene H. Mathison appeals from the final judgment entered in the District Court ² for the District of South Dakota upon a jury verdict finding him guilty of multiple counts of tax evasion, in violation of 26 U.S.C. §7201. The district court sentenced appellant to serve twenty-one months imprisonment and three years supervised release, and to pay $51,019.85 in restitution, a $4,000 fine, $1,448.80 representing the costs of prosecution, and a special assessment of $650. For reversal, Mathison raises a number of pro se challenges to his jury-trial convictions and the resulting sentence. For the reasons discussed below, we affirm the judgment of the district court.

Mathison was the founder, treasurer, and CEO of Golden Age Services Corp., a company that sold living-trust packages to the public. After Golden Age failed to pay various employment taxes, the Internal Revenue Service (IRS) investigated. As a result, Mathison was later charged with thirteen counts of attempting to evade and defeat the payment of federal income-withholding and FICA taxes owed by Golden Age, by concealing and attempting to conceal assets from the IRS through placement of funds and property in the names of nominees, in violation of §7201. On appeal Mathison first argues the district court erred in denying his motion to dismiss the indictment against him, because §7201 does not apply to the charged offenses. After de novo review, see United States v. Sykes, 73 F.3d 772, 773 (8th Cir.), cert. denied, 517 U.S. 1246 (1996), we reject this argument. Section 7201 clearly covers the offenses described in the indictment. See 26 U.S.C. §7201 (stating in relevant part that "[a]ny person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall . . . be guilty of a felony" (emphasis added)); United States v. McGill [92-1 USTC ¶50,052], 964 F.2d 222, 230 (3d Cir.) (§7201 encompasses two kinds of affirmative behavior--evasion of assessment and evasion of payment--and latter includes, inter alia, placing assets in name of others; citing Spies v. United States [43-1 USTC ¶9243], 317 U.S. 492, 499 (1943)), cert. denied, 506 U.S. 1023 (1992).

Next, Mathison argues the district court erroneously admitted prior-bad-acts evidence against him at trial. We agree with the district court, however, that the evidence in question--a false answer Mathison gave during an interview with an IRS official who was investigating Golden Age's delinquent taxes--was an act of evasion probative of willfulness, an element of the offenses being tried. We thus conclude the district court did not abuse its discretion in admitting the testimony. See Fed. R. Evid. 404(b); United States v. Tomberlin, 130 F.3d 1318, 1320 (8th Cir. 1997) (standard of review); United States v. Heidebur, 122 F.3d 577, 579 (8th Cir. 1997) (Rule 404(b) admits evidence of other crimes or acts relevant to any issue in trial unless such evidence tends to prove only criminal disposition; bad acts that form integral part of crime charged fall outside Rules ambit).

Mathison also complains the district court denied him the right to call his former office secretary, who would have testified that she worked for Mathison at a new business after he left Golden Age, and taxes were promptly paid there. Assuming this matter is properly before us as an evidentiary issue (the defense did not call this witness, and Mathison's later pro se proffer of her testimony was made for the purpose of discharging counsel), we conclude the evidence was not so probative that the district court abused its broad discretion. See United States v. Barnes, 140 F.3d 737, 738 (8th Cir. 1998) (per curiam). In any event, given the other evidence against Mathison, we conclude any error in not admitting this testimony was harmless. See Fed. R. Crim. P. 52(a).

Next, Mathison argues the district court improperly denied him the right to discharge counsel and present closing argument pro se. We also reject this argument. First, it is questionable whether Mathison unequivocally asked to proceed pro se, because he stated at one point that he wished to act as co-counsel. In any event, we do not believe the district judge--who was concerned about jury confusion--abused his discretion in denying the request. See United States v. Einfeldt, 138 F.3d 373, 378 (1998) (no constitutional right to hybrid representation; it is available at district court's discretion); United States v. Webster, 84 F.3d 1056, 1062 & 1063 n.3 (8th Cir. 1996) (defendant must clearly and unequivocally assert desire to waive counsel and proceed pro se; right to self-representation is unqualified only if demanded before trial, and thereafter is subject to trial court's discretion which requires balancing of defendant's legitimate interests in representing himself against potential disruption and possible delay). We likewise reject Mathison's related contention that he is entitled to relief because he withdrew his request for a lesser-charge instruction believing he could present closing argument pro se.

Mathison also argues the district court should have instructed the jury that, to convict him, it had to find more money was due than was reported, Mathison did something to prevent the correct assessment of the tax owed, and he acted with an evil motive; Mathison takes further issue with a portion of the instruction permitting the jury, in determining willfulness, to consider any statements he had omitted. The record does not indicate Mathison preserved these issues by objecting below, and after reviewing the instructions as a whole, we find no error, much less plain error. See Fed. R. Crim. P. 52(b); United States v. Barnes, 140 F.3d at 738 (standard of review); Cheek v. United States [91-1 USTC ¶50,012], 498 U.S. 192, 201 (1991) (willfulness requires government to prove law imposed duty on defendant, defendant knew of duty, and defendant voluntarily and intentionally violated duty); United States v. Clements, 73 F.3d 1330, 1338 (5th Cir. 1996) (instruction accurately set out elements of §7201 offense where jury was told evidence had to establish beyond reasonable doubt that defendant knowingly and intentionally attempted to evade or defeat payment of taxes owed).

Next, Mathison argues the prosecution's closing remarks injected new and false allegations into the case. We reject this argument for lack of a showing that the remarks were inconsistent with the evidence. Cf. United States v. Robinson, 110 F.3d 1320, 1327 (8th Cir.) (so long as prosecutors do not stray from evidence and reasonable inferences from it, they may use colorful and forceful language in arguments to jury), cert. denied, 118 S. Ct. 432 (1997). Even if the statements were improper, the defense did not object to them, and exceptional circumstances warranting reversal are not present here. See id. at 1326.

We also reject Mathison's sentencing arguments centering around his contention that he accurately reported taxes due and simply did not pay them, and we specifically reject his contention that the district court wrongly assessed a two-level enhancement for using a sophisticated means to impede discovery of the offense. See U.S.S.G. §2T1.1(b)(2) (1997); cf. United States v. Becker [92-2 USTC ¶50,314], 965 F.2d 383, 390 (7th Cir. 1992) (affirming sophisticated-means enhancement where defendant hid assets under account identified by arbitrary number, eliminated all bank accounts in his name, and deposited earnings in sons account), cert. denied, 507 U.S. 971 (1993). Mathison's suggestion that the district court should have referenced existing tax liens in its restitution order is equally meritless.

Mathison raises numerous issues relating to a search warrant affidavit. However, he did not file a motion to suppress or object to evidence based on an illegal search. Moreover, he challenged the search warrant in another criminal case resulting in convictions that are presently on appeal before us. We thus decline to consider the search warrant issues Mathison raises here, except to the limited extent we summarily reject his argument that the affidavit was improper for lack of any allegations that he tried to interfere with the assessment of the amount of tax due.

Last, we note Mathison's claims of ineffective assistance of counsel are more properly raised in proceedings under 28 U.S.C. §2255. See United States v. Reyna-Segovia, 125 F.3d 645, 646 (8th Cir. 1997) (per curiam).

Accordingly, we affirm the judgment of the district court. We also deny, as meritless or moot, the various motions the parties have filed on appeal.

¹ The Honorable John T. Noonan, Jr., United States Circuit Judge for the Ninth Circuit, sitting by designation.

² The Honorable Richard H. Battey, Chief Judge , United States District Court for the District of South Dakota.

 

 

[97-2 USTC ¶50,538] United States of America, Appellee v. Joan M. Noske, Appellant United States of America, Appellee v. James L. Noske, Appellant United States of America, Appellee v. James L. Noske, Appellant United States of America, Appellee v. Joan M. Noske, Appellant United States of America, Appellee v. John B. Ellering, Appellant United States of America, Appellee v. Imelda M. Spaeth, Appellant United States of America, Appellee v. Laverne Scherping, Appellant United States of America, Appellee v. Loren Scherping, Appellant

(CA-8), U.S. Court of Appeals, 8th Circuit, 95-3235MN, 95-3254MN, 96-1997MN, 96-1999MN, 96-2001MN, 96-2004MN, 96-2006MN, 96-2008MN, 6/24/97, Affirming an unreported District Court decision

[Code Sec. 1 ]

Constitutional arguments: Double jeopardy: Damages: Punitive v. remedial.--The prosecution of a brother and his sister on charges of conspiracy to defraud the government by impeding the IRS did not violate the Double Jeopardy Clause of the U.S. Constitution because the imposition of penalties for promoting abusive tax shelters compensated the government for its damages and was not punitive in nature. The siblings sold services involving the use of business trusts and supposedly tax-exempt corporations to help individuals hide income and assets from the IRS. They were convicted of income tax evasion and were penalized in an amount representing 20% of the income derived from their abusive activity.

[Code Sec. 7203 ]

Crimes: Evidence: Immunity: Admissibility.--Although taxpayers had been granted derivative use immunity concerning the information and records that they provided to IRS agents, the record established that the criminal indictments against them was derived from legitimate, independent sources. The trial court's determinations as to the admissibility of certain evidence were sustained.

[Code Sec. 7203 ]

Crimes: Conspiracy to defraud: Tax evasion: Defenses: Double jeopardy.--Two conspiracy counts against a brother and sister who promoted abusive tax shelters did not violate double jeopardy. The counts addressed separate agreements with separate objects among different people, rather than a single agreement to commit two crimes.

[31 U.S.C. §5311 ]

Bank Secrecy Act: Anti-structuring provisions: Violation: Evidence.--Evidence presented at trial supported an individual's conviction on charges of violating the anti-structuring provisions of the Bank Secrecy Act. The jury could reasonably have found that the taxpayer asked a bank to break down sale proceeds into cashiers checks and cash in amounts that would avoid triggering the reporting requirement and that the taxpayer willfully violated the applicable statute.

[Code Secs. 7203 and 7206 ]

Crimes: Evasion of tax: Conspiracy to evade: Conspiracy to defraud: Evidence.--The evidence supported the conviction of an individual on charges of tax evasion, conspiracy to evade taxes and conspiracy to defraud the government. The proof showed that taxes were owed, that a sale of assets was a sham for tax purposes, and that the taxpayer acted in agreement with others to defraud the government. Also, the evidence supported the convictions of two other individuals who had knowledge of the tax shelter activities on charges of conspiracy to defraud the government. Once a conspiracy was shown, the jury could reasonably infer that the parties knew of the conspiracy's object and willingly joined and participated.

[Code Sec. 7203 ]

Crimes: Tax evasion: Conspiracy to evade: Conspiracy to defraud: Jury instructions.--Jury instructions given at trial did not improperly prejudice taxpayers charged with crimes in connection with their promotion of abusive tax shelters. Any error in giving a willful blindness instruction was harmless with respect to the taxpayer challenging it. An instruction concerning trust arrangements as shams correctly stated the law. The failure of an instruction to include exhibit numbers was harmless. An instruction charging that a transaction lacking economic substance cannot be recognized for tax purposes was harmless because, reading the instructions as a whole, the jury was free to find that a transaction lacking economic substance was not entered into with intent to impede the IRS.

[Code Sec. 7203 ]

Crimes: Tax evasion: Conspiracy to evade: Conspiracy to defraud: Sentencing: Costs.--The trial court committed no errors in the sentencing of taxpayers who were convicted of tax evasion, conspiracy to evade taxes and conspiracy to defraud the United States. A presentence report was properly adopted without conducting an evidentiary hearing, and sentencing guidelines were properly followed. Tax loss was properly calculated in deciding the base offense levels. The trial court acted appropriately in adding two levels to the base offense level because the taxpayers used sophisticated means. Furthermore, one taxpayer's grouping argument and an attack on his criminal history category were rejected. The taxpayers were also properly assessed the costs of prosecution for tax evasion.

William Whitledge, Robert E. Lindsay, Wade W. Parrish, Cory Smith, Department of Justice, Washington, D.C. 20530, Keith William Reisenauer, United States Attorney's Office, 655 First Ave., N., Fargo, N.D. 58108, for plaintiffs-appellees. Virginia Guadalupe Villa, Federal Public Defender's Office, 300 S. Fourth St., Minneapolis, Minn. 55415, Richard Henderson, Nilles & Hansen, 1800 Radisson Tower, Fargo, N.D. 58108, Keith Anthony Cannon, United States Penitentiary, P.O. Box 1000, Leavenworth, Kan. 66048, Robert Gerard Malone, 386 N. Wabasha St., St. Paul, Minn. 55102, Thomas G. Dunnwald, 310 Fourth Ave., S., Minneapolis, Minn. 55415, Nancy R. Vanderheider, 505 N. Hwy., 169, Minneapolis, Minn. 55441, Paul G. Morreim, 301 McAndrews Rd., W., Burnsville, Minn. 55337, John Charles Brink, Daniel L. Gerdts, 401 Second Ave., S., Minneapolis, Minn. 54401, for defendants-appellants. Joan M. Noske, Federal Prison Camp, P.O. Box 6000, Pekin, Ill. 61555-6000, pro se. John B. Ellering, 466 First St., S.E., Richmond, Minn. 56368, pro se. Loren Scherping, 3595 County Rd., Freeport, Minn. 56331, pro se. Imelda M. Spaeth, P.O. Box 72, Richmond, Minn. 56368, pro se. James L. Noske, United States Medical Center for Federal Prisoners, P.O. Box 4000, Rochester, Minn. 55903-4000, pro se. Laverne Scherping, 26718 358th St., Freeport, Minn. 56331, pro se.

Before: MCMILLIAN, BEAM, and FAGG, Circuit Judges.

FAGG, Circuit Judge:

James L. Noske, a law school graduate and financial planner, and his sister, Joan M. Noske, an accountant and tax return preparer, sold services promoting the use of business trusts and supposedly tax-exempt corporations to help many individuals hide income and assets from the Internal Revenue Service (IRS). Basically, the Noskes helped their clients facing tax assessments transfer assets to one of the Noskes' "nonprofit" corporations in a "sale" for no consideration. The transfer made it appear as though the client no longer owned the property, preventing the IRS from levying on it to satisfy outstanding tax liabilities, but the clients continued to exercise full control over the property. The Noskes also helped clients seeking to reduce or avoid federal income tax form a business trust, which conducted no business activity, name the Noskes' "nonprofit" corporations as trustees, and transfer all income-producing property to the trust. Through a contribution of trust shares to one of the purported nonprofit corporations and other maneuvers, the arrangement effectively evaded the assessment and payment on 60% of the clients' income. With the help of Imelda M. Spaeth from the early 1980s through the early 1990s, and John B. Ellering from 1988 through 1993, the Noskes obtained third parties to sign often-blank documents as officers of the Noske corporations. Joan Noske filed income tax returns for the trusts, showing distributions to Noske corporations and the clients.

The Noskes' clients included brothers Loren and Laverne Scherping, owners and operators of a dairy farm in Minnesota . After the IRS decided the Scherpings owed a tax deficiency, the brothers purported to convey their farm to a trust formed with the help of the Noskes, naming Noske corporations as trustees. The Scherpings also transferred all their farm personal property, including equipment and livestock, to a Noske corporation. The Scherpings retained full control over their farm, however. When the Tax Court decided the income earned from the farm was taxable to the Scherpings individually rather than the Noske corporation, Joan Noske helped the Scherpings sell the cattle to avoid an IRS levy. In cashing the cattle purchasers' checks, Joan Noske deliberately evaded requirements that banks report currency transactions over $10,000 by breaking the transactions down into smaller amounts.

For their parts in the scheme, the Noskes, Spaeth, and Ellering were charged in Count I of the indictment with conspiracy to defraud the United States by impeding the IRS. The Government also charged the Noskes and the Scherpings with conspiracy to evade income taxes assessed against the Scherpings in Count II of the indictment, and with income tax evasion in Count III. Joan Noske and the Scherpings were also charged with several counts of structuring a monetary transaction for negotiation of the cattle proceeds. The Noskes, Spaeth, and Ellering were convicted of all charges against them. The Scherpings were found guilty of conspiracy to evade income taxes, but acquitted on the other charges. The Noskes, Spaeth, Ellering, and the Scherpings appeal. Having carefully examined their many arguments, we affirm.

The Noskes contend their prosecution on the conspiracy counts violates double jeopardy because the IRS had already imposed civil tax penalties against them for promoting abusive tax shelters. See 26 U.S.C. §6700 (1988) (providing for penalty of $1000 or 100% of income derived from activity). The Noskes have not been punished by assessment of the §6700 penalties, however, because the penalties are remedial rather than punitive in nature. The Noskes were jointly assessed a penalty of $490,174, representing 20% of the income derived from their abusive activity. As the district court found, this is not overwhelmingly disproportionate to the Government's damages. See United States v. Halper, 490 U.S. 435, 439 (1989) (penalty more than 220 times greater than Government's loss qualified as punishment for double jeopardy purposes). Although no final tally has been calculated, the district court found the Government had incurred "obviously substantial" costs and "significant expenses" because of the Noskes' behavior, including lost tax revenue and costs of investigation and prosecution over a ten-year period. At bottom, the penalties imposed do not exceed what could reasonably be regarded as compensation for the Government's damages. See id. "[T]he Government is entitled to rough remedial justice," id. at 446, regardless of the precise amount needed for compensation. See Thomas v. Commissioner [95-2 USTC ¶50,439], 62 F.3d 97, 101 (4th Cir. 1995) (§6653(b)(1) addition to tax not punitive in violation of double jeopardy). The district court concluded, and we agree, that the penalty serves the remedial goal of reimbursing the Government.

The Noskes also contend the Government's evidence against them included or was derived from information and records they provided to three particular IRS agents under a written immunity agreement in effect between 1983 and 1985. The district court held a five-day hearing on the immunity issue and concluded the Noskes had been granted derivative use immunity. After reviewing the 1994 indictment, the sources of information that led to the indictment, and the information provided under the grant of immunity, the district court held the Government had shown the information used to obtain the indictment was derived from legitimate, independent sources, and the information provided by the Noskes to the three agents was not used, directly or indirectly, in obtaining the indictment. Having reviewed the record, including the district court's lengthy report and addenda, we conclude the district court committed no error. See United States v. Wiley, 997 F.2d 378, 381 (8th Cir. 1993).

Next, the two conspiracy counts do not subdivide a single criminal conspiracy into multiple violations of the same offense in violation of double jeopardy. Although the two counts charge violations of the same statute, 18 U.S.C. §371, the totality of the circumstances reveals the counts address separate agreements. See United States v. Okolie, 3 F.3d 287, 290-91 (8th Cir. 1993). Count I charged the Noskes, Spaeth, and Ellering with conspiracy to defraud the United States , and the evidence showed they agreed to provide sham entities and record keeping services that permitted clients to hide their own tax liabilities. Count II charged the Scherpings, who were not members of the Count I conspiracy, and the Noskes with conspiring to evade the payment of the Scherping's tax liabilities. The evidence established the Scherpings were motivated to evade only their own tax liabilities, rather than to provide general tax evasion services like the Noskes, Spaeth, and Ellering. See United States v. Rosnow [92-2 USTC ¶50,506], 977 F.2d 399, 405-06 (8th Cir. 1992). In sum, the two conspiracy counts address separate agreements with separate objects among different people, not a single agreement to commit two crimes. See United States v. Thomas, 759 F.2d 659, 662 (8th Cir. 1985).

The district court did not abuse its discretion in denying motions by Spaeth and the Scherpings for severance. Joinder was proper under Fed. R. Crim. P. 8(a), and Spaeth and the Scherpings have not shown actual prejudice warranting severance under Fed. R. Crim. P. 14. See United States v. Delpit, 94 F.3d 1134, 1143 (8th Cir. 1996). Acquittals of some defendants on some charges and a defendant charged only with count II show the jury was able to compartmentalize the evidence. See id. at 1144; United States v. Nevils, 897 F.2d 300, 305 (8th Cir. 1990). Further, any risk of prejudice was reduced by the district court's instructions, which directed the jury to consider each offense and its supporting evidence separately, and to analyze the evidence with respect to each individual without considering evidence admitted solely against other defendants. See Delpit, 94 F.3d at 1144.

The district court also did not abuse its discretion in refusing to admit evidence of the Scherpings' willingness to pay what they believed was the correct amount of their income tax liabilities for 1979 through 1983. See id. at 1146 (standard of review). Under a Tax Court ruling, the Scherpings were legally obligated to pay a higher amount than they allegedly believed was correct. The Scherpings' willingness to pay an amount less than they legally owed was simply irrelevant.

The district court correctly refused to suppress a list of trust documents seized during a search of John Ellering's home and bowling alley. Even if the search violated Ellering's Fourth Amendment rights, the list was merely cumulative of other properly admitted evidence showing Ellering had knowledge of the trusts, and thus admission of the list was harmless beyond a reasonable doubt. See United States v. Johnson, 12 F.3d 760, 765 (8th Cir. 1993).

The district court did not abuse its discretion in admitting an exhibit showing that Spaeth had unpaid tax liabilities from 1980 and 1981, and that in Tax Court proceedings assessing the deficiencies, Spaeth had testified she had no taxable income from her job at a veterinary clinic because she had donated her services to a Noske nonprofit corporation, which allegedly performed services for the clinic under a contract. Noting the exhibit reflected Spaeth's activities during the time frame of the charged conspiracy, the court held the evidence was relevant and admissible. We agree. The evidence was connected with and part of Spaeth's activities with the Noskes, see United States v. Luna, 94 F.3d 1156, 1162 (8th Cir. 1996), and was not unfairly prejudicial, see Fed. R. Evid. 403. Even if the exhibit were considered evidence of other crimes, the exhibit was admissible to show Spaeth's knowledge of the conspiracy's object and her intent to join, and Spaeth's motion in limine shows she had reasonable notice the exhibit might be offered.

See Fed. R. Evid. 404(b).

Similarly, the district court did not abuse its discretion in excluding certain evidence James Noske sought to introduce. See Delpit, 94 F.3d at 1146. The court properly excluded evidence that IRS Special Agent Patrick Henry recommended against pursuing prosecution of the Noskes in 1988. Henry did not have the benefit of most of the evidence against the Noskes, which was gathered later, so his 1988 opinion was based on incomplete information and is irrelevant. Even if relevant, the minimum probative value of the evidence is outweighed by the danger of unfair prejudice, confusion of issues, and misleading the jury. See Fed. R. Evid. 403. As for the district court's ruling precluding James Noske from calling Agent Henry as a witness, Noske has not shown the exclusion prejudiced him.

Joan Noske challenges her convictions for structuring a transaction to evade requirements that financial institutions report the payment, receipt, or transfer of currency exceeding $10,000. See 31 U.S.C. §5324(3) (1988) (found in 1994 version at §5324(a)(3) without substantive change); id. §5313(a). Viewing the evidence in the light most favorable to the verdict, see United States v. Erdman, 953 F.2d 387, 389 (8th Cir. 1992), the evidence supports Joan Noske's structuring convictions. Less than a week after the Tax Court sustained the Commissioner's determination of deficiencies in the Scherpings' tax liabilities for 1981 through 1983, the Scherpings and Joan Noske liquidated the Scherpings' herd of dairy cattle over a five-day period. In three of the sales, Joan negotiated the buyers' checks over $10,000 for currency and the purchase of money orders in amounts less than $10,000. The jury could reasonably find Joan asked the bank to break down the proceeds into cashiers' checks and cash in lesser amounts to avoid triggering the reporting requirement. The jury could also reasonably infer Joan Noske willfully violated the antistructuring statute. Ample evidence showed Joan knew of the bank's duty to report cash transactions over $10,000 and her own duty not to evade triggering a bank report, including her notification by the IRS about the reporting requirements, her status as a tax return preparer and later a certified public accountant, and the elaborate nature of the scheme. See Ratzlaf v. United States [94-1 USTC ¶50,015], 510 U.S. 135, 146-47, 149 n.19 (1994).

Although Joan did not trigger the reporting requirement by receiving more than $10,000 in cash on any one day, the indictment's structuring counts stated a crime. The reporting requirement need not be triggered for a person to violate §5324(3). See United States v. Davenport , 929 F.2d 1169, 1172-73 (7th Cir. 1991). Indeed, §5324(3) targets evasion of the reporting requirement; if the structuring is successful, the bank's duty to file a currency transaction report is not activated. See Davenport , 929 F.2d at 1172-73. Additionally, contrary to Joan's view, §5324(3) is not void for vagueness. See id. at 1173.

The evidence was also sufficient to sustain Joan Noske's other convictions. For Joan's tax evasion conviction, the Government introduced evidence that the Scherpings owed taxes, including the Tax Court decision finding the Scherpings' sale of their farm assets to a Noske corporation was a sham for tax purposes. Joan's conviction for conspiracy to evade the Scherpings' tax liabilities is similarly supported by evidence that she and the Scherpings began to liquidate the herd of cattle that the Scherpings had "sold" to the corporation, right after the Tax Court issued its adverse decision. Likewise, the evidence was sufficient to convict Joan of conspiracy to defraud the United States . Evidence showed Joan acted to impede the IRS, and agreed with others to do so. Joan's filing of income tax returns for the trusts rather than the clients individually was part of the deception.

The evidence was also sufficient to convict Spaeth and Ellering of conspiracy to defraud the United States . Once a conspiracy is shown, only slight evidence is needed to prove a particular defendant's participation. See United States v. McCarthy, 97 F.3d 1562, 1568 (8th Cir. 1996), cert. denied, 117 S. Ct. 1011, and cert. denied, 117 S. Ct. 1284 (1997). The jury could reasonably infer Spaeth and Ellering knew of the conspiracy's object and willingly joined and participated. Spaeth and Ellering were deeply involved in the Noskes' illegal activities. The evidence showed Spaeth used a Noske entity to try to evade her own tax liabilities, acted as an officer and an incorporator of bogus Noske entities, signed numerous fake documents, and was a signatory on a FAST trust checking account used to funnel income back to Noske clients. Similarly, Ellering put his own business into a Noske trust, acted as a trustee of Noske entities, and was also a signatory on the FAST trust checking account. In sum, ample evidence showed Spaeth and Ellering were knowingly involved in the Noskes' efforts to hide the income and assets of numerous taxpayers.

The district court's jury instructions did not improperly prejudice the appellants. The willful blindness instruction was proper at least with respect to unconvicted codefendant Dwaine Weber. See United States v. Gonzales, 90 F.3d 1363, 1371 (8th Cir. 1996). Any error in giving the instruction was harmless with respect to Joan Noske, who now challenges it. See United States v. Bolstad, 998 F.2d 597, 598 (8th Cir. 1993) (per curiam). Joan did not request that the instruction be limited to Weber, the Government did not argue it applied to her during closing argument, and evidence of Joan's actual knowledge was overwhelming.

The appellants also challenge the instruction that trust arrangements are shams for tax purposes if the trust's originator retains control over the property or income placed in the trust, and does not change the way the property or income is treated. The instruction correctly states the law, however. See Paulson v. Commissioner [93-1 USTC ¶50,271], 992 F.2d 789, 790 (8th Cir. 1993) (per curiam ). Whether the trusts were taxable as trusts or as corporations, the jury was properly instructed to decide if the trusts were economically viable entities or existed merely to facilitate the Noske tax evasion scheme.

James Noske also argues the district court should have included the exhibit numbers in an instruction that directed the jury not to consider Revenue Officer Cleland's testimony or any exhibits introduced through him in considering the case against the Noskes. Any error was harmless, however, because James provided the restricted exhibit numbers to the jury during closing arguments, without Government contradiction. As for the instruction charging that a transaction lacking economic substance is not recognized for tax purposes, any error was harmless because, reading the instructions as a whole, the jury was free to find a transaction lacking economic substance was not entered into with intent to impede the IRS. James Noske was not entitled to an instruction on entrapment by estoppel because the evidence did not support the defense. See United States v. Achter, 52 F.3d 753, 755 (8th Cir. 1995); United States v. Austin , 915 F.2d 363, 365 (8th Cir. 1990). Although James contends the district court committed error in refusing to give a series of other requested instructions, he does not explain why the instructions given instead were wrong.

Last, the district court committed no errors in sentencing James and Joan Noske. James contends the district committed error in adopting the presentence report (PSR) without conducting an evidentiary hearing. In response to James's lengthy objection to the PSR, the district court made detailed findings of fact addressing his objections, and noted that it had presided at the trial and had heard all the evidence. James was not entitled to an evidentiary hearing because the district court could properly base its sentencing findings on evidence and testimony from the trial. See Delpit, 94 F.3d at 1154.

Turning to the substantive attacks on their sentences, the Noskes first challenge the district court's calculation of tax loss in deciding their base offense levels. After holding an evidentiary hearing on the calculation of monetary loss, the district court adopted the amount specified in the PSR. Having carefully reviewed the matter, we conclude the district court correctly calculated the amount of tax loss. As loss resulting from the Count I conspiracy, the district court properly used 28% of the untaxed distributions to a Noske "nonprofit" corporation, which should have been paid as the distributors' personal income tax. The Government was not required to prove it actually lost that amount in taxes. See U.S. Sentencing Guidelines Manual §2T1.1(a)(B) (1992) ("U.S.S.G."); id. §2T1.3(a) (tax loss equals 28% of gross income). The record shows the distributors were not entitled to charitable deductions for the sham distributions. The district court also properly included for uncharged relevant criminal conduct the amounts of tax, computed from IRS files, evaded by clients other than the Scherpings by using the Noskes' business trust scheme. See United States v. Meek [93-2 USTC ¶50,409], 998 F.2d 776, 781-82 (10th Cir. 1993).

The district court was also right in adding two levels to the base offense level for the Noskes' use of sophisticated means. See U.S.S.G. §2T1.1(b)(2); id. n.6; United States v. Lewis [96-2 USTC ¶50,452], 93 F.3d 1075, 1080-82 (2d Cir. 1996). The district court made no mistake in adding two more levels to Joan Noske's base offense level under U.S.S.G. §3B1.3 for her abuse of a position of trust. The addition applies because of Joan's position as a financial planning adviser and tax preparer, even though she did not become a CPA until 1988. See United States v. Tardiff, 969 F.2d 1283, 1289-90 (1st Cir. 1992).

James Noske's grouping argument fails because his 96-month sentence does not exceed the total statutory maximum of 15 years. Likewise, his attack on his criminal history category is refuted by the plain language of the applicable guideline commentary. See U.S.S.G. §4A1.2 n.1. Finally, the Noskes were properly assessed the costs of prosecution for tax evasion as 26 U.S.C. §7201 requires. See United States v. Wyman [84-2 USTC ¶9147], 724 F.2d 684, 688 (8th Cir. 1984).

We have carefully considered all of the appellants' contentions, including those raised in their pro se briefs and not mentioned here. Having found no reason for reversal, we affirm.

 

 

 

 

[2005-1 USTC ¶50,241] United States of America , Plaintiff-Appellee v. Timothy Kosinski, Defendant-Appellant.

U.S. Court of Appeals, 6th Circuit; 03-2414, March 22, 2005.

Unpublished opinion affirming an unreported DC Mich. decision.

[ Code Sec. 7203]

Penalties, criminal: Criminal conviction: Jury instructions: Conspiracy to defraud IRS: Sufficiency of indictment: Sentencing: Calculation of tax loss. --

An individual was properly convicted of conspiracy to defraud the IRS. The indictment specified that he knowingly and willingly joined with other individuals for the purpose of defrauding the IRS, and named individuals and acts. Trial evidence established that the individual conspired with others to claim illegal deductions for his construction company and assisted a subcontractor in avoiding employee and withholding taxes. Further, the jury instructions clearly required the jury to find intent and an agreement to defraud the IRS. His claim that he was incorrectly sentenced also was rejected. The district court reasonably included in calculating the tax loss: (1) the unpaid taxes of subcontractors, and (2) unreported income attributable to checks made out to subcontractors that were deposited in to the individual's personal bank account. There was no proof that the amounts deposited into his personal bank account were loan repayments. Finally, his claims that a portion of the tax loss was diverted income and, therefore, only a percentage was includible in calculating the tax loss, was rejected.

Before: Boggs, Chief Judge and Martin, Circuit Judge, and Weber, District Judge. ^*

¬ Caution: The court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.®


PER CURIAM: Timothy Kosinski appeals from his criminal convictions stemming from tax fraud. He argues that 1) prejudicial testimony was introduced at trial, 2) the indictment was constructively amended, 3) the jury was improperly instructed, 4) Count One (Conspiracy) of the indictment was legally insufficient, 5) his motion for acquittal on Count One (Conspiracy) was erroneously denied, 6) his sentence was miscalculated under the Guidelines, and 7) he was sentenced in violation of the Sixth Amendment. For the following reasons, we affirm his conviction, but vacate his sentence and remand for resentencing.

I

On June 20, 2002, a grand jury returned a nine-count indictment against Timothy Kosinski: one count of conspiracy to defraud the IRS and to structure currency transactions to evade reporting requirements, five counts of subscribing a false federal tax return, and three counts of structuring a currency transaction to evade reporting requirements. A jury found Kosinski guilty on seven counts, and not guilty on two of the three structuring counts. The district court sentenced Kosinski pursuant to the Sentencing Guidelines. The court found an offense level of nineteen, which corresponds to a range of thirty to thirty-seven months of imprisonment for offenders with no criminal history. The district court then sentenced Kosinski to thirty months of imprisonment for Counts One and Seven and thirty months of imprisonment for Counts Two through Six, to run concurrently. Kosinski was also ordered to pay an assessment of $7,000, a fine of $60,000, and the costs of incarceration.

Kosinski is a dentist, who founded T.J. Construction ("T.J.") in 1992, after the death of his father. His father was a carpenter and independent contractor, and he had done work with Thyssen Steel Incorporated ("Thyssen"). Thyssen manufactures steel wire, steel coil, and other steel products. Under Kosinski, T.J. picked up where his father had left off, and continued to do work for Thyssen. Thyssen was in the midst of a multi-million dollar expansion of its warehouse system, in which T.J. had considerable involvement. Specifically, T.J. acted as a "quasi-general contractor" for major aspects of a warehouse expansion project in Detroit , Michigan , and as a true general contractor for the construction of a new warehouse in Richburg , South Carolina .

Phillips Contracting Company, which was run by Melvin Phillips, served as a subcontractor for T.J. on the Thyssen projects, doing most of the concrete, excavation, and underground utility work. T.J. handled paperwork for Phillips, and, at Melvin Phillips's request, paid in cash for work performed. Kosinski and Melvin Phillips worked together for several years and were friends. Their relationship as business associates was particularly close, so much so that two of Phillips's employees testified that they believed Kosinski and Phillips were partners.

Between 1996 and 1998, checks totaling $8,143,625 were drawn on T.J.'s business account and made payable to Melvin Phillips or Phillips Contracting, but were deposited in Kosinski's personal bank accounts. Kosinski and his associates withdrew most of the money in cash, and used much of the cash to make payments to Phillips. Kosinski concealed the flow of this money by making numerous withdrawals of $9,500 --below the $10,000 reporting threshold. Kosinski, his wife, and his employee, Nina Spratt, often engaged in multiple transactions on a single day. Between January 1995 and May 1999, Kosinski and his associates withdrew $7,676,000 in cash from his various personal accounts. Although Kosinski claimed tax deductions for the full amount of $8,143,625, at least $1,400,000, and possibly more, was never paid to Phillips Contracting.

Melvin Phillips paid his employees with a combination of checks and cash. Neither the checks nor the cash payments reflected any withholding. Phillips Contracting did not file any employment tax returns with the IRS between 1995 and 1999. Testimony was introduced that Phillips had agreed with employees to pay them less in return for not withholding any taxes, with the awareness that the employees would not pay those taxes. Melvin Phillips claimed that he used cash to pay suppliers in order to get a better deal; for instance, he claimed to have spent over $1,000,000 in cash on concrete. The project's concrete suppliers, however, denied having ever received a cash payment, and the defense produced no witness or document that confirmed any cash payments for supplies.

Kosinski also claimed a business deduction for work done between 1996 and 1998 at his primary home, his vacation home, and his mother's home. Kosinski paid for the work out of T.J.'s business account, and then claimed deduction for the work on T.J.'s income tax. Contractors are not permitted to take business deductions for work performed at their home or the home of a relative.

Al Paas, the architect overseeing the project for Thyssen, acted as the owner's construction manager. On at least three occasions, he received an envelope from Kosinski containing $5,000 in cash. Although the record is somewhat unclear about the date of these payments, there was at least some testimony that the payments were made during the period of the conspiracy: 1995 to 1999. Kosinski told Paas to "use" the money and never asked for receipts, nor was the money reported to the IRS by any party. In mid-1996, Paas recommended to Thyssen that Kosinski receive an additional $400,000 in performance bonuses. Paas did not inform Thyssen of the $5,000 payments he recieved, but he testified that they did not influence his handling of the project in any way.

II

Kosinski makes five claims seeking reversal of some or all of his convictions. He also argues that his sentence was calculated incorrectly and that applying the Sentencing Guidelines violated his Sixth Amendment rights.

A. Prejudicial Testimony

Kosinski argues that the testimony of Paas about the $5,000 payments and their purpose was improperly admitted and prejudicial. He claims that the government elicited the testimony to show that he bribed Paas and received favorable contracts and an increase in the performance bonus. He argues that in a trial for conspiracy to defraud the IRS, this testimony had no probative value and was prejudicial. Kosinski also argues that the testimony showed that the $5,000 payments took place in 1991 or 1992, before the conspiracy occurred. Kosinski's counsel objected to the testimony at trial and subsequently moved for a mistrial.

We review for abuse of discretion the district court's denial of a motion for mistrial. United States v. Rigsby, 45 F.3d 120, 125 (6th Cir. 1995). Although Kosinski never cites it, presumably he is arguing that the evidence was inadmissible under Federal Rule of Evidence 404(b), which provides in relevant part that "[e]vidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show action in conformity therewith." Such evidence is admissible, however, if it is offered to show "motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident." Ibid. Finally, even if relevant, "evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence." Fed. R. Evid. 403.

It is clear from the record that the government elicited extensive testimony suggesting that Paas was paid bribes to secure favorable contracts and bonuses for T.J. The prosecutor's questions clearly intimated a link between the payments to Paas and T.J.'s increased performance bonus. From the testimony elicited on direct examination, the jury probably could infer a link between the payments/bribes and the favorable contracts T.J. was awarded without competitive bidding.

Kosinski is simply wrong, however, to assert that the payments were clearly outside the time-frame of the conspiracy. Although the testimony is somewhat conflicting, at one point Paas was asked if he knew where the money from the $7,600,000 in cash generated during 1995 to 1999 was spent. He eventually conceded that some of it went to pay him. There is apparently contradictory testimony elsewhere, but the jury reasonably could have concluded that the payments occurred during the relevant time-frame.

The testimony was probative because the $5,000 cash payments themselves were tax evasions. Kosinski paid the $5,000 without witholdings, and Paas never reported the payments. Paas testified that the money was used for expenses or given to charity, but there is no evidence to support this and the jury could conclude the $5,000 payments were unreported income. This would make Paas a participant, if a minor one, in the conspiracy to avoid reporting income and paying taxes. The favorable treatment from Paas, such as the increased performance bonus, is thus relevant to showing why the bribes were paid and why the jury should disbelieve the claim that the money was for expenses and charity.

The bribery testimony was not unduly prejudicial. Obviously, evidence that Kosinski paid bribes casts his general moral character in an unfavorable light. But the testimony showed both that Paas was participating in the conspiracy by personally evading taxes and by facilitating or acquiescing to the rest of the scheme. Therefore, we conclude the district court did not abuse its discretion in admitting the testimony.

B. Constructive Amendment of the Indictment

Kosinski claims that the indictment was constructively amended so that it was possible that the jury convicted him of bribery, rather than the charges on which he was indicted. He argues that the evidence of bribery was improperly introduced, and the jury instructions on Count One (Conspiracy) permitted a guilty verdict even if the jury found that defrauding the IRS was only a collateral or incidental effect of the conspiracy. This claim is without merit.

The Fifth Amendment guarantees that an accused be tried only on those offenses presented in an indictment and returned by a grand jury. Stirone v. United States , 361 U.S. 212, 217-19 (1960). "[A]n amendment involves a change, whether literal or in effect, in the terms of the indictment." United States v. Barrow [ 97-2 USTC ¶50,558], 118 F.3d 482, 488 (6th Cir. 1997). "This Circuit has held that a variance rises to the level of a constructive amendment when the terms of an indictment are in effect altered by the presentation of evidence and jury instructions that so modify essential elements of the offense charged that there is a substantial likelihood that the defendant may have been convicted of an offense other than that charged in the indictment." United States v. Chilingirian, 280 F.3d 704, 711 (6th Cir. 2002). We review the question of whether there was an amendment to the indictment de novo. Id. at 709.

As we concluded above, the evidence of bribery was properly admitted. Even though properly admitted, however, it may still have created the possibility of conviction on an uncharged count. To determine whether this could have occurred, we look to the jury instructions. See United States v. Campbell, 317 F.3d 597, 607 (6th Cir. 2004) (juries are presumed to follow instructions of the trial judge).

Kosinski's claim here is without merit because the jury instructions make clear that the jury must find intent and agreement to defraud the IRS. The district court started its jury instructions by reading from the indictment, which stated that the jury must find it was "an object of the conspiracy that [the conspirators] would and did defraud the United States for the purpose of impeding, impairing, obstructing, and defeating the lawful functions of the Internal Revenue Service ...." (emphasis added). The court drove the point home by repeating several times during the instructions that the jury must find that Kosinski was part of a conspiracy that intended to defraud the IRS:

A conspiracy to defraud the United States reaches any conspiracy for the purpose of impeding, impairing, obstructing or defeating the lawful function of the government. I instruct you that the Internal Revenue Service is an agency of the Department of Treasury of the United States .

....

[You must find] that two or more persons conspired, or agreed, to defraud the United States , or one of its agencies or departments, by dishonest means.

....

[T]he Government must prove beyond a reasonable doubt that there was a mutual understanding ... between two or more people, to cooperate with each other to defraud the United States .... This is essential.

(emphasis added). The district court also reiterated that to convict Kosinski the jury must find that he knowingly and purposefully joined the conspiracy and acted to further its aim of defrauding the IRS:

[T]he Government must prove that the Defendant knew and agreed to the purposes of the conspiracy and knowingly and voluntarily joined the conspiracy.

....

[J]ust because the Defendant may have done something that happened to help a conspiracy does not make him a conspirator.

....

What the Government must prove beyond a reasonable doubt is that the Defendant knew the conspiracies [sic] main purpose, and that he voluntarily joined it intending to help advance or achieve its goals.

Finally, the jury form itself made clear that purpose was a necessary element of the Conspiracy Count:

As to the first object other conspiracy charged in Count One, that the defendant conspired to defraud the United States for the purpose of impeding and impairing the lawful functions of the Internal Revenue Service, we the jury unanimously find the defendant Timothy Kosinski: Guilty.

(emphasis added). Consistent with these instructions, the jury could convict only if it found that the purpose of the conspiracy was to defraud the IRS.

C. Jury Instruction

Kosinski argues that the district court erroneously rejected his proposed jury instruction with respect to Count One (Conspiracy). Kosinski had asked the district court to include the following instruction: "the Government must prove that Dr. Kosinski had the actual intent to frustrate or impede the IRS, not merely that impeding the IRS was a foreseeable consequence of the conspiracy." He argues that in the absence of this instruction, the jury may have convicted even if defrauding the IRS was only a collateral or incidental effect of the conspiracy. This claim has the same basis as the constructive amendment claim, and we reject it for the same reason.

This court reviews jury instructions as a whole to determine whether they fairly and adequately inform the jury of relevant considerations and explain the applicable law to assist the jury in reaching its decision. United States v. Layne, 192 F.3d 556, 574 (6th Cir. 1999). "Trial courts have broad discretion in drafting jury instructions, and we reverse only for abuse of discretion." United States v. Prince, 214 F.3d 740, 761 (6th Cir. 2000) (citations omitted). "A district court's refusal to deliver a requested jury instruction amounts to reversible error only if the instruction (1) is a correct statement of the law, (2) was not substantially covered by the charge actually delivered to the jury, and (3) concerns a point so important in the trial that the failure to give it substantially impairs the defendant's defense." United States v. Jackson, 347 F.3d 598, 606 (6th Cir. 2003) (citations omitted).

The district court did not err because Kosinski's requested instruction was "substantially covered by the charge actually delivered to the jury." As the discussion of jury instructions in the previous section indicates, the district court not only covered this point, but did so in a highly repetitive fashion. The court then repeated that purpose requirement --by a conservative count --at least three times while giving jury instructions. Finally, the jury form also stated that the jury must find purpose to convict on Count One.

D. Legal Sufficiency of Count One

Kosinski argues that Count One (Conspiracy) of the indictment is insufficient as a matter of law and the district court erred by denying his motion to dismiss the Count. Kosinski asserts that "[a]llegations of failure to report income are not sufficient to make out a conspiracy to impair and impede the IRS." Kosinski is vague as to which elements of the conspiracy charge are left out, but he states that the indictment "allege[s] only consequences of cash transactions and structuring." From this we infer that he is making an allegation that the indictment does not allege either purpose to defraud the IRS or an agreement to defraud the IRS.

We review de novo the sufficiency of an indictment. United States v. DeZarn, 157 F.3d 1042, 1046 (6th Cir. 1998). An indictment is legally sufficient "if it, first, contains the elements of the offense charged and fairly informs a defendant of the charge against which he must defend, and second, enables him to plead an acquittal or conviction in bar of future prosecutions for the same offense." United States v. Superior Growers Supply, Inc., 982 F.2d 173, 176 (6th Cir. 1992).

The essential elements of a conspiracy are:

(1) the conspiracy described in the indictment was wilfully formed, and was existing at or about the time alleged; (2) that the accused willfully became a member of the conspiracy; (3) that one of the conspirators thereafter knowingly committed at least one overt act charged in the indictment at or about the time and place alleged; and (4) that such overt act was knowingly done in furtherance of some object or purpose of the conspiracy as charged.

United States v. Kraig [ 96-2 USTC ¶50,616], 99 F.3d 1361, 1368 (6th Cir. 1996) (citations omitted).

The indictment states all of these elements. It alleges that Kosinski willfully and knowingly joined with others to defraud the IRS. It names several other individuals and alleges that they committed a number of acts with the purpose of defrauding the IRS. The indictment also lists hundreds of overt acts that it alleges were in furtherance of the conspiracy --mostly bank transactions, but also payments to workers and others. Although the indictment does not charge any substantive offense, that is unnecessary for a conspiracy to defraud under 18 U.S.C. § 371. United States v. Khalife, 106 F.3d 1300, 1303 (6th Cir. 1997) (because there is no substantive offense underlying a conspiracy to defraud under 18 U.S.C. § 371, an indictment need not refer to any substantive offense). We therefore reject this claim.

E. Judgment of Acquittal on Count One (Conspiracy)

Kosinski claims that denial of his motion for acquittal with respect to Count One (Conspiracy) was in error. He argues that the evidence, viewed in the light most favorable to the prosecution, failed to establish that impeding and impairing the IRS was an object of the conspiracy. After two pages summarizing case law, the entirety of Kosinski's argument is the following two sentences:

In this case, evidence that Mr. Phillips did not pay taxes for his employees or provide 1099's for his subcontractors did not establish evidence of Mr. Phillips [sic] conspiracy with Dr. Kosinski. A conclusion that an agreement was proved is contrary to the jury instruction that a general contractor has no legal obligation for taxes of his subcontractors.

This argument is without merit.

We must uphold a jury verdict if there is substantial evidence, viewed in the light most favorable to the government, to support it. United States v. Wells, 211 F.3d 988, 1000 (6th Cir. 2000). We allow the government to benefit from all reasonable inferences. Ibid.

The evidence did not show merely that Phillips did not pay taxes or withholding for his employees. It showed that he conspired with Kosinski to do this. Kosinski was not free to conspire with Phillips to avoid paying Phillips's employees' taxes merely because he was not responsible for those taxes in the first instance. Moreover, evading withholding and taxes for employees was only one part of the conspiracy. Evidence was introduced showing that Kosinski conspired with others to claim illegal deductions for T.J., to conceal revenue from the project, to structure financial transactions so as to avoid reporting, and many other illegal acts. If the jury found credible the evidence on any one of these allegations, it would have been sufficient to convict on Count One even if the jury completely discounted the evidence that Kosinski and Phillips conspired to avoid paying their employees' taxes.

F. Tax Loss Calculations in Sentencing

Kosinski argues he was sentenced incorrectly. He argues that his offense level should be determined by U.S.S.G. §2S1.3 instead of U.S.S.G. §2T1.9. He also argues that the calculation of tax loss was erroneous.

Although we review interpretations of the Guidelines de novo, the determination of the amount of loss is a finding of fact that we will not disturb unless clearly erroneous. United States v. Guthrie, 144 F.3d 1006, 1011 (6th Cir. 1998). "When a district court calculates the amount of loss caused by a crime involving fraud or deceit, the court need not determine the amount of loss with precision. The guidelines require a district court to make a reasonable estimate ...." United States v. Kohlbach, 38 F.3d 832, 835 (6th Cir. 1994).

The district court correctly applied U.S.S.G. §2T1.9 to the conspiracy charge in Count One. The guideline applicable to structuring, U.S.S.G. §2S1.3(c)(1), states that "if the offense was committed for the purpose of violating the Internal Revenue laws, apply the most appropriate guideline from Chapter 2, Part T (Offenses Involving Taxation) if the resulting offense level is greater than that determined above." The offense level under U.S.S.G. §2S1.3 is 6; whereas under U.S.S.G. §2T1.9 the minimum offense level is 10. Thus, U.S.S.G. §2T1.9 applies.

The defendant argues that we cannot be sure the offense was committed for the "purpose of violating" tax laws, noting that Count One identified two aims of the conspiracy (to structure and to defraud the IRS), and asserting that the jury was not asked to return a verdict on whether the conspiracy was to structure or to defraud the IRS (or both). This is simply a misrepresentation; the jury form breaks out the two purposes of the conspiracy in Count One and the jury found defendant guilty with respect to both.

The district court did not commit clear error in calculating the amount of tax loss. The district court began with the $5,635,000 in cash between 1996 and 1998 that was paid to Melvin Phillips. At Phillips's (separate) trial, it was estimated that 40% of the cash payment Phillips received was used for the cash payroll, and the district court used the same assumption here. That put the unreported payroll at $2,254,000; the district court then took 28% of that figure as an estimate of tax loss, pursuant to U.S.S.G. §2T1.1. This produced a tax loss of $631,176, which was used to calculate Kosinski's offense level. Kosinski argues that because he was not legally responsible for the taxes of Phillips's subcontractors, he should be assessed only the unreported wages of Phillips's direct employees, excluding subcontractors. However, even if Kosinski was not responsible for the subcontractors' taxes, he was part of a conspiracy to avoid payment of taxes for Phillips's employees and subcontractors alike. Thus, it was reasonable for the district court to include the unpaid taxes of the subcontractors as part of the tax loss associated with the conspiracy.

Finally, Kosinski challenges the tax loss calculations of the district court with respect to Counts Two through Six (Subscribing a False Tax Return). Kosinski argues that the checks made out to Phillips, but deposited in Kosinski's personal account, are loan repayments and should not be included as unreported income. But since there is no evidence of this loan agreement, the district court did not commit clear error by concluding otherwise. Kosinski also claims that the court erred because $342,000 of the amount considered as tax loss was really diverted income, and should be multiplied by 28% to get tax loss. Kosinski does not explain why this is so, except by citation to motions filed below, and therefore waives this claim.

G. Sentencing under the Guidelines

Kosinski also argues that the district court erroneously sentenced him based on facts not found by the jury, in contravention of United States v. Booker, 125 S. Ct. 738 (2005). He argues that this case should be remanded for resentencing. We agree.

In Booker, the Supreme Court concluded that judicial fact-finding which led to a sentence under the Guidelines greater than that authorized by the jury verdict alone violated the Sixth Amendment. Id. at 755-56. The Court's solution was to strike 18 U.S.C. § 3553(b)(1), which is the provision making the Guidelines mandatory. Id. at 756-57. The Court left intact the remainder of the Guidelines, instructing that they must be consulted by a sentencing court but are no longer binding. Ibid. The Supreme Court has instructed us to apply Booker to cases on direct review using "ordinary prudential doctrines, determining, for example, whether the issue was raised below and whether it fails the 'plain-error' test." Id. at 769.

Although Kosinski did not raise a Sixth Amendment objection in the sentencing court, he did object to the factual determinations made by the judge. Before this court, he filed briefs with Sixth Amendment arguments based first on Blakely v. Washington, 124 S. Ct. 2531 (2004), and then on Booker, as those cases were decided. We are satisfied that the objection below to judicial fact-finding preserved the Sixth Amendment issue for review.

This case is factually indistinguishable from Booker itself and thus resentencing is required. Booker was convicted by a jury of possessing at least 50 grams of cocaine. 125 S. Ct. at 746. At sentencing, the district court determined that Booker possessed at least 616 grams of cocaine and sentenced him accordingly. Ibid. Had Booker been sentenced on the jury's finding alone, the Guideline range would have been 210 to 262 months. Ibid. Instead, based on the district court's finding that Booker possessed more cocaine, Booker received a sentence of 360 months. Ibid. The Supreme Court concluded that because only 50 grams was argued to the jury, the sentence exceeded that authorized by the jury verdict and thus violated the Sixth Amendment. Id. at 756. In this case, Kosinski was sentenced based on the amount of tax loss determined by the district court. The jury was never asked to determine tax loss. Without the district court's factual determination of tax loss, the offense level would be 10, corresponding to a sentence of 6 to 12 month. U.S.S.G. §2T1.9. Applying the reasoning of Booker, the 30-month sentence Kosinski received plainly went beyond that authorized by the jury. We therefore conclude that Kosinski was sentenced in violation of the Sixth Amendment.

III

For the reasons set forth above, we AFFIRM Kosinski's convictions, but VACATE his sentence and REMAND for resentencing consistent with Booker and this opinion.

^* The Honorable Herman J. Weber, United States District Judge for the Southern District of Ohio, sitting by designation.

 

[87-2 USTC ¶9469] United States of America , Plaintiff-Appellee v. Edward J. Conley, Defendant-Appellant

(CA-7), U.S. Court of Appeals, 7th Circuit, 86-2644, 7/29/87, 826 F2d 551, Affirming unreported District Court decision

[Code Sec. 7201 . Result unchanged by the Tax Reform Act of 1986 ]

Criminal penalties: Evidence: Admissibility: Failure to file return: Evidence supporting penalty: Instructions to jury.--A personal injury lawyer who concealed and attempted to conceal the nature, extent, and ownership of his assets by placing his assets, funds, and other property in the names of others and by transacting his personal business in cash to avoid creating a financial record was properly convicted by jury on three counts of willful attempt to evade and defeat the payment of his personal income tax. There was sufficient evidence that could lead a trier of fact, upon learning of the way the lawyer handled his financial affairs, to find at least one affirmative act of evasion for each tax year charged in the three counts. He had ample notice that the IRS was attempting to collect what he owed, and as a lawyer he should have required little notice. He admitted he transferred away the title to his house for the purpose of shielding the house from the IRS. He also manipulated his bank accounts in various ways, used his son's name on a bank account he opened for his own personal use, and attempted to separate himself from his horse business. Furthermore, during the years in issue, the lawyer used cash for expense payments and avoided having a personal bank account. In addition, although the lawyer argued that certain items of financial evidence were erroneously admitted to his prejudice (such as his brokerage accounts, his trips around the United States and to Europe, his purchase of a riding mower, the fact that he owned a Cadillac, and a photograph of his "lovely home in a country setting"), there was no abuse of the trial judge's discretion and certainly no plain error which could cause a miscarriage of justice if not recognized. Finally, the court's instruction on the lesser-included offense of willful failure to pay taxes, which did not inform the jury that the failure to pay the tax must occur at the time or times required by law or regulations, and the instruction that the lawyer's taxes were "owed" on April 15 were adequate and without plain error.

Anton R. Valukas, United States Attorney, Laurie N. Feldman, Assistant United States Attorney, 219 S. Dearborn St., Chicago, Ill. 60604, for plaintiff-appellee. Joseph A. Lamendella, Lamendella & Daniel, 2 N. LaSalle St., Chicago, Ill. 60602, for defendant-appellant.

Before WOOD, JR., COFFEY, and RIPPLE, Circuit Judges.

WOOD, JR., Circuit Judge:

The defendant, Edward J. Conley, a personal injury lawyer, was convicted by jury in July 1986 on three counts of willful attempt to evade and defeat the payment of his personal income tax, in violation of 26 U.S.C. §7201 . ¹ The defendant was charged with concealing and attempting to conceal the nature, extent, and ownership of his assets by placing his assets, funds, and other property in the names of others and by transacting his personal business in cash to avoid creating a financial record. The defendant was charged in Count I with a deficiency of approximately $71,397 for the year 1979; in Count II, for the year 1980, a deficiency of approximately $45,987, and in Count III, for 1981, a deficiency of $11,622. ²

The defendant raises four issues: (1) whether the evidence was sufficient to show the affirmative acts of evasion charged; (2) whether the proof of evasive acts occurring throughout the year was at fatal variance with the allegations that evasive acts occurred "on or about April 15" of the years involved; (3) whether various items of evidence were properly admitted into evidence, and (4) whether certain instructions were appropriate.

I. FACTUAL BACKGROUND

As a self-employed personal injury lawyer the defendant did well, but he was less than enthusiastic about sharing his money with the government. From 1966 through 1981, he assessed his own tax debt at $241,657.13, but during that period he paid less than $7,000 on time. He totally ignored the requirement that he make quarterly estimated income tax payments. Each year the defendant received a deficiency notice on the joint returns he filed with his wife, but the deficiencies, together with added interest and penalties, failed to sufficiently impress him with his tax obligations. We will examine in more detail the latter four years of that period.

In early 1978, the IRS filed a tax lien in Will County in the total amount of $32,278.97 owed by defendant for the years 1974, 1975 and 1976. When April 15, 1978, arrived, the defendant neither filed his return nor paid the prior year's taxes. Three days later, however, defendant and his wife created a land trust of their house and acreage, property which they had previously held in joint tenancy. The Chicago Title and Trust Company was trustee, defendant's wife was named beneficiary, and the defendant was the contingent beneficiary. On May 1, 1978, the defendant paid what he owed for 1974, but he failed to satisfy the other deficiencies.

In early 1979, the IRS began to pay more attention to the defendant. In January, an IRS agent made a house call on the defendant to collect back taxes. Finding no one at home, the agent left his calling card. In February, the IRS filed more liens in Will and Cook counties. The day after the liens were filed, the defendant left for a trip to Florida . About a week later, the IRS served a notice of levy and a summons on the trustee for the property held in the land trust. After learning of this action from the trustee, the defendant paid $6,000 on his 1976 taxes. Also in February, the IRS served a levy on the American National Bank where the defendant maintained three accounts: a Client Fund account, the funds of which, according to the defendant, belonged to his clients; an Attorney-at-Law account in his own name; and an R.C. Stables account for which he and his son, Terrence J. Conley, were signatories. The defendant was not listed as an owner of the stables account. Nevertheless, the defendant used this stables account to pay some business and personal expenses, including the expenses for his horse-racing activities. His son maintained a separate account at American National Bank.

After the bank received notice of the IRS's levy, it segregated the funds in the defendant's Attorney-at-Law account. The bank did not, however, segregate the funds in the defendant's Client Fund account because those funds did not appear to belong to the defendant, but to his clients. The bank gave the defendant notice of its actions, and the defendant responded within a week by opening a new account at the Chicago Tokyo Bank in the name of his son, Terrence. This account was funded by $2,000 cash and a $2,000 check drawn on defendant's Client Fund account. Terrence did not contribute to this account. With the exception of one check drawn by his son, the defendant used this account for his personal and business expenses.

On March 17, 1979, the defendant traveled to Seattle , Washington . On or about April 15, 1979, the defendant filed a tax return for 1978, but failed to enclose any payment.

Although the defendant had had an interest in horse racing for several years, within a week of failing to pay his 1978 taxes he transferred the horses he had owned and raced in 1977 and 1978 to his sons. From then through 1982, the defendant raced and claimed ³ horses in his sons' names. His son Terrence claimed two horses in 1979, Committee Doll for $4,000 and Smithton Road for $2,500. ⁴ Checks drawn on the account never named defendant as payee, but were endorsed to him and then cashed. The defendant's sons showed no horse income or expenses on their returns for 1979-1981. When the defendant's son Timothy was later audited, the defendant submitted an affidavit stating that the horses were actually his although nominally owned by Timothy. At trial, the defendant admitted that any horse-racing proceeds were his.

In June of 1979, the IRS filed tax liens for defendant's 1978 taxes. Another agent visited his home, and again left a calling card when she found no one at home. Shortly thereafter, the agent served a notice of seizure and levy on the defendant's trust assets for the taxes due for 1975, 1976, and 1978. The total amount due was $57,221.31. A notice for sealed bids appeared in the Chicago Tribune prompting the defendant to pay in full the amount due for those years. The 1977 tax year for some reason had not been included.

In August 1979 the defendant filed the 1977 return, but without enclosing payment. The IRS again filed liens. In October, the defendant and his wife left for a trip to England and France , and IRS seized the assets in the defendant's law office. When defendant understood that he would be locked out of his office and it contents sold, he promptly paid the amount then due in full, approximately $18,000.

For 1979 the defendant admitted over $200,000 gross income. Using its standard procedures, the IRS estimated that the defendant cashed checks payable to him, usually at a currency exchange, for about $104,000, without making any deposit. In that year defendant also spent over $12,000 purchasing horses. When he filed his return he deducted over $30,000 for horse-racing expenses. Defendant managed to make timely payments on installment loans for a Buick and a Cadillac and some other items including his mortgage, making some of the payments in cash.

In 1980, the defendant timely filed his 1979 tax return showing a tax due of $79,789, but, as was his habit, he made no payment. In April of 1980, the defendant opened a brokerage account at Paine Webber. He traded in risky stocks for about a year, investing over $30,000, but he suffered a net loss. Also in April, the defendant's house was taken out of trust and conveyed to the defendant's three children as joint tenants. The defendant's wife signed the order to the trustee directing the conveyance with a notation that it was to be rushed as it would soon be picked up by the defendant. The order had been notarized in the defendant's office. The defendant and his wife continued to live in the home, make the mortgage payments, and deduct the payments on their tax return. The defendant later admitted the transfer was to avoid seizure by IRS.

In May of 1980, the IRS levied on a personal account the defendant maintained at the Matteson-Richton Bank which he somtimes used for personal expenses. The IRS likewise levied on the Attorney-at-Law account at the American National Bank, but, again, not the Client Fund account because the money was apparently the defendant's clients', not his own. After this levy, the defendant stopped using the Attorney-at-Law account and began drawing for personal and business purposes on the Client Fund account as if it were his own. He continued his racing and claiming in the name of one of his sons, but admitted that his racing expenses exceeded $40,000. The defendant's total 1980 gross income, according to defendant's figures, was $131,000, about half of it estimated by the IRS to have been received in cash. The defendant began making even his mortgage payments in cash.

The defendant ushered in 1981 by opening an account with Charles Schwab & Co. During the year he invested about $12,000 in that account, as well as about $2,500 in his Paine Webber account. He financed his Schwab investment with checks on the Chicago Tokyo account held in his son's name, or with checks drawn on his Client Fund account. The defendant timely filed his 1980 tax return, but again made no payment on his self-calculated obligation of $53,845.46. He later paid $7,500 on what he owed for 1979. The IRS responded with a lien for the 1980 taxes. The IRS estimated that in 1981 the defendant received approximately $127,055 in cash.

In January of 1982, the defendant traveled to Alabama . In February and March, the IRS filed liens in Cook County for taxes the defendant owed for 1979 and 1980. The defendant timely filed his 1981 return showing a tax due of $81,729, and must have caused some surprise at IRS by enclosing a down payment of $3,900.

In April of 1983, two special agents, Hagan and Doukas, met with defendant in his law office to discuss his 1977-81 taxes. The defendant could not explain why he did not pay his taxes. Whatever his reasons may have been for postponing payment, the defendant has now accumulated interest and penalties as well as a prison term and a fine.

At trial the defendant was his only witness. He denied that he created the land trust in an attempt to hide his house from the IRS, and he denied any responsibility for the later transfer by his wife to their children. He explained his personal use of the Client Fund account saying that his share of his clients' insurance settlements were deposited in the account. He had not viewed his stock investments as risky. He explained that he transferred his horse-racing activities to his sons because he had no time for the horses, although in 1983, after meeting with IRS agents, he reclaimed his horse-racing interests. His practice of cashing clients' checks which IRS had noticed he explained was a service to clients without bank accounts. He had various other explanations for the ways he handled his financial affairs.

II. THE ISSUES

The standard for reviewing the sufficiency of the evidence to support a conviction is whether "after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." Jackson v. Virginia, 443 U.S. 307, 319 (1979); see also United States v. Perlaza, 818 F.2d 1354, 1358 (7th Cir. 1987) United States v.Draiman, 784 F.2d 248, 251 (7th Cir. 1986).

The defendant claims that the government's evidence showed only that he defaulted in his payment of taxes, not that he criminally attempted to evade their payment. He correctly points out that the government did not attempt to show that his returns were erroneous or fraudulent. The guilty verdict, he argues, is the product of an accumulation of errors and a "knee jerk" reaction by the jury to a lawyer who reported a gross income of $1,030,000 for the period, owed $135,000 in taxes, lived in a nice house, drove a Buick and a Cadillac, owned race horses and traveled throughout the United States and Europe for recreation. Those aspects of the defendant's life were obviously part of the picture considered by the jury, but rightly so.

The statute under which the defendant was convicted requires proof of three elements: (1) willfulness, (2) existence of a tax deficiency, and (3) an affirmative act constituting an attempt to evade or defeat payment of the tax. Sansone v. United States [65-1 USTC ¶9307 ], 380 U.S. 343, 351 (1965); United States v. Foster [86-1 USTC ¶9327 ], 789 F.2d 457, 459 (7th Cir. 1986); 26 U.S.C. §7201 . The defendant argues that the jury was presented only with evidence of the defendant's default in his payment of taxes, which the defendant asserts is not a crime. In Spies v. United States [43-1 USTC ¶9243 ], 317 U.S. 492, 498 (1943), the Supreme Court distinguished between a willful failure to pay tax when due, a misdemeanor, and a willful attempt to defeat and evade a tax, a felony. The Court determined that the difference lay in the word "attempt," which implies some affirmative action beyond mere nonpaymemt of tax. "Willful but passive neglect of the statutory duty may constitute the lesser offense, but to combine with it a willful and positive attempt to evade tax in any manner or to defeat it by any means lifts the offense to the degree of felony." Id. at 499. Although the defendant admits the tax deficiency, he denies that he committed any willful, affirmative act of evasion. In his view he is being imprisoned merely for debt. We find, however, that there is sufficient evidence in the record that could lead a rational trier of fact, upon learning of the way the defendant handled his financial affairs, to find at least one affirmative act of evasion for each of the years charged in the three counts.

Defendant had more than ample notice that the IRS was attempting to collect what he owed, and as a lawyer, he should have required little notice. He transferred away the title to his house in order to protect it from the IRS. Two IRS agents testified that the defendant admitted he undertook his title transfers for the purpose of shielding the house from the IRS, although at trial the defendant denied making the statement. His house maneuvers began ten days after he failed to pay his 1979 taxes and were rushed to completion by the defendant's law office. He manipulated his bank accounts in various ways, turning finally to his Client Fund account because of its protected status, a status he then violated. He also used his son's name on a bank account he opened for his own personal use, and attempted to separate himself from his horse business, although after IRS inquiry he decided that was not a good idea because he was getting his sons in IRS trouble. During the years in issue the defendant used cash for expense payments and avoided a personal bank account. He also moved his brokerage accounts around. Defendant's financial transactions usually increased in number around April of each year.

The defendant also argues truthfully that the jury was presented with no evidence of defendant's willful failure to disclose his tax liability. The charge against the defendant, however, was that he willfully attempted to avoid paying what he did disclose, a separate offense. There is a distinction between willfully attempting to evade the assessment of the tax and willfully attempting to evade or defeat the payment of the tax. Sansone v. United States [65-1 USTC ¶9307 ], 380 U.S. 343, 354 (1965). We have accepted the defendant's invitation to compare his conduct with that of the defendants in several other cases.

In Cohen v. United States [62-1 USTC ¶9202 ], 297 F.2d 760 (9th Cir.), cert. denied, 369 U.S. 865 (1962), the defendant previously had been convicted of tax evasion, and the Ninth Circuit was reviewing his conviction for willfully attempting to evade the payment of his taxes. The defendant here seems to argue that because his conduct was not as egregious as that of Cohen, he should not be convicted of the same crime. Cohen, however, does not set a minimum level of wrongful conduct below which one may not be convicted of willful attempt to evade payment of taxes. Although Cohen was in considerably more trouble than the defendant here, there are similarities in the evidence presented in each case. There was evidence in Cohen that Cohen had

placed his assets in the name of others, deposited them with others, dealt in currency, caused his obligations to be paid through and in the name of others, caused moneys paid to him to be paid through and in the name of others, and paid creditors but not the government, all for the purpose of defeating the payment of his income tax liabilities.

297 F.2d at 762. The jury here was presented with evidence that the defendant engaged in some of these kinds of conduct. The government offered evidence that the defendant placed his assets in his sons' names, deposited his assets with others, dealt in currency, and paid creditors but not the government. The defendant may have used fewer means to violate 26 U.S.C. §7201 than did Cohen, but he nevertheless violated the statute.

In United States v. Mesheski [61-1 USTC ¶9233 ], 286 F.2d 345 (7th Cir. 1961), this court reversed the conviction of a tax preparer who converted the tax payments of his clients to his own use and then failed to pay his taxes on what he had embezzled from his clients. Although what Mesheski did to his clients was not passive, as far as his own tax obligations were concerned, the evidence disclosed nothing but mere passive failure to pay. We held that there "must be something more, some affirmative positive act to attempt to defeat or evade the tax." 286 F.2d at 346. The defendant here, as is evident from his course of dealings with his assets and his taxes, performed the necessary positive acts. Because Mesheski's real crime was embezzlement, rather than tax evasion, Mesheski has little relevance to the defendant's situation.

In United States v. Trownsell [66-2 USTC ¶9661 ], 367 F.2d 815 (7th Cir. 1966), the defendant previously had been convicted of tax evasion. When it came time to pay, he liquidated his assets and deposited the proceeds in Switzerland . Although the defendant here did not remove his assets so completely, he similarly attempted to place them beyond the government's reach in violation of 26 U.S.C. §7201 . Trownsell was a simple case, and of no assistance to defendant who attempted, although less efficiently, to accomplish the same result.

In United States v. Voorhies [81-2 USTC ¶9710 ], 658 F.2d 710 (9th Cir. 1981), the defendant failed to file any returns, and, like Trownsell, made use of Swiss banks to avoid tax payment. The court ruled that "[i]ndependent of Voorhies' failure to file 1970 and 1972 personal returns and to pay the corresponding taxes due and owing, the evidence is sufficient to support his conviction for the willful attempt to evade the payment of those taxes." Id. at 715. That evidence showed, among other things, that Voorhies liquidated his business assets, exchanging the proceeds for small-denomination cashier's checks, coins, and platinum, and made several trips out of the country to negotiate the checks and deposit the coins and platinum. Voorhies undertook these travels following an IRS audit that put him on notice of tentative tax deficiencies of over $33,000. Again, although the defendant here used different means of attempting to conceal his assets, he attempted to reach the same result, and his conduct is similarly culpable.

The defendant in United States v. Hook [86-1 USTC ¶9179 ], 781 F.2d 1166 (6th Cir.), cert. denied, 107 S.Ct. 269 (1986), filed timely and accurate tax returns, as the defendant in this case generally did, and, like the defendant, paid only a fraction of the amount of taxes due. The IRS found it difficult to locate Hook's assets, because he transacted most of his business in cash, or used others' credit cards. He also bought a house in his girlfriend's name. Hook argued that 26 U.S.C. §7201 did "not encompass conduct which goes solely to concealing assets," but, instead, applied only "if the taxpayer also files a fraudulent return or otherwise attempts to conceal the existence or amount of taxable income." Id. at 1169. The Sixth Circuit, citing Spies v. United States [43-1 USTC ¶9243 ], 317 U.S. 492, 499 (1943), concluded that Hook's argument was contrary to the language of 26 U.S.C. §7201 and the Supreme Court's interpretation thereof. To the extent the defendant here has tried to press the same argument, insisting that he has been honest with the IRS in filing accurate returns, the holding in Hook, with which we agree, demonstrates that the filing of accurate returns does not exonerate the defendant's attempts to then evade the actual payment of his taxes by concealing his assets.

It cannot be expected that all tax payment evaders approach their problem in the same way. They have demonstrated a certain misguided freedom to use their own devices as they deem best to suit their own circumstances. Although the defendants in the cases we have reviewed used some different methods of attempting to conceal their asests than did the defendant here, the cases are not distinguishable on that ground. The statute does not require any similarity or pattern, and specifically prohibits attempts to evade or defeat tax "in any manner." The Supreme Court in Spies, 317 U.S. at 499, specifically declined to define or limit the congressional use of the phrase "in any manner" lest it constrict its scope.

Defendant makes an effort to explain the way he handled the title to his house, his bank accounts, horses, cash transactions, and other aspects of the government's case, and points out things done by other tax payment evaders that he did not do. The defendant, however, failed to convince the jury, and after reviewing this record that failure is understandable.

The defendant also argues that the government failed to prove the charges in the indictment which alleged that on or about April 15 in each of the years involved the defendant acted in an attempt to evade tax payment. The defendant argues that the government thus failed to prove beyond a reasonable doubt an essential element of the crime charged, citing United States v. Francesco, 725 F.2d 817, 821 (1st Cir. 1984), a narcotics case. It is accepted that the government must sustain its burden of proof of each element of the crime, In re Winship, 397 U.S. 358, 363-65 (1970). In this case, however, it was not necessary for the government to prove that all the acts of the defendant to evade payment occurred each of the years on April 15, although the evidence shows a concentration of evasive action around April 15, the date defendant's taxes were due, but not paid. That date each year seems to have reminded defendant that it was time not to pay but to do something to avoid payment. It was also necessary during other times of the year for the defendant to follow up on his other willful nonpayment plans for that year's taxes. Whether actually occurring in April or not, the defendant's activities were all related and directed toward his annual ritual of avoiding payment of his tax for that particular year.

In United States v. Galiffa, 734 F.2d 306, 312 (7th Cir. 1984), this court examined the various criteria by which an indictment is to be measured, as set forth by the Supreme Court in Russell v. United States, 369 U.S. 749 (1962). The indictment in this case was more than sufficient to inform the defendant of the offense with which he was charged, and he presented a defense, although unsuccessfully. Nothing in the record suggests that the defendant had the slightest doubt what the case against him was about.

The defendant concedes that some of the alleged evidentiary and jury instruction errors he now raises on appeal would not by themselves amount to reversible error, but argues that cumulatively they constitute plain error under Federal Rule of Criminal Procedure 52(b). ⁵ The defendant failed to object at trial to most of these alleged errors. United States v. Young, 470 U.S. 1, 15-16 (1985); United States v. Hill, 332 F.2d 105, 107 (7th Cir. 1964).

The defendant argues first that certain items of financial evidence were erroneously admitted to his prejudice. This evidence included, among other things, his brokerage accounts, his trips around the United States and to Europe , his purchase of a riding mower, and the fact that he owned a Cadillac. It does not appear, however, in viewing the evidence as a whole, that the government tried to convert a "collection case" or a "failure to pay case" into a felony. The evidence tended to show that the defendant had the means to pay his taxes, indicating that his failure to pay was for other reasons. The government argued that the defendant simply wished to maintain a high style of living. The trial judge has wide discretion in the admission of evidence, and we will not reverse his decision absent an abuse of discretion. United States v. Buishas, 791 F.2d 1310, 1313 (7th Cir. 1986); United States v. Harris, 761 F.2d 394, 398 (7th Cir. 1985). Even if it may have been error to admit any particular item, the error would be harmless. The defendant's self-assessment, assuming it was true and correct, amply apprised the jury that he made a "good living as a lawyer."

A photograph of the defendant's house, a "lovely home in a country setting," was admitted without objection, and was stipulated to be his house. The defendant now argues that this photo was introduced solely to inflame the jury against him. The government weakly argues that the photo shows where the revenue agent called and left her card. Beyond that, however, the government also argues that the photo reflected on the defendant's standard of living and his motive for attempting to separate himself from the house by placing title in his wife's name, and then in trust. Again, the admissibility of the photograph is a matter of the trial court's discretion and absent a showing of abuse will not be disturbed on appeal. United States v. Fleming, 594 F.2d 598, 607 (7th Cir.), cert. denied, 442 U.S. 931 (1979). We see no abuse and certainly no "plain" error which might, under Federal Rule of Criminal Procedure 52(b), cause a miscarriage of justice if not recognized. United States v. Frady, 456 U.S. 152, 163 (1982).

The government also offered some summary chronological charts showing, during the relevant period, what the defendant was doing in relation to his taxes and financial activities. The defendant conceded that the charts were proper to use as aids to testimony, but objected to their admission in evidence. Federal Rule of Evidence 1006 permits the admission of summary charts not only in tax cases, but also in other cases, at the trial court's discretion. That exercise of discretion will be sustained absent "a clear showing of abuse and resulting prejudice" to the defendant. United States v. Dana [72-1 USTC ¶9227 ], 457 F.2d 205, 207-08 (7th Cir. 1972). Defendant's objection goes more to the admissibility of the underlying financial evidence which, as we have already demonstrated, was properly admissible. The charts were not attacked as inaccurate. Needham v. White Laboratories, Inc., 639 F.2d 394, 403 (7th Cir.), cert. denied, 454 U.S. 927 (1981). The charts aided the jury in understanding the evidence, which involved incidents and transactions occurring over a period of years. We find no abuse.

The defendant also objects to the admission of other summary charts and to the testimony of a revenue agent who created the charts. One of these other summary charts was a Deposit Analysis Summary Chart, which the revenue agent drew up after examining all the bank accounts with which the defendant had a connection, showing deposits and expenditures. The jury needed the chart's help in putting the evidence in perspective. The defendant objected to the chart, asserting that it was an impermissible attempt by the government to put its evidence twice before the jury. The trial judge, in response to the objection, restricted the agent's testimony where it would be unnecessarily repetitive. There was no abuse of discretion.

The defendant also finds fault with the instructions. The defendant argues that the court's instruction on the lesser-included offense ⁶ of willful failure to pay taxes misled the jury, because it did not inform the jury that the failure to pay the tax must occur at the time or times required by law or regulations. 26 U.S.C. §7203 . Another instruction, however, informed the jury, in case the date had slipped their memories, that the defendant's taxes were "owed" on April 15. The instructions as a whole were adequate. The defendant did not object at trial to the instruction to which he now objects, and in context there is no plain error.

The defendant also objects to the fact that the court gave the Seventh Circuit's standard "joint venture" instruction ⁷ because, according to the defendant, there was no evidence to justify it. Some of the defendant's wife's activities connected with the transfer of the house out of trust to the children, and the defendant's son's signature on checks for his father, all shown in the evidence, were sufficient, for example, to permit the inference that the wife's and son's acts were willfully directed by the defendant to help accomplish his avoidance of his tax payments. If the jury believed that he orchestrated their acts, then the defendant's directions made him responsible for the acts of those who assisted him.

Lastly, the defendant objects to the trial court's instruction defining willfulness because it does not distinguish and exclude mere negligent conduct. The instruction is short and plain, and by its own words excludes all but willful conduct done voluntarily to avoid a legal duty. It thereby excludes negligent or accidental acts. It is a standard Seventh Circuit instruction in tax cases ⁸ which has been used and approved. ⁹ United States v. Bressler [85-2 USTC ¶9646 ], 772 F.2d 287, 291 (7th Cir. 1985), cert. denied, 106 S.Ct. 852 (1986).

The jury was guided by proper instructions and its verdict that the defendant was guilty was supported with ample evidence.

AFFIRMED.

¹ 26 U.S.C. §7201 provides for two offenses, the more common being to evade or defeat any tax, and the offense charged in this case, to evade or defeat the payment thereof.

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 $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

² The trial judge imposed a period of imprisonment of one year and one day on Count I, and sentenced defendant on each of Counts II and III to concurrent three-year periods of probation, to run consecutively to the sentence on Count I. As a condition of probation the defendant was required to pay all back taxes and penalties. The judge also imposed fines in the amount of $10,000 on each count.

³ A claiming race is a horse-racing procedure which requires a horse owner wishing to enter a race for an attractive purse to risk losing the horse to another person willing to pay the stated claiming price. It is considered a way to keep owners honest and to increase competition. Claiming races are not a new concept as something similar dates back to the 17th century in England . Today it is estimated that over seventy percent of all races run in the United States are claiming races. See T. Biracree & W. Insigner, The Complete Book of Thoroughbred Horse Racing 217-22 (1982).

⁴ One year earlier the defendant had claimed a race horse with the dubious name of Dumpling for $2,500.

⁵ Rule 52(b) provides that "[p]lain errors or defects affecting substantial rights may be noticed although they were not brought to the attention of the court."

⁶ The trial judge gave the following instruction:

To sustain the charge of the lesser offense of wilful failure to pay taxes, the government must prove the following propositions:

First: The defendant owed taxes;

Second: The defendant failed to pay those taxes; and

Third: The defendant's failure to pay was wilful.

If you find from your consideration of all the evidence that each of these propositions has been proved beyond a reasonable doubt, then you should find the defendant guilty.

If, on the other hand, you find from your consideration of all of the evidence that any of these propositions has not been proved beyond a reasonable doubt, then you should find the defendant not guilty.

⁷ The joint venture instruction provided as follows:

Whatever a person is legally capable of doing he can do through another person by causing that person to perform the act. If the acts of another are willfully ordered, directed, or authorized by the defendant, he is responsible for such acts as though he personally committed them.

⁸ The instruction provided that

[a]n act is done wilfully if done voluntarily and intentionally with the purpose of avoiding a known legal duty.

⁹ See Federal Criminal Jury Instructions of the Seventh Circuit 83 (1980).

 

 

[87-1 USTC ¶9351] United States of America , Plaintiff-Appellee v. Lawrence Dubé, Defendant-Appellant

(CA-7), U.S. Court of Appeals, 7th Circuit, 86-1449, 6/28/87 , 820 F2d 886, Affirming an unreported District Court decision

[Code Secs. 7201 , 7203 and 7205 --Result unchanged by the Tax Reform Act of 1986 ]

Evidence: Admissibility: Oral testimony: Juries: Instructions to.--A former commercial airline pilot who participated in various religious schemes to avoid paying income taxes was properly convicted of attempting to evade taxes, failing to file tax returns and submitting false withholding statements. The testimony of a minister concerning conversations held with the taxpayer was not protected under the priest-penitent privilege. The minister testified only to conversations involving the taxpayer's efforts to relieve himself from paying taxes and not about his spiritual confidences. The IRS's admission of a civil case that involved a tax protestor church in order to refute the taxpayer's contention that certain tax questions he raised were unresolved did not constitute prejudicial error. Although there was no evidence that the taxpayer was actually aware of the holding in the case, in view of all of the other evidence, its admission was inconsequential. As to the instruction on the issue of willfulness, the court rejected the taxpayer's claim of error on the ground that the jury was not permitted to consider his misunderstanding defense under an objectively reasonable standard. The court reiterated its position stated in T.J. Koliboski, CA-7, 85-1 USTC ¶9251 , that wages are income and a tax protestor's good faith belief otherwise would not act to negate willfulness.

Theodore T. Scudder, Ruff, Weidenarr & Reidy, One N. LaSalle St., Chicago, Ill. 60602, for plaintiff-appellee. Anton R. Valukas, United States Attorney, Deborah A. Devaney, Assistant United States Attorney, 219 S. Dearborn St., Chicago, Ill., for defendant-appellant.

Before BAUER, Chief Judge, WOOD, JR., and POSNER, Circuit Judges.

WOOD, JR., Circuit Judge:

This appeal involves a former commercial airline pilot who sought to satisfy his opposition to paying income taxes by belatedly getting "religion." However, that only got him indicted and convicted of willfully attempting to evade and defeat his income tax for the year 1981, a felony, ¹ of failing to file tax returns for the years 1981, 1982, and 1983, ² and of submitting during the latter part of 1982 ³ three false Employee's Withholding Allowance Certificates (Form W-4) to his employer, these latter charges being misdemeanors. The defendant was acquitted on six charges relating to the prior years of 1978-1980.

The defendant-appellant Dubé raises three issues: first, whether the defendant's tax-related conversations with a minister were privileged, second, whether the district court properly admitted evidence of a particular civil tax case to which defendant was not a party, and third, whether the jury was properly instructed on the issue of willfulness. ⁴

I. FACTUAL BACKGROUND

The defendant, Larry Dubé, learned to fly for the United States Air Force in 1954 and served in the military for about ten years. ⁵ He was then hired by United Airlines and flew for United for twenty years. In April 1978 he was promoted to first officer on a Boeing 747 and in July was promoted to captain, with substantial increases in salary for both promotions. For the year 1981 his total wages were $91,538.18.

The defendant had married three times, being twice divorced. Dubé had one natural child from his second marriage. This child was dyslexic. He also adopted his second wife's two daughters from a prior marriage. Dubé and his third wife were married in 1972 and had three children. During the early years of his third marriage the defendant paid his income taxes. He considered himself to be a nominal church member.

The defendant describes his religious conversion as beginning when his sixteen-year-old dyslexic son was sent to a psychiatric facility. About this time, January or February of 1978, he bought a book in a drugstore entitled What the World is Coming To, by Pastor Chuck Smith, which, the defendant says, impacted on his religious outlook. His two large pay raises came shortly after that in April and July of 1978. During this period Dubé's conversion occurred. About a month after his first promotion he sent for literature about the Life Science Church, a church which claimed to bestow certain tax advantages. In May of 1978 he decided to join, sent in $500, and by mail soon received his "credentials" which ordained Dubé a minister and a doctor of divinity, and granted a charter for a church. Included was a form entitled "Vow of Poverty" which the defendant signed. For another $100 Dubé's wife also became a minister. He designated part of his home as a Life Science Church.

The head of Life Science, William Drexler, was a lawyer, but he referred to himself as a Bishop and Chief of Order of Almighty God. Much of the material the defendant received from the Bishop, however, was concerned with taxes and not with religion. The Bishop's theory was that the church was tax exempt and that if the defendant, under his "vow of poverty," continued his flying as a minister of the church and donated his entire income to the church he established, then whatever he drew back from the church for his own personal purposes was exempt from all taxation. The type of "poverty" Dubé achieved by signing the "vow of poverty" is likely to cause wonderment among certain recognized religious orders. ⁶ Over time the defendant, in addition to what he withdrew for his own use, however, did make contributions to various recipients, such as family members, churches, and others, some of which were recognized as charitable.

About a week after receiving his credentials the defendant began to take advantage of his new divinity status by sending to United Airlines his W-4 claiming eighty-five withholding allowances. This action was intended to stop all federal tax withholding, as the defendant explained in an accompanying letter to United Airlines. The IRS began to show some interest as the defendant received notice that his 1976 tax return was to be audited. ⁷ He immediately directed his bank not to honor any IRS summonses.

Later in 1978 Dubé began corresponding with United Airlines about his tax status. United advised the defendant that he was not exempt. He complained in a letter to a member of another Life Science Church, Bishop Sumption, that United Airlines had refused to recognize his position. He stated that the IRS was confiscating his property against his will to support socialistic programs to which he was religiously and morally opposed. He began to sign his correspondence as "Reverend."

In 1979, after reading in a national news magazine that Life Science Church was a sham church with tax-protester members, the defendant changed his church's name and became affiliated with the Basic Bible Church , as Bishop Sumption had also decided to do. This new church, however, had similar tax policies, and, incidentially, included other commercial pilots as members. For $600 the defendant received a new set of credentials and thereby became not only a minister and doctor of divinity, but also a bishop and an apostle. He continued his same tax policies.

In 1980 Bishop Sumption led Dubé to yet another church. This time it was called the Community Church of Truth, and the price was increasing: it was now $750. Within about two months the IRS first directly contacted the defendant. The defendant tried to contact the Bishop of the Basic Bible Church , but got no response. ⁸ Dubé, apparently feeling the need for even more religion, then sought to join the Christian Assembly of God Church in Zion , Illinois , a recognized church, not a tax church. His relationship with the pastor of that church, Michael Ciociola, and their conversations, are the basis of the claimed privilege which the defendant says was breached by the admission at trial of the pastor's testimony.

The defendant at this time received an inquiry from IRS as to why he had failed to file his 1978 return. Dubé's unsatisfactory tax payment situation was not cleared up, so in 1982 the IRS directed United Airlines to overwithhold from the defendant's wages. As a result no taxes were due from the defendant for 1982 or 1983. In the fall of 1982 Dubé filed three W-4's with United Airlines in which he again claimed to be exempt. The IRS investigation turned into a criminal investigation.

II. DISCUSSION

A. The Claim of Privilege

The defendant claims that Reverend Ciociola's testimony should have been excluded under what he labels a "believer-clergyman" privilege, and the government denies that what it calls the "priest-penitent" privilege was applicable to the particular conversations between Reverend Ciociola and the defendant. To use the term "priest" as the government does, although a common practice, see, e.g., Trammel v. United States, 445 U.S. 40, 45, 51 (1980), might suggest application only to a particular religion not involved in this case; we will therefore refer to it simply as the clergy-penitent privilege. ⁹

Referring to another type of claimed privilege, Learned Hand, in McMann v. SEC, 87 F.2d 377, 378, cert. denied, 301 U.S. 684 (1937) commented that, "[t]he suppression of truth is a grievous necessity at best." Because testimonial privileges contravene the fundamental principle that the public has a right to every person's evidence, privileges must be strictly construed so as to be applied only to the very limited extent that "excluding relevant evidence has a public good transcending the normally predominant principle of utilizing all rational means for ascertaining truth." Trammel, 445 U.S. at 50 (citing Elkins v. United States, 364 U.S. 206, 234 (1960) (Frankfurter, J., dissenting)). The Court in Trammel explained in dicta that the clergy-penitent privilege is limited to private communications rooted in confidence and trust. The privilege "recognizes the human need to disclose to a spiritual counselor, in total and absolute confidence, what are believed to be flawed acts or thoughts and to receive priestly consolation and guidance in return." 445 U.S. at 51. If, however, one seeks out the clergy only for income tax avoidance, we see no more need for a protective privilege than if the taxpayer had consulted his butcher or barber. The taxpayer is not a penitent seeking spiritual relief from his sins, only a citizen seeking relief from his obligation to pay taxes.

In 1980, in the same month that Dubé applied to join the Community Church of Truth, he and his wife also joined the Christian Assembly of God Church where Ciociola was pastor. Before he became a member, the defendant told Ciociola that he, Dubé, was tax exempt because he was a minister. Ciociola merely responded with "Oh." Ciociola testified to three or four more tax conversations with the defendant over the next two-and-a-half years which generally occurred in a public restaurant. Ciociola testified that the defendant "mentioned on [one] occasion that the vow of poverty entailed one's ability to take all his resources and use them for the church. In using those resources for the church, you were thereby tax-exempt because you could do things with that money that normally you couldn't do." Ciociola, in their conversations, explained to the defendant that the teaching he had received about taxes was that pastors of even small struggling churches had to pay income taxes on wages they received from the church, as well as on income from any additional outside employment. Ciociola checked further with the legal counsel for his church who reaffirmed the tax opinion which Ciociola had explained to Dubé. Ciociola passed this correct income tax information to the defendant. Dubé, Ciociola believed, was relying on the tax information Dubé had received with his mail-order credentials when he joined the Life Science Church and the Basic Bible Church . Ciociola advised the defendant that he should seek tax advice outside those churches because of the complications that had arisen with the IRS.

Ciociola in his testimony revealed nothing from any conversations he may have had with the defendant which related in any way to defendant's spiritual confidences. Ciociola's testimony related only to Dubé's efforts to relieve himself from the necessity of paying income taxes. The mere fact that Ciociola was a legitimate pastor did not cast a privilege around all or whatever Ciociola and Dubé happened to talk about. In this case, their conversations were only about the defendant's efforts to avoid paying his taxes. This was a subject that the defendant continually argued with United Airlines, the IRS, the leaders of his various mail-order churches, and even with a United States Senator and a Congressman. There was nothing confidential about Dubé's tax views.

The defendant's other arguments can be quickly dismissed. Dubé argues that Ciociola never knew that a clergy-penitent privilege existed, and that the government therefore was able to take advantage of Ciociola, causing Ciociola to violate the privilege. This argument is groundless as there was nothing in Dubé and Ciociola's tax conversations which the privilege could protect. Defendant argues that he and Ciociola also discussed intimate moral and spiritual matters. We do not know whether that is true or not because Ciociola was not asked to testify as to anything of that nature. The defendant also argues that Ciociola's testimony was erroneously admitted to show the willfulness of defendant's tax maneuvers. There was evidence enough of willfulness without any of Ciociola's testimony, but, in any event, the tax debates between Ciociola and the defendant do not amount to disclosure to a spiritual counselor in absolute confidence about what are believed to be "flawed acts or thoughts" for the purpose of receiving the benefit of "priestly consolation and guidance" in return. Trammel, 445 U.S. at 51.

The defendant persistently sought someone to tell him he was tax exempt, but he could find no one who would do so except his mail-order churches, a number of whose leaders and members also went to the penitentiary. If by merely joining one of the tax churches a person could avoid all taxes and yet have the full use of his earned income, there would likely be an overnight overabundance of mail-order bishops. That sudden proliferation of bishops, however, would hardly indicate a great religious revival in this country.

B. Civil Revenue Ruling

Over defendant's objection an IRS witness testified about a 1981 tax court case, McGahen v. Commissioner [CCH Dec. 37,781 ], 76 T.C. 468 (1981), which was admitted into evidence. McGahen disposed of the same Basic Bible Church contentions here raised by the defendant. There was, however, no showing that the defendant was actually aware of the holding in the case. The case was admitted for the limited purpose of showing that specific, reliable tax information was available to the defendant, in order to rebut the defendant's claim that the tax questions he raised with ministers, congressmen, and others had no definitive answers. The defendant was relying on a defense of "good faith misunderstanding" of the law, but the jury was instructed that it could consider whether the defendant intentionally avoided discovering what he did not want to learn about being required to pay his taxes. The information the defendant did not want to have about his tax liabilities was easily available to him whether he chose to acknowledge it or not.

McGahen was a civil case. It contained no finding of "guilt" in like circumstances, but it revealed what should have been abundantly clear even without the decision. The Basic Bible Church was nothing more than a tax protest church. Some members of the Basic Bible Church were indicted in 1981. The defendant knew about that and moved to another church, but he showed his willfulness by continuing to violate the tax laws even though he could have, and should have, known better.

We do not see the McGahen decision as making much difference one way or the other in view of all the other evidence. Although the decision had been admitted for a limited purpose over the defendant's objection, the defendant sought no limiting instruction. We find no prejudice and no error in its admission in these particular circumstances.

C. Instructions

In light of the evidence presented, there was little question about what the defendant had or had not done about his taxes. The pivotal issue was Dubé's willfulness. He claims error on the grounds that the jury was not permitted to consider his misunderstanding defense under an "objectively reasonable standard," and that a "strict" instruction was erroneously given.

The defendant submitted his own intent instruction which would have placed on the government the burden of proving that the defendant acted with a "bad purpose" to disobey or disregard the law. The defendant claims that in United States v. Pomponio [76-2 USTC ¶9695 ], 429 U.S. 10 (1976), the Supreme Court adopted the subjective standard in determining willfulness in tax prosecutions, that is, the defendant should be found not guilty if he actually believed in his erroneous belief. We have already read Pomponio differently in United States v. Koliboski [85-1 USTC ¶9251 ], 732 F.2d 1328, 1329 n.1 (7th Cir. 1984). In capital letters we delared that "WAGES ARE INCOME" and warned would-be tax protestors that no "good faith" belief otherwise would change the law. We recently reiterated the position in United States v.Ferguson [86-1 USTC ¶9475 ], 793 F.2d 828, 831 (7th Cir.), cert. denied, 107 S. Ct. 406 (1986). Even if the law were as defendant argues his guilt nevertheless was plain. What the tax laws required of defendant was simple, plain, and known to him, but he chose to pretend otherwise while living well in "poverty."

The government submitted separate instructions on intent, good faith, misunderstanding, and knowledge. As to misunderstanding the government proposed an instruction that "a good faith misunderstanding of the law based on reasonable grounds may negate willfulness." This instruction has been approved in this circuit. United States v. Bressler [85-2 USTC ¶9646 ], 772 F.2d 287, 291 (7th Cir. 1985), cert. denied, 106 S. Ct. 852 (1986). In an effort to satisfy both parties, the trial judge prepared his own instruction on willfulness, expressing his view that this circuit would move away from an objective standard and use reasonableness merely as one factor in determining subjective good faith. That may come to pass, ¹⁰ but there is no need to reconsider the current rule in this case because the trial judge gave his own instruction rather than this circuit's standard instruction. The defendant, however, even under the more favorable instruction that the trial court gave, allowing the jury to consider Dubé's honest beliefs, was not able to prevail with the jury. He therefore has no meritorious complaint in that regard.

The court gave the government's "ostrich" instruction relating to intentional avoidance. Although the defendant objected to the instruction, and raises the objection on appeal, Dubé's complaint is to no avail. The circuit has approved the instruction as given, although it has been suggested that the instruction could and should be improved.United States v. Ramsey, 785 F.2d 184, 189-91 (7th Cir.) (collecting cases in this and other circuits and criticizing wording of instruction), cert. denied, 106 S. Ct. 2924 (1986); United States v. Josefik, 753 F.2d 585, 589 (7th Cir.), cert. denied, 471 U.S. 1055 (1985).

We find no reversible error.

¹ Count IV alleged a violation of 26 U.S.C. §7201 , in that the defendant had gross income of approximately $91,706 and taxable income of $65,254 upon which he owed a tax of approximately $22,515.

² Counts VIII, IX and X alleged violations of 26 U.S.C. §7203 .

³ Counts XI, XII and XIII alleged violations of 26 U.S.C. §7205 .

⁴ The defendant was sentenced to three months imprisonment on Count IV, which has been served, and three years probation on the remaining counts.

⁵ The defendant, who served overseas although not in combat situations, was recommended for several decorations for accomplishing a difficult "dead-stick" landing of an F-104, but the decorations were not awarded.

⁶ Later, other similarly poverty-stricken commercial pilots who owned pleasure boats, condominiums, and private planes were convicted for tax fraud.

⁷ This civil audit culminated with the defendant paying an additional sum of $300 to the IRS.

⁸ In 1981 the Bishop and other members of the Basic Bible Church were indicted for tax fraud; the Bishop and a group of Braniff pilots were later convicted. In a letter to a "minister" acknowledging these indictments the defendant wrote, "We either regain our freedom in this country or I'll see you in the internment camp!"

⁹ This privilege, of course, would apply in other cases to ordained ministers, rabbis, Christian Science practitioners, as well as priests.

¹⁰ The Seventh Circuit, as of March, 1987, had not yet moved away from the objective standard: "A bona fide misunderstanding of the duty to file . . . might be framed as a 'mistake of law' defense which, according to this Court, succeeds or fails on the standard of objective reasonableness." United States v. Sato [87-1 USTC ¶9226 ], 814 F.2d 449, 451 (7th Cir. 1987).

 

 

[86-2 USTC ¶9713] United States of America , Appellee v. Joseph Abodeely, Appellant

(CA-8), U.S. Court of Appeals, 8th Circuit, 85-2108, 9/22/86 , Affirming an unreported District Court decision

[Code Sec. 7201 ]

Criminal tax evasion: Admission of evidence: Relevancy.--The trial court did not err in admitting evidence of the defendant's gambling and prostitution activities; thus, his conviction for criminal tax evasion was upheld. In the government's case to establish, by the bank deposits and cash expenditures method, that the defendant had unreported income, the evidence was relevant to show a likely source of unreported taxable income. Also, the probative value of the evidence outweighed its potential prejudicial effect.

Richard L. Murphy, Assistant United States Attorney, Sioux City , Iowa , for appellee. Mark S. Pennington, 620 Fleming Bldg., Des Moines , Iowa , for appellant.

Before ARNOLD, Circuit Judge, HENLEY, Senior Circuit Judge, and STROM, District Judge. ^*

HENLEY, Senior Circuit Judge:

Defendant Joseph Abodeely was indicted by the grand jury for two counts of criminal tax evasion in violation of 26 U.S.C. §7201 for the tax years of 1978 and 1979. Following a jury trial in the United States District Court for the Northern District of Iowa, ¹ the defendant was convicted on both counts and sentenced to two years imprisonment under Count II of the indictment, imposition of sentence was suspended on Count I, and defendant was placed on probation for three years commencing on his release from confinement. Defendant was also fined $10,000.00. Abodeely now appeals his convictions claiming that the district court erred in admitting over his objections evidence regarding Abodeely's involvement in promoting prostitution and his gambling activity in Las Vegas . This court has jurisdiction to hear the appeal. 28 U.S.C. §1291 . We affirm.

Joseph Abodeely derived his income from several business ventures. These included the Unique Motel, the Food Factory (a fast food restaurant), and the Meeting Place (a bar featuring exotic dancers and located near the Unique Motel). Abodeely filed an income tax return, along with his wife, for the 1978 tax year in which he stated their net taxable income was a negative $627.00. They declared a net taxable income for 1979 of $25,443.00. The government set out to prove that Abodeely's taxable income was substantially greater than the amount he stated in his tax returns for those two years. The government utilized the "bank deposits and cash expenditures" method to demonstrate that Abodeely received more income than he reported on his tax returns.

Evidence was introduced regarding various potential sources of the unreported income. ² Among these potential sources were Abodeely's six trips to Las Vegas during 1978 and 1979. Abodeely had established credit with the MGM Grand Hotel and could receive markers from the cashier. A marker is an advance or loan which may be exchanged at the hotel's casino for chips in order to gamble. During each trip Abodeely received markers for between $12,000.00 and $16,000.00. Abodeely would then pay back these markers, in cash, on his subsequent trips. Abodeely's gambling activity was also rated by MGM. On his March, 1978 trip Abodeely was graded a B-30. The "B" indicated that Abodeely placed bets of $50.00 to $75.00 per bet. The "30" is time played in increments of fifteen minutes. Thus, "30" indicated he played seven and one-half hours. Mr. Abodeely's rating never fell below "B" for any of the six trips. This rating is used by the MGM to determine whether a player is to receive complimentary benefits. Room, food and beverage will be given if the player places a minimum of $7,500.00 in bets. Airfare will also be given if the amount of the bets exceeds $10,000.00. Abodeely received complimentary room, food, beverage and airfare on each occasion during 1978 and 1979. The records from the MGM do not disclose whether Abodeely won, lost, or broke even while gambling.

In addition to the gambling evidence, the trial court also permitted the government to introduce evidence of Abodeely's involvement in promoting prostitution. Kim Golston testified that she worked for Abodeely for between four and six weeks in 1979. Golston would use a room at the Unique Motel and Abodeely would send men to her room. Golston would split the money that she received from the prostitution sixty/forty with Abodeely, Abodeely receiving sixty per cent. Another witness testified that she overheard Abodeely tell one of the dancers who worked for him that "if she couldn't hook for him she could move out of her apartment" at the Unique Motel.

Abodeely argues that the trial court erred in admitting this testimony because it was not relevant, Fed. R. Evid. 402, or, if relevant, its probative value was outweighed by the danger of unfair prejudice. Fed. R. Evid. 403.

The standard for review of the district court's evidentiary rulings challenged by the appellant is whether the court abused its discretion. United States v. Poston, 727 F.2d 734, 739 (8th Cir.), cert. denied, 466 U.S. 962 (1984). The admissibility of evidence is primarily a determination to be made by the district court, United States v. Jones, 687 F.2d 1265, 1267 (8th Cir. 1982), and this court will not substitute its judgment unless there has been an abuse of discretion. United States v. Iron Shell, 633 F.2d 77, 86 (8th Cir. 1980), cert. denied, 450 U.S. 1001 (1981). Appellant contends that the evidence of the likely sources of income was not relevant to the government's proof of tax evasion under the bank deposits and cash expenditures method of proof.

In order to obtain a conviction for income tax evasion under 26 U.S.C. §7201 , the government must prove, beyond a reasonable doubt, the following elements:

(1) That there is a tax deficiency for the relevant year that is due and owing;

(2) That the defendant knowingly and wilfully failed to pay; and

(3) That the failure to pay was in an attempt to evade or defeat the tax due.

United States v. Grasso [80-2 USTC ¶9593 ], 629 F.2d 805, 807 (2d Cir. 1980); United States v. Goichman [77-1 USTC ¶9115 ], 547 F.2d 778, 781 (3d Cir. 1976). Abodeely's claims of error do not challenge the government's proof of the second and third elements. Defendant challenges the introduction of evidence as it relates to the first element--proof of a tax deficiency.

In order to prove a tax deficiency, " 'the government must show first that the taxpayer had unreported income, and second, that the income was taxable.' " United States v. Fogg [81-2 USTC ¶9607 ], 652 F.2d 551, 555 (5th Cir. Unit B 1981), cert. denied, 456 U.S. 905 (1982) (quoting United States v. Hiett [78-2 USTC ¶9754 ], 581 F.2d 1199, 1200 (5th Cir. 1978)); see United States v. Vannelli [79-1 USTC ¶9257 ], 595 F.2d 402, 405-06 (8th Cir. 1979) ("In a tax evasion prosecution it is necessary to show that an individual received more income than he reported. In order to do this, the government must establish potential sources from which this unreported income was derived."). Proof of unreported taxable income by direct means is extremely difficult and often impossible. By the very fact that a taxpayer has failed to report the income, it behooves him to obscure any trace of its existence. Therefore, direct methods of proof, which depend on the taxpayer's voluntary retention of records of the income, fail. Accordingly, the government has armed itself with an arsenal of indirect methods of proof which rely on circumstantial evidence to disclose unreported taxable income. These methods include:

(1) "Net worth," Holland v. United States [54-2 USTC ¶9714 ], 348 U.S. 121 (1954);

(2) "Cash expenditures," Taglianetti v. United States [68-2 USTC ¶9479 ], 398 F.2d 558 (1st Cir. 1968), aff'd per curiam [69-1 USTC ¶9295 ], 394 U.S. 316 (1969); and

(3) "Bank deposits," United States v. Esser [75-2 USTC ¶9654 ], 520 F.2d 213 (7th Cir. 1975), cert. denied, 426 U.S. 947 (1976).

The government may choose to proceed under any single theory of proof or a combination method, including a combination of circumstantial and direct proofs. H.G. Balter, Tax Fraud and Evasion, ¶13.03[3] (4th ed. 1976). The government denominates the method it used at trial in this case as the "bank deposits and cash expenditures" method. The "bank deposits" or "bank deposits and cash expenditures" method has been variously defined. The foundation of the method requires that the government "initially introduce evidence to show (1) that, during the tax years in question, the taxpayer was engaged in an income producing business or calling; (2) that he made regular deposits of funds into bank accounts; and (3) that an adequate and full investigation of those accounts was conducted in order to distinguish between income and non-income deposits." United States v. Morse [74-1 USTC ¶9228 ], 491 F.2d 149, 152 (1st Cir. 1974) (citations omitted); see also Esser, 520 F.2d at 217; Gleckman v. United States [35-2 USTC ¶9645 ], 80 F.2d 394 (8th Cir. 1935), cert. denied, 297 U.S. 709 (1936). All non-taxable deposits are then excluded from the gross deposits and amounts on deposit from prior years are not included. Morse, 491 F.2d at 152. The figure arrived at after this "purification," United States v. Boulet [78-2 USTC ¶9628 ], 577 F.2d 1165, 1167 (5th Cir. 1978), cert. denied, 439 U.S. 1114 (1979), is the net taxable bank deposits. Under a "pure" bank deposits approach, no further proof is necessary and "the jury is entitled to infer that the difference between the balance of deposited items and reported income constitutes unreported income." Esser, 520 F.2d at 217 (footnote omitted). The bank deposit method requires that the taxpayer's income be circulated through his bank accounts. If the income is simply received or converted into cash exclusive of his bank accounts and subsequently spent, its existence is not reflected in the bank deposits analysis. Likewise, unless the unreported income is converted into durable or investment property (automobiles, real estate, etc.), it will not be discovered in a net worth analysis. Taglianetti, 398 F.2d at 562. Therefore, the bank deposits and cash expenditures method, an augmentation of the bank deposits method, is sometimes used by the government to prove the existence of unreported income.

Under this augmented approach the underlying bank deposits foundation must be laid to establish the initial taxable income. To this figure the government then adds any other income which the taxpayer received but did not deposit in any bank account. Morse, 491 F.2d at 152; Morrison v. United States [59-2 USTC ¶9657 ], 270 F.2d 1, 2 (4th Cir.), cert. denied, 361 U.S. 894 (1959). This formulation of the approach would not immediately suggest the phrase "cash expenditure" as an appropriate adjunct to "bank deposits" in naming the method. The method could more aptly be described as bank deposits and non-deposits. The rationale for the naming of this method is, however, germane to the court's opinion. The basis for the cash expenditures language is found in such cases as Boulet, 577 F.2d at 1167, and Percifield v. United States [57-1 USTC ¶9406 ], 241 F.2d 225 (9th Cir. 1957). In both cases, the court states the bank deposit foundation and then continues that cash expenditures which would not be reflected in bank deposits are added thereto. Boulet, 577 F.2d at 1167; Percifield, 241 F.2d at 229 n.7. Such language apparently led appellant to conclude that bank deposits and cash expenditures method is an amalgamation of the bank deposits, see Esser, 520 F.2d at 217, and cash expenditures, see Taglianetti, 398 F.2d at 562, methods. The cash expenditures method, however, is a simple variant of the net worth method and requires the government to establish a beginning and ending net worth position of the taxpayer. Taglianetti, 398 F.2d at 562; United States v. Newman [72-2 USTC ¶9719 ], 468 F.2d 791, 793 (5th Cir. 1972), cert. denied, 411 U.S. 905 (1973). No showing of opening or closing net worth is necessary under the bank deposits and cash expenditures method. Boulet, 577 F.2d at 1167 n.3; Percifield, 241 F.2d at 230. A careful reading of Boulet and Percifield reveals that the government there did not merely prove a cash expenditure; it also demonstrated a source of the income from which the expenditures were made. In all the cases the government presented proof of the source of the undeposited income. Morse, 491 F.2d at 153 ("customer checks which had been cashed or endorsed over to third parties"); Boulet, 577 F.2d at 1167 ("cash the doctor received from fees"); Percifield, 241 F.2d at 229 (unreported income from gambling); Vannelli, 595 F.2d at 405-06 (embezzled bingo proceeds). Thus, the cash expenditures identified in Boulet and Percifield are not an end in themselves, but, rather, an indication that an unreported income source exists to be found. An indication alone, however, is not enough to convict someone of tax evasion because the money for the expenditure may have come from a taxable source or a non-taxable source. Under any method the government must demonstrate, beyond a reasonable doubt, that the unreported income came from a taxable source. There are two different ways that the government can show the taxable nature of the income. ³