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First, the government may choose to negative all possible sources of non-taxable income. If this is done, there is no necessity of proving a likely source of the income. United States v. Massei [58-1 USTC ¶9326 ], 355 U.S. 595 (1958) (per curiam). Under the bank deposits approach this would require the government to "do everything that is reasonable and fair [in] the circumstance to identify any non-income transactions and deduct them from total deposits." Esser, 520 F.2d at 217. The same is true in a bank deposits and cash expenditures case. Morse, 491 F.2d at 152. The second approach is to prove a likely source from which the jury could reasonably find that the income sprung. Holland , 348 U.S. at 138; Vannelli, 595 F.2d at 406. Proof of a likely source of the income necessarily negatives possible non-taxable sources. Holland , 348 U.S. at 137-38. Appellant argues that Holland is a net worth case and has no bearing on a bank deposits and cash expenditures case.

This court does not completely agree. Under any §7201 tax evasion case the government must show unreported taxable income as an element of its proof. Further, the net worth and bank deposits and cash expenditures methods both rely on circumstantial evidence, and the various safeguards expressed in Holland regarding the use of circumstantial evidence apply equally. United States v. Wiese [84-2 USTC ¶10,010 ], 750 F.2d 674, 678 (8th Cir. 1984); United States v. Hall [81-1 USTC ¶9209 ], 650 F.2d 994, 997 (9th Cir. 1981). Therefore, under any circumstantial method of proof, it is incumbent on the government to prove that the excess income is taxable.

Gains from unlawful activity are taxable, James v. United States [61-1 USTC ¶9449 ], 366 U.S. 213, 218-20 (1961); United States v. Eliano [75-2 USTC ¶9692 ], 522 F.2d 201, 202 (2d Cir. 1975); as are gains from gambling, McClanahan v. United States [61-2 USTC ¶9550 ], 292 F.2d 630, 631-32 (5th Cir.), cert. denied, 368 U.S. 913 (1961). Here, gambling and prostitution evidence is relevant because it has the tendency to make it more probable that Abodeely had unreported income from a taxable source. Fed. R. Evid. 401. "All relevant evidence is admissible" unless otherwise excluded. Fed. R. Evid. 402. The prostitution evidence was plainly relevant because the testimony of Golston clearly reveals that Abodeely was receiving taxable income. The testimony concerning a requirement that a dancer "hook" or "move" tended to show that appellant was in the prostitution business for profit.

This court is somewhat troubled by the gambling evidence, but does conclude that it was marginally relevant. The evidence reveals that Abodeely made six trips to Las Vegas during the tax years in question and made wagers in excess of $10,000.00 on each trip. From this evidence three conclusions may be drawn. First, the conclusion urged by the government, that Abodeely won at gambling and received income. Second, Abodeely may have lost. Losing, however, would also indicate unreported income because the losses would have to be covered. Abodeely always repaid his markers in cash on the subsequent trip. If he was losing money, this indicates a substantial unreported income source necessary to satisfy the losses. The third possibility is that Abodeely broke even; this would indicate no income from gambling and also might not evidence any other income source. Abodeely argues that he simply took the the markers to use the cash as an interest free loan for cash flow at his various businesses. This explanation is plainly at odds with MGM's rating of Abodeely and the complimentary airfare which he was extended. The various inferences that may be drawn, but which a jury was not required to draw, from this evidence weigh in favor of evidencing an income source.

Apart from relevance Abodeely urges that the probative value of the questioned evidence is outweighed by the danger of unfair prejudice.

Evidence of this nature is undoubtedly prejudicial to the defendant. The rule requires, however, that the probative value be substantially outweighed by the danger of unfair prejudice. Fed. R. Evid. 403. A district court's determination respecting the admissibility of evidence under Rule 403 is given great deference, United States v. Michaels, 726 F.2d 1307, 1315 (8th Cir.), cert. denied, 105 S.Ct. 92 (1984), and, as indicated, will not be reversed "absent a clear and prejudicial abuse of discretion." Wade v. Haynes, 663 F.2d 778, 783 (8th Cir. 1981), aff'd sub nom., Smith v. Wade, 461 U.S. 30 (1983). Numerous cases have upheld the admission of highly prejudicial evidence that was inextricably tied to proving the taxable nature of the income. United States v. Tafoya [85-1 USTC ¶9341 ], 757 F.2d 1522, 1526-27 (5th Cir.), cert. denied, 106 S.Ct. 252 (1985) (payment for assassination attempts); United States v. Ochs, 595 F.2d 1247, 1260-61 (2d Cir.), cert. denied, 444 U.S. 955 (1979) (income derived from extortion, loansharking and prostitution); United States v. Carrillo [78-2 USTC ¶9528 ], 561 F.2d 1125, 1127 (5th Cir. 1977) (unsavory business dealings that may have been the basis of state criminal prosecution).

The court has no conceptual difficulty with the evidence concerning prostitution. While it is certainly prejudicial, it is highly probative of unreported taxable income. The gambling evidence, while having less direct probative value, is much less prejudicial, and indeed if its admission was error (which this court does not conclude), the error was harmless beyond a reasonable doubt. After all, having been shown that Abodeely ran a bar and a brothel, even the most straitlaced Iowa jury could hardly have been adversely affected by a showing of his participation in the legal, though perhaps sinful and worldly in the eyes of a midwestern jury, activity of gambling in Nevada .

We note that the district court closely scrutinized the challenged evidence in a series of conferences held out of the presence of the jury. That court endeavored to ensure that Abodeely would not be convicted on evidence of other crimes, but only on evidence of tax violations by giving several curative and limiting instructions during the challenged testimony. In sum, the trial was fair and free from abuse of discretion in receipt of evidence.

Abodeely's conviction is affirmed.

^* The Honorable Lyle E. Strom, United States District Judge, District of Nebraska, sitting by designation.

¹ The Honorable Donald E. O'Brien, United States District Judge, Northern District of Iowa , presiding.

² The government argued that Abodeely had ten separate sources of unreported income: (1) money from room rentals at the Unique Motel that were not recorded; (2) prostitution income; (3) automobile sales; (4) Meeting Place--bar tabs, over the counter sales, and cover charges which were not rung up on the cash register; (5) rental of exotic dancers to V.F.W. post; (6) United Airline coupons; (7) assistance fees from Rapid Chevrolet for help in selling cars; (8) back door sales of televisions, radios and stereos; (9) Las Vegas gambling; and (10) rental income from other property.

³ The court has dwelled on the matter of nomenclature to demonstrate that the government's method of proof here is not simply an amalgamation of the bank deposits and cash expenditures methods, but more nearly resembles a combination of the bank deposits and specific item, United States v. Horton [76-1 USTC ¶9219 ], 526 F.2d 884, 886 (5th Cir.), cert. denied, 429 U.S. 820 (1976), methods, although it lacks some of the specific item method's precision.

 

 

[86-1 USTC ¶9215] United States of America , Appellee v. Frank V. Ebner, Frank T. Petrozza, Joseph S. Rodi, Lorraine C. Schneider a/k/a " Lorraine C. Jania", Lawrence Ranucci, Howard G. Tapen, Jr., Defendants-Appellants

(CA-2), U.S. Court of Appeals, 2nd Circuit, 85-1280, 1281, 1282, 1283, 85-1302, 1338, 1/29/86 , 782 F2d 1120, (782 F2d 1120.) Affirming an unreported District Court decision

[Code Sec. 7201 ]

Evasion or avoidance of tax: Willful evasion: Church tax schemes: Miscellaneous assertions of error.--Although the taxpayers, who had been involved with a tax-evasion scheme centering around a bogus religious organization, claimed that the District Court abused its discretion by allowing certain evidence to be introduced during their trial, their convictions for tax evasion were affirmed.

Rudolph W. Giuliani, United States Attorney, Martin L. Perschetz, Mary T. Shannon, Stuart E. Abrams, Assistant United States Attorneys, New York, N.Y. 10007, for appellee. Barry M. Fallick, Rochman, Platzer & Fallick, 230 Park Ave., New York, N.Y. 10169, for defendants-appellants Lawrence Panucci and Joseph S. Rodi. Frank V. Ebner, Valley Stream , N.Y. , pro se. Eric Greenbush, 150 Nassau St. , New York , N.Y. , for defendant-appellant Howard G. Tapen, Jr. Philip Katowitz, Brooklyn , N.Y. , for defendant-appellant Frank T. Petrozza. H. Howard Friedman, 295 Madison Ave. , New York , N.Y. , for defendant-appellant Lorraine C. Schneider.

Before FEINBERG, Chief Judge, LUMBARD and OAKES, Circuit Judges.

LUMBARD, Circuit Judge:

Frank Ebner, Frank Petrozza, Joseph Rodi, Lorraine Schneider, a/k/a "Lorraine C. Jania," Larry Ranucci, and Howard Tapen, Jr. appeal from judgments of conviction entered in July and August, 1985, in the Southern District, following a two-month trial before Judge Vincent L. Broderick and a jury. The indictment charged 15 counts against all the appellants as well as Donna Petrozza, Frank Petrozza's wife. The indictment charged the defendants with conspiracy to defraud the United States , in violation of 18 U.S.C. §371 , and with individual income tax evasion, in violation of 26 U.S.C. §7201 .

The appellants all argue, first, that the district court abused its discretion by receiving into evidence portions of a New York State Supreme Court opinion enjoining defendants from continuing to implement the tax avoidance scheme that was the subject of the federal indictment; they claim that the jury understood that evidence to be an authoritative statement of their guilt. Second, appellant Ebner argues that, as result of several evidentiary decisions and the court's charge, he was denied a fair trial. Third, appellant Schneider contends that the evidence was insufficient to show that she committed affirmative acts of tax evasion, and thus, under Spies v. United States [43-1 USTC ¶9243 ], 317 U.S. 492 (1943), her conviction cannot stand. Finally, appellant Tapen argues that Judge Broderick abused his discretion by denying Tapen's pretrial motion for a severance under Fed. R. Crim. P. 14, and that this denial unfairly prejudiced him. We find these arguments to be without merit.

The appellants' tax-evasion scheme centered around a bogus religious organization called the Life Science Church ("LSC"). The proof at trial showed that the defendants, on the basis of sham "vows of poverty" taken as LSC "ministers," followed by the assignment of income to their own personal "churches," paid no income taxes on over $3,660,000 of taxable income derived primarily from the marketing and sale to the public of LSC "ministries".

Ranucci and his co-defendants became associated in 1977, when Ranucci and his partner, Reichert, formed U.N.I. Vending, a Long Island company engaged in the sale and distribution of vending machines. Ebner and Tapen were U.N.I. commissioned salesmen; Frank and Donna Petrozza were independent distributors of U.N.I. Vending equipment; and Schneider, who is Ranucci's daughter, was U.N.I.'s bookkeeper.

Late in 1978, Ranucci was approached by William Drexler, who was the national head and "Archbishop" of LSC. Drexler, a former lawyer, ¹ explained to Ranucci that a principal "belief" of LSC's was that Americans were overtaxed and had the right to choose not to pay taxes; he said that LSC marketed and sold "ministries" as a means of eliminating or substantially reducing a purchaser's income tax liability. Drexler offered to sell Ranucci and Reichert, for $60,000, an LSC "bishopship" covering New York State and New England , pursuant to which they would be enabled to sell "ministries" to the public for $3,000 each. They would retain $2,500 and then remit the balance of $500 to Drexler, who would supply a complete packet of credentials. These new "ministers" could in turn recruit other members of LSC and receive commissions out of the $2,500 retained by the "bishops." Ranucci quickly agreed, paid Drexler the $60,000, and left U.N.I. Vending to work for the church full-time. ² He headed the scheme in New York and New England and was assisted in the New York area by his co-defendants. Ebner, Schneider, and Tapen also left U.N.I. to join LSC.

On December 22, 1978, Ranucci opened his first LSC "church" bank account in the name of the "Life Science Church", which only Ranucci could use in New York as the name for his own personal "church." One week later, he signed his LSC "vow of poverty," pledging to make an irrevocable gift to his "church" of all his present and future assets and income. The remaining defendants all opened their "church" bank accounts and took their LSC "vows of poverty" at different times in 1979. Each chose his or her own name for the personal "church"--for example, Howard Tapen, who owned an automobile transmission repair shop, became the "minister" of the " Church of Transmission ."

The LSC scam was implemented in two ways. The more popular was the "vow of poverty" system, according to which a "minister" would transfer all his interest in present and future income and in material assets to his "church." The "minister" would close all of his personal bank accounts and open at least one checking account in the name of his church, over which the "minister" would exercise full control. The "minister's" personal expenses, which often included luxury items such as cars, boats, or, in Ranucci's case, a "baptismal" (swimming) pool in his backyard, were paid out of church funds and were characterized for tax purposes as authorized expenses of a tax-exempt "church" for the support of its "minister" and to fulfill the "church's" religious and charitable purposes.

Another way to implement the scheme was called the "50% system." The "minister" would not take a vow of poverty, but would instead continue to maintain accounts and assets in his own name, and would not claim to have renounced his interest in his income. He would, however, open a bank account in the name of his LSC personal "church," and deposit into that account up to 50% of his adjusted gross income, which is the maximum amount permitted to be deducted as a charitable contribution under the I.R.C. The "minister" would continue to file tax returns, but would deduct all funds deposited into his "church" account, even though he retained complete control over them and used the funds to pay his personal expenses. Most new ministers chose the "vow of poverty" system because it resulted in greater tax savings and because the 50% system ran a greater risk of an income tax audit.

As area "bishop" in charge of all LSC operations in New York and New England , Ranucci controlled the bank accounts containing the membership fees paid by the new LSC "ministers," which were called "donations." Ranucci retained at least 60% of these fees; the remainder was paid out in commissions to the "missionaries" who recruited the new LSC ministers. In 1980, the "Bishop's Council" was formed--comprised of Ranucci, Ebner, the Petrozzas, Rodi, Schneider, and Ranucci's son, Larry Ranucci, Jr. From that point on, all membership fees were deposited into a bank account in the name of Life Science Church, N.A. ("LSCNA"), a partnership made up of the members of the Bishop's Council. Ranucci presided over the Bishop's Council, and as an LSCNA partner he received a 20% distributive share of its net profits after expenses.

Ebner, Petrozza, Rodi, Schneider, and Tapen all assisted Ranucci by recruiting and "training" new ministers; they received commissions in the form of "donations" from LSC to their individual auxiliary "churches." Upon formation of the Bishop's Council in 1980, all but Tapen became "Auxiliary Bishops" who, as LSCNA partners, were entitled to equal 20% shares of the partnership's net profits. From December 15, 1980, through November 25, 1981, over $2.1 million in cash was withdrawn from the LSCNA bank account and divided among the Auxiliary Bishops and Ranucci, Jr., who functioned as a messenger in withdrawing the cash from the LSCNA account.

Ranucci stopped paying taxes in the year 1978, writing on his return for that year that he had taken a vow of poverty and was exempt from federal taxes. He had not filed a tax return by the time of trial, even though he had earned $1,696,045.35 in taxable income in the years 1979-81, mainly from selling ministries. Ebner paid no federal income taxes for the years 1978 through 1983, even though he earned $656,156.88 in taxable income from selling ministries in the years 1979-81 alone. The Petrozzas filed no federal income tax returns and paid no federal income taxes for the years 1980 through 1983, even though they earned $590,576.62 in 1980 and 1981, primarily from the sale of LSC ministries. Schneider paid no federal income taxes for the years 1980-82, although she earned $293,496.03 of taxable income from the sale of LSC ministries in 1980 and 1981. Tapen filed joint tax returns with his wife in the year she was involved with LSC, but he omitted from their 1980 joint return $61,064.50 in taxable income from the sale of ministries.

While the defendants were reporting to the IRS that they were ministers living under "vows of poverty," they were enjoying their tax-free affluence. They used "church" funds to pay their daily expenses and to pay for Cadillacs, oceanfront homes, and boats, and also to establish bank accounts in other countries. All the expenditures were justified as necessary to the conduct of church business--for example, Ranucci spent $9,279 in cash for a Harley-Davidson motorcyle and sidecar, telling the dealer that the purpose was to "spread the word of God."

On May 20, 1980, the Attorney General of the State of New York commenced an action in Supreme Court to enjoin various subdivisions of LSC operating in the state. The action named twelve individual respondents, including Ranucci, Ebner, the Petrozzas, Schneider, and Tapen. The verified petition alleged that LSC was defrauding the public by promoting the tax advantages of LSC "ministries," by operating an unlawful pyramid scheme, and by practicing law without a license. The Attorney General obtained a temporary restraining order prohibiting, inter alia, sale of "minister's" credentials, as well as removal, withdrawal, or disposition of any funds on deposit in the name of LSC, any individual respondent, or any LSC-chartered "church."

On August 8, 1980, the TRO was vacated and the freeze on "church" funds was lifted. In place of the TRO, the court substituted a preliminary injunction, prohibiting the respondents from 1) selling ministries, 2) compensating recruiters of ministers on a commission basis, or 3) stating the tax consequences of becoming a minister, unless it was in the form of a written opinion furnished by an attorney or a certified public accountant. In spite of this injunction, the defendants continued the three prohibited practices. ³

After a month's trial during June, 1981, Justice Seymour Schwartz rendered an opinion on April 27, 1982, sustaining the petition against all the defendants except Schneider and Donna Petrozza. He held that the LSC "vow of poverty" system would not result in tax-exemption and that LSC "churches" were not tax-exempt under the I.R.C. On July 16, 1982, Justice Schwartz permanently enjoined the sale of LSC "ministries."

The first federal indictment against the defendants for individual tax evasion was filed in June, 1984. A superseding indictment was filed on March 15, 1985, and the federal trial commenced against all defendants on March 18, 1985. ⁴ The defense focused on whether the defendants acted willfully and with intent to violate the law, or whether they acted innocently in reliance on the advice of attorneys, other individuals, and various materials. The defense called three attorneys who had at one time or another preformed legal services for LSC. The attorneys testified that they had given LSC advice in the structuring of the ministries, but they also testified that they never told the defendants that they were exempt from paying taxes on income earned in their individual capacities; or that the "churches" could be considered tax-exempt if it was found that they were organized for the purpose of tax avoidance; or that the "churches" could be tax-exempt if the defendants benefitted personally from the "churches' " net earnings.

Ebner, Petrozza, and Rodi took the stand and testified that they believed that their conduct was legal, based on statements made to them and on other materials. All three admitted, however, their knowledge that "ministers" who earned income in their individual capacities were liable for tax on that income, that "churches" could not be tax-exempt if organized for the purpose of tax avoidance, and that there was no exemption if any part of the churches' net earnings inured to their benefit. They acknowledged that no lawyer or other person had ever stated that the law was otherwise, and Ebner testified that he had informed every defendant of these principles.

Evidence also showed that various lawyers, including F. Lee Bailey, had informed the defendants on several occasions that the tax schemes were illegal. A lawyer named Louis Venezia told those assembled at a 1980 meeting, including Rodi, that the LSC tax program was a fraud that would not work, that Ranucci was a "con man" who had been involved in previous pyramid schemes, and that Ebner had been convicted twice of securities fraud. ⁵ Ranucci presented a brief defense, but did not testify. Schneider and Tapen presented no defense.

On May 23, 1985, the jury found Ranucci and Ebner guilty of conspiracy to defraud the United States , and all defendants guilty of tax evasion. All defendants received sentences of imprisonment, and all except Tapen were fined. Each defendant placed on probation was ordered, as a special condition, to resolve his or her tax liability with the I.R.S. and to make payments to the I.R.S. on a schedule to be set by the Probation Department.

The defendants argue that Judge Broderick abused his discretion by receiving into evidence portions of Justice Schwartz's opinion of April 27, 1982 , in People v. Life Science Church, 113 Misc.2d 952 (Sup. Ct. N.Y. Co. 1982), appeal dismissed, 61 N.Y.2d 604 (1983), cert. denied, 105 S. Ct. 97 (1984). They argue that the prejudicial effect of the evidence outweighed its probative value and that it should have been excluded under Fed. R. Evid. 403.

Judge Broderick allowed into evidence the legal analysis contained in Justice Schwartz's opinion because this analysis related to what appellants admit was the key issue in the case--whether they "willfully" evaded taxes. ⁶ Justice Schwartz's opinion clearly demonstrated that the defendants could not reasonably believe that the supposed tax benefits of an LSC "ministry" existed under the law. The opinion pointed out that to be tax-exempt, a church had to have been organized solely for religious or charitable purposes; that religious officials are required to pay income taxes on earnings just like everyone else; that a "vow of poverty" creates a tax exemption only if the member of the religious order receives income solely as a member of the order and remits his income to the order, and treats it as belonging to the order; that the employer paying wages must look to the order and not to the individual member of that order for the performance of services; and that the services performed must be in furtherance of an exempt purpose. Thus, the defendants had been given an authoritative statement of the requirements for tax exemption, and had been put on notice that LSC did not meet these requirements. This was strong proof to rebut defendants' contention that they did not knowingly do anything illegal and that they acted in accordance with advice fron lawyers. ⁷

Despite the clear relevance of the opinion, the defendants argue that its prejudicial nature outweighed its probative value. We disagree. The probative value of the opinion on the issue of the defendants' intent was clear. The district court acted well within its discretion in admitting the evidence. Judge Broderick gave the jury clear cautionary instructions before he received any of the evidence concerning the suit by the Attorney General. He emphasized that the state court opinion could be considered solely on the issue of intent and the degree to which the defendants had been placed on notice that their conduct was illegal. Such limiting instructions are " 'an accepted part of our present trial system,' " United States v. Siegel, 717 F.2d 9, 18 (2d Cir. 1983), quoting United States v. Figueroa, 618 F.2d 934, 943 (2d Cir. 1980), and consequently there is a "presumption that juries will follow [them]." Watkins v. Sowders, 449 U.S. 341, 347 (1981).

Ebner argues that he was denied a fair trial. First, he argues that the court erred in admitting evidence of two prior convictions. Ebner had twice been convicted of securities fraud, once in New York State Supreme Court and once in the Southern District. The court made an on-the-record finding under Fed. R. Evid. 609(b) that the probative value of the conviction substantially outweighed its prejudicial effect. See United States v. Mahler, 579 F.2d 730, 734-36 (2d Cir.), cert. denied, 439 U.S. 991 (1978). Judge Broderick did not abuse his discretion. In admitting Ebner's New York State securities fraud conviction, he ruled that Ebner himself opened the door to the use of that conviction by denying, during his direct testimony and on cross-examination, that he was guilty of the federal offense and claiming that his federal guilty plea was the result of bad advice from lawyers and undue influence. The evidence of the state conviction served to impeach Ebner's testimony that his conduct in LSC and his prior federal conviction were attributable to advice he had received from lawyers. The remainder of Ebner's claims that he was denied a fair trial are without merit.

Schneider argues that her conviction should be set aside because there was no proof that she "filed" a "vow of poverty" with the I.R.S. Of course, it was not necessary to "file" the "vow" with the I.R.S. to implement the tax-evasion scheme, and none of the defendants did so. Nonetheless, Schneider argues that the proof was insufficient to establish an affirmative act of tax evasion necessary to satisfy the rule in Spies v. United States [43-1 USTC ¶9243 ], 317 U.S. 492 (1943). Schneider's indictment, however, never alleged that she physically "filed" a "vow of poverty," nor was such an allegation necessary. To support the tax evasion convictions, the Government needed only to prove some affirmative act done to evade the tax; this can consist of "any conduct, the likely effect of which would be to mislead or conceal" taxable income. Id. at 499. Schneider filed a false 1980 income tax return; she lived according to a sham "vow of poverty"; and she actively participated in and profited fromn the LSC pyramid scheme. The evidence amply demonstrated that the "likely effect" of such conduct was to mislead the Government and to conceal taxable income.

Finally, Tapen argues that Judge Broderick's denial of his pretrial motion for a severance under Fed. R. Crim. P. 14 was an abuse of discretion. He argues that severance should have been granted because he participated in the conspiracy for a shorter period of time than his co-defendants and was charged with failing to report less income than was charged against them. These differences did not require a severance. Both counts in which Tapen was named arose out of a common scheme in which all of the defendants participated. Joinder was therefore proper. See, e.g., Schaffer v. United States , 362 U.S. 511, 514-16 (1960). Nor do we thnk it relevant that Tapen became involved in the conspiracy later than his co-defendants; this does not absolve him of "liability for the conspiracy's unlawful acts committed both before and after his adoption of the conspiracy." United States v. Guillette, 547 F.2d 743, 751 (2d Cir.), cert. denied, 434 U.S. 839 (1977). Nor does his subsequent withdrawal from the conspiracy constitute a sufficient ground for severance, see United States v. Ventura, 724 F.2d 305, 312 (2d Cir. 1983). The court instructed the jury that evidence relating to the conspiracy after Tapen left LSC could not be considered against him. ⁸ Judge Broderick acted well within his discretion, see Opper v. United States , 348 U.S. 84, 95 (1954), in denying Tapen's Rule 14 motion.

Convictions affirmed.

¹ Drexler was disbarred in Minnesota , the only state in which he was admitted to practice in 1971. He was indicted by a federal grand jury in the Southern District of California on May 5, 1981, for tax-related offenses arising out of his activities in LSC. He was convicted by a jury in November, 1981, and in January, 1982 was sentenced to a prison term.

² Reichert, acting on the advice of his attorney and accountant, decided not to accept Drexler's proposal. Ranucci nevertheless decided to go ahead on his own, telling Reichert that the "church has more viability than the vending business," and that this might be his last chance to become a millionaire.

³ Tapen left LSC in late 1980 to form a new "church," the Church of the Holy Scriptures ("CHS"). He tried to convince several LSC "elders" to leave LSC and join him in CHS, telling them that CHS would advocate the 50% method because it was safer for the average "minister," and that CHS would charge only $2,000 to join, which would make it easier to sign up new recruits. He also stated that leaving LSC was advisable because the legal fees that LSC would have to pay to resist government attack would bankrupt the organization.

⁴ On March 21, 1985, defendant Donna Petrozza was severed from the case on grounds unrelated to the merits.

⁵ Evidence of Ebner's prior convictions was received to impeach his testimony at trial, pursuant to Fed. R. Evid. 609.

⁶ Judge Broderick excluded those parts of the opinion that recited facts, so that the jury could not have been prejudiced with respect to consideration of the government's evidence. This left only Justice Schwartz's findings as to the applicable law.

⁷ Although the last year for which any of the defendants was charged with tax evasion was 1981 and Justice Schwartz did not render his opinion until April 27, 1982, the opinion and the notice it provided to defendants was nevertheless relevant. The decision was filed only 12 days after the deadline for 1981 tax returns, yet no defendant against whom the evidence was received in evidence has ever filed a 1981 return. Schneider filed no return for 1982, and Ranucci, Ebner, Petrozza, and Rodi filed no returns for 1982 or 1983. Ebner, Petrozza, and Rodi did not file tax returns for 1984. The jury may consider evidence of intent to evade taxes in one year as evidence of intent to evade payment in prior or subsequent years. See, e.g., United States v. Farber [80-2 USTC ¶9580 ], 630 F.2d 569, 572 (8th Cir. 1984). Further, the indictment alleged that the conspiracy continued through the filing of the superseding indictment in 1985, and there was proof that the defendants against whom the opinion was offered continued to claim to live under "vows of poverty" and to maintain property and bank accounts in the names of their "churches" even after Justice Schwartz issued his opinion.

⁸ Nor does Tapen's acquittal on the conspiracy count mean that his trial on the substantive count should have been severed. Even when joinder of defendants is predicated on a conspiracy count on which the evidence is so insufficient that it is dismissed without submission to the jury, a severance of defendants as to remaining substantive counts need not be granted absent a showing of prejudice from the joinder or of bad faith on the Government's part in bringing the conspiracy charge. United States v. Variano, 550 F.2d 1330, 1334 (2d Cir.), cert. denied, 434 U.S. 892 (1977).

 

 

[84-2 USTC ¶9530] United States of America v. Jerome Ashfield v. Sanford Storm

(CA-3), U. S. Court of Appeals, 3rd Circuit, Nos. 83-5344, 83-5380, 83-5384, 735 F2d 101, 6/1/84 , Affirming in part, and reversing and remanding in part an unreported District Court decision

[Code Sec. 7201]

Criminal penalties: Attempted tax evasion: Willfulness: Evidence: Admissibility: New trial: Newly discovered evidence.--The conviction of one taxpayer for attempted evasion of personal income taxes was affirmed. The court properly exercised its discretion in refusing to grant the taxpayer a new trial on the ground of newly discovered evidence. The acquittal of a second taxpayer was reversed and the court left open to the district court the option of considering a renewed motion for a new trial of the second taxpayer. The evidence of a scheme whereby corporate funds were used to repay the taxpayer-officers' personal debt and thereby understate their personal income was sufficient to sustain the jury's guilty verdict. The district court did not err in excluding certain hearsay evidence or in refusing to grant a mistrial.

W. Hunt Dumont, United States Attorney, Jonathan S. Feld, Assistant United States Attorney, Faith Hochberg, Sills, Beck, Cummis, Zuckerman, Radin & Tischman, Newark, New Jersey 07102, for U. S. Lawrence S. Horn, Trent S. Dickey, Sills, Beck, Cummis, Zuckerman, Radin & Tischman, 33 Washington Street, Newark, New Jersey 07102, for Jerome Ashfield. Boris Kostelanetz, Lawrence S. Feld, Edward M. Spiro, James C. Sherwood, Elliot Silverman, Kostelanetz & Ritholz, 80 Pine Street, New York, New York 10005, Howard D. Cohen, Gutkin, Miller, Shapiro & Selesner, 225 Millburn Avenue, Millburn, New Jersey 07041, for Sanford Storm.

Before ADAMS, SLOVITER, Circuit Judges, and TEITELBAUM, District Judge ^*

Opinion of the Court

ADAMS, Circuit Judge:

This appeal comes to us from the trial of Sanford Storm and Jerome Ashfield, two business associates who were charged with attempted evasion of personal income taxes. After a jury returned guilty verdicts against each defendant, the trial court sustained Storm's conviction, but ruled that the evidence against Ashfield was insufficient and entered a judgment of acquittal in his favor. On appeal, a careful examination of the record leaves us satisfied that Storm's conviction should be affirmed. We are, however, compelled to differ with the trial court's weighing of the evidence against Ashfield. While the record here, as with most white-collar crimes, consists of a complex web of inferential proof, we are persuaded that the evidence is sufficient to support the jury's verdict against Ashfield. We therefore reverse the judgment of acquittal for Ashfield and affirm the conviction of Storm.

I.

Storm and Ashfield are the sole shareholders and officers of National Talent Associates (NTA), a closely held corporation that placed child models for television, magazine and catalog advertising. NTA essentially acted as a referral service for another, larger talent agency. After locating interested parents by direct mail, NTA would select suitable children, execute a 5-year contract with the parents, photograph the aspiring child model, and send the picture to the Schuller Talent Agency, which would in turn accept about one in twenty referrals, and arrange job interviews for them. For this service, NTA charged a one-time fee of $135 to $165 when the contract was signed. Thereafter, NTA received a commission of 10% of a child's earnings up to $1000, and 15% of any additional earnings.

NTA established two corporate bank accounts. The first, the management trust account, was the repository for compensation paid by employers for the work of the child models. From these payments, NTA deducted its commission and sent a check for the remainder to the client. NTA's commission earnings were then transferred to the second corporate account, the operating account.

Within NTA's operating account were various categories such as commission income (the 10% or 15% fees transferred from the management trust account), sales income (the $135 to $165 one-time registration fee), and officers' loans receivable (outlays and repayments for personal expenses of Storm and Ashfield). ¹ All payments to the operating account were credited as sales income, unless specifically designated for deposit to some other category.

During an audit of NTA, the Internal Revenue Service (IRS) discovered that between 1973 and 1975 almost $60,000 from the trust account was deposited in the officers' loans account and credited in equal amounts to Storm and Ashfield as repayment of personal loans. As a result of these loan repayments, each defendant in effect received $30,000 in dividends that twice escaped taxation. Because the deposits were never listed as income to NTA, no corporate tax was paid on them, and because the deposits were never reported as income to Storm and Ashfield, no personal tax was paid on them.

In April 1982, Storm and Ashfield were indicted on eight counts of evading corporate and personal income tax in 1974 and 1975. Six of the eight counts were, however, dismissed as barred by the statute of limitations, leaving only two counts in place: one count each for Storm and Ashfield for attempted evasion of personal income tax in 1975. ²

At trial, the defendants did not contest that the loan repayments had been incorrectly credited to them. Rather, the defense asserted lack of "willfulness" on the part of Storm and Ashfield. In particular, Storm attempted to show through cross-examination of the government's witnesses that the repayments were erroneously recorded because of a mistake by NTA's accounting firm. Ashfield's defense was that he had no control over NTA's accounting practices and that he was unaware of the errors. Neither Storm nor Ashfield took the stand, and no other witness testified on behalf of the defense.

On February 9, 1983, the jury returned a guilty verdict against each defendant. But on April 11, 1983, the district court granted a motion for acquittal of Ashfield, ruling that "reasonable minds could not have concluded that all of the elements of the crime charged were established beyond a reasonable doubt. . . ." App. at 44a. The district court, however, left in place the jury's guilty verdict against Storm, and on May 19, 1983 , sentenced him to 90 days imprisonment, three years probation, and a $5000 fine. Timely appeals were filed by Storm, by the government (appealing Ashfield's acquittal) and by Ashfield (defensively cross-appealing the trial court's denial of his motion for a new trial).

II.

Although both defendants assert that the district court committed errors requiring us to order a new trial, the central issue before us is the sufficiency of the evidence against Storm and, particularly, against Ashfield. Because a ruling that the proof adduced at trial was inadequate would be dispositive of both of the defendants' appeals, we consider that issue first.

A.

To establish guilt of tax evasion under 26 U. S. C. A. §7201 (West Supp. 1983), the government must show: (1) the existence of a tax deficiency, (2) an affirmative act constituting an attempted evasion of payment of taxes, and (3) willfulness. Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 351 (1965). Neither Storm nor Ashfield challenge the proof of the first two elements of the crime; they contest only the proof of the last element--willfulness.

For purposes of §7201, willfulness is defined as the voluntary, intentional violation of a known legal duty. See U. S. v. Pomponio [76-2 USTC ¶9695], 429 U. S. 10, 11-13 (1976) (per curiam); U. S. v. Bishop [73-1 USTC ¶9459], 412 U. S. 346, 359-60 (1973). Willfulness may, however, be inferred from circumstantial evidence. The Supreme Court has made clear that willful tax evasion may be proven by a consistent pattern of underreporting large amounts of income and by the taxpayer's failure to include all his income on his books and records. Holland v. U. S. [54-2 USTC ¶9714], 348 U. S. 121, 139 (1954). See Spies v. U. S. [43-1 USTC ¶9243], 317 U. S. 492, 499 (1942). Likewise in this circuit, we have repeatedly held that repetitious conduct resulting in underpayment of taxes may be sufficient to show willfulness. U. S. v. Alker [58-2 USTC ¶9829], 260 F. 2d 135, 148 (3d Cir. 1958) ("consistent understatement [of tax liability] is evidence of willfulness"); U. S. v. Frank [57-1 USTC ¶9675], 245 F. 2d 284, 287-88 (3d Cir. 1957) (proof of a consistent pattern of underreporting "is itself enough" to sustain a jury finding of willful tax evasion). See also U. S. v. Greenlee [75-1 USTC ¶9488], 517 F. 2d 899, 903 (3d Cir. 1975) ("a two year pattern of derelictions . . . [is] itself indicative of the willfulness."). Recently, our Court reversed a decision to acquit an accused tax evader, holding that the evidence was sufficient given the proof of a long-run pattern of reporting at variance with the taxpayer's defense, the substantiality of the sums the taxpayer failed to report, and the number of times taxpayer received income checks he claimed to have forgotten. U. S. v. Doan [83-2 USTC ¶9437], 710 F. 2d 124, 126 (3d Cir. 1983). Obviously, these decisions pertaining to the permissible scope of a jury's inferences from circumstantial evidence are necessarily fact-intensive and therefore not subject to easy generalization. Nonetheless, it is clear that a jury may find a defendant's tax evasion was willful wholly on the basis of inferential proof.

In the case at hand, the jury was carefully instructed on the meaning of willfulness. The court explained that

in this case the attempt to evade or defeat the tax must be a willful attempt, that is to say it must be an attempt made voluntarily and intentionally and with specific intent to keep from the government a tax imposed by the income tax laws which it was the legal duty of the defendants to pay to the government and which the defendants knew it was their legal duty to pay.

App. at 895a. Having heard this definition as well as seven days of testimony, the jury found that both Ashfield and Storm were guilty of the crime charged in their indictment--that is, that they "did knowingly and willfully attempt to evade and defeat a large part of the income tax due and owing . . . to the United States." App. at 891a; see App. at 892a, 910a-911a.

Given those verdicts, the trial court's ruling on the sufficiency of the evidence was governed by strict principles of deference to a jury's findings. In deciding whether to grant the motions for acquittal, the trial court was required to view the evidence in the light most favorable to the prosecution and to draw all reasonable inferences therefrom in the government's favor. See Glasser v. U. S., 315 U. S. 60, 80 (1942); U. S. v. Jannotti, 673 F. 2d 578, 598 (3d Cir. 1982) (in banc). Viewing the evidence in this light, the trial court was obliged to uphold the jury's verdict unless no rational jury could conclude beyond a reasonable doubt that the defendants willfully attempted to evade their tax obligations. See Burks v. U. S., 437 U. S. 1, 16-17 (1978); Doan, supra, 710 F. 2d at 127; Jannotti, supra, 673 F. 2d at 598.

In our review of the sufficiency of the evidence, we must apply the same standard of deference to the jury's findings. See Burks, supra, 437 U. S. at 17; U. S. v. Dixon, 658 F. 2d 181, 188 (3d Cir. 1981). Thus, we must independently re-examine the record and determine as a matter of law whether the evidence could support an inference of guilt beyond a reasonable doubt. See Jannotti, supra, 373 F. 2d at 598. Our task is not to decide what we would conclude had we been the finders of fact; instead, we are limited to determining whether the conclusion chosen by the factfinders was permissible.

B.

After hearing argument on Storm's motion for acquittal, the district court announced that "there was more than ample evidence in the record to justify the jurors in determining and assessing guilt of Mr. Storm beyond a reasonable doubt." App. at 994. We agree.

As the officer in charge of NTA's bookkeeping, Storm was responsible for producing the financial records which were in turn used by NTA's accounting firm to prepare the corporation's tax returns. App. at 174a, 234a. Most importantly, Storm's bookkeeping duties included the task of filling out the internal deposit slips. These slips designated the source of money being deposited in NTA's operating account and the particular category of the operating account--such as officers' loans or commission income--to which the money was to be credited. App. at 240a, 242a, 337a, 342a. Under NTA's accounting practices, unidentified deposits were treated as sales income. App. at 241a. The accountants could not credit a deposit to any category other than sales income without an express designation on the internal deposit slip or specific instructions from Storm himself. App. at 244a-45a, 342a, 419a, 421a, 436a. Consequently, any deposit credited as a repayment to the officers' loans account had to be requested--directly or indirectly--by Storm.

Between 1973 and 1975, a series of repayments to the officers' loan account followed a consistent pattern. In 1975, checks for $20,000 and $8,000 were drawn from the management trust account and deposited in the operating account as officers' loan repayments, divided equally between Storm and Ashfield. App. at 482a, 647a, 730a. In 1974, by the same procedure, $9,000 and then $6,000 from the trust account were credited as loan repayments. App. at 526a, 660a, 662a, 665a. Likewise in 1973, $6,500 and then $10,000 were transferred from the trust account to the loan account. App. at 661a-65a. For three consecutive years, therefore, the same method was used to understate the corporate income of NTA and the personal income of the defendants.

In view of Storm's control of the NTA books and especially the designation of deposits to the officers' loan account, a rational jury could conclude beyond a reasonable doubt that the three-year pattern of misreported loan repayments was the product of a voluntary and intentional effort by Storm to evade payment of taxes. When we consider, in addition, certain other inculpatory facts, we must conclude that the evidence against Storm rises well above the level necessary to sustain a guilty verdict. Storm had taught accounting, App. at 686a, and accordingly there can be little question that he understood the implications of crediting a deposit as an officers' loan repayment. More significantly, there is evidence that Storm sought to conceal the records pertaining to the management trust account and thereby evinced consciousness of the impropriety of using commission earnings to repay officers' loans. Before the IRS audit, none of NTA's accountants knew of the management trust account or of the separate ledger maintained for it. App. at 325a, 331a. When the IRS served a summons on NTA requesting all financial records, Storm produced no document containing any reference to the trust account and, through his attorney, claimed that the production was complete. App. at 689a-90a. Placed alongside the other evidence, this evidence of attempted concealment by a person trained in bookkeeping confirms that the district court properly denied Storm's motion for acquittal.

C.

Less compelling is the evidence against Ashfield because, in contrast to Storm, he did not directly participate in preparing NTA's bookkeeping entries. Nevertheless, viewing the evidence in the light most favorable to the government, as we must, we believe that the record was sufficient to sustain the jury's guilty verdict against Ashfield.

The district judge reached the opposite conclusion in a brief oral opinion that relies on U. S. v. Forrest, 620 F. 2d 446 (5th Cir. 1980). ³ By focussing on the Forrest case, the district judge intimated his concern that Ashfield was convicted merely on the basis of his close business association with Storm. In Forrest, the Fifth Circuit held that a wife's guilty knowledge could not be inferred simply from the fact that she was married to the kingpin of a large-scale illegal operation. 620 F. 2d at 451. The Forrest court emphasized:

That one is married to, associated with, or in the company of a criminal does not support the inference that that person is a criminal or shares the criminal's guilty knowledge.

Id. (footnotes omitted). We do not take exception with this statement; rather we believe that the evidence of Ashfield's participation in a tax evasion scheme goes well beyond a mere professional association with Storm.

Between 1973 and 1975, Ashfield borrowed $29,000 of corporate funds and spent it for such personal expenses as tuition payments for his child at Rider College and individual income tax payments to the IRS. App. at 532a, 534a. For a person whose maximum reported income during this three-year period reached approximately $41,000 in 1975, App. at 675a, these loans from NTA were not negligible. The jury could reasonably infer that Ashfield was aware of his substantial personal indebtedness to the corporation.

To repay this debt legally, Ashfield should have deposited funds from his personal, after-tax income in NTA's operating account and designated these deposits as repayments to his loan account. Ashfield did this only once, however, during the period 1973-75. In 1975, he endorsed a $4,000 salary check--from which tax had been withheld--and deposited it as a loan repayment. App. at 750a-51a. From this evidence, a rational jury could infer that Ashfield knew the proper method to be employed in repaying his loans from NTA.

In contrast to this one legal repayment of $4,000, the record shows that from 1973 to 1975 seven deposits totalling almost $60,000 were transferred from the trust account and credited one-half to Ashfield as loan repayments. App. at 674a-82a. This repetition of a particular transaction whereby corporate funds were used to repay the officers' personal debts would support an inference that the deposits were being misreported by plan, not by accident. The question left open by this pattern of misreporting is whether Ashfield willfully participated in the arrangement either by affirmative act or by tacit approval.

When we consider the record as a whole, we are persuaded based on the inferential proof that a jury could rationally conclude beyond a reasonable doubt that Ashfield at least tacitly approved of his fellow officer's tax evasion scheme. The record links Ashfield to one of the series of transactions by which the tax evasion scheme was implemented. In 1973, Ashfield wrote a $6,500 check on the trust account and deposited it in the operating account as a loan repayment, equally divided between him and Storm. App. at 661a. Each of the other six transfers of NTA income from the trust account to the officers' loan account during 1973-75 were evenly divided between Ashfield and Storm. Since nothing in the evidence indicates that NTA's accounting system ordinarily required the officers to repay their loans in equal and simultaneous sums, the jury could infer that the loan repayments were being shared intentionally. It seems improbable that Ashfield's business associate would be so scrupulously honest about splitting the profits of the tax evasion scheme if Ashfield were unaware of its existence. This inference is strengthened by the evidence that these loan repayments permitted Ashfield to escape a substantial proportion of his personal income tax during 1973-75, rising from nineteen per cent in 1973, to twenty per cent in 1974, and to thirty-six percent in 1975. App. at 676a, 678a, 682a. These do not appear to be the sort of insignificant amounts that an experienced business executive would easily overlook.

Our review of this evidence is further influenced by Ashfield's substantial role in the management of a successful enterprise. Since its incorporation in 1969, Ashfield was a fifty per cent shareholder and one of the two officers of NTA, a firm that realized gross income exceeding $452,000 in 1975. App. at 608a. As the corporation's vice president, Ashfield's responsibilities included supervising NTA's pension plan and investments. App. at 336a, 768a. Moreover, although Ashfield did not prepare NTA's bookkeeping records, he did attend financial meetings with the accountants. App. at 190a-91a, 324a-26a. At none of the meetings did he disclose the existence of the trust account. When he filled out a tax preparation questionnaire from the firm's accountants, Ashfield certified that there was no income other than that disclosed on the records of NTA's operating account. App. at 296a-98a, 764a-65a.

When Ashfield's managerial and ownership role at NTA is viewed alongside all the evidence of his profitable involvement with the officers' loan account, we believe that the record is adequate to support a jury finding that Ashfield willfully participated in a tax evasion scheme. The district court's judgment of acquittal must therefore be reversed. We do not, however, mean by this holding to foreclose the district court from reconsidering Ashfield's motion for a new trial. The district judge denied that motion "for the record," App. at 45a, without stating his reasons and immediately after granting Ashfield an acquittal. Consequently, his ruling may perhaps have been premised on the view that the acquittal mooted the motion for a new trial. Given our decision today, and the fact that the district judge's focus on U. S. v. Forrest, 620 F. 2d 446 (5th Cir. 1980), may indicate his concern that the jury's deliberations were tainted by the spillover effect of evidence against Storm, we expressly leave open to the district court, in its discretion, the option of considering a renewed motion for a new trial of Ashfield. Cf. U. S. v. Dixon , 658 F. 2d 181, 193 (3d Cir. 1981).

III.

Having determined that the evidence was sufficient to support the guilty verdicts rendered against both defendants, we turn to Storm and Ashfield's ⁴ assertion that during their trial the district court committed reversible error.

A.

The defendants claim that the district court erroneously excluded a hearsay statement suggesting that the misreporting of income occurred by mistake. Specifically, the defense sought at trial to establish that Irwin Giblen, owner of NTA's accounting firm (Giblen & Co.), had characterized the treatment of the loan repayments as an "accounting error." Because Giblen died prior to trial, this comment could be admitted only as a "statement against interest" under Fed. R. Evid. 804(b)(3). After a special hearing on admissibility, the trial court ruled that this comment, as least as recalled by accountant Donald Smith, was not a statement against interest and was therefore inadmissible heresay. Storm and Ashfield contend that this ruling constitutes an incorrect application of the rules of evidence.

At the hearing held to determine the admissibility of the Giblen hearsay statement, Smith testified that prior to meeting with an IRS agent to discuss the investigation, he received instructions from Giblen as to "how to deal with the revenue agent." App. at 441a. Smith at first maintained that Giblen told him to say "an accounting error had been made," and that "an accountant had made a mistake." App. at 439a. But on cross-examination, Smith conceded that the "accounting error" explanation "may well have come from either Mr. Storm or Mr. Ashfield," App. at 446a, and finally acknowledged that no one other than Storm and Ashfield "would know whether there was an error." App. at 449a.

Following this hearing, the trial court found that "basically . . . [Giblen's statement] is a position that is going to be taken with the IRS." App. at 453a. More importantly, the judge found that the statement was "not one which Mr. Giblen was necessarily adopting or endorsing or vouching for as being true." App. at 455a. Based on these findings, the court determined that Giblen's statement was not a statement against interest "either of himself or his company." App. at 453a.

Rule 804(b)(3) provides that an out-of-court statement by an unavailable witness is admissible if it was

at the time of its making so far contrary to the declarant's pecuniary or proprietary interest, or so far tended to subject him to civil or criminal liability . . . that a reasonable man in his position would not have made the statement unless he believed it to be true.

Thus, an essential predicate for applying this rule is that the hearsay be objectively contrary to the declarant's interest. In the case before us, the district court concluded that this prerequisite was lacking. Because, in the court's view, Giblen failed to "adopt[] or endors[e] or vouch[] for" the explanation, his statement was not objectively contrary to his interest and therefore did not satisfy Rule 804(b)(3)'s threshold requirement.

Reviewing this determination under the abuse of discretion standard, we are satisfied that the trial court properly exercised his discretion in excluding the Giblen hearsay. Two factors undergird our conclusion. First, Giblen's comment was so general that it never expressly assumed responsibility by a Giblen & Co. accountant: no accountant was named and no particular error was identified. ⁵ Second, Giblen made his statement after his firm had begun to act as a representative of Storm and Ashfield in the IRS investigation. Giblen seems to have been serving as a conduit for defenses suggested by his clients.

The defendants have suggested that the trial judge's exclusion of this hearsay is at odds with his decision to admit another Giblen hearsay statement. Allen Stockelberg, the second-in-command at Giblen & Co., was permitted to testify about Giblen's comments after an evidentiary hearing at which he reported Giblen as saying "we had fouled up." App. at 207a. ⁶ As we view this statement, it differs substantially from the excluded comments in that it approaches a direct and personal assumption of responsibility by Giblen & Co.'s owner. Certainly the district judge acted within his discretion in admitting this statement while excluding Donald Smith's recollection of Giblen's other comments.

B.

Storm and Ashfield also argue that the district court erred in refusing to grant a mistrial in order that the law firm representing Storm could withdraw from the case and one of its attorneys could take the stand. The defendants assert that the significance of the lawyer's testimony was not apparent until the government surprised them at trial with unexpected evidence that the lawyer could rebut and that the court's decision not to grant a mistrial effectively deprived them of their right to present a complete defense.

The issue arose when, at trial, an IRS special agent testified about a September 1978 meeting with Storm and his attorney, Jerome Miller. Storm was supposed to produce all of NTA's financial records for 1973-75, and, according to the special agent, Storm claimed that he had indeed produced all the documents required by the IRS summons. The IRS later discovered, through NTA's bank, that records for the management trust account were not produced, and this discovery ultimately led to the uncovering of the illegal loan repayments.

When the testimony regarding the missing documents was introduced, Storm moved for a mistrial. Storm argued that because Miller's law firm represented him at trial, and because Disciplinary Rules 5-101 and 5-102 of the Model Code of Professional Responsibility (1979) prevented Miller from testifying in a case in which his firm acted as counsel, a mistrial was necessary to permit Storm to retain new counsel and to put Miller on the stand to impeach the special agent's report of the September 1978 meeting. The trial court refused to grant a mistrial, declaring that Storm's attorneys had "fully discharged their obligation" and that they fell under an exception to the rule because they were "now so completely immersed in this case" that they would "surely [provide] the most effective representation." App. at 628a-629a. Despite these assurances from the judge, the defense chose not to call Miller to the stand.

The district court's decision not to order a new trial because of this development was proper for two reasons. First, assuming for the moment that Storm was indeed surprised at trial by the special agent's testimony, the district court properly invoked an exception to the disciplinary rules. Although ordinarily a lawyer must withdraw from representation of a client when "it is obvious that . . . a lawyer in his firm will be called as a witness on behalf of his client," Model Code, supra, DR 5-102(A), the Model Code permits an attorney to continue "[a]s to any matter, if refusal would work a substantial hardship on the client because of the distinctive value of the lawyer or his firm as counsel in a particular case." Id. at DR 5-101(B). We agree with the district court that in view of the longtime involvement of Miller's law firm, both in the IRS investigation and in the trial preparation, the firm's withdrawal would have worked a "substantial hardship" on Storm.

Second, and more importantly, the record demonstrates that the defense knew the September 1978 meeting might well be brought up at trial. Far from being a "booby trap"--the term used in Storm's brief--the testimony by the IRS special agent was brought to the defense's attention with adequate time to prepare a response. Well before trial, the government sent the special agent's memorandum of the September 1978 meeting to the defense as part of the Brady production. Once again during pretrial evidentiary rulings, the government moved to introduce Miller's statement during the September 1978 meeting as an adoptive admission of Storm. In light of these early warnings, we believe the government fairly characterizes Miller's failure to testify as a "tactical decision."

The defendants argue that they should have been specifically put on notice about the special agent's testimony on three other occasions: (1) when the prosecution moved to disqualify Miller's law firm; (2) when the prosecution moved for admission of a memorandum containing statements by Miller about the document production; and (3) when the prosecution agreed with Storm to stipulate to admission of NTA financial records without calling a document custodian. But this catalog of purported "concealment" by the government simply reaffirms the conclusion that, despite Miller's extensive involvement in the IRS investigation, and despite the innumerable points on which he could have testified, the defense intentionally chose to keep Miller's firm in the case. The September 1978 meeting was anything but an isolated "booby trap"; the prosecution's evidence was replete with such encounters, a fact the defense well knew. Having made the decision to use Miller's firm nonetheless, the defense is not persuasive in its contention that we should order a new trial to be conducted by other counsel.

C.

Storm and Ashfield's final claim of trial error arises from a statement by the prosecutor that they insist constitutes a comment on the defendants' failure to take the stand. In his rebuttal summation, the Assistant United States Attorney stated:

Sure trust accounts are common in business. There is nothing wrong with having a trust account. It is part and parcel of a business where you have client income. You heard no explanation of the reason why it was necessary to keep such a trust account secret except to avoid payment of taxes.

App. at 872a. Defense moved for a mistrial and curative instruction, but the judge ruled that "I didn't find anything offensive" and "I don't feel there is the likelihood of the jury drawing an improper inference." App. at 874a-875a. The judge gave only the standard cautionary instruction about not drawing inferences from a defendant's failure to testify.

In the circumstances of this case, we do not believe this comment required a mistrial. The "explanation" for the secrecy could have come from a number of witnesses. Trust accounts were discussed at length in the testimony of several Giblen & Co. accountants and a talent agency employee, and an explanation for the secrecy surrounding NTA's trust account could have been extracted from them if the defense so chose. Thus, when the prosecution asked rhetorically why no explanation was proffered, the question might just as well have referred to persons who took the stand. Since it was far from clear that the prosecutor's statement referred to the defendants, we believe that the judge acted within the proper scope of his discretion in refusing a mistrial.

IV.

On behalf of Ashfield alone, it is asserted that the district judge erroneously denied a post-verdict motion for a new trial based on the discovery of an accountant's workpaper containing the notation "7500--each officer was withdrawn to personal name from escrow account." According to Ashfield, the discovery of this document required a new trial because the notation proved that NTA's accountants knew of the existence of the management trust account, and therefore supported the claim that the underpayment of taxes resulted from an accounting error. To prevail on a motion for a new trial based on newly discovered evidence, a defendant bears the heavy burden of establishing five requirements: the evidence must be newly discovered; facts must be alleged from which the court may infer diligence on the part of the movant; the evidence must not be merely cumulative or impeaching; it must be material to the issues; and it must be such that, on a new trial, it would probably produce an acquittal. U. S. v. Rocco, 587 F. 2d 144, 146 (3d Cir. 1978). We have carefully considered the document as well as the record on the basis of this exacting standard. In view of Ashfield's limited showing of diligence and failure to demonstrate that this new evidence would probably produce an acquittal, we are satisfied that the district judge properly exercised his discretion in refusing Ashfield a new trial on the ground of this newly discovered document.

V.

The judgment of conviction against Storm will be affirmed. The judgment of acquittal in favor of Ashfield will be reversed, and Ashfield's case will be remanded to the district court for action consistent with this opinion.

^* Hon. Hubert I. Teitelbaum, United States District Court for the Western District of Pennsylvania, sitting by designation.

¹ Through this officers' loans account, Storm and Ashfield borrowed from corporate funds to pay for such personal expenses as rent, college tuition, tax bills, and even a cemetery plot. App. at 528a-538a.

² Specifically, Count 1 of the indictment alleged that Storm "did knowingly and willfully attempt to evade and defeat a large part of the income tax due and owing by him to the United States for calendar year 1975 . . . [i]n violation of Title 26, United States Code, Section 7201." App. at 19a. Count 2 alleged the same crime by Ashfield. App. at 20a.

³ The district court's analysis of the record consisted of the following statement:

I am not going to recite chapter, line and verse of the evidence that bore upon the knowledge, the intent, the guilt, if you will, of Mr. Ashfield. It has been amply explored here by both counsel.

The Court realizes also that it does not sit as a super jury to retry this case and [sic] if the jury had not rendered its verdict. Whether or not I would reach a different result as the trier of the facts is not the standard, and the [ U. S. v.] Gross [, 375 F. Supp. 971 (D. N. J. 1974)] and Curley [v. U. S. , 160 F. 2d 229 (D. C. Cir. 1947)] test which I have described here makes that clear.

However, based upon what I consider to be well-reasoned precedent in United States v. Forest [sic], [620, F. 2d 446 (5th Cir. 1980)], which I have cited earlier, I determine that giving indeed due regard to all of the functions of the jury here as the triers of the fact and the drawers of legitimate inferences, reasonable minds could not have concluded that all of the elements of the crime charged were established beyond a reasonable doubt as to the defendant Ashfield.

The record and the evidence which might have served as a source for the jury's verdict in that respect was insufficient to permit the jury's verdict based upon that high standard and burden of proof.

Accordingly, the Court will enter a judgment of acquittal with regard to the defendant Jerome Ashfield.

App. at 44a-45a.

⁴ Most of Ashfield's brief is devoted to arguing that the district court correctly granted his motion for acquittal. Ashfield also argues, however, that if we reverse the judgment of acquittal, we should order a new trial because of purported trial errors of the district court. On these issues, Ashfield's brief incorporates the arguments pressed in Storm's brief, except for one claim based on newly discovered evidence. See Part IV, infra.

⁵ Indeed, despite all the testimony by accountants, no accounting error was ever identified at trial. Moreover, the Giblen & Co. accountant who actually worked on NTA's books during 1973-75, Maurice Fleinblatt, told Smith that no error was made. App. at 447a.

⁶ Before the jury, however, Stockelberg testified that Giblen had said the loan repayments "should have been handled differently." App. at 365a.

 

 

[84-1 USTC ¶9380] United States of America , Appellee v. Thomas G. Heyward, Appellant

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 82-5183, 729 F2d 297, 3/5/84

[Code Sec. 7201]

Criminal penalties: Income tax evasion: Evidence: Hearsay: Admissibility.--A memorandum, which was contained within the files of a deceased attorney and which indicated the taxpayer may have received certain income through a loan rather than through drugsmuggling activities, was not admitted into evidence under the residual hearsay exception on the ground that it was not more probative than other reasonably available evidence. The residual hearsay rule should be invoked only where other evidence is difficult to obtain. Additionally, in failing to turn over the memorandum to the taxpayer's defense counsel, a prosecutor neither violated the taxpayer's constitutional rights nor shirked his duty to disclose exculpatory documents to the defense, since only documents materially affecting the question of an individual's guilt concerning criminal tax evasion need be disclosed and the memorandum was not material. Also, evidence could be introduced establishing the discovery of a drug-laden airplane since other evidence demonstrated the taxpayer's ownership of the plane. Finally, assets that were discovered by the IRS in 1980 were properly used as the basis for determining the taxpayer's net worth in 1978 and 1979. The time difference was sufficiently close to warrant the notion that the assets reflected the taxpayer's income in previous year.

Henry Dargan McMaster, United States Attorney, Wells Dickson, Assistant United States Attorney, Columbia, S. C. 29202, for appellee. Randolph Murdaugh, III, John W. Hendrix, Roberts Vaux, for appellant.

Before RUSSELL and MURNAGHAN, Circuit Judges, and BULLOCK, ^* District Judge.

BULLOCK, District Judge:

Thomas G. Heyward was convicted in March 1982, in a trial by jury, of two counts of income tax evasion in violation of 26 U. S. C. §7201. The government's case rested on the net worth of proof, which requires either a negativing of all the possible nontaxable sources of the defendant's net worth increases over the years in question, or the establishment of a "likely source" of income. United States v. Massei [58-1 USTC ¶9326], 355 U. S. 595, 78 S. Ct. 495, 2 L. Ed. 2d 517 (1958). The instant case proceeded along the latter route, with the government convincing the jury that Heyward's increases in net worth were attributable to drugsmuggling activities.

I.

Heyward's defense was that any increase in net worth was due to a $175,000.00 loan he received from a man named Robert Horan, who died before these proceedings began. Horan's widow, business partner, and accountant each testified, however, that Horan did not have access to that amount of cash, that it would have been impossible for him to make that sizeable a loan, and that they had never heard of Heyward before. Heyward could present no note evidencing the indebtedness and claimed that the funds had been kept in a strongbox under his bed.

During the trial Heyward's attorney attempted to introduce into evidence a memorandum from the files of the deceased attorney who had handled Horan's estate, Robert O. Bowden. The memorandum, signed "R. O. B.," stated:

After several calls to various people . . . it turns out that Bob Horan had a Navajo B which he owned with Gary Scott and goes under the numbers of 33FZ. They also thought he had a Navajo Chieftan at Grumman American under the numbers 80RS or 80RJ, but it may have been sold about a week before he died. In conjunction with that, Savannah Bank reported to the FBI that he came in with $100,000 cash and turned it into a cashier's check payable to the C & S Bank, and this would conform with the indebtedness situation on his plane which he probably paid off.

In response to the prosecution's hearsay objection, Heyward's attorney claimed that the memorandum satisfied Fed. R. Evid. 804(b)(5), the residual hearsay exception. That rule states:

Other exceptions. A statement not specifically covered by any of the foregoing exceptions but having equivalent circumstantial guarantees of trustworthiness, if the court determines that (A) the statement is offered as evidence of a material fact; (B) the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; and (C) the general purposes of these rules and the interests of justice will best be served by admission of the statement into evidence. However, a statement may not be admitted under this exception unless the proponent of it makes it known to the adverse party sufficiently in advance of the trial or hearing to provide the adverse party with a fair opportunity to prepare to meet it, his intention to offer the statement and the particulars of it, including the name and address of the declarant.

The trial judge refused to admit the memorandum into evidence, principally on the ground that counsel had not given the prosecution the required advance notice, ¹ but also because he questioned whether it was more probative than other reasonably available evidence.

We decline to extend the residual hearsay exception to the memorandum in question for the latter reason. We are mindful that Rule 804(b)(5) was not written to be used as a "new and broad hearsay exception," Fong v. American Airlines, Inc., 626 F. 2d 759, 763 (9th Cir. 1980), but was meant to be "invoked sparingly." Robinson v. Shapiro, 646 F. 2d 734, 742 (2d Cir. 1981). Accord Huff v. White Motor Corp., 609 F. 2d 286, 291 (7th Cir. 1979). The legislative history of the rules puts it more strongly: "It is intended that the residual hearsay exceptions will be used very rarely, and only in exceptional circumstances." Fed. R. Evid. 803 Senate committee note (quoted in United States v. Kim, 595 F. 2d 755, 765 [D. C. Cir. 1979]). Those exceptional circumstances are lacking here, for the Horan memorandum fails to meet the requirement of 804(b)(5)(B) that it be "more probative on the point for which it is offered than any other evidence the proponent can procure through reasonable efforts."

Testimony by an officer of Savannah Bank would quite clearly be more probative of Horan's possession of $100,000.00 than is the file memorandum of the late Mr. Bowden. Bowden procured this information through a telephone call, and it hardly seems unduly burdensome to require defendant's counsel to duplicate that feat. The trial judge granted a recess to allow defendant's counsel to obtain this testimony, but the issue was not raised again the next morning, and we can only conclude that defense counsel himself questioned the value of the testimony.

Other courts have been equally loath to apply the residual hearsay exception when it would not be difficult to go behind the proferred hearsay to reach more solid evidence. In United States v. Kim, 595 F. 2d 755 (D. C. Cir. 1979), for example, defendant attempted to introduce a telex from his bank in Korea regarding $400,000.00 which he had on deposit there. Defendant's aim was to prove that he had other sources of funds and would not have accepted money to bribe members of Congress. The court refused to apply the residual hearsay exception, stating "[m]uch stronger evidence of alternative sources of income would be the actual business records reflecting the profitable business activities which produced that income, or testimony from business partners, employees and accountants as to the actual income source in some active business of Hancho Kim." Id. at 766. See Zenith Radio Corp. v. Matsushita Elec. Indus. Co., 505 F. Supp. 1190, 1264-65 (E. D. Pa. 1980); In re Sterling Navigation Co., 444 F. Supp. 1043, 1046-47 (S. D. N. Y. 1977).

II.

Heyward next claims that the Horan memorandum constitutes exculpatory material which the government had a duty to turn over to him under the rule of Brady v. Maryland, 373 U. S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963). Assuming for the sake of argument that the prosecution had possession of the memorandum prior to trial, Brady has never been interpreted to require a prosecutor to throw open his files to opposing counsel. A prosecutor does not have "a constitutional obligation to disclose any information that might affect the jury's verdict." United States v. Agurs, 427 U. S. 97, 108, 96 S. Ct. 2392, 49 L. Ed. 2d 342 (1976). Thus every failure to make a disclosure is not reversible error.

The standard by which a prosecutor's failure to turn over allegedly exculpatory material must be judged is one of materiality. The United States Supreme Court has framed the question in terms of the strength of the evidence: "[I]f the omitted evidence creates a reasonable doubt that did not otherwise exist, constitutional error has been committed." Id. at 112. We thus turn to the Horan memorandum to determine whether its evidentiary impact would have risen to this level.

The Horan memorandum states merely that Horan had apparently sold one of his aircraft and had entered the Savannah Bank with $100,000.00 in cash, the proceeds from that sale, which he converted to a cashier's check made out to the lienholder on that aircraft. It makes no connection between Horan and the defendant, evidence of which was also entirely lacking at trial. It does not establish that Horan had access to large amounts of cash which he might conceivably have lent to the defendant. In short, we do not find the Horan memorandum to be so probative of Heyward's innocence that it should be considered error for the prosecution not to have diclosed it.

III.

Heyward's final contention is that the trial court erred in admitting into evidence that his plane was found in Georgia loaded with over 4,000 pounds of marijuana. This evidence was an integral part of the government's proof that Heyward's additional income had come through drug smuggling. Heyward's principal objection appears to be that there is insufficient evidence to link him to the plane's cargo. ² We find this argument unpersuasive. Heyward was the record owner of the plane and presented no evidence that it had been stolen. In fact, one day before its recovery by state agents in Georgia , Heyward asked one of his employees if the plan had returned. Other evidence also led to the conclusion that the plane was being used for illicit purposes. The plane was allegedly used for mosquito spraying, but the tanks for the insecticide opened into the main fuel tanks, giving the plane a range far greater than that needed for its purported purpose. Hilton Head Air Service, a corporation owned by Heyward, purchased approximately 15,000 to 20,000 gallons more fuel than they had recorded selling during 1976-78 and no explanation was provided for its disappearance. On one instance in January 1980, the corporation was missing 1,600 gallons from the close of business one night to its opening the next morning. These circumstances suggest a number of previous clandestine trips by Heyward.

Heyward also argues that the trial court erred in allowing the government to introduce evidence of the discovery of the drugladen plane in 1980 to substantiate its net worth claims for 1978 and 1979. We do not find the discovery of the plane in February 1980 to be so temporally remote from the two previous years which were the subject of this indictment as to render the evidence inadmissible. See, e.g., Beard v. United States [55-1 USTC ¶9400], 222 F. 2d 84, 92 (4th Cir.) (discovery of gambling equipment on defendant's premises in 1945 admissible in net worth case in 1944), cert. denied, 350 U. S. 846 (1955). The time difference was simply a matter to be considered by the jury. See United States v. Wright [82-1 USTC ¶9389], 667 F. 2d 793, 800 (9th Cir. 1982).

As there was no reversible error in the trial court proceedings, the appellant's conviction is

AFFIRMED.

¹ Courts have generally construed the notice requirements of 804(b)(5) and its companion rule 803(24) strictly. See, e.g., United States v. Atkins [80-2 USTC ¶9490], 618 F. 2d 366, 372 (5th Cir. 1980); United States v. Ruffin [78-1 USTC ¶9269], 575 F. 2d 346, 358 (2d Cir. 1978). When new evidence is uncovered on the eve of trial, however, advance notice is obviously impossible. Recognizing that practical realities in this instance bar compliance with the letter of the rule, at least one court has granted a continuance to allow the party entitled to advance notice an opportunity to prepare to meet the evidence. United States v. Bailey [78-2 USTC ¶9706], 581 F. 2d 341, 348 (3d Cir. 1978); 4 J. Weinstein and M. Berger, Weinstein's Evidence 803-294 (1982) (continuance is the proper remedy); see also Fed. R. Evid. 102 ("These rules shall be construed to secure fairness in administration . . . to the end that the truth may be ascertained . . ..").

² Hoyward also contends that this evidence was "more prejudicial than probative," an allusion to Rule 403, Fed. R. Evid., under which relevant evidence may be excluded if the trial court finds that "its probative value is substantially outweighed by the danger of unfair prejudice." The trial court has wide discretion in this area, however, and its determination will not be overturned except under the most "extraordinary" of circumstances. United States v. MacDonald, 688 F. 2d 224, 227-28 (4th Cir. 1982), cert. denied, -- U. S. --, 103 S. Ct. 726 (1983). We find no such circumstances in the present case.

 

 

[83-1 USTC ¶9419] United States of America , Plaintiff-Appellee v. Steven T. Heise, Defendant-Appellant

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 81-3080, 709 F2d 499, 6/17/83

[Code Sec. 7302]

Crimes: Failure to file returns: Fifth amendment: Evidence of prior returns.--A taxpayer's conviction for willful failure to file tax returns was upheld by the Court of Appeals, since he was not entitled to withhold information on returns under the Fifth Amendment privilege against self-incrimination. Prior returns filed by the taxpayer were admissible evidence in showing that he knew he had a duty to file a proper return.

Mitchell Ehrenberg, John M. Seigel, Randolph Baxyer, Assistant United States Attorneys, Cleveland, Ohio 44114, for plaintiff-appellee. Steven T. Heise, Route 1 Box 65 , Salem , W. Va. 26426, pro se.

Before ENGEL, Circuit Judge, and WEICK and PHILLIPS, Senior Circuit Judges.

PER CURIAM:

This is a tax protester case. Appellant Steven Heise was convicted of willful failure to file income tax returns in violation of 26 U. S. C. §7203. On appeal he seeks reversal by claiming, inter alia, that his failure to file proper returns constituted a valid exercise of his fifth amendment privilege against compulsory self-incrimination. We affirm the conviction.

During the years 1976 and 1977, appellant worked as a security guard for Temple University and received wages of approximately $9,000 in 1976 and $7,000 in 1977. Although he had filed complete and proper tax returns for previous years, Heise did not do so for tax years 1976 and 1977. Instead, as part of a tax protest movement, he submitted 1040 forms for both years with no financial information on which to compute his tax liability. Rather, on each line of the form Heise cited his refusal to supply the necessary information on the basis of numerous constitutional grounds--primarily the fifth amendment.

On November 7, 1979 , appellant was charged with one count of willful failure to file an income tax return for the year 1976, in violation of §7203, by Information filed in the Eastern District of Pennsylvania. Heise was charged with a second violation under §7203, for tax year 1977 by Information filed on January 4, 1980, in the Northern District of Ohio. The two charges were consolidated for trial in the Northern District of Ohio.

On November 21, 1980, appellant was convicted by a jury of both charges. Senior District Judge William K. Thomas sentenced Heise to 20 days in jail on the first count and two years probation on the second count. The sentence was stayed pending appeal.

The gravamen of this appeal is Heise's argument that he is protected by the fifth amendment from disclosing the information requested and may not be subjected to prosecution for the exercise of that right.

The Supreme Court has held that the fifth amendment privilege against compulsory self-incrimination, if validly exercised, is a defense to a §7203 prosecution. Garner v. United States , 424 U. S. 648, 662 (1976). The court also has held that the privilege does not justify an outright refusal to file an income tax return. United States v. Sullivan [1 USTC ¶236], 274 U. S. 259, 263 (1927). In the present case, Heise asserted the privilege in response to each specific question; however, he did so on such a wholesale basis as to deny the Internal Revenue Service any information with respect to his income for the years 1976 and 1977.

This Circuit has held that a tax return which contains no information from which tax liability can be calculated does not constitute a tax return within the meaning of the Internal Revenue Code. See United States v. Mundt, 666 F. 2d 1029 (6th Cir. 1981); United States v. Evanko [79-2 USTC ¶9544], 604 F. 2d 21, 23 (6th Cir. 1979), cert. denied, 444 U. S. 1024 (1980), citing United States v. Jordan [75-1 USTC ¶9154], 508 F. 2d 750, 752 (7th Cir.), cert. denied, 423 U. S. 842 (1975); United States v. Daly [73-2 USTC ¶9574], 481 F. 2d 28, 29 (8th Cir.), cert. denied, 414 U. S. 1064 (1973). Other circuits, also have held that the failure to provide any information in a tax return is tantamount to failure to file any return at all. See, e.g., United States v. Pilcher [82-1 USTC 9299], 672 F. 2d 875, 877 (11th Cir.), cert. denied, -- U. S. -- (1982); Beatty v. Commissioner of Internal Revenue [82-1 USTC ¶9204], 667 F. 2d 501, 502 (5th Cir. 1982); United States v. Booher [81-1 USTC ¶9304], 641 F. 2d 218, 219 (5th Cir. 1981); United States v. Edelson [79-2 USTC ¶9564], 604 F. 2d 232, 234 (3rd Cir. 1979); United States v. Brown [79-1 USTC ¶9322], 600 F. 2d 248, 251 (10th Cir.), cert. denied, 444 U. S. 917 (1979); United States v. Pryor [78-1 USTC ¶9391], 574 F. 2d 440, 442 (8th Cir. 1978). Therefore, Heise's failure to provide the proper financial data on his tax returns amounted to a total failure to file a return. This cannot be justified under the fifth amendment.

Appellant also argues that he exercised his fifth amendment privilege in good faith and, therefore, cannot be prosecuted under §7203 for willful failure to file a return. This claim is without merit. In United States v. Bishop [73-1 USTC ¶9459], 412 U. S. 346, 360 (1973), the Supreme Court ruled that the term "willfully" merely connotes "bad faith" or a voluntary, intentional violation of a known legal duty. This court has held that the willfulness requirement of §7203 is satisfied if there is a deliberate intent not to file returns that the taxpayer knows ought to be filed. Evanko, supra, 604 F. 2d at 23, citing United States v. Greenlee [75-1 USTC ¶9488], 517 F. 2d 899, 904 (3rd Cir.), cert. denied, 423 U. S. 985 (1975). The record discloses clearly that Heise was a tax protestor who attempted to frustrate the tax laws by use of the fifth amendment. The finding that appellant failed to assert the privilege in good faith was not clearly erroneous.

Appellant also argues that it was error for the district court to permit the Government to admit into evidence prior tax returns to demonstrate Heise's knowledge of the duty to file a proper tax return. This claim is without merit.

Rule 404(b) of the Federal Rules of Evidence provides that evidence of other acts may be admissable to prove one's knowledge. In similar cases, when a person has filed the so-called "fifth amendment" tax return, the courts have permitted the Government to introduce prior tax returns to demonstrate the taxpayer's knowledge of the duty to file a proper tax return. See, e.g., United States v. Moore [80-2 USTC ¶9627], 627 F. 2d 830, 832 (7th Cir. 1980) (in a §7203 prosecution it is acceptable to use earlier returns to show willfullness), cert. denied, 450 U. S. 916 (1981), citing United States v. Stout [79-2 USTC ¶9461], 601 F. 2d 325, 329 (7th Cir.), cert. denied, 444 U. S. 979 (1979); United States v. Thiel [80-1 USTC ¶9373], 619 F. 2d 778, 781 (8th Cir.) (there is no abuse of discretion in admitting taxpayer's income tax filings either for the years preceding or following the years upon which the conviction is based), cert. denied, 449 U. S. 856 (1980), quoting United States v. Luttrell [80-1 USTC ¶9150], 612 F. 2d 396, 397 (8th Cir. 1980). Cf. United States v. Nuth [79-2 USTC ¶13,314], 605 F. 2d 229, 234-35 (6th Cir. 1979) (in prosecution for fraud in connection with preparation and filing of four gift tax returns, trial judge did not err in admitting defendant's tax returns for eight year period to demonstrate defendant's sophistication in preparing complex tax returns).

All other contentions made by appellant have been considered and are without merit. Accordingly, the conviction is affirmed.

 

 

[82-2 USTC ¶9484] United States of America , Appellee v. Eugene Mastropieri, Herbert Pate and Carolyn Pate, Appellants

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket Nos. 81-1017, 81-1019, 685 F2d 776, 7/20/82

[Code Sec. 7201]

Criminal penalties: Tax evasion: Net worth: Source of income: Jury instructions: Admissibility.--In a tax evasion case, the IRS may satisfy any burden it might have by showing that, for each consecutive year in issue, expenditures vastly exceeded taxpayer's small opening balance for the first year, as determined by independent investigation, increased by any known nontaxable sources. Where the IRS is unable to develop a likely source of taxpayer's income, it has done enough when it investigates reasonable, possible sources of nontaxable income and explores whatever leads the taxpayers or others may proffer; it need not negative all possible sources of nontaxable income. Jury instructions which were, in part, improper did not harm taxpayer. Evidence of an attempt to suppress evidence was admissible.

Edward R. Korman, United States Attorney, Brooklyn, N. Y. 11201, James D. Harmon, Jr. and Thomas P. Puccio, Department of Justice, Brooklyn, N. Y., for appellee. William Sonenshine, New York, N. Y., for Eugene Mastropieri, William I. Aronwald, Bartles, Pykett & Aronwald, 925 Westchester Avenue, White Plains, N. Y. 10604, for Herbert and Carolyn Pate.

Before MOORE , FRIENDLY and OAKES, Circuit Judges.

FRIENDLY, Circuit Judge:

In this trial before Judge Mishler and a jury in the District Court for the Eastern District of New York, Herbert Pate, his wife Carolyn, and his attorney, Eugene Mastropieri, were convicted of a number of offenses growing out of the alleged filing of false income tax returns (or, in one instance, failure to file a return) by the Pates for the years 1971, 1972, 1973, 1974 and 1975. The trial was on three separate indictments, 78 Cr. 219, 79 Cr. 238 and 80 Cr. 174.

The first indictment was limited to charging the Pates with willfully and knowingly attempting to defraud the United States by filing an income tax return which substantially understated their income for 1971, in violation of 26 U. S. C. §7201 and 18 U. S. C. §2. The second indictment charged the Pates with willfully and knowingly attempting to evade income taxes by failing to file a return for 1972, in violation of 26 U. S. C. §7201 and 18 U. S. C. §2. The third indictment began with a count charging the three defendants with conspiring with each other and one Fiore B. Acovino ¹ to defraud the United States in violation of 18 U. S. C. §371, by obstructing the lawful functions of the Internal Revenue Service (IRS) in the assessment and collection of revenue. Count Two charged that Herbert Pate had endeavored to obstruct the due and proper administration of the Internal revenue laws by causing Dennis Ilich to state falsely to IRS agents that he had given the Pates $10,000 in cash, in violation of 18 U. S. C. §§ 1505 and 2. Counts Three and Four charged Herbert Pate with suborning Dennis and Daisy Ilich, respectively, to give false testimony before a grand jury that was investigating the charges of tax evasion by the Pates, in violation of 18 U. S. C. §1622. Count Five charged the Pates with tax evasion for 1973 in the same manner as the first indictment had charged in respect of 1971 and additionally charged Mastropieri with aiding and abetting their attempt. Count Six charged that Herbert Pate had violated 26 U. S. C. §7206(1) by including in his 1973 income tax return the amount of $6,450 as income as a process server when he knew he had not received any such income. Counts Seven and Ten were the analogues of Count Five with respect to 1974 and 1975 income and Count Eight was an analogue of Count Six with respect to 1974 income. Count Nine charged that Mastropieri had violated 26 U. S. C. §7206(1) by claiming as a 1974 deduction the process server income reported by Herbert Pate for that year.

All three defendants were convicted on all counts in which they were named, except that Herbert Pate was acquitted of suborning the perjury of Dennis Ilich and Carolyn Pate was acquitted of tax evasion for 1972. Herbert Pate was sentenced to concurrent five year terms of imprisonment on the conspiracy and tax evasion counts to run concurrently with three year concurrent terms of imprisonment on the false return counts, all to run consecutively to five year concurrent terms of imprisonment on the obstruction and subornation counts. Mastropieri was sentenced to concurrent three year terms of imprisonment on each count on which he was convicted. Carolyn Pate was placed on probation for two years. The Pates and Mastropieri appeal on a multitude of grounds. We affirm.

I. The Facts

The Government's proof on the tax evasion counts was primarily that during the tax years 1971-75 the Pates had made investments in real estate, a corporation, an investment fund, and an insurance policy, and had made various other expenditures, including $7,723.25 for Herbert Pate's attendance at a North Carolina weight reducing clinic in 1974, of a size far beyond what could be accounted for by their resources on January 1, 1971 and the amounts they had reported as income plus non-taxable receipts such as loans, gifts or inheritances, less normal living expenses. ²

The predicate for this analysis was an effort to determine the Pates' financial position as of January 1, 1971. IRS Special Agent Conlisk canvassed 47 banks, 71 brokerage firms and 13 lending institutions in the vicinity of the Pates' residence. ³ In addition, Conlisk searched the local property records of Bronx, Nassau, Queens, Kings and Suffolk Counties "for the years during the investigation and prior to 1967" ⁴ and failed to disclose any real property purchased or sold or any mortgages given or received under the names of Herbert or Carolyn Pate, the last name Bidmead (Herbert's former surname) or Ilich (Carolyn's maiden name) other than the properties discussed below. He checked records of the Savings Bond division of the United States Treasury Department covering the period "1947 or 1952" through 1975 and found no bonds issued in any of the Pates' names. He checked records of the IRS to determine whether the Pates had been named as recipients on gift tax returns. He checked County Clerk records to determine whether the Pates had received any fudns from judgments or inheritances. He also interviewed unnamed friends and relatives of the Pates to determine whether they had loaned or given any money to the Pates, and received a generally negative response. A similar investigation was made with respect to Acovino except that the starting point was January 1, 1972.

From this analysis and his examination of the 32 separate bank accounts used by the Pates and Acovino, Conlisk determined that the Pates had no cash on hand as of January 1, 1971 ; that Acovino had $3,724.75 on hand as of January 1, 1972 ; that the Pates had received relatively small amounts of funds from nontaxable sources; but that the Pates had made expenditures in the tax years 1971-75 of over $292,730.70 ⁵ as compared with reported income of $35,082.24 and Acovino had expended in the tax years 1972-74 over $338,624.45.

In establishing a January 1, 1971 starting point for the Pates, the Government relied not only on Agent Conlisk's investigation but also on an interview on July 13, 1970, between Herbert Pate and a state probation officer, Sanford Eisler, in which Pate told Eisler that he had no financial assets except a small sum in his checking account. During this same interview, in filling out a questionnaire requiring him to "[l]ist all other properties such as bank accounts, life insurance, automobile, stocks, bonds, real property, etc., owned by you and your dependents", Pate responded "life insurance $10,000 myself and wife owned since 1968."

As heretofore noted, see not 2 supra, the Government's principal proof of expenditure was not of a gradual increase of net worth, see, e.g., Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 130 (1954), or of ordinary payments in excess of reported income, see e.g., United States v. Bianco [76-1 USTC ¶9351], 534 F. 2d 501 (2 Cir.) cert. denied, 429 U. S. 822 (1976), although some such payments were proved, but instead centered on four transactions, each involving considerable sums of money, in each of which the Pates had taken much trouble to conceal the fact or the extent of their participation. We shall discuss these in connection with the tax years in which they occurred.

1. 1971 and the purchase of 559 West Beech Street

Total 1971 expenditures of $44,972.04 for the Pates, as against reported income of $5,827.39, included life insurance premiums, rental of a summer house, the purchase of an automobile, and residence payments totalling $13,410.74. However, the major expenditure was $31,561.30 for the purchase of a house at 559 West Beech Street in Long Beach , Long Island . On July 10, 1971, a contract to purchase the house was made by Mrs. Pate (using her maiden name, Carolyn Ilich) and her sister-in-law, Barbara Sacchitello. Barbara and her husband Peter lived in Port Washington Long Island, with their children. An attorney was given $4,500 to make the down payment. On July 23 and August 16 Barbara deposited $5,000 and $8,000 into her bank account. The $5,000 was cash, allegedly provided by her husband; the $8,000 was a check drawn on a savings account in the name of Carolyn Bidmead. On July 26 Barbara deposited in a second account $5,500 allegedly provided by her since-deceased father-in-law. At the closing on July 26 two checks on these accounts drawn to Peter Sacchitello in the amounts of $13,000 and $5,000 were used to pay part of the purchase price. Additional funds were supplied by two checks, in the amounts of $7,385 and $444, drawn on accounts of Carolyn Ilich.

There is no basis for doubting that the two last-mentioned checks and the $4,500 down payment came from the Pates. The checks were signed by Carolyn Ilich/Pate, and a receipt for the down payment bore the notation "deposit from Ilich". The case with respect to the two checks, totaling $18,000, signed by Peter Sacchitello is only a little less clearcut. The Government's proof began with the fact that the Sacchitellos were a couple of modest means; he worked for ConEd and his wife testified, "I [was] working, but not what you would call a job." Nonetheless, in the two months before the purchase of the house the Sacchitellos deposited $18,500 in various bank accounts; the Sacchitello checks for the house were later to come from these accounts. Of the $18,500 that the Sacchitellos deposited, $8,000, as we have already seen, was plainly Pate money. While the remaining $10,000 was deposited into the Sacchitello accounts in cash, and thus was less directly traced to the Pates, circumstantial evidence pointed to the Pates as the source. The Pates lived in the house at all times; the Sacchitellos never did. Likewise, the Pates paid all the expenses associated with the residence--mortgage, taxes, maintenance, and so forth--even though Peter Sacchitello, in accord with "the deal" he had made with the Pates, deducted the property taxes and mortgage interest on his income tax returns. When the house was sold in July 1979, the Pates received $30,000, although the Sacchitellos purportedly will receive the remainder in monthly payments. Even more telling was Peter Sacchitello's account of how he and his wife obtained the funds for the purchase of the West Beech Street house. He testified at trial that his father, a 62 year-old plasterer, gave him $18,000 in cash some time before the purchase, although he could not remember whether the money had been given to him all at once or in installments, nor where it had been handed over to him, nor what denominations the bills were. Despite his assertion that he had been given the money for investment purposes, he kept the money, "[i]n the closet, probably", for a considerable period before depositing the money in the bank. He could not recall in which closet he had stashed the money, but said it was "probably" wrapped in a paper bag. His memory was also remarkably weak with respect to how much of the $18,000 patrimony had gone towards the purchase of the West Beech Street House. In 1976, while represented by Mastropieri, Sacchitello told Agent Conlisk that $15,000 had been so furnished. When confronted by Conlisk with the $8,000 Carolyn Bidmead check, he asked Mastropieri, "How do I answer that?" Before the grand jury Sachitello repeated the $15,000 figure, while at trial he testified that only $10,000 had gone to buy the house.

From all this evidence a jury was surely entitled to infer that Sacchitello's account of the $18,000 was a fabrication induced by the Pates and Mastropieri, and further that the entire purchase price of the house, except for a $14,585 FLSA loan, had been provided by the Pates, although channelled through the Sacchitellos to disguise its true source.

2. 1972 and the investment in Sanzo International

In 1972 the Pates paid $3,174.65 in life insurance premiums to First Investors Life, $10,200 for an investment in First Investors Fund, $4,520.95 for an automobile, and $4,781.26 for residence expenses relating to 559 West Beech St. , but reported no taxable income. An even more suspicious item was an investment of $20,000 in a company called Sanzo International Corporation.

Early in 1972 a Fort Lauderdale attorney, Merrill Bookstein, was retained by Joseph Fitch and Joseph Fortman to raise capital for the operation of a marble quarry in Italy . He was told that some people in New York represented by Mastropieri were interested. In July or August, Mastropieri, Pate and Acovino attended a meeting in Bookstein's office. Meanwhile Bookstein has organized Sanzo International Corporation. He had also drawn up a shareholders agreement naming Pate, Acovino, and five others as stockholders and crediting Pate (using his former name of Herbert Bidmead) and Acovino with $20,000 each of a contribution. Bookstein set up a trust account at the Castle Bank & Trust Company, a Bahamian bank, to receive these contributions.

On August 10, 1972, $37,500 in cash was deposited into the account of the Mastropieri and Joseph law partnership and was recorded, at Mastropieri's direction, as "Sanzo Corporation". On August 16, a $42,000 check, dated August 10 and signed by Mastropieri, was deposited to the Castle Bank trust account. The pattern was repeated a few months later. On October 10, a $14,000 cash deposit was received by the partnership account and recorded, again at Mastropieri's direction, as "Sanzo Corporation"; on the same day, two checks of $7,000 each were drawn to Fitch and Forman, evidently to buy out their interests.

The corporation's operations in Italy were started up by James Sanzo in late 1972. Whenever Sanzo needed operating funds he telephoned Mastropieri, who regularly told him that he would check with his clients. Some $120,000 was transmitted to Sanzo as a result of these conversations, Further, on one occasion Mastropieri and Acovino traveled to Italy and gave Sanzo $8,000 in cash to buy a compressor.

On the basis of this evidence the jury was clearly entitled to infer that Pate had placed $20,000, and probably much more, in this venture.

3. 1973

1973 was the only tax year in which the Pates did not engage in an unusual financial transaction. However, they invested $11,000 with First Investors, incurred residence expenses of $5,790.40 for 599 West Beech St. , increased their bank accounts by $4,682.75, and paid withholding tax of $2,362.93--as against reported taxable income of $10,104.62, mostly the "process server" income discussed below. In the same year Acovino made large deposits in the Bank of Perrine in south Florida , which were later transferred to a trust account, under a trust deed prepared by Mastropieri, in the Castle Bank.

4. 1974 and the purchase of 70 Rochester Avenue

During 1974 the Pates spent $6,086.55 for residence expenses, invested $10,800 with First Investors, paid $3,544.05 for life insurance premiums and $7,723.25 for Herbert Pate's attendance and expenses at a weight reducing clinic, increased their bank accounts by $17,347.41, and made tax payments of $2,020.65--as against reported income of $7,971.08. In addition ot all this they spent a considerable sum in purchasing a house at 70 Rochester Avenue in East Atlantic Beach , which was occupied after the purchase by Mr. Pate's mother who paid nothing to live there.

The contract to purchase the house and an adjoining vacant lot was signed by the Pates. The circumstances with respect to payment were as follows. On August 16, 1974, there was a $34,500 cash deposit into Mastropieri's escrow account. On the same day Mastropieri wrote a $34,500 certified check to Pate which purported to represent the proceeds of a mortgage on the Rochester Ave. property. This was endorsed over to the sellers and the mortgage was recorded. There was no evidence that any interest or principal payments were ever made upon it. In addition the Pates paid $5,000 on the signing of the contract and more than $9,000 in cash on the closing. The jury was amply justified in finding that the $34,500 cash deposit to Mastropieri's account was Pate money and that the mortgage was simply a sham created to conceal the Pates' expenditure. ⁶

5. 1975 and the purchase of 52 Brookline Avenue

While there were some $23,597.50 of miscellaneous payments in 1975, the major item was $40,000 spent in the purchase of a house at 52 Brookline Avenue --as against reported income of $11,179.15. The house was purchased in the names of Carolyn Pate and her mother, Daisy Ilich, in October, 1975. At the closing a $40,000 check, dated October 6, 1975, and drawn on an account of a "Mastro Enterprises Ltd., was delivered to the sellers.

One week before the closing a cash deposit of $39,200 was made into the checking account of Mastro Enterprises Ltd. There is no indication who made the deposit. Mrs. Pate instructed her mother, who occupied the house, to write a check each month to cover the mortgage payments. These checks were turned over to Mrs. Pate, who deposited them in the Mastro Enterprises bank account. However, the Pates paid Mrs. Ilich amounts in cash exactly equalling the supposed mortgage payments, and checks to cash in the same amount were drawn on Mastropieri-controlled bank accounts. There is no evidence that other payments were made on the mortgage. The jury could conclude from this that there never was a mortgage loan, that the $40,000 payment on the house was made with the Pates' money and that the monthly payments made by Mrs. Ilich were a sham.

Further material relevant to the charge of tax evasion was furnished by evidence produced to support the charges in Counts Six and Eight of the third indictment that Pate had willfully and knowingly filed 1973 and 1974 income tax returns which falsely stated that he received $6,450 and $7,322.50 as process-server income. ⁷ The Government's theory was that the Pates and Acovino, feeling the need to show some taxable income, developed, with Mastropieri's assistance, the idea of claiming to be employed by Mastropieri as process servers. This theory was amply supported by the evidence. Mastropieri maintained a partnership with Alan Joseph, which handled ordinary civil business, but had his own criminal and matrimonial practice. Five secretaries in Mastropieri's law office, including Mastropieri's personal secretary, testified that they knew of no process serving of investigation done by Pate or Acovino, although they knew of others who rendered such service. Joseph and one Leonard Eisenberg, who assisted Mastropieri in his criminal practice, testified that they knew Pate and Acovino only as clients of the law partnership and were not aware of their having done any work as process servers or investigators. Mastropieri's accountant, Gordon, who reconciled Mastropieri's bank account on a monthly basis and prepared cash receipt and disbursement ledgers, was never told that any money was being paid to Pate or Acovino, and Mastropieri's checks and checkbooks reflected no evidence of monies paid to either in the form of checks payable to cash or otherwise. The jury was entitled to conclude that the process server income was an invention of Pate, Acovino and Mastropieri, designed to provide some semblance of income which might be presented as accounting at least for their living expenses.

Beyond this there was evidence of Herbert Pate's obstruction of an administrative proceeding and subornation of perjury. When Dennis Ilich, Pate's father-in-law, was summoned for an interview by Agent Conlisk, he claimed that in 1964 he and his wife had given the Pates a wedding gift of $10,000. He repeated this before the grand jury. He testified at trial that this was not true and that Pate had told him to lie to Agent Conlisk. ⁸ Dennis Ilich's wife Daisy testified before the grand jury that she had given the Pates $5,000 in 1964 upon their wedding and another $5,000 in 1967 on the birth of a grandchild. At trial she testified that the testimony she had given the grand jury was false and that Herbert Pate, saying "something about the income tax evasion, of getting off income taxes", had asked her to give it. She further testified at trial that her grand jury testimony to the effect that she had never been repaid the $10,000 which she had put up for the Brookline Ave. house was likewise false. Carolyn Pate had in fact repaid the $10,000 in cash installments, although Mrs. Ilich did not remember who had told her to lie before the grand jury about the matter.

II. Appellants' attacks on the sufficiency of the Government's investigation

The appellants contend that the Government failed to establish an opening net balance as of January 1, 1971 , and opening net balance as of the beginning of each of the ensuing taxable years, with the certainty required by the leading case of Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121 (1954), and by this court in numerous cases of which it suffices to cite United States v. Costanzo [78-2 USTC ¶9575], 581 F. 2d 28 (1978), cert. denied, 439 U. S. 1067 (1979) (affirming conviction), and United States v. Grasso [80-2 USTC ¶9593], 629 F. 2d 805 (1980) (reversing conviction). While the investigation or at least its presentation in the record, see note 3, supra, was not so thorough as in Costanzo and should not be regarded as a model, it was sufficient under the circumstances of this case.

Appellants' attack begins with the fact that Herbert Pate's talk with Probation Officer Eisler occurred in July, 1970, and thus left open the possibility that the Pates had received large resources between July and the end of December. The point might have some force if the Government had not made an independent investigation into the Pates' opening net worth as of January 1, 1971. Since such an investigation was undertaken, the statement to Eisler simply provided corroboration often not present, and never deemed necessary, in tax evasion cases of this sort. In many net worth or expenditures cases the defendant either says nothing with respect to his financial condition at the beginning of the period of claims "the existence of substantial cash on hand at the starting point . . . made up of many years' savings which for various reasons were hidden and not expended until the prosecution period." Holland v. United States, supra, 348 U. S. at 127; United States v. Bianco, supra. See generally, Duke, Prosecutions for Attempts to Evade Income Tax; A Discordant View of a Procedural Hybrid, 76 Yale L. J. 1, 10-34 (1966). Here we have an admission by Pate, made only six months before the beginning of the prosecution period, that he and his wife had no financial assets except life insurance, for which the Government credited him. To be sure the Pates' absence of financial resources in July 1970 does not absolutely negate the possibility that affluence from non-taxable sources had been attained by January 1971. However, it serves two offices valuable to the Government's case. It constricts the time in which a pre-period "cash hoard" might have come into existence, and it negates the possibility that the Pates had a pre-period asset which could have suddenly appreciated into a large source of wealth.

A second criticism is that Conlisk never interviewed Mrs. Pate. While Pate's oral statement to Eisler seems to have been directed only to his own finances, the questionnaire included Mrs. Pate. The inquiries of banks, brokerage firms, and lending institutions apparently also included Mrs. Pate, as did the checks of savings bonds records, gift tax returns and property records. While an attempt to interview Mrs. Pate would have been advisable, we do not regard its absence as fatal.

A third criticism is that even if the Government made an adequate showing of a near zero net worth as of January 1, 1971 , it failed to make such a showing as of the beginning of each of the four other taxable years. We do not read Holland as requiring a formal net worth statement as of the beginning of each taxable year. Although it does require that increased net worth "can be reasonably allocated to the appropriate tax year", 348 U. S. at 129, the Government met that burden here. None of the purchases made by the Pates was income-producing save for $37,000 in investments in the First Investors Fund. There is no indication in the tax returns that any asset was sold in they years 1971-75. The Government urges it satisfied any burden it might have by showing that in 1971 and each subsequent year, expenditures vastly exceeded the small January 1, 1971 opening balance increased by any known non-taxable sources, such as loans. This appears sufficient under the circumstances. Cf. Taglianetti v. United States, supra, 398 F. 2d at 565 (in cash expenditures cases Holland requirements met without formal net worth presentation if proof "makes clear the extent of any contribution which beginning resources or a diminution of resources over time could have made to expenditures.").

Neither can the Government be faulted for failing to follow "relevant leads furnished by the taxpayer", Holland v. United States , supra, 348 U. S. at 135-36, for the Pates never supplied any. They did not assert the "favorite defense" of a "cache . . . made up of many years' savings which for various reasons were hidden and not expended until the prosecution period," 348 U. S. at 127; although Sacchitello did, the Government discredited his story.

The Pates also make much of the Government's failure to point to a likely source of the illegally unreported income. ⁹ They rely on the statement in United States v. Grasso, supra, 629 F. 2d at 808:

Either a "likely source" of the illegally unreported income represented by the calculated increase in net worth plus non-deductible expenditures in the year in question must be shown or all possible sources of nontaxable income must be negated.

and contend that the Government did not meet the almost impossible burden of negating "all" possible sources of non-taxable income.

Our statement in Grasso derived from what the Supreme Court had said in United States v. Massei [58-1 USTC ¶9326], 355 U. S. 595, 595 (1958).

In Holland we held that proof of a likely source was "sufficient" to convict in a net worth case where the Government did not negative all the possible non-taxable sources of the alleged net worth increase. This was not intended to imply that proof of a likely source was necessary in every case. On the contrary, should all possible sources of nontaxable income be negatived, there would be no necessity for proof of a likely source.

However, in Holland the Court also made the less extreme statement that "[w]hen the Government rests its case solely on the approximations and circumstantial inferences of a net worth computation, the cogency of its proof depends upon its effective negation of reasonable explanations by the taxpayer inconsistent with guilt", 348 U. S. at 135 (emphasis added), and we have said that the Government can meet its burden under Massei by negating all "reasonably possible sources" of non-taxable income. United States v. Schipani [66-2 USTC ¶9512], 362 F. 2d 825, 830 (2 Cir.), vacated per curiam on other grounds and remanded, [67-1 USTC ¶9115] 385 U. S. 372 (1966). See also United States v. Bianco, supra, 534 F. 2d at 506 (Government need not negate purely hypothetical sources). Cf. United States v. Penosi [72-1 USTC ¶9103], 452 F. 2d 217, 219 (5 Cir. 1971), cert. denied, 405 U. S. 1065 (1972) (Government's burden of negating non-taxable sources met "by producing evidence of an investigation which uncovered no sources"). Unless this common-sense reading is given to the Massi and Grasso standards, the government could seldom, if ever, win a net worth or an expenditures case. See United States v. Bianco, supra, 534 F. 2d at 506. It would be obliged, for example, to produce evidence that no bank or other lending institution in the United States or, for that matter, in the world had made a loan to the defendant and that no decedent, however unrelated or unknown, had made the defendant an object of his beneficence. We do not think the Supreme Court or this court meant to impose so impossible a task on the Government in all cases where it has been unable to develop a likely source of income. In such cases, the Government does enough when, as here, it investigates reasonably possible sources of non-taxable income and explores whatever leads the taxpayers or others may proffer. Once it has thus established a prima facie case, the taxpayer "remains quiet at his peril." Holland v. United States, supra, 348 U. S. at 139.

Beyond this, less stringent standards with respect both to establishing opening net worth and to negating non-taxable income sources are justified in a case like this where defendants were shown to have gone to such lengths to conceal their unreported increases in wealth. If in fact the Pates had large resources in January 1971, or re-received large nontaxable amounts thereafter, why did they go to so much trouble to conceal the real estate transactions and the investment in Sanzo Corporation in 1971, 1972, 1974 and 1975? One reasonable inference, that they desired to conceal assretions in wealth in order to avaid income taxation, would be highly incriminating. Another reasonable inference, that they desired to hide the fruits of criminal activity would be equivalent to evidence of a likely source. There is a third possible inference, that they desired to defraud creditors, but there is nothing to suggest that they had any. Still further support for the inference of tax evasion is furnished by the evidence that in two of the tax years Pate reported income for process serving which he did not in fact receive. Why did Pate report and pay taxes on amounts not in fact received unless he was trying to conceal larger amounts that he had received? The evidence of subornation of perjury and obstruction of justice added further fuel to the flame. In short, the Government's proof here was not simply of a naked increase in wealth or expenditures unaccountable by assets at the beginning of the series of tax years; this was supplemented by proof of acts having a distinct aura of criminality, of which defendants were found guilty. It would be grotesque to hold that, with the wealth of proof against the Pates, their convictions for income tax evasion must be set aside because the Government's investigation may not have met standards that might be required in a closer case.

III. The Conspiracy Charge

At the conclusion of the Government's case Mastropieri's counsel moved, out of the presence of the jury, to strike all testimony of acts and declarations of conspirators which had been admitted subject to connection. The judge denied the motion, saying:

I find that the government proved by a fair preponderance of the credible testimony that the conspiracy charged in the indictment was established and existed at or about the time set forth in the indictment for the purposes set forth.

I further find that as to each defendant, there is independent evidence that by the accused acts and declarations the defendant knowingly and wilfully entered into the cospiracy.

I find that the government proved that by a fair preponderance of the credible testimony.

He added:

Having made those findings, I will charge the jury that all the acts and declarations made by any member of the conspiracy may be charged against any accused that they find to be a member of the conspiracy in determining whether that particular defendant knowingly and wilfully entered into the conspiracy by proof beyond a reasonable doubt.

Not disputing the sufficiency of the evidence to support the judge's preliminary determination, appellants single out for criticism one sentence in the charge, reading as follows:

If the government proved the conspiracy charged in the indictment beyond a reasonable doubt, then you may use as evidence any act or declaration made by any individual who you find to be a member of the conspiracy against the accused in order to determine whether that accused knowingly and wilfully entered into the conspiracy.

If this sentence stood alone, it would clearly be erroneous since it omits the essential element that declarations of a party to a conspiracy are admissible against another only if made "during the course of and in the furtherance of the conspiracy." F. R. E. 801(d)(2)(E). However, the judge gave two further instructions, one before and another after the one we have quoted. The first was:

Since every member of a conspiracy becomes the agent of every other member of the conspiracy, with relation to the business of the conspiracy, the acts and declaration of one who you find to be a member of the conspiracy, made during the term of the conspiracy and in furtherance of the purpose of the conspiracy, may be considered as evidence against the accused in determining whether the government proved the conspiracy charged in the indictment. So that all the acts and declarations of all the alleged conspirators may be used to determine whether the government proved the conspiracy charged in the indictment beyond a reasonable doubt.

The second, which followed immediately after the sentence complained of by appellants, read:

Of course, any statement or act by anyone not a member of the conspiracy charged in the indictment may not be considered as evidence against any accused nor may any act or statement that is not in furtherance of the conspiracy or made during the term of the conspiracy be used against any of the accused.

The former scarcely helped since although its first sentence was a correct statement of the law, the second was not. On the other hand, the latter instruction was correct and would have cured the errors if we can believe the jurors were able to separate the wheat from the chaff.

The respective roles of judge and jury with respect to admission of the declarations of one conspirator against another have had a long history in this circuit. It will suffice to begin with United States v. Pugliese, 153 F. 2d 497 (1945), an opinion by Judge Learned Hand, who built so much of this circuit's law. Mr. and Mrs. Pugliese were charged with illegal possession of distilled spirits. Finding that they had been joint venturers, the trial judge allowed the jury to consider the wife's declarations as against the husband. The jury acquitted the wife and the husband claimed this established that admission of the declarations was error. Judge Hand ruled against this, saying, 153 F. 2d at 500:

The admissibility of the wife's declarations in the case at bar was for the judge, and the fact that the jury later acquitted her was irrelevant. The issue before him was altogether different from that before them: he had only to decide whether, if the jury chose to believe the witnesses, Pugliese and his wife were engaged in a joint undertaking; they had to decide whether they believed the witnesses beyond a doubt.

Judge Hand followed this with a more extensive descussion in United States v. Dennis, 183 F. 2d 201, 230-32 (1950), aff'd, without discussion of this point, 341 U. S. 494 (1951). The trial judge in that case had left it to the jury to determine, before considering the declarations of an instructor of the Communist party, whether it was convinced beyond a reasonable doubt that the instructor was a member of the conspiracy and that the teaching was in furtherance of its aims and purposes. If the jury was so convinced, but not otherwise, it could consider the statements and acts of the instructor as if they were said or done by defendants also found to have been members of the conspiracy. Judge Hand observed, 183 F. 2d at 230:

It is not clear in the books that these instructions did not too much confine the jurors' use of the declarations, for it directed them not to regard them at all unless they were first convinced beyond reasonable doubt that the declarant and the defendants were engaged in a common venture which the declarations helped to realize. It is difficult to see what value the declarations could have as proof of the conspiracy, if before using them the jury had to be satisfied that the declarant and the accused were engaged in the conspiracy charged; for upon that hypothesis the declarations would merely serve to confirm what the jury had already decided. In strict logic these instructions in effect altogether withdrew the declarations from the jury, and it was idle to put them in at all. The law is indeed not wholly clear as to who must decide whether such a declaration may be used; but we think that the better doctrine is that the judge is always to decide, as concededly he generally must, any issues of fact on which the competence of evidence depends, and that, if he decides it to be competent, he is to leave it to the jury to use like any other evidence, without instructing them to consider it as proof only after they too have decided a preliminary issue which alone makes it competent. Indeed, it is a practical impossibility for laymen, and for that matter for most judges, to keep their minds in the isolated compartments that this requires.

After referring to United States v. Pugliese, supra, Judge Hand concluded that it was unnecessary to reconsider whether that case had gone too far since the trial judge in Dennis had left the preliminary question of fact to the jury as the defendants had requested.

Passing over such intervening decisions as United States v. Ross, 321 F. 2d 61, 68, cert. denied, 375 U. S. 894 (1963) and United States v. Ragland, 375 F. 2d 471, 477 (1967), cert. denied, 390 U. S. 925 (1968), we next gave extensive consideration to the problem in United States v. Geaney, 417 F. 2d 1116, 1119-20 (1969), cert. denied sub nom. Lynch v. United States, 397 U. S. 1028 (1970). We thought our opinion in that case made certain points entirely clear:

(1) Responsibility for determining whether declarations of an alleged conspirator should be admitted against another rests on the shoulders of the trial judge. He may not allow the jury to consider such declarations without a preliminary affirmative determination on his part.

(2) Before allowing the declarations to be admitted, the judge must "satisfy himself of the defendant's participation in a conspiracy on the basis of the non-hearsay evidence." More particularly, while declarations may be admitted subject to connection with a cautionary instruction, "the judge must determine, when all the evidence is in, whether in his view the prosecution has proved participation in the conspiracy, by the defendant against whom the hearsay is offered, by a fair preponderance of the evidence independent of the hearsay utterances."

(3) If the judge so determines, "the utterances go to the jury to consider along with all the other evidence in determining whether they are convinced of defendant's guilt beyond a reasonable doubt". This necessarily disapproved the practice of allowing the jury to reconsider the admissibility of declarations whose admissibility the judge had sustained under the procedures outlined in (1) and (2).

As we read the Federal Rules of Evidence, our holding in Geaney with respect to the respective roles of judge and jury was approved. Rule 104(a) states that "[p]reliminary questions concerning . . . the admissibility of evidence shall be determined by the court, subject to the provisions of subdivision (b)." Subdivision (b), which reads:

(b) Relevancy conditioned on fact. When the relevancy of evidence depends upon the fulfillment of a condition of fact, the court shall admit it upon, or subject to, the introduction of evidence sufficient to support a finding of the fulfillment of the condition.

is addressed to an entirely different kind of problem, as the Notes of the Advisory Committee show. ¹⁰ But see, McCormick, Evidence, §53 at 19 (2d ed. Supp. 1978) (admissibility of conspirator's declarations governed by Rule 104(b)); Kessler, The Treatment of Preliminary Issues of Fact in Conspiracy Litigations: Putting the Conspiracy Back into the Coconspirator Rule, 5 Hofstra L. Rev. 77, 88-92, (1976) (same).

In United States v. Stanchich, 550 F. 2d 1294, 1299, n. 4 (1977), we considered the effect of the F. R. E. upon Geaney and concluded that Rule 104(a) adopted Geaney's conclusion that the admissibility of statements of a conspirator is for the court. We gave further consideration to the problem in United States v. Ziegler, 583 F. 2d 77 (1978). We there reversed a conviction based in part on statements of a conspirator where the judge had refused to make the preliminary determination required by Rule 104(a) and had left the question of admissibility to the jury. We held this abdication of judicial responsibility to be reversible error without regard to whether there was sufficient evidence in the record apart from the challenged declaration to have supported a Geaney ruling. ¹¹

Our belief that the admissibility of conspirators' statements is a matter for the judge alone is strengthened by the wide acceptance which that practice has now won among the courts of appeals. ¹² It would be strengthened still further if we were to reconsider the issue on the merits. This very case illustracts the wisdom of Judge Weinstein's observation, 1 Evidence ¶104[05] at 104-44.9:

When the judge decides admissibility, the jurors should not be told anything about the issue. Giving them a "second bite at the apple" serves only to confuse, and achieves no useful purpose, though a number of courts have held that defendant cannot complain of this practice since it theoretically is for his protection.

The better procedure is for the judge to make the final decision as to the admissibility and then to let the jury evaluate the probative force of the evidence in its decision on the merits. (footnotes omitted)

See also United States v. Bey, supra, 437 F. 2d at 191-92; United States v. Santiago , supra, 582 F. 2d at 1136; United States v. Enright, supra, 579 F. 2d at 987; United States v. Bell , supra, 573 F. 2d at 1044.

Here an able and experienced trial judge gave an instruction, two sentences of which, if taken in isolation, would have allowed the jury to consider declarations not in furtherance of the conspiracy. While instructions must be read as whole, Cupp v. Naughten, 414 U. S. 141, 146-47 (1973), this subject is so fraught with complexity that we cannot have the ordinary assurance that the jury will disregard the erroneous instruction because it has been overcome by the correct one; moreover, the judge did not explain what "in furtherance of" meant. Beyond all this, as Judge Hand pointed out in Dennis, supra, the effect of the instruction, if taken literally by the jury, is to deprive the prosecution of evidence on which the law entitles it to rely. We therefore expect that trial judges in this circuit not only will shoulder the responsibility of making the determination of admissibility, as Judge Mishler did, but will hereafter refrain from giving the jury a "second bite." ¹³

However, the "second bite" instruction does not require reversal in the facts here. In general, as Judge Hand pointed out in Dennis, supra, 183 F. 2d at 230, such an instruction is favorable to the defendant since in a case where the judge has properly determined that the declarant's participation in the conspiracy has been sufficiently established by other evidence, it allows the jury to disregard declarations which it ought to consider. See also United States v. Nickerson, 606 F. 2d 156, 158 (6 Cir.), cert. denied, 444 U. S. 994 (1979) (second bite instruction a "windfall" for defendant). Here the only respect in which the instructions were unfavorable to the defendants was the omission in two sentences of the requirement that the declaration must be in the course and in furtherance of the conspiracy. However, appellants have failed to point to any declarations not in the course and in furtherance of the conspiracy that were received in evidence. The error in allowing the jury a "second bite" was therefore harmless to the defendants and must be disregarded, F. R. Cr. P. 52(a).

IV. Mastropieri's Objection to the Admission of Evidence of Attempted Suppression of Evidence

Mastropieri raises one point, unrelated to the rest of the case, which we can conveniently discuss now. The facts are as follows:

Near the conclusion of the presentation of the Government's case, just before the luncheon recess at about 1 P.M. on September 29, 1980 , the prosecutor applied in open court for a warrant to search Mastropieri's law office, asserting that Mastropieri's financial records would tend to prove the sham nature of the mortgages in the 70 Rochester Ave. and 52 Brookline Ave. transactions and the nonpayment of any fees for investigative services from Mastropieri. The judge reserved decision until the end of the luncheon recess.

Unknown to Mastropieri, his office was under observation by Agent Colasacco. About 1:30 or 1:35 P.M. Agent Colasacco saw Louis Antonaccio, Mastropieri's brother-in-law, walk out of the office and place a carton containing records in the trunk of a car. Antonaccio reentered the office, returned with an attache case, got into the car and drove off, followed by IRS agents. Shortly after 2 P.M. Judge Mishler denied the application for a search warrant. About 4 P.M., Antonaccio, who had been driving aimlessly with the records in his trunk, was served with a "forthwith" subpoena requiring him to produce the records before the judge. The judge impounded the attache case and the carton of records.

At a hearing conducted outside the presence of the jury, the judge ruled that compelling Antonaccio to produce ledger sheets written by Gordon, Mastropieri's accountant, would violate Mastropieri's privilege against self-incrimination. The Government therefore did not offer any of the records that Antonaccio had removed. However, the judge allowed the Government to adduce evidence designed to show Mastropieri's connection with the removal of the records as indicating consciousness of guilt.

There can be no doubt that an attempt to suppress material records permits an inference of consciousness of guilt and therefore of guilt itself, see 2 Wigmore, Evidence §278(2) (Chadbourn rev. 1979); Di Carlo v. United States, 6 F. 2d 364, 368 (2 Cir.), cert. denied, 268 U. S. 706 (1925); United States v. Graham, 102 F. 2d 436, 442 (2 Cir.), cert. denied, 307 U. S. 643 (1939); United States v. Gottfried, 165 F. 2d 360, 363 (2d Cir.), cert. denied, 333 U. S. 860 (1948). Mastropieri's argument is rather that the Government did not succeed in connecting him with Antonaccio's removal of the records. We think it did.

The jury heard testimony that, at about 1:15 P.M., shortly after the judge had reserved decision on the application for a search warrant, Agent Bellamy saw Mastropieri make a telephone call from a hallway telephone outside the courtroom. Madeline Nigri, who worked in Mastropieri's office, received a call from him between 1 P.M. and 2 P.M. and placed Antonaccio on the phone at Mastropieri's request. About a half hour later Nigri saw Antonccio carry a carton from the office. Nigri also testified that she received no call from Mrs. Mastropieri during the relevant period and that, as she recalled, at no time during that period did anyone else in the office answer the phone.

If this had been the only evidence, it would clearly have sufficed to convince, it reasonable juror beyond a reasonable doubt that Mastropieri had asked Antonaccio to remove the records. However, before calling the agents and Ms. Nigri, the Government had called Antonaccio and Mrs. Mastropieri out of the presence of the jury. Although acknowledging that he received a telephone call between 1:00 and 1:30 P.M., Antonaccio said this had come from Mrs. Mastropieri, who asked him to remove a carton of checks from the rear office and to place it in the trunk of his car, explaining only that the court did not need it but might do so. He claimed that the attache case was his own, and that he had driven around running errands but had never called Mr. or Mrs. Mastropieri concerning the records. Mrs. Mastropieri confirmed that she had called Antonaccio after hearing the Government's request for a search warrant and that when she left the courtroom she saw and heard her husband telephoning a secretary and inquiring only whether there were "Any problems. Any messages. Anything urgent." After the agents' testimony in open court the Government called Antonaccio under a grant of immunity. At this time he claimed that Mastropieri had called him about forty-five minutes or an hour earlier than Mrs. Mastropieri's call. He estimated that Mastropieri's call came before 1 P.M. This was impossible since court did not adjourn until shortly after 1 P.M. and there were no recesses and no record of Mastropieri being excused during the previous hour.

The judge carefully instructed the jury that the evidence they had heard from Antonaccio, Agents Bellamy and Colasacco, and Ms. Nigri was offered for a very limited purpose, namely, to support the Government's claim that there had been an attempt to suppress evidence; that in order to reach such a conclusion the jury must find that Mastropieri directed the removal of the records and did so with intent to suppress them; and that even such a finding would not be proof of guilt but would simply permit an inference of consciousness of guilt.

Mastropieri contends that the Government "totally failed to establish that appellant had directed the removal of the records" since there was no testimony that Mastropieri had instructed anyone to remove the records and since "[e]ven if the jury were to disbelieve Antonaccio's testimony, the void left in the evidence does not operate to justify a finding that it was appellant who directed the removal of the records." Mastropieri Br. at 32. This amounts to saying that all facts must be proved by testimonial rather than circumstantial evidence--an assertion so preposterous that it need only be stated to be rejected, see 1 Wigmore, Evidence §25 (1940 ed.). Indeed, the jury would have been justified in inferring not only that the facts were not as Antonaccio testified but that Mastropieri had caused him to lie. The case is readily distinguishable from Dyer v. MacDougall, 201 F. 2d 265 (2 Cir. 1952) (L. Hand, J.), where the plaintiff had no evidence of the utterance of the slander except his claim that witnesses, whose testimony was against him, were flagrant liars. Here there was affirmative evidence in Agent Bellamy's testimony of Mastropieri's telephone call, Ms. Nigri's testimony that Mastropieri called at the time and spoke to Antonaccio, and Agent Colasacco's testimony that this talk was followed by the removal of the documents. Antonaccio's testimony simply created a conflict for the jury to resolve. The days when the Government could be claimed to have "vouched for" Antonaccio by calling him as a witness are happily gone forever. See Advisory Committee Note to Rule 607.

V. Mastropieri's Other Points

Other contentions by Mastropieri can be briefly handled.

Mastropieri was named only in Count One of the third indictment charging his participation in a conspiracy, Count Nine of the third indictment charging him with falsely claiming a 1974 deduction for process serving fees paid to Herbert Pate, and Counts Five, Seven, and Ten of the third indictment charging him with aiding and abetting the Pates to defeat collection and payment of their 1973, 1974 and 1975 income taxes. He claims that, as to each count, the evidence was insufficient to warrant submission to the jury.

Count Nine requires little discussion. Mastropieri in effect concedes that there was ample evidence to support the Government's claim that Pate had done no work for the law partnership of Mastropieri & Joseph. His contention is rather that, in addition to the partnership business, which handled ordinary civil matters, he was engaged in a matrimonial and criminal practice on his own account for which Pate might have rendered services. But there is absolutely nothing to indicate that Pate did in fact perform any such service. Indeed all of the evidence--the testimony of Mastropieri's secretaries, his accountant Gordon, his law partner Joseph, and Eisenberg, who assisted him in his criminal practice, as well as the evidence that Pate spent half of 1974 at a weight-reducing clinic in North Carolina --pointed decidedly the other way. The Government was not required to prove that Mastropieri could not possibly have incurred the claimed deduction. It was enough if the Government introduced evidence, whether circumstantial or otherwise, from which a jury could reasonably be convinced beyond a reasonable doubt that the claimed deductible expense had not actually been incurred. See United States v. Bianco, supra, 534 F. 2d at 506. See generally, 10 Mertens, Federal Income Taxation, 55 A. 27 (1976 ed.). The Government did so here.

We likewise have no doubt about the sufficiency of the evidence on Counts One (conspiracy) and Counts Five, Seven, and Ten (aiding and abetting tax evasion for 1973, 1974, and 1975). 1974 and 1975 were the years of the 70 Rochester Ave. and 52 Brookline Ave. transactions described above. The evidence there summarized fully supported an inference that Mastropieri made his own bank account available for deposits of cash by the Pates and that the mortgages given by Mastropieri and "Mastro Enterprises" were sham. Mastropieri's argument that he had no reason to know that these transactions were part of a scheme of tax evasion rather than for some other purpose, e.g., a fraud on creditors, was properly addressed to the jury. As to 1973, the evidence, especially the testimony of Mastropieri's accountant, Gordon, who prepared the Pates' tax return with information provided by Mastropieri, amply supported an inference that Mastropieri had helped the Pates to hatch the strategy of reporting false process serving income. This and other evidence stated in our summary were sufficient as well to warrant submission of the charge of conspiracy.

Mastropieri's final claim is that the court erred in excluding letters written by Mastropieri and delivered to the IRS by his accountant, Gordon, in connection with a civil audit of his 1974 tax return. Gordon testified in the absence of the jury that the IRS requested a letter of verification as to the recipient of the payment for investigative services claimed as a deduction for that year. This letter read:

To whom it may concern:

The investigative services for the year 1974 were as follows: Mr. Herbert Pate, SS number 078-32-8104, 559 West Beech Street , Long Beach , New York , $7,320.50. Sincerely, Eugene R. [sic] Mastropieri.

Mastropieri's argument is that if he had intended to conceal Pate's tax evasion, he would not have named Pate. The inference well that Pate had included the income in well that Pate had included the income in his income tax return which Mastropieri had every reason to think the IRS was investigating. In any event the judge was justified in excluding the evidence under Rule 403. There was too much danger that, no matter what the judge might charge, the jury would take the letter as proof of the facts asserted rather than for the limited purpose urged by Mastropieri.

The Court also excluded an earlier letter dated December 14, 1976, reading:

To whom it may concern

The investigative services I paid for the year 1974 related to the investigations in connection with criminal trials that were pending in the year 1974 and some matrimonial cases. The investigations were for obtaining witnesses and information relating to financial status of various defendants in matrimonial cases. The investigative services were throughout the year 1974. Very truly yours, Eugene F. Mastropieri.

and two other letters stating that the August 16, 1974 deposit of $34,500 into Mastropieri's escrow account represented money belonging not to him but to his "clients".

The only value of the December 14 letter would have been in lending some support to Mastropieri's claim that Pate was engaged in connection with Mastropieri's criminal and matrimonial practice, of which Joseph and the secretaries may not have been aware. As such it was clearly offered for the truth of the matter asserted and was inadmissible hearsay. United States v. Marin, 669 F. 2d 73, 84 (2 Cir. 1982). The same reasoning applies to the two letters in regard to the $34,500 deposit. In addition we fail to see the relevancy of these letters; the Government's claim was precisely that the $34,500 was the Pates' money, not Mastropieri's.

The judgments of conviction are affirmed.

¹ Acovino was not charged. He had disappeared on November 2, 1974.

² There appears to have been some confusion whether the Government's proof followed the "net worth" or "cash expenditure" method. The Government claims to have relied on the expenditure methold. Judge Mishler charged the jury that this was a net worth case. The Pates, stradding the fence, characterize it as a "net worth/expenditures" case.

The basic difference between the two methods has been well explained by Judge Coffin in Taglianetti v. United States [68-2 USTC ¶9479], 398 F. 2d 558, 562-63 (1 Cir. 1968), aff'd without discussion of this point, [69-1 USTC ¶9295] 394 U. S. 316 (1969). The net worth method is used when a taxpayer shows an increase in net worth not derivable from reported income. Since this method "is unavailing against the taxpayer who consumes his self-determined tax free dollars during the year and winds up no wealthier than before", the cash expenditure method was developed to "reach such a taxpayer by establishing the amount of his purchases of goods and services which are not attributable to the resources at hand at the beginning of the year or to non-taxable receipts during the year." Where, as here, the taxpayer expends his unreported income on investments or durable property, the Government has a choice of methods: It can focus either on the sums expended or the value of the assets accumulated.

The present case does not exactly fit either the net worth or cash expenditure mold, although it more closely resembles the latter. The Government's principal proof was not simply of expenditures but rather of investments, in each year but one, of large amounts of money which appellants had taken pains to conceal.

³ Incredibly the record does not contain the form of letter or letters which Conlisk sent to these institutions. However, appellants do not dispute that the inquires were adequate to elicit information with respect to opening balances and that they disclosed no assets other than the few hereafter mentioned.

⁴ Counsel for the Pates reads this as meaning 1971-75 and years earlier than 1967. The Government's reading, namely, 1971-75 and back from 1971 to 1967, is more reasonable. On this appeal we are bound to view the evidence in the light most favorable to the Government.

⁵ Many of these expenditures were made by or in the name of Carolyn Pate. Daisy Ilich, her mother, testified that Carolyn had not worked outside the home since 1967 and that she had held no job in 1973, 1974 or 1975. Conlisk's investigation likewise disclosed that during the tax years at issue Carolyn was a housewife engaged in bringing up her three children.

⁶ We have omitted mention of highly suspicious activities of Acovino in 1974. One of these, involving the purchase of a house for his parents, was similar to the Pates' purchase described above; in this transaction Mastropieri, after Acovino's death, admitted that the mortgage was sham. Acovino also deposited $100,000 in cash at the Bank of Perrine for transfer to the Castle Bank.

⁷ As indicated above, Count Nine charged that Mastropieri had falsely claimed a deduction for the $7,322.50 payment in 1974. Mastropieri did not cliam the $6,450 paid to Pate (and a larger amount paid to Acovino) for process serving in 1973, although his accountant, Gordon, who also prepared the Pates' and Acovino's returns, testified that he had advised Mastropieri he could take such a deduction by filing an amended return.

⁸ He also testified that he had lied to the grand jury on his own in order to conform his testimony to that of his wife and that Pate had told him to tell the truth to the grand jury. Apparently on this basis the jury acquitted Pate of suborning Dennis Ilich's grand jury testimony--the only count on which he was acquitted.

⁹ At a hearing prior to sentence one Albert Rossi testified that he had had large transactions in heroin with Acovino and Pate, and Judge Mishler found that the cash accumulated by both Pate and Acovino was from an illegal source and at least in part from narcotics deals. However, no evidence to this effect was before the jury, and we cannot and do not consider it.

¹⁰ Subdivision (b). In some situations, the relevancy of an item of evidence, in the large sense, depends upon the existence of a particular preliminary fact. Thus when a spoken statement is relied upon to prove notice to X, it is without probative value unless X heard it. Or if a letter purporting to be from Y is relied upon to establish an admission by him, it has no probative value unless Y wrote or authorized it. Relevance in this sense has been labelled "conditional relevancy." Morgan, Basic Problems of Evidence 45-46 (1962). Problems arising in connection with it are to be distinguished from problems of logical relevancy, e.g. evidence in a murder case that accused on the day before purchased a weapon of the kind used in the killing, treated in Rule 401.

If preliminary questions of conditional relevancy were determined solely by the judge, as provided in subdivision (a), the functioning of the jury as a trier of fact would be greatly restricted and in some cases virtually destroyed. These are appropriate questions for juries. Accepted treatment, as provided in the rule, is consistent with that given fact questions generally. The judge makes a preliminary determination whether the foundation evidence is sufficient to support a finding of fulfillment of the condition. If so, the item is admitted. If after all the evidence on the issue is in, pro and con, the jury could reasonably conclude that fulfillment of the condition is not established, the issue is for them. If the evidence is not such as to allow a finding, the judge withdraws the matter from their consideration. Morgan, supra; California Evidence Code §403; New Jersey Rule 8(2). See also Uniform Rules 19 and 67.

The order of proof here, as generally, is subject to the control of the judge.

¹¹ One sentence in the opinion, 583 F. 2d at 80, reads:

Whether or not the the defendant is given a "second bite at the apple" as was done in Dennis, supra, 183 F. 2d at 231, and as is sometimes done by judges in this Circuit, see 1 J. Weinstein & M. Berger, Commentary on Rules of Evidence ¶104[05](2), at 104-39 to 104-45 (1976), the judge can not abdicate his responsibility to take the first bite.

If this was meant to countenance the practice of giving the jury a "second bite" rather than simply recognizing the occasional existence of the practice, it was dictum contrary to Geaney. The cited pages in Judge Weinstein's Commentary disclose no reference to judges in the Second Circuit allowing second bites subsequent to Geaney, although the instant case makes obvious that they sometimes have. Indeed Judge Weinstein dates the Second Circuit's practice of leaving the issue of admissibility to the judge alone as far back as Dennis, see ¶104[05](2) at 104-40 & n. 7.

¹² Every court of appeals which has addressed the issue has committed the admissibility determination solely to the judge. Some of these courts have reached this result on the basis of the Federal Rules of Evidence. See United States v. Petrozziello, 548 F. 2d 20, 22-23 (1 Cir. 1977); United States v. James, 590 F. 2d 575, 578-80 (5 Cir.) (en banc), cert. denied, 442 U. S. 917 (1979); United States v. Enright, 579 F. 2d 980, 984-87 (6 Cir. 1978); United States v. Santiago, 582 F. 2d 1128, 1132-36 (7 Cir. 1978); United States v. Bell, 573 F. 2d 1040, 1043-44 (8 Cir. 1978); United States v. Jackson, 627 F. 2d 1198, 1217-18 (D. C. Cir. 1980). Other circuits reached the same result prior to the adoption of the Rules, see United States v. Bey, 437 F. 2d 188, 190-92 (3 Cir. 1971); United States v. Vaught, 485 F. 2d 320, 323 (4 Cir. 1973); Carbo v. United States, 314 F. 2d 718, 735-38 (9 Cir. 1963); cert. denied sub nom. Palermo v. United States, 377 U. S. 953 (1964); United States v. Pisciotta, 469 F. 2d 329, 332-33 (10 Cir. 1972), and have since reaffirmed it. See United States v. Trowery, 542 F. 2d 623, 626-27 (3 Cir. 1977); United States v. Stroupe, 538 F. 2d 1063, 1065 (4 Cir. 1976); United States v. Federico, 658 F. 2d 1337, 1342 (9 Cir. 1981); United States v. Andrews, 585 F. 2d 961 (10 Cir. 1978).

¹³ This is in accord with the practice approved by most of the treatise writers. In addition to Weinstein, supra, see e.g., E. Devitt and C. Blackmar, Federal Jury Practice and Instructions, §27.06, at 9-20 (3d ed. Supp. 1981) (withdrawing as "unnecessary" previous model instruction); Saltzburg and Redden, Federal Rules of Evidence Manual 63-65 (2d ed. 1977) (if preponderance standard is used by judge, no instruction needs or ought to be given to jury with respect to its use of conspirator's statements). See also 4 Wigmore, Evidence, §1079 at 24 (Chad. rev. Supp. 1982); 21 Wright and Graham, Federal Practice and Procedure: Evidence, §5053 at 259-61 (1977); 10 Moore 's Federal Practice ¶104.13[5] (2d ed. 1976). But see McCormick, Evidence, §53 at 19 (2d ed. 1978 Supp.).

 

 

[82-1 USTC ¶9305] United States of America , Appellee v. Robert E. Keltner, Appellant

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 80-5100, 675 F2d 602, 4/5/82 , Affirming unreported District Court decision

[Code Sec. 7201]

Fraud: Defenses: No deficiency because of carryback: Admission of summary charts with typographical errors: Admission of expert opinion.--Neither the District Court's jury instruction nor its admission of evidence was shown to have been erroneous so as to require a fraud conviction to be set aside. The jury's consideration of the taxpayer's testimony regarding a net loss carryback was properly limited to the issue of intent because proof of a subsequent loss carryback is not material to negate proof of fraud. The use of a summary chart was not prejudicial, in the sense that the taxpayer was denied a fair trial, because it was based upon evidence already before the jury and the typographical errors were identified and corrected. An expert opinion testimony was also not prejudicial since it was relevant and material to rebut the taxpayer's claim that the returns of a subchapter S corporation were accurate.

Stephen G. Jory, United States Attorney, Wheeling, West Virginia 26003, John F. Murray, Acting Assistant Attorney General, Michael L. Paup, Robert E. Lindsay, R. Russell Mather, Department of Justice, Washington, D. C. 20530, for appellee. Orville L. Hardman, for appellant.

Before WINTER, Chief Judge, PHILLIPS and MURNAGHAN, Circuit Judges.

MURNAGHAN, Circuit Judge:

Appellant Robert Keltner was charged by a federal grand jury on January 25, 1980 , with two counts of willfully attempting to evade his federal income taxes for the calendar year 1972 and the calendar year 1973, in violation of 26 U. S. C. §7201, by filing false and fraudulent returns for those years. At trial the government used the net worth and personal expenditures methods of proof to show that appellant, an attorney, had received taxable income of $20,746.50 in 1972 and $111,547.85 in 1973, upon which there were taxes due of $6,063.51 and $62,037.50. His 1972 return, due April 15, 1973 , but filed on March 22, 1974 , reported a loss for tax purposes of $922.82 and no tax liability, although he inexplicably paid taxes of $196.75 for that year. His 1973 return, due April 15, 1974, but filed on July 4, 1975, reported taxable income of $2,376, and a tax liability of $792. According to the government's evidence, appellant had understated his tax liability by $5,866.56 in 1972, and $61,245.50 in 1973.

Appellant argued that he was entitled to additional deductions, not claimed on his returns, for net operating losses sustained by United Innkeepers, Inc., a Subchapter S corporation which he purchased in September, 1973. The informational return for the fiscal year ending August 31, 1974 , due November 15, 1974 , and filed by United Innkeepers on January 1, 1976 showed a net operating loss of $90,840.12, and the 1975 and 1976 returns, filed on April 17, 1980 , and due respectively on November 15, 1975 and November 15, 1976 , showed net operating losses of $86,606.70 and $63,744.47. He argued that the losses could be carried back to 1972 and 1973, thereby entirely eliminating any tax liability for those years.

The district court denied appellant's pretrial motion for acquittal and ruled that the evidence of United Innkeepers' losses could be admitted only to show appellant's lack of specific intent. After a jury trial appellant was found guilty on both counts, and the district court sentenced him to two concurrent five year sentences and fined him $10,000.

Appellant contends that the district court should have permitted him to establish as a defense that, because of the net operating losses, he had no tax liability for 1972 or 1973. Additionally, he argues that the testimony of the government expert and the summary chart on which he relied should not have been admitted into evidence.

[Net Operating Loss]

I. Appellant's argument relies heavily on the following sequence of events: in September, 1973, Keltner purchased United Innkeepers; on March 22, 1974, he filed his 1972 return; and on July 4, 1975, he filed his 1973 return. The returns were not fraudulent, he contends, because at the time they were filed he had, in fact, already incurred net operating losses which could be carried back, pursuant to 26 U. S. C. §172, to eliminate any tax liability for 1972 and 1973.

It is uncontested that, in order to convict a defendant of tax evasion, the government must prove that he actually owed some tax in excess of the amount stated on his return. E.g., Koontz v. United States [60-1 USTC ¶9405], 277 F. 2d 53 (5th Cir. 1960); Holt v. United States [59-2 USTC ¶9771], 272 F. 2d 272 (9th Cir. 1959). It by no means follows that, if a subsequently incurred net operating loss can be carried back to eliminate a tax liability that existed at the time the return was required to be filed, the defendant may escape conviction by reason of the fortuity of a later loss that would reduce or eliminate misstatements of tax liability fraudulent when made.

The lucky loser argument was rejected in Willingham v. United States [61-1 USTC ¶9401], 289 F. 2d 283 (5th Cir. 1961), cert. denied, 368 U. S. 828(1961). There the defendant admitted having claimed fictitious deductions during 1952 and 1953, but claimed, inter alia, that he should nevertheless be acquitted because a loss carryback from 1955 eliminated the 1953 liability. The court found that, although the defendant was entitled to deductions, he was not relieved from criminal liability. The court stated:

A taxpayer may not, with impunity, willfully make false deductions in an attempt to evade the 1953 tax, and which has the actual effect of reducing the tax imposed for that year, after taking into account all deductions that are then available, whether claimed or not, because fortuitously in 1955 a loss occurs, which for tax purposes can be carried back to wipe out the 1953 liability.

We think the crime is complete when with willful intent, a false and fraudulent return is filed for a year as to which, with all benefits arising out of events up to that time taken in his favor, there would still be a tax due by him but for the fraud. . . . Any adjustment that may be permissible resulting from subsequent losses does not prevent the fraud committed in 1953 from being an attempt to "evade or defeat any tax imposed by this chapter."

289 F. 2d at 288.

Appellant's distinction of Willingham is not persuasive. He argues that here the operating losses had accrued prior to the filing of the returns, and that he was entitled to show all deductions available at the time of actual filing, rather than at the time filing was required. Even if that were the case, it would save defendant only as to the second count. The 1972 return was filed on March 22, 1974, and the corporation's fiscal year did not end until August 31, 1974. A net operating loss sustained by a Subchapter S corporation does not become available to a shareholder until the corporation's taxable year which produces the loss has ended. 26 C. F. R. §1.1374-1(b)(2) (1981). Whether there would, indeed, be any loss at all of the year could not be ascertained until the year had fully run. It was therefore impossible to know whether there would be a net operating loss until a date well after the 1972 return was filed.

Appellant seeks unavailing solace in 26 U. S. C. §1374(c) which deals with allocation between a prior and a subsequent owner of a Subchapter S corporate loss. The loss for any year is prorated, based on the number of days during the year each owned the stock. However, that determination too can only be made after the full year is completed and the amount of the loss, if any, ascertained. While a seller may know immediately, if the sale takes place one month into the year, that the fraction of any loss which may eventually be attributable to him will be 31/365ths, nevertheless, he must wait until after the passage of the 365th day to know the amount to be multiplied against the fraction, and indeed to know whether there will be any loss whatever to which the fraction may be applied. Cf. 26 C. F. R. §1.1374-1(b)(2)(1981), supra ("The deduction allowed by shareholders by section 1374(b) is a deduction for the taxable year of the shareholder in which or with which the taxable year of the corporation ends. . . .").

More to the point, the actual time of filing is irrelevant. In Manning v. Seely Tube & Box Co. [50-1 USTC ¶9163], 338 U. S. 561 (1950), the IRS assessed a deficiency against defendant corporation for 1941. When the corporation filed its 1943 return, it had a net operating loss which, when carried back, wiped out the tax liability for 1941. The Supreme Court held that, notwithstanding the abatement of the 1941 deficiency, the interest assessed on the deficiency was unaffected. The Court stated:

From the date the original return was to be filed until the date the deficiency was actually assessed, the taxpayer had a positive obligation to the United States : a duty to pay its tax.

Id. at 565 (emphasis added). Similarly, in the present case, as of the date when the 1972 and 1973 returns were "to be filed" (i.e. April 15, 1973 and April 15, 1974, respectively) appellant had an obligation to pay the tax due. The fact that subsequent operating losses would have permitted him to file an amended return and obtain a refund did not permit him to bypass the requirement of timely filing of a return indicating his income as of the date he was required to file. See also Simon v. Commissioner [57-2 USTC ¶9989], 248 F. 2d 869 (8th Cir. 1957) (1943 tax became due and payable on date 1943 return was required to be filed; subsequent operating loss subject to carryback did not relieve taxpayer from penalty for deficiency assessed based on 1943 return).

Appellant's interpretation of the net operating loss carryback provisions would create an enormous opportunity for abuse. Under his view, a taxpayer could simply falsify a return and refrain from claiming a net operating loss until the commencement of a tax evasion prosecution. If no prosecution occurred, the taxpayer would be free to carry the loss forward, getting a second benefit since by falsifying his return he would have eliminated the need to apply the loss to a prior year as it should have been. Moreover, a sufficiently wealthy taxpayer with no available net operating loss could fraudulently understate his tax liability, and only in the event of a tax evasion prosecution, purchase a corporation with accumulated losses, to apply to the wiping out of his prior tax liability, and therefore his criminal liability.

Appellant was, of course, entitled to argue that he truly believed, even if his belief was erroneous, that he owed no taxes, in order to prove his lack of intent to evade tax liability. The district court permitted him to testify extensively as to the losses, and instructed the jury to consider the testimony only on the issue of intent. In view of his failure to claim the losses on the 1972 and 1973 returns, or any amendments thereto, it is not surprising that the jury found the requisite intent to evade taxes. We find no error in the district court's treatment of the evidence of net operating losses.

[Properly Admitted Evidence]

II. Appellant next contends that the admission of the government's summary chart and of some of the explanatory testimony of the government's witness, David Bayha, were erroneous. The use of summary charts in tax evasion trials is within the trial court's discretion. United States v. Meriwether [73-2 USTC ¶9731], 486 F. 2d 498 (5th Cir. 1973), cert. denied, 417 U. S. 948 (1974). The charts are admissible only if they are "based upon and fairly represent competent evidence already before the jury." United States v. Conlin [77-1 USTC ¶9291], 551 F. 2d 534, 538 (2d Cir. 1977), cert. denied, 434 U. S. 831(1977). See also United States v. Moody [64-2 USTC ¶9873], 339 F. 2d 161 (6th Cir. 1964). An appellate court will reverse a conviction due to erroneous admission of the charts only if the defendant shows that he was prejudiced. United States v. Meriwether, supra. Cf. United States v. Conlin, supra (erroneous admission of chart did not deprive defendant of fair trial).

With exception of certain typographical errors, all of the figures listed in the summary chart were based upon evidence before the jury. The typographical errors in the chart were clearly identified and corrected by Bayha at trial, so appellant was not prejudiced. There was no error in the admission of the summary chart.

Appellant argues further that he was prejudiced by Bayha's testimony that the United Innkeepers corporate tax return was irregular. The argument has no merit. The district judge sustained an objection of the testimony on the ground that it was appropriate for rebuttal, but not for the case in chief. The testimony was clearly relevant and material, since defendant's claim that he had no tax liability rested on the premise that United Innkeepers returns were accurate. Bayha, as an expert witness, was competent to testify on the matter. It was within the judge's discretion to defer consideration of the matter until defendant had raised the defense, but there was no error in permitting Bayha to testify on the matter.

Accordingly, we affirm.

AFFIRMED.

 

 

[81-1 USTC ¶9301] United States of America , Appellee v. Bobby J. Bernhardt, Appellant

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 80-1819, 642 F2d 251, 3/5/81 , Affirming unreported District Court decision

[Code Sec. 7203]

Crimes: Willful failure to file: Trial: Continuance: Admissibility of evidence: Abuse of discretion.--The court affirmed the taxpayer's conviction on two counts of willful failure to file an income tax return. The trial court had ample justification for and did not abuse its discretion by denying a requested lengthy continuance where there were numerous earlier continuances, the defense counsel could have informed the court of his situation earlier, and the cocounsel should have been prepared to continue. The trial court did not abuse its discretion when it refused to admit evidence of court opinions, on which the defendant allegedly relied, to prove the defendant's lack of intent because the court determined that presenting legal materials would tend to confuse the jury.

Edward G. Warin, United States Attorney, Robert F. Kokrda, Assistant United States Attorney, Omaha, Neb. 68101, for appellee. Donald W. MacPherson, John McKindles, Grant & MacPherson, 3900 East Camelback Rd., Phoenix, Ariz. 85018, for appellant.

Before HEANEY, Ross and ARNOLD, Circuit Judges.

PER CURIAM:

Bobby J. Bernhardt was charged with two counts of willful failure to file an income tax return under 26 U. S. C. §7203. Evidence admitted at trial showed that Bernhardt had filed joint returns with his wife from 1968 through 1972 but failed to file a return during either 1973 or 1974. In 1975 Bernhardt submitted a 1973 Form 1040 and a 1974 Form 1040 to the Internal Revenue Service, but both forms contained only the words "none" or "object, self-incrimination" in the space where income information was to be listed. No income information was provided on the forms. Further evidence was introduced to show that Bernhardt had sufficient income in 1973 and 1974 to necessitate the filing of returns.

At trial Bernhardt was represented by Mark McClellan with John McKindles as cocounsel. Trial began on May 6, 1980. On May 12 McKindles moved for a continuance of several days because McCellan would be unable to continue Bernhardt's defense due to a family emergency and McKindles needed time to prepare himself to properly conduct the defense. The court denied the motion for a lengthy continuance but did agree to continue the case until the following morning.

During trial the defense attempted to introduce into evidence a copy of Garner v. United States (no citation given) and other legal references which Bernhardt claimed to have relied upon in determining that he was not required by file a return, tending to show a lack of intent. The trial court denied admission of the materials into evidence on the ground that legal materials could not properly be submitted to the jury, but did permit testimony regarding the content of Garner v. United States . Bernhardt was convicted on two counts of violating Section 7203. On appeal, he alleges that: (1) the trial court abused its discretion in refusing to grant the requested continuance, thus denying his counsel adequate time to prepare his defense; and (2) the trial court erred in denying the admission of the copy of Garner v. United States into evidence.

Bernhardt maintains that under the circumstances in this case the court abused its discretion in refusing to grant a continuance. The determination of whether a denial of a continuance is arbitrary enough to violate due process depends on "the circumstances present in every case, particularly in the reasons presented to the trial judge at the time the request is denied." Ungar v. Sarafite, 376 U. S. 575, 589 (1964). In United States v. Little, 567 F. 2d 346, 348-49 (8th Cir. 1977), cert. denied, 435 U. S. 969 (1978), this court noted five factors that the trial court must weigh in determining whether to grant a continuance. They are:

(1) the nature of the case and whether the parties have been allowed adequate time for trial preparation;

(2) the diligence of the parties requesting the continuance;

(3) the conduct of the opposing party and whether a lack of cooperation has contributed to the need for a continuance;

(4) the effect of the continuance and whether a delay will seriously disadvantage either party;

(5) the asserted need for the continuance, with weight to be given sudden exigencies and unforeseen circumstances.

The trial court, in refusing to grant the motion for a lengthy continuance, considered the numerous earlier continuances, the conduct of defense counsel in not informing the court of McClellan's situation earlier and the fact that McKindles had entered his appearances as cocounsel. The court apparently felt that the defense had been allowed sufficient time to prepare for trial and that McKindles, as cocounsel, should have been prepared to proceed with the defense. There was no indication that the need for additional time was in any way caused by a lack of cooperation by the prosecution. Furthermore, the court, in detailing the proceedings for the record, seems to suggest a lack of diligence on the part of the defense. The record indicates that the trial court had ample justification for denying the continuance and did not abuse its discretion.

Bernhardt next contends that the trial court erred in refusing to admit into evidence legal references and citations, and in particular a copy of Garner v. United States (no citation given), a court of appeals opinion. The trial court found that under Cooley v. United States [74-2 USTC ¶9718], 501 F. 2d 1249 (9th Cir. 1974), cert. denied, 419 U. S. 1123 (1975), citations and references to legal materials were inadmissible and ordered them deleted from the evidence.

Under the Federal Rules of Evidence the trial court has broad discretion in determining the relevancy and admissibility of evidence. United States v. Peltier, 585 F. 2d 314, 332 (8th Cir. 1978), cert. denied, 440 U. S. 945 (1979); United States v. Briscoe, 574 F. 2d 406, 408 (8th Cir.), cert. denied, 439 U. S. 858 (1978). It is only where the trial court excludes relevant evidence without sufficient justification that a defendant's right to compulsory process is violated. United States v. Peltier, supra, 585 F. 2d at 332. In Cooley v. United States, supra, 501 F. 2d at 1253-54, the Ninth Circuit held that the United States Supreme Court opinions on which defendant claimed to have relied were inadmissible to support his contention that he did not act "willfully." That court noted:

In the orderly trial of a case, the law is given to the jury by the court and not introduced as evidence. It is the function of the jury to determine the facts from the evidence and apply the law as given by the court to the facts as found by them from the evidence. Obviously, it would be most confusing to a jury to have legal material introduced as evidence ad then argued as to what the law is or ought to be.

Bernhardt's argument that showing jurors the opinion on which he allegedly relied would tend to prove his lack of intent would require jurors to reach conclusions regarding the law as stated in the opinion. This would no doubt have resulted in the jury being faced to some extent with legal rather than factual questions. The trial court was warranted in excluding the material under Fed. R. Evid. 403 on the ground that it would tend to confuse the jury.

The judgment of conviction is affimed.