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[80-2 USTC ¶9680] United States of America , Plaintiff-Appellee v. William J. Pry, Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 79-5330, 625 F2d 689, 9-12-80 , Affirming unreported District Court decision

[Code Sec. 7203]

Crimes: Failure to file return: Employer's quarterly return: Willfulness: Good faith: Prior wrongs.--Although testimony relating to prior, knowing failures to file employer's quarterly tax returns may have been harmful to the taxpayer, it was relevant to his defense of a good-faith belief that such filing was unnecessay during the years in issue. Therefore, the testimony was admissible as evidence of his willfulness in failing to comply with requirements of the tax law.

[Code Sec. 7203]

Crimes: Failure to file return: Trial: Change of venue.--Claims of financial incapacity to travel to the site of his trial and of prejudice against him within the ares in which the government's suit was brought were insufficient to merit a change in venue. The trial court properly exercised its discretion in denying the taxpayer's motion since the cause of action arose and all witnesses were present in the district from which he sought removal.

[Code Sec. 7203]

Crimes: Failure to file return: Thial: Sentencing: Conditions of sentence: Parole.--A motion attacking the legality of the sentence imposed by the trial court was denied. The court acted properly in requiring that the taxpayer be treated as a parolee after serving ten months of a one-year sentence, even though the applicable statute provided for such treatment upon release after service of one-third of the sentence. It was within the court's discretion to set the terms of the sentence.

Jamie C. Boyd, United States Attorney, Le Roy Morgan Jahn, Assistant United States Attorney, San Antonio, Texas, for plaintiff-appellee. Lucien B. Campbell, P. Joseph Brake, 727 East Durango Blvd. , San Antonio , Texas , for defendant-appellant.

Before THORNBERRY, GEE and REAVLEY, Circuit Judges.

PER CURIAM:

Appellant William J. Pry was convicted by a jury of failure to file employer's quarterly tax returns in violation of 26 U. S. C. §7203. Pry claims the district court erred in denying his motion for a change of venue, in admitting certain evidence of his prior acts and in ordering that he be released from prison as if on parole only after he serves 10 months of his one-year sentence. We reject Pry's challenges and affirm.

Change of Venue

During all times relevant to the offenses charged in the indictment, Pry lived and worked in Austin , which is in the Western District of Texas. He also was required at all relevant times to file his federal tax forms with the Internal Revenue Service (IRS) office in Austin .

Pry was indicted in the Western District and was tried in Austin . His counsel was a member of the Federal Public Defender's office stationed in San Antonio , which is also in the Western District approximately 70 miles from Austin .

Sometime prior to trial, Pry moved from Austin to Houston , which is in the Southern District of Texas. Houston is approximately 130 miles from Austin and approximately 170 miles from San Antonio .

All nine of the government's witnesses were from the Austin area.

A few weeks before trial, Pry moved under Fed. R. Crim. P. 21(a) and (b) ¹ to have the proceedings transferred to the Houston division of the Southern District. In support of the motion, he claimed he was financially ill-equipped to travel to Austin for the trial or to travel to San Antonio to consult with his lawyer and that, because of the "great number of government employees including the Internal Revenue Service in Austin," he could not receive a fair trial in that city. ² In opposition, the government pointed out that its witnesses lived near Austin and that the public defender had access to travel funds. The district court denied the motion.

Because the tax forms Pry failed to file should have been filed in Austin , the Western District of Texas was a proper venue for his trial. See United States v. Calhoun [78-1 USTC ¶9203], 566 F. 2d 969, 973 (5th Cir. 1978). We may reverse the denial of the motion for a change of venue only upon a showing that the district court abused its discretion, United States v. Juarez, 573 F. 2d 267, 280 (5th Cir. 1978); United States v. Walker, 559 F. 2d 365, 372 (5th Cir. 1977). Pry has made no such showing. Under Rule 21(b), the district court is to consider the convenience of the witnesses as well as the convenience of the parties. The district court in this case apparently considered the inconvenience that would have been suffered by the Austin-area witnesses had the case been transferred to Houston . The denial of the motion was within the court's range of discretion.

Prior Acts

During all times relevant to the offenses alleged in the indictment, Pry owned and operated Capital Specialty Blasting Company, which performed dynamite-blasting operations for construction and road-building companies. Pry had several employees who were paid hourly wages. The indictment alleged that Pry was "an employer of labor and a person required under the provisions of the Internal Revenue Code to make a return of federal income taxes withheld from wages and Federal Insurance Contributions Act taxes" and that, in violation of 26 U. S. C. §7203, ³ he had filed no employer's quarterly tax return for any of the tax quarters of 1974 or for the first tax quarter of 1975.

The government's evidence showed not only that Pry had failed to file the required forms but also that he had withheld money from his employees' wages purportedly to be turned over to the IRS and that he had kept the money. During its case-in-chief, the government offered the testimony of Marcus Erfurt, who was Pry's business partner until December, 1973, when he left Pry to establish his own dynamite-blasting business. Erfurt testified that after taking over Capital's bookkeeping chores from Pry during 1973, he found two employer's quarterly tax return forms that Pry had filled out for the first two quarters of 1973 but that he had not sent to the IRS. Erfurt mailed them in.

A defendant's good faith belief that he need not file an employer's quarterly tax return is a defense to a charge brought under §7203 of "willfully" failing to file the return, see United States v. Pinner [77-2 USTC ¶9706], 561 F. 2d 1203, 1206 (5th Cir. 1977); United States v. Douglass, 476 F. 2d 260, 263 (5th Cir. 1973).

Pry claims that Erfurt 's testimony should have been excluded under Fed. R. Evid. 402, 403 and 404(b). If it may be said that the unmailed 1973 quarterly reports proved a prior wrong and that this was harmful to Pry, it is nevertheless relevant and admissible as evidence of Pry's knowledge and intent. In 1973 Pry apparently knew the proper means of complying with the law. See United States v. Beechum, 582 F. 2d 898 (5th Cir. 1978).

Sentence

Pry was convicted on all five counts under which he was indicted. The district court sentenced him to one year of imprisonment on Count One and ordered that he be "released as if on parole after serving TEN (10) MONTHS, pursuant to Title 18, United Sates Code, Section 4205(f) . . ." The court also sentenced Pry to one year of imprisonment on each of Counts Two through Five but ordered that those sentences be suspended and that Pry be placed on probation for three years on each of those counts. The sentences for the latter four counts were to run concurrently with each other but consecutively with the sentence imposed under Count One.

Pry claims that the sentence imposed under Count One is illegal. He argues that 18 U. S. C. §4205(f), the statute under which the district court imposed a portion of the sentence, authorizes a district court to order a defendant released as if on parole only if the defendant is to be released immediately upon having served one-third of the prison term to which he was sentenced. The district court, as noted above, ordered that Pry be released only after he serves 10 months of the one year sentence.

18 U. S. C. §4205(f) provides in pertinent part:

Any prisoner sentenced to imprisonment for a term or terms of not less than six months but not more than one year shall be released at the expiration of such sentence less good time deductions provided by law, unless the court which imposed sentence, shall, at the time of sentencing, provide for the prisoner's release as if one parole after service of one-third of such term or terms . . ..

Section 4205(f) was enacted in 1976 as part of the Parole Commission and Reorganization Act, 18 U. S. C. §§ 4201 et seq. Its legislative history is not enlightening. There is a dearth of dispositive jurisprudence. Section 4205(f) is the only provision in the body of federal law authorizing the district courts to order, at the time of sentencing, that a defendant be released as if on parole and after service of a portion of his sentence. The subsection applies only to defendants sentenced to prison terms of between six months and one year, inclusive.

Another provision of the Act, §4205(b), grants the district courts the discretion to determine, at the time of sentencing, when a prisoner imprisoned for more than a year shall become eligible for parole. Section 4205(b) permits the district courts to set that time at any point during the first third of the prison sentence. If the district court does not exercise that power, the prisoner will become eligible for parole, pursuant to §4205(a), after service of one-third of his prison sentence.

The government argues that the portion of §4205(f) indicating that release shall be after service of one-third of the prison term sets the threshold and the district court may order a prisoner released at any time after his service of at least that one-third. We find this persuasive and consistent with the broad discretion allowed in sentencing. To accept Pry's argument would result in holding that the district court could sentence Pry to several years imprisonment and suspend all or any of it but he could not sentence him to a year and provide for his release after 10 months. We reject that overly legalistic reading of 18 U. S. C. §4205(f).

We find merit in the government's further argument that adoption of Pry's interpretation of §4205(f) would adversely affect the authority granted by 18 U. S. C. §3651 ⁴ for the imposition of split sentences.

Pry would have this court change his sentence so that he will be eligible for release as if on parole after service of one-third of his one year prison term. We decline to do that. It is apparent that the district court intended Pry to serve at least 10 months in prison. We defer to the broad discretion given to trial courts in matters of sentencing.

Pry's conviction and sentence are AFFIRMED.

¹ Fed. R. Crim. P. 21(a) and (b) provides:

(a) For Prejudice in the District. The court upon motion of the defendant shall transfer the proceeding as to him to another district whether or not such district is specified in the defendant's motion if the court is satisfied that there exists in the district where the prosecution is pending so great a prejudice against the defendant that he cannot obtain a fair and impartial trial at any place fixed by law for holding court in that district.

(b) Transfer in Other Cases. For the convenience of parties and witnesses, and in the interest of justice, the court upon motion of the defendant may transfer the proceeding as to him or any one or more of the counts thereof to another district.

² On appeal, Pry has abandoned the claim that he was entitled to a change of venue under Fed. R. Crim. P. 21(a), dealing with prejudice in the district in which the trial is to be held. His brief addresses only the claim that he was entitled to a change of venue under Fed. R. Crim. P. 21(b).

³ 26 U. S. C. §7203 provides:

Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return (other than a return required under authority of section 6015 or section 6016), keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 1 year, or both, together with the costs of prosecution.

⁴ 18 U. S. C. §3651 provides in pertinent part: Upon entering a judgment of conviction of any offense not punishable by death or life imprisonment, if the maximum punishment provided for such offense is more than six months, any court having jurisdiction to try offenses against the United States, when satisfied that the ends of justice and the best interest of the public as well as the defendant will be served thereby, may impose a sentence in excess of six months and provide that the defendand be confined in a jail-type institution or a treatment institution for a period not exceeding six months and that the execution of the remainder of the sentence be suspended and the defendant placed on probation for such period and upon such terms and condition as the court deems best.

 

 

[80-2 USTC ¶9783] United States of America , Appellee v. Eileen Eldorado Johnson, Appellant

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 79-5272, 634 F2d 735, 11/12/80 , Affirming an unreported District Court decision

[Insert A at 7401]

Crimes: False returns: Evidence: Medicare billing by taxpayer-doctor.--In a taxpayer-doctor's trial for income tax evasion, evidence was introduced that she had overstated Medicaid billings, and government counsel referred to the taxpayer's "fraudulent" submission of Medicaid forms. The Court of Appeals affirmed the taxpayer's conviction on the grounds that no prejudice resulted to the taxpayer from the admission of the evidence relating to the submission of Medicaid forms, or from the government characterization of the forms as "fraudulent". The evidence was properly admitted because the taxpayer's defense to the income tax evasion charge was that she was completely absorbed in her medical practice and inadvertently understated her income. According to the court, the introduction of evidence relating to a fraudulent act committed by the taxpayer was a proper means of refuting the taxpayer's assertion that she did not have the requisite criminal intent to evade taxes. Further, the government counsel's reference to the submission of "fraudulent" forms was cured by the trial judge in his instructions to the jury, so that no prejudice resulted.

John S. Edwards, Faye S. Ehrenstamm, Assistant United States Attorneys, for appellee. S. W. Tucker, Hill, Tucker & Marsh, J. Hugo Madison for appellant.

Before RUSSELL, WIDENER and PHILLIPS, Circuit Judges.

PHILLIPS, Circuit Judge:

Convicted by a jury of federal income tax evasion under 26 U. S. C. A. §7201, Eileen Eldorado Johnson unsuccessfully moved in the district court for a new trial, on the grounds that evidence of her overstated Medicaid billings was improperly admitted and that government counsel's reference to her "fraudulent" Medicaid forms unduly prejudiced the jury. We affirm, holding that the extrinsic acts evidence was properly admitted under Fed. R. Evid. 404(b) and that no prejudice resulted from the "fraudulent" reference in view of the trial court's corrective action.

I Johnson is a medical doctor, who inherited her practice from her deceased brother. She filed tax returns for 1972, 1973, and 1974, which understated her income by approximately $120,000.00 and her tax liability by approximately $31,000.00. Her defense at trial was inadvertence: she had had nothing to do with preparing her tax returns because she cared nothing for money and chose, instead, to devote her time to the demanding personal needs of her patients. To support this defense she produced seven local witnesses--three physicians, a school board member, a public school teacher, a mortician, and a minister--who testified to her truthfulness, honesty, and compassion, and to the busy nature of her practice.

In attempted rebuttal of this portrait of Johnson as an altruistic healer of the sick, whose concerns lay elsewhere than attending to her financial interests and resulting legal responsibilities, the government called Robert Pemberton, an auditor for the U. S. Department of Health, Education & Welfare. Pemberton testified at length about his investigation of Johnson's billings for Medicaid services for 1976-78. His study showed that Johnson reported four times as many services per patient as other Virginia doctors. Johnson did not object to the general course of Pemberton's testimony. In fact, the following day Johnson again took the stand in order to testify that she had not signed the Medicaid billings upon which Pemberton had based his investigation. During cross-examination, government counsel asked Johnson, "Who would have received the benefit of all the fraudulent forms for Medicaid that were filed?" Johnson's counsel objected and moved for a mistrial because use of the term, "fraudulent," unduly prejudiced the jury. The trial judge overruled the motion, directed government counsel to rephrase the question, and gave the jury a cautionary instruction.

II We hold that Pemberton's testimony was admissible under Fed. R. Evid. 404(b), which provides:

Evidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show that he acted in conformity therewith. It may, however, be admissible for other purposes, such as proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident.

The first sentence of Rule 404(b) brings forward the traditional rule that extrinsic acts evidence is inadmissible solely to prove that defendant is a bad character and, therefore, likely to have committed the crime charged. See, e.g. Michelson v. United States , 335 U. S. 469 (1948); United States v. Woods, 484 F. 2d 127 (4th Cir. 1973); Lovely v. United States , 169 F. 2d 386 (4th Cir. 1948); Advisory Committee Notes to Fed. R. Evid. 404(b); McCormick, Evidence §190, at 447 (2d ed. 1972). Extrinsic acts evidence, however, may be admissible for other purposes including those listed in Rule 404(b). The Rule's list is merely illustrative, not exclusive, Wright & Graham, Federal Practice and Procedure: Evidence §5240, at 469 (1978).

Rule 404(b) of course commits to trial judge discretion the determination whether extrinsic act evidence shall be admitted under its second sentence. In exercising that discretion the judge first must determine if the proffered evidence is relevant to an issue other than the accused's character. If so, then the trial judge must balance the evidence's probative value against the dangers of undue prejudice aroused by this form of evidence. This may concededly pose particularly difficult problems. The Advisory Committee Notes to Rule 404(b) state:

No mechanical solution is offered. The determination must be made whether the danger of undue prejudice outweighs the probative value of the availability of other means of proof and other factors appropriate for making decisions of this kind under Rule 403 [confusion of issues, misleading the jury, undue delay, waste of time, and needless presentation of cumulative evidence].

Within this general guideline for the exercise of trial court discretion, we think the evidence here challenged was properly admitted. The general prohibition contained in the first sentence of Rule 404(b) is designed to prevent prosecutorial overreaching by a means whose obvious effectiveness has made it an inescapable temptation for advocates over the years. The second sentence however reflects the perception that evidence of "other . . . acts" may sometimes be critical to proof on a dispositive issue related to a defendant's state of mind. The ambivalence reflected in the Rule but serves to emphasize the particular delicacy of the discretionary rulings its administration may require. There is no gainsaying that the ruling here posed just such a problem for the trial judge, but we think he properly resolved it.

Particularly where, as here, a defendant in a criminal case by her own testimony and that of others has deliberately sought as the primary means of defense to depict herself as one whose essential philosophy and habitual conduct in life is completely at odds with the possession of a state of mind requisite to guilt of the offense charged, that defendant may be considered in effect to have forfeited any protection that the first sentence of the Rule might otherwise have provided against the type of "other act" evidence here challenged. See Walder v. United States , 347 U. S. 62 (1954). In such circumstances, testimony such as that of Pemberton may well be the only effective way to rebut evidence designed generally to plant in the jury's mind a reasonable doubt that such a person could have possessed the culpability of mind requisite to convict of the crime charged. Balancing the probative value of the challenged evidence against its potential for unfairly prejudicing the defendant, and on the latter point taking into account that the defendant deliberately chose to base her defense upon evidence not otherwise effectively rebuttable, we conclude that the district judge's admission of Pemberton's evidence lay well within the bounds of the discretion reposed in him.

III We think that government counsel's unfortunate reference to "fraudulent" medicaid forms was sufficiently corrected by the trial judge's cautionary actions so that the risk of prejudice was adequately removed.

Finding no merit in the defendant's other contentions, we affirm.

AFFIRMED.

Dissenting Opinion

WIDENER, Circuit Judge, dissenting:

I respectfully dissent and would grant a new trial.

Assuming that the evidence of other acts is admissible for one purpose or another, and I think, after United States v. Woods, 484 F. 2d 127 (4th Cir. 1973), even taking into consideration the later advent of the new rules, the admissibility of such evidence is pretty well entrusted in this circuit to the almost uncontrolled discretion of the trial judge, Pemberton's most damning testimony is not considered by the majority in its opinion.

Pemberton testified that Dr. Johnson had billed for specific services not rendered, and he ascertained that fact by asking the patients involved. Thus, the false billing he concluded Dr. Johnson had done was proved by statements other than those made by the declarant while testifying at a trial or hearing and offered in evidence to prove the truth of the matter asserted. This is hearsay pure and simple under FRE 801(c) and inadmissible under FRE 802, for it is not subject to any exception as to which I am advised.

An example follows:

"THE COURT:

Q. And then you checked with some of the patients?

A. Yes, sir.

Q. And found out that the services were not rendered?

A. In talking with the recipients, they stated that they had not received certain services which were billed by Dr. Johnson."

Specific instances of conduct, whether offered to rebut a defense to the merits, as the majority treats it, or whether offered to rebut a defense of good character, I think may no more be proved by hearsay than by any other essential fact in the case.

The testimony I have quoted is only a part of that introduced; other evidence is equally as inadmissible. It may only be considered highly prejudicial, and its admission should warrant a new trial.

 

 

[80-2 USTC ¶9580] United States of America , Appellee v. Michael O. Farber, Appellant

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 79-1815, 630 F2d 569, 7/10/80

[Code Sec. 7203]

Conviction for willful failure to file return: Defenses: Improper jury instructions claimed: Reliance on counsel: Fifth amendment privilege asserted: No abuse of district court discretion: No reversible error.--The Court of Appeals upheld the taxpayer's conviction for willful failure to file a return and held that the jury instructions defining the elements of willfulness were proper and expressly recognized the fifth amendment argument presented by the taxpayer in defense. Additionally, the court held that the admission into evidence of documents relating to the tax paying conduct (as a tax protestor) of the taxpayer for subsequent years was relevant to the issue of intent or willfulness in a prior year, and that the District Court's failure to include an instruction relating to the reliance on counsel defense for filing a tax protestor return was justified because the taxpayer did not demonstrate that he sought competent legal advice.

Roxanne Barton Conlin, United States Attorney, Amanda M. Dorr, Assistant United States Attorney, Des Moines, Ia. 50309, for appellee. Mark W. Bennett, Allen, Babich & Bennett, 5835 Grand Ave. , Des Moines , Ia. 50312 , Michael O. Farber, 1206 Fairview Ave. , Spencer , Ia. 51301 , pro se.

Before HENLEY and MCMILLIAN, Circuit Judges, and ROY, District Judge. ^*

HENLEY, Circuit Judge:

Michael O. Farber appeals from the judgment and sentence of the district court ¹ convicting him of willful failure to file an income tax return for tax year 1974, in violation of 26 U. S. C. §7203. Appellant was sentenced to one year imprisonment with provision for release after service of one-third of this term. We affirm.

During 1974 Farber was employed as a salesman for the IMC Mint Corporation (IMC) of Salt Lake City , Utah . His employment with this corporation began in spring of 1973 and terminated when the organization was placed in receivership on June 21, 1974. According to uncontested evidence at trial, Farber received a total of $24,060.07 in commission paychecks from IMC in 1974. However, due to the confused state of the corporation's records, he apparently did not receive a Form 1099 from either IMC or the receiver indicating his total commissions for 1974.

Appellant submitted a Form 1040 return for 1974, but allegedly because he lacked a Form 1099 from which to ascertain his income, he answered key entries with assertion of the fifth amendment. ²

On appeal, both appellant pro se and retained counsel have submitted briefs. Our affirmance is based on careful review of each.

Farber contends first that the district court abused its discretion in admitting into evidence voluminous tax documents which could fairly be characterized as tax protester materials for years subsequent to 1974.

It is settled that evidence of other crimes or acts is admissible under Fed. R. Evid. 404(b) to show intent, plan, or absence of mistake, so lang as four additional prerequisites are met, i. e., (1) a material issue has been raised; (2) the proffered evidence is relevant to that issue; (3) the evidence of other crimes is clear and convincing; and (4) the evidence relates to wrongdoing similar in kind and reasonably close in time to the charge at trial. United States v. Frederickson, 601 F. 2d 1358, 1365 (8th Cir.), cert. denied, -- U. S. --, 100 S. Ct. 281 (1979) (and cases cited).

In the present case, the contested evidence was offered to show Farber's intent and willfulness in failing to file for tax year 1974. The evidence was clearly admissible under the first three prerequisites described above, and we cannot agree with appellant's contention that the materials fail to meet the fourth prerequisite in that they were dissimilar in kind and far removed in time from the crime charged. Although one of the documents (Form 1040 for 1975) was accepted as a return by the IRS, it was nevertheless similar to Farber's 1974 return in containing expressions of Farber's studied dissatisfaction with the income tax system. All of the contested documents were prepared and filed within three and one-half years of the return date for 1974. We have held that subsequent tax paying conduct is relevant to the issue of intent or willfulness in a prior year. United States v. Luttrell [80-1 USTC ¶9150], 612 F. 2d 396 (8th Cir. 1980); United States v. Bowman [79-2 USTC ¶9497], 602 F. 2d 160 (8th Cir. 1979).

Appellant next alleges that his failure to file was not willful in that he offered to refile for tax year 1974 if the government granted him immunity from prosecution. We know of no relevant authority for the proposition that a taxpayer's failure to file is not willful when he asserts a willingness to refile contingent upon a grant of immunity.

The remaining and closer issues on appeal involve the trial court's jury instructions, which we consider under the plain error rule, Fed. R. Crim. P. 52(b), since appellant failed at trial to comply with the procedural mandates of Fed. R. Crim. P. 30 for objection to the court's instructions.

Appellant contends first that he relied in good faith on the advice of counsel and that the jury should have been instructed on this defense. Farber testified at trial that prior to filing his 1974 return, he consulted attorney William Drexler, whom he had heard speak at a tax protest seminar. Allegedly, it was Mr. Drexler who advised appellant to handle the problem of unascertainable income by filing a 259-page return.

At least one court has recognized in a tax exasion context that reliance on counsel is a defense to prosecution and that a defendant is entitled to an instruction on this defense. Bursten v. United States [68-1 USTC ¶9400], 395 F. 2d 976, 981-82 (5th Cir. 1968); accord, United States v. Mitchell [74-1 USTC ¶9414], 495 F. 2d 285, 288 (4th Cir. 1974) (prosecution under 26 U. S. C. §7206 for false tax return). On the other hand, the Fifth Circuit has explained the limited scope of its ruling in Bursten by noting that a reliance defense is available where the defendant relied on "competent tax counsel" (emphasis in Fifth Circuit opinion) and that the defense may not be available in every case. United States v. Anderson [78-2 USTC ¶9678], 577 F. 2d 258, 260 (5th Cir. 1978), citing Bursten v. United States , supra.

Here, we are not convinced that appellant attempted to obtain competent legal advice. We note that Farber first became acquainted with Drexler at a tax protest seminar. According to his testimony, an unidentified person sitting next to him in the audience referred to Drexler as an attorney, and Farber thereafter assumed without further inquiry that Drexler was in fact licensed to practice law. Counsel at oral argument informed us that Drexler was disbarred prior to 1974. Nevertheless, when appellant encountered difficulty with his 1974 return, he decided to telephone Drexler in California rather than seek local legal counsel. It is apparent that appellant sought out Drexler because he agreed with Drexler's antitax sentiments, not because he sought competent legal advice. In these circumstances, we decline to find plain error in the trial court's failure to instruct the jury on a reliance defense.

Farber's final and somewhat troublesome contention is that the trial court failed in its instructions to recognize his strongest defense, i. e., that he was unable to ascertain his income, that he consequently feared perjuring ³ himself, and that he claimed the fifth amendment on his Form 1040 in good faith. As appellant reminds us, a defendant cannot properly be convicted for an erroneous claim of fifth amendment privilege asserted in good faith, Garner v. United States [76-1 USTC ¶9301], 424 U. S. 648, 663 and 663 n. 18 (1976); United States v. Schiff, 612 F. 2d 73, 78 n. 6 (2d Cir. 1979); United States v. Edelson [79-2 USTC ¶9564], 604 F. 2d 232, 234-36 (3d Cir. 1979); United States v. Johnson [78-2 USTC ¶9642], 577 F. 2d 1304, 1310-11 (5th Cir. 1978); Cooley v. United States [74-2 USTC ¶9718], 501 F. 2d 1249, 1253 n. 4 (9th Cir. 1974), cert. denied, 419 U. S. 1123 (1975), insofar as an assertion of this constitutional privilege may negate the element of willfulness required for conviction under 26 U. S. C. §7203. ⁴ United States v. Edelson, supra, 604 F. 2d at 235-36.

In addressing Farber's contention, we note at the outset that the allegedly objectionable jury instructions set out correct statements of the law. The court instructed that disagreement with the law is not a defense to prosecution under 26 U. S. C. §7203, United States v. Pohlman [75-2 USTC ¶9677], 522 F. 2d 974, 976 (8th Cir. 1975) (en banc), cert. denied, 423 U. S. 1049 (1976), and that a good faith belief in the unconstitutionality of the tax laws is not a defense. ⁵ Hayward v. Day [80-1 USTC ¶9296], No. 79-2055, slip op. at 2 (8th Cir. March 13, 1980); United States v. Ware [79-2 USTC ¶9608], 608 F. 2d 400, 405 (10th Cir. 1979).

The court further instructed that a finding of willful failure to file was required for conviction, defining "willful" in lauguage identical to that suggested in this court's en banc opinion in United States v. Pohlman, as a "voluntary, intentional violation of a known legal duty" (emphasis added). United States v. Pohlman. supra, 522 F. 2d at 977, cited with approval in United States v. Pomponio [76-2 USTC ¶9695], 429 U. S. 10, 12-13 (1976). Implicitly, this instruction permitted conviction only if the jury believed that Farber knew of his duty to report income despite the difficulty he had encountered in ascertaining income figures. The jury apparently and with reason did not credit Farber's purported fear of perjury after hearing his cross-examination testimony that he did not attempt to straighten out his checkbook, he did not attempt to obtain records of his bank deposits, he did not attach an affidavit to his Form 1040 explaining his problem, and he did not comply with the IRS's suggestion that he pay half the estimated tax due.

We note also that the court's instructions expressly recognized appellant's fifth amendment argument. The jury was correctly informed that "under the fifth amendment . . . a person has a right to refuse to answer a question if his truthful answer to the question would tend to expose him to criminal prosecution." United States v. Johnson, supra, 577 F. 2d at 1310-1311 (5th Cir. 1978); United States v. Karsky, supra, 610 F. 2d at 550 and 550 n. 5 (8th Cir. 1979).

Appellant nevertheless contends that the benefit of this instruction was diluted by the further instruction that the fifth amendment privilege "does not permit a person to completely refuse to disclose on his income tax return any information relating to his income, and filing a 1040 form with a fifth amendment objection to income questions constitutes a failure to file the return." We find that this instruction on failure to file was reasonable where the taxpayer provided the IRS with insufficient information to calculate tax liability; see note 2, supra; United States v. Johnson, supra, 577 F. 2d at 1311; United States v. Irwin [77-2 USTC ¶9627], 561 F. 2d 198, 201 (10th Cir. 1977), cert. denied, 434 U. S. 1012 (1978); United States v. Daly [73-2 USTC ¶9574], 481 F. 2d 28, 29 (8th Cir.), cert. denied, 414 U. S. 1064 (1973), and where the instruction on failure to file did not predetermine the separate, hotly contested issue of whether Farber's failure to file was willful. As indicated, the district court instructed accurately on the element of willfulness, giving this matter over to the jury for its consideration.

It is perhaps true that in its jury instructions the court could have more precisely spelled out the relationship between willfulness as an element of the offense and assertion of a fifth amendment defense, with an instruction that willfulness may be negated by a reasonable though erroneous assertion of the fifth amendment in good faith. See, e.g., United States v. Edelson, supra, 604 F. 2d at 235. However, the courts' failure to give such an instruction was not, in our opinion, plain error, and we conclude that a new trial is not necessary to prevent a miscarriage of justice. Fed. R. Crim. P. 52(b); Tanner v. United States, 401 F. 2d 281 (8th Cir. 1968), cert. denied, 393 U. S. 1109 (1969); Cross v. United States, 347 F. 2d 327, 330 (8th Cir. 1965).

For the foregoing reasons, the judgment and sentence of the district court are affirmed.

^* The Honorable Elsijane Trimble Roy, United States District Judge, Eastern and Western Districts of Arkansas , sitting by designation.

¹ The Honorable Harold D. Vietor, United States District Judge for the Southern District of Iowa.

² Farber's 1974 Form 1040 reported $95.00 in income, as indicated on the form 1099 from a previous employer. It contained no other financial information relating to income or deductions. On the line requesting information regarding income from sources other than wages, dividends and interest, appellant wrote "object. Fifth Amendment." The 259 page return included such information as the Unlted States Constitution, a copy of the Declaration of Independence, photocopies of newspaper articles, and numerous other items. It was not accepted by the Internal Revenue Service because it lacked sufficient information for a determination of income tax liability.

Appellant subsequently, in 1977 and 1978, filed two Forms 1040X attempting to amend the 1974 return, but these forms again contained numerous references to appellant's fifth amendments rights and were not accepted by the IRS.

³ Form 1040 requires the the taxpayer declare under penalty of perjury that the return is true, correct and complete to the best of his knowledge and belief.

⁴ 26 U. S. C. §7203 provides in pertinent part:

Any person required under this title to pay any estimated tax or tax, or required . . . to make a return . . . who willfully fails to pay such estimated tax or tax, [or] make such return . . . shall . . . be guilty of a misdemeanor.

⁵ We recognize that a more limited assertion of erroneous constitutional belief may be a defense. Specifically, a taxpayer's good faith but mistaken belief that the fifth amendment permits him to refuse to answer inquiries on a tax form may be a defense in a §7203 prosecution. Garner v. United States, supra, 424 U. S. at 663 and 663 n. 18; United States v. Schiff, supra, 612 F. 2d at 78 n. 6; United States v. Edelson, supra, 604 F. 2d at 234-36; United States v. Johnson, supra, 577 F. 2d at 1310-1311; United, States v. Pohlman, supra, 522 F. 2d at 977 n. 2; Cooley v. United States, supra, 501 F. 2d at 1253 n. 4.

As the trial court instructed, good faith misunderstanding of the requirements of the law, as distinct from disagreement with it, may also be a defense insofar as misunderstanding can negate the element of willfulness required for conviction. 26 U. S. C. §7203; United States v. Karsky, 610 F. 2d 548, 550 n. 4 (8th Cir. 1979), cert. denied, 100 S. Ct. 1058 (1980); United States v. Pohlman, supra, 522 F. 2d at 976.

 

 

 

[76-1 USTC ¶9110] United States of America , Plaintiff-Appellee v. James Hall Fendley, Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit., No. 74-3976, 10/9/75

[Code Secs. 7201 and 7206(1)]

Criminal penalties: Tax evasion: Filing of false tax return: Embezzlement: Sufficiency of evidence: Admissibility of records: Jury conviction upheld.--Taxpayer's conviction by a jury of tax evasion and of filing a false income tax return was affirmed by the Court of Appeals for the Fifth Circuit. Various business records and computer printouts establishing willful embezzlement by the taxpayer, which was the basis for his conviction for the tax violations, were properly admitted into evidence. One dissent.

Frank D. McCown, United States Attorney, Ft. Worth , Texas , William F. Sanderson, Jr., Richard H. Stephens, Roger J. Allen, Assistant United States Attorneys, Dallas , Texas , for plaintiff-appellee. James L. Martin, P. O. Box 146 , 913 Custer Rd. , Richardson , Texas , for defendant-appellant.

Before TUTTLE, GODBOLD and MORGAN, Circuit Judges.

TUTTLE, Circuit Judge:

James Hall Fendley was convicted by a jury of tax evasion and filing a false tax return in 1967 in violation of §§ 7201 and 7206(1) of the Internal Revenue Code, 26 U. S. C. §7201, 7206(1). The defendant appeals.

Fendley was found by the jury to have embezzled large sums from his employer, the National Western Life Insurance Company. Fendley failed to report any of the monies which he was found to have embezzled, and this essentially is the basis for his conviction. The defendant does not dispute the rule that money misappropriated from one's employer is taxable as ordinary income. James v. United States [61-1 USTC ¶9449], 366 U. S. 213, 81 S. Ct. 1052, 6 L. Ed. 2d 246 (1961); United States v. Burrell [75-1 USTC ¶9152], 505 F. 2d 904 (5th Cir. 1974); rather the defendant attacks both the sufficiency of the evidence as well as certain specific business records admitted into evidence. We find the defendant's claims to be meritless, and accordingly we affirm his conviction.

Fendley was found by the jury to have devised a scheme whereby he and certain of his employees fraudulently induced Western Life Insurance Company to pay them commissions on sham policies of insurance. Fendley's scheme was based on Western Life's practice of paying advance commissions against future premiums to new agents during their first year of employment. When the company received an application for insurance with a first month's premium, it would pay the sales agent an advance of four and one-half times the premium, up to a maximum of $750.00 per month. Fendley would induce someone to purchase a policy by paying him the amount of the first month's premium; after forwarding the policy to the home office Fendley would then persuade the purchaser to cancel the policy. Thus he would receive commissions against premiums which would never be paid. To avoid the $750 ceiling, Fendley used a number of names other than his own as pretended agents. The 622 policies shown to have been shams produced commission advances of over $179,000 which were in essence unearned. Fendley was shown to have personally endorsed commission checks, made payable to him and to some 49 other agents, totalling $80,648.41.

The defendant first complains that the Government failed to adequately prove that he had in fact endorsed the 202 checks admitted into evidence against him. The defendant does not, however, challenge the expertise of the Government's expert witness who identified the signatures on each check as having been written by Fendley--rather the defendant repeats the attacks first raised in cross-examination of the Government's handwriting expert as to the method by which he arrived at his opinion. The defendant's criticisms of the expert's method of comparing handwriting samples go solely to the weight of his testimony, not its admissibility, and in our view the jury was entitled to accept the expert's opinion.

The defendant argues that there was insufficient evidence for the jury to find that he wilfully embezzled funds from his employer, rather he claims that the commission advances were merely loans. After carefully reviewing the record, we have no doubt that this jury was fully justified in finding that Fendley wilfully embezzled the funds, and that there was no evidence whatever of any intention to repay them. Fendley received huge amounts of unearned commissions and banked them without any effort to return them to Western Life; Fendley was shown to have submitted sham policies in the names of non-existent agents in order to increase the amount of commissions he could obtain from Western Life; finally, the record shows that when Western Life attempted to investigate the business practices of the Fendley agency, Fendley attempted to persuade his employees to refuse to talk to company investigators. All these circumstances convincingly establish that Fendley misappropriated his employer's funds for his own use, and that accordingly these funds were properly taxable to him. See United States v. Burrell, supra.

The defendant also complains of three specific sets of records introduced against him at trial. All three sets of records were admitted under the Federal Business Records Act, 28 U. S. C. §1732.

"Business records are admissible in federal courts as evidence of a transaction or occurrence if made in the regular course of business and if it was the regular course of business to make such records within a reasonable time of the transaction or occurrence."

United States v. DeFrisco, 441 F. 2d 137, 139 (5th Cir. 1971).

This Court has frequently had occasion to review the admissibility of business records under the Business Records Statute:

"The purpose of the federal Business Records Act is to dispense with the necessity of proving each and every book entry by the person actually making it. The theory underlying the Act is that business records in the form regularly kept by the company and relied on by that company in the ordinary course of its business have a certain probability of trustworthiness."

Louisville and Nashville Railroad Co. v. Know Homes Corp., 343 F. 2d 887, 896 (5th Cir. 1965); United States v. DeFrisco, supra, 441 F. 2d at 139.

The trial court has a broad zone of discretion in determining the admissibility of business records, and normally its ruling should be disturbed only when that discretion has been abused. United States v. Middlebrooks, 431 F. 2d 299, 302 (5th Cir. 1970), cert. denied, 400 U. S. 1009, 91 S. Ct. 56, 27 L. Ed. 2d 622 (1971). In recently reviewing the standards for admissibility under the Business Records Act we concluded that the statute's primary purpose was to "provide a check on trustworthiness" and that business records are admissible if three conditions are met:

"(1) The records must be kept pursuant to some routine procedure designed to assure their accuracy, (2) they must to created for motives that would tend to assure accuracy (preparation for litigation, for example, is not such a motive), and (3) they must not themselves be mere accumulations of hearsay or uninformed opinion."

United States v. Miller, 500 F. 2d 751, 754 (5th Cir. 1974).

The defendant objects to the admission of Government Exhibits 4-1 and 4-2 solely on the basis that the custodial witness who laid the foundation for the introduction of these exhibits was not himself in the employ of the company making the records at the time they were made. A witness laying the foundation for admissibility of a document as a business record need not have been the preparer of the document, United States v. Gremillion, 464 F. 2d 901, 906 (5th Cir. 1972)--for indeed this Court stated that:

"Section 1732 was adopted in part to eliminate the requirement that the entrant appear to authenticate the record."

United States v. Miller, supra, 500 F. 2d at 754.

"[T]he person who actually keeps the books and records and makes the entries need not testify if a person does testify who is in a position to attest to the authenticity of the records." United States v. Dawson [68-2 USTC ¶9527], 400 F. 2d 194, 199 (2d Cir. 1968). These criteria were met in this case, and we find the exhibits to have been properly admitted.

Finally, the defendant objects to the introduction of Government Exhibit 9-108, a computer printout introduced as a business record of the Western Life Insurance Company. This printout showed the credit balances of each of the agents in the Fendley agency, and showed the aggregate total of $179,084.41 as being owed by the Fendley agency for unearned commission advances.

The defendant objected at trial to the introduction of this exhibit on these grounds:

"Then, Your Honor, we will renew our objection to Government's Exhibit 9-108-B (sic) on the basis that there is no accuracy shown that the instrument is accurate as to the figures it reflects;

And that the preparer was someone other than the witness here; that we cannot determine the accuracy of it, and therefore, it shouldn't be admitted;

Because it would be hearsay and, again, I cannot cross-examine the paper, obviously, without having the party assigned to compiling the figures on it before us.

We object on that basis."

It appears to us that this loosely formulated and imprecise objection at most comes to this: (1) that the document was hearsay; (2) that the witness laying the foundation for its introduction was someone other than the preparer; and (3) that the witness laying the foundation was unable to personally attest to the accuracy of the figures contained in the document. There was no objection on the only grounds which would have permitted the trial court to have required that a fuller foundation be laid for the admission of the exhibit--that the printout was made and kept in the regular course of business, for regular business purposes and relied upon by the business, and finally that it was not "mere accumulations of hearsay or uninformed opinion." United States v. Miller, supra, 500 F. 2d at 754.

The grounds asserted in the defendant's objection are clearly insubstantial. While obviously the document was hearsay, this in itself fails to state an objection as to whether the exhibit met the admissibility requirements of the Business Records Act. Similarly, nothing in the Business Records Act requires either that the foundation witness be able to personally attest to the accuracy of the information contained in the document, or that he have personally prepared the document. In fact, both these requirements have been frequently held to have been specifically eliminated by 28 U. S. C. §1732. See United States v. Miller, supra; United States v. Gremillion, supra; United States v. DeFrisco, supra.

The defendant now on appeal raises new grounds as a basis for objecting to the admissibility of Exhibit 9-108. In our view the defendant is foreclosed from making these objections at this time, as he failed to comply with the requirements of Rule 51 of the Federal Rules of Criminal Procedure that he make "known to the (trial) court the actions which he desires the court to take or his objection to the action of the court and the grounds therefor." Clearly, if the defendant fails to object to the admission of evidence, objection is normally waived, United States v. Maddox, 492 F. 2d 104 (5th Cir. 1974) unless the admission of such evidence is such clear error that it affects substantial rights. See United States v. Davis , 496 F. 2d 1026 (5th Cir. 1974); Sykes v. United States , 373 F. 2d 607 (5th Cir. 1966). Here, although the defendant objected in general terms on the three grounds of hearsay, authorship and accuracy, he failed to object with that reasonable degree of specificity which would have adequately apprised the trial court of the true basis for his objection--if in fact he wished to object to the lack of a proper foundation under the business records statute. ¹ United States v. Bryant, 480 F. 2d 785, 792 (2d Cir. 1973).

Here the adherence to the requirements of Rule 51 is peculiarly required. Questioning the same witness who introduced 9-108 the Government had already meticulously and properly laid the foundation for the introduction of more than 100 documentary exhibits under the Business Records Act. Had the defendant properly objected that the Government had failed to observe the same care in introducing 9-108, the court could then have permitted the Government to lay the proper foundation if the printout was in fact kept in the ordinary course of business and relied upon by the business. Instead when the Government negligently failed to ask the proper sequence of foundation questions concerning 9-108, no objection was raised which would have alerted the court or the Government counsel to this mistake. The defendant now proposes this as grounds for reversing his conviction--but does not argue that the admission of 9-108 was clear error, only that the foundation laid was inadequate and that such computerized evidence is unreliable.

It is true that the Government failed to completely lay a proper foundation for the admission of the exhibit. This may well have resulted from the fact that there was a lengthy voir dire concerning the witness' knowledge of the preparer and the accuracy of the exhibit, both irrelevant to the issue of admissibility. Despite our concern that the Government failed to fully justify the admission of 9-108 under the business records exception to the hearsay rule, we do not believe this is grounds for reversal. Even otherwise inadmissible hearsay does not provide grounds for reversal if proper objection isn't made, or if it doesn't constitute clear error.

The defendant does not now claim that the introduction of 9-108 was clear error; in this we agree. The sole question then becomes whether the cluster of objections made at trial to the introduction of the exhibit preserve the point for appeal. ²

As we have said, we do not find in the general objections made at trial any reference to the three-fold requirements set out in United States v. Miller for compliance with the foundation requirements of the Business Records Act; nor do we find in these objections any reference to the reliability of the method of preparation. To object as the defendant did that "the preparer is someone other than the witness here" and that consequently "there is no accuracy shown that the instrument is accurate as to the figures it reflects" in no way apprises the trial court that the defendant attacks the reliability of the method of preparation of the exhibit.

The defendant has persisted in his belief that he has a right to cross-examine the preparer of each document introduced into evidence against him; despite the clear case-law in this Circuit to the contrary, the defendant has objected to Exhibits 4-1, 4-2 and 9-108 at trial and on appeal on the narrow grounds that the actual entrant of the numbers contained in each exhibit did not testify and thus the exhibits were inadmissible. There is no latent ambiguity in these objections--by which more precise and correct objections can be distilled--the defendant objected that the preparer of each document wasn't in court, not that computerized evidence is unreliable or that an inadequate foundation had been laid. Yet our cases make it clear that the defendant could not successfully object to the admissions of the documents on this basis.

The use of similar computer printouts has been upheld in criminal prosecutions. United States v. Russo, 480 F. 2d 1228 (6th Cir. 1973); United States v. De Georgia , 420 F. 2d 889 (9th Cir. 1969). In Olympic Insurance Co. v. H. D. Harrison, Inc., 418 F. 2d 669 (5th Cir. 1969) we held that such a computer printout was not intrinsically unreliable, and that such a printout was admissible as a business record under 28 U. S. C. §1732. ³

Of course we agree that should a defendant wish to attack the reliability of such computerized evidence he should be given the opportunity to inquire into the procedures by which data is fed into and retrieved from the computer. See United States v. De Georgia , supra, 420 F. 2d at 893, n. 11. We do not believe, however, that computer evidence is so intrinsically unreliable as to make its introduction clear error.

Accordingly, the defendant's conviction is AFFIRMED.

¹ We doubt whether the imprecise objections made were intended to object to the foundation laid; we note that during the introduction of Exhibits 4-1 and 4-2, the foundation for which was properly laid, the defendant objected only on the same grounds on which he later objected to 9-108, that the witness wasn't the preparer and he could not vouch for the document's accuracy. It is difficult to account for the defendant's having objected in the same terms to the prior introduction of exhibits which had been properly introduced unless the grounds stated were the only grounds the defendant then relied upon.

² We note that even were the point preserved for appeal, the introduction of the exhibit could still constitute harmless error.

³ We also note that Rule 803(6) of the new Federal Rules of Evidence which have now come into effect specifically provides that "data compilations" should be treated as any other record of regularly conducted activity.

[Dissenting Opinion]

GODBOLD, Circuit Judge (dissenting):

With deference, I must dissent. I think that admission into evidence of Exhibit 9-108, the computer printout, was reversible error.

The printout lists 139 agents and for each shows, among other data, what was identified as the current balance owed by him to the company. These are subtotalled for 14 agencies and totalled for the Fendley division (in the amount of $179,084.41).

The majority acknowledge that the requirements of the Business Records Act, 28 U. S. C. §1732, were not met, but hold that the failure is to be overlooked because the defendant's objection was not sufficient. ^1a

While the failure to lay a proper foundation is conceded, it is necessary to set out what occurred in order to understand the defense's objection, the sufficiency of it, and the policy reasons that are eroded by the majority's rationale that the objection was not sufficiently precise. The government offered no foundation testimony concerning the printout but simply asked the foundation witness if he could identify it, he said that he could, and it was offered in evidence. Previously the government had had the foundation witness lay a proper basis for introduction of three groups of documents from the business records of the insurance company, Exhibits 9-1 through 9-49, 9-50 through 9-65, and 9-66 through 9-107B. When Exhibit 9-108 was offered with no foundation evidence defense counsel conducted a voir dire. Following is that testimony:

Q. [By defense counsel] Mr. Laughlin, with reference to Government's Exhibit 9-108, what is that instrument?

A. "(Witness looks.) What is this?

Q. What do those--as with reference to Government's Exhibit 9-108--

A. I am sorry, I can't hear you.

Q. With reference to Government's Exhibit 9-108, would you tell us what those are--do you know what those are?

A. Yes, I do.

Q. All right. What is the terminology that you used in your company that you call those--what is the name of the instruments?

A. This is entitled "Balance forward for division 12865", a listing for the Fendley agency.

Q. Now, this is showing balances as of May 1, 19 68?

A. (Witness looks.) That is correct. It shows the amount owed to the company by the agents in the general agency, and the total by division.

It lists--this is dated 5/1/68, and the accounting here would be as of the end of the preceding month, which would be April 30th, 1968.

Q. All right. Now, who prepared this instrument?

A. This is prepared by National Western Life Insurance Company.

Q. You are not an accountant, are you?

A. I am not operating in the capacity of an accountant at this time.

Q. Is that correct?

A. That is correct.

Q. That is not in your capacity with the company, is it?

A. My capacity was an accounting supervisor at one time with the company, yes.

Q. As to this, you did not supervise this preparation, though, did you?

A. Let me think. I will have to think a moment and get my chronology of the dates right in my mind.

(Pause)

Yes. At this time I was in charge of the Commission Accounting for the National Western Life Insurance Company.

Q. Did you prepare the figures for the Government's Exhibit 9-108?

A. (Witness looks.) I did not prepare them, no. They are prepared from computer records.

Q. So, you don't know and you can't tell us that--testify as to their accuracy, from your personal knowledge, in the preparation of them, is that right?

A. Well, yes, I can. I can, by relating them to the other statements that were prepared, showing these same balances.

Q. Well, what other statements did you use to determine the accuracy of these balances shown on Government's Exhibit 9-108?

A. Well, I have not compared these recently.

Q. Do you have them with you?

A. Do I have what?

Q. Do you have the work papers that you had with you?

A. I did not prepare work papers on them, no.

Q. So, you don't--

A. (Indicating) But, as to these, to the best of my recollection, I have checked in the past the current balances shown for each agent here against the commission account statements, which is a separate record.

Q. And who furnished that statement that you checked?

A. Those are also furnished from our computer records.

Q. So, you didn't prepare the statements which you used to compare these two?

A. No, sir. I did not prepare those statements, myself.

Q. So, you can't testify as to the accuracy of Government's Exhibit 9-108, can you?

A. I cannot say there would not be some error of some kind in a computer record, no, sir.

Defense counsel's objection, quoted in full by Judge Tuttle and again below, was overruled.

28 U. S. C. §1732 requires that an entry be made in "regular course of business" and that it be in regular course of such business to make the entry at the time of the act (etc.) or within a reasonable time thereafter. In this case the only entrant or recorder revealed by the foregoing testimony is the computer. By its nature the computer records data coming from elsewhere. The classic case on regular course of business where the entrant or maker records information supplied by others is Standard Oil Company of California v. Moore, 251 F. 2d 188 (CA-9, 1957).

A memorandum or record cannot be considered as having been made in the "regular course" of business, within the meaning of §1732, unless it was made by an authorized person, to record information known to him or supplied by another authorized person. The second paragraph of §1732(a) expressly provides that the entrant or maker need not have personal knowledge of the matters recited in the memorandum or record. Wheeler v. United States, 93 U. S. App. D. C. 159, 211 F. 2d 19, 23, certiorari denied 347 U. S. 1019, 74 S. Ct. 876, 98 L. Ed. 1140. But where the entrant or maker records information supplied by others, it must appear that "it was part of their regular course of business to report to him what the declarants themselves knew, as it was part of his business to record what they said." United States v. Grayson, 2 Cir., 166 F. 2d 863, 869. Where the information comes to the entrant or maker from unauthorized persons, the memorandum or record is therefore inadmissible, not because it contains hearsay, but because it was not made in the regular course of business.

* * *

A memorandum or record cannot be considered as having been made in the "regular course" of business, within the meaning of §1732, unless it was made pursuant to established company procedures for the systematic or routine and timely making and preserving of company records.

* * *

If there was any systematic or routine procedure being followed in the preparation and filing of such writings, the burden was upon appellee to prove it. He failed to do so, at least with regard to most such exhibits. Where this foundation was lacking, the exhibit was not admissible under §1732.

Id. at 214-215 (footnotes omitted, emphasis added). See also footnote 34 at 215.

Section 1732 dispenses with the necessity of establishing reliability of recorded data by cumbersome testimony of numerous witnesses and substitutes the regular course of business requirements.

The element of unusual reliability of business records is said variously to be supplied by systematic checking, by regularity and continuity which produce habits of precision, by actual experience of business in relying upon them, or by a duty to make an accurate record as part of a continuing job or occupation. McCormick §§ 281, 286, 287; Laughlin, Business Entries and the Like, 46 Iowa L. Rev. 276 (1961).

28 U. S. C. A., Federal Rules of Evidence, Annotation to Rule 803, at p. 587.

What we know--and all we know--from the testimony quoted above that is even tangentially related to §1732 inquiries is: (1) the insurance company uses a computer; (2) the computer printed this document; (3) the witness "supervised" the "preparation" of this document; (4) in the past the witness had checked current balances [either these or ones like these] shown on a printout against other computer records; (5) the witness could not say the printout was accurate.

Some of the things we do not know are these:

(a) The source[s] of the information consisting of the balance allegedly owed by each of the 139 agents in the Fendley division.

(b) Whether the [undisclosed] source[s] were authorized to receive the data and whether those sources "reported" it to the computer (or the person in charge of putting data into the computer) in the regular course of business.

(c) Whether the data was recorded by the computer (i. e., put into its stored data) in the regular course of business and with the necessary degree of timeliness.

No explanation is tendered of why the government laid a §1732 foundation for the three previous groups of exhibits but offered none for the computer printout. After defense counsel completed his voir dire and then objected, the government made no move to go forward with proof of the necessary elements. Of course, the government has the benefit of whatever proof has been elicited on voire dire. The comparison between that proof and the proper foundations laid in other computer evidence cases, relied upon by Judge Tuttle is striking. In U. S. v. Russo, 480 F. 2d 1228 (CA-6, 1973), cert. denied, 414 U. S. 1157, 94 S. Ct. 915, 39 L. Ed. 2d 109 (1974), the issue was the admissibility of the annual statistical computer run of Blue Shield of Michigan. In that case:

The uncontradicted testimony of two witnesses established that the 1967 statistical run was a regularly maintained business record of Blue Shield and was made in the ordinary course of business. It was also shown that this record was relied upon by the company in conducting its business, particularly with reference to its auditing and actuarial procedures.

* * *

Assuming that properly functioning computer equipment is used, once the reliability and trustworthiness of the information put into the computer has been established, the computer printouts should be received as evidence of the transactions covered by the input. No evidence was introduced which put in question the mechanical or electronic capabilities of the equipment and the reliability of its output was verified. The procedures for testing the accuracy and reliability of the information fed into the computer were detailed at great length by the witnesses. The district court correctly held that the trustworthiness of the information contained in the computer printout had been established.

Id. at 1239-40.

The mechanics of input control to assure accuracy were detailed at great length as was the description of the nature of the information which went into the machine and upon which its printout was based.

Id. at 1241.

Similarly in U. S. v. De Georgia, 420 F. 2d 889 (CA-9, 1969), computerized records of Hertz Corporation were held properly admitted on a foundation consisting of showing the input procedures used, the tests for accuracy and reliability, and the fact that an established business relied on the computerized records in the ordinary course of carrying on its activities.

As the majority set out, we have recently pointed to three conditions that should be met to assure evidentiary trustworthiness of business records offered under §1732. U. S. v. Miller, 500 F. 2d 751, 754 (CA-5, 1974). Not one of those requirements was met in this instance. First, the witness made no reference to any procedure, routine or otherwise, designed to assure the accuracy of these records. Second, he was silent as to the motive for maintaining the records. We can assume that an insurance company would want records like these, but judicial speculation by appellate judges is not what sound policy requires. So far as the evidence discloses, the agents' balances could have been calculated and cumulated for the purpose of this prosecution, which Miller precisely forbids. Third, we do not know whether the items are, or are not, "mere accumulations of hearsay or uniformed opinions."

In the context of this case a computer is no different from a human recorder who receives information supplied by others and records it. This is not to say, whether information is received and recorded by a sophisticated electronic device, by a manually operated electric machine, or by a clerk holding a quill pen, that all data must be traced back to its original source in order to be admissible. The foundation witness can--just as the witness could have done in this case if the facts justified it--explain the business operations pursuant to which information is received by A in regular course of business, and in regular course of business passed on by him to B (who may be a computer or a person or a combination of them) who, timely and in regular course of business, makes a record.

Turning to the objection, the prosecution's failure should not be salvaged at the appellate level by the palliative that there was an insufficient objection. Especially is that so when the only foundation evidence produced was by the efforts of the defense. But I address myself to the majority's theory.

The objection was as follows:

Then, Your Honor, we will renew our objection to Government's Exhibit 9-108-B, [sic] on the basis that there is no accuracy shown that the instrument is accurate as to the figures it reflects;

And that the preparer was someone other than the witness here; that we cannot determine the accuracy of it and, therefore, it shouldn't be admitted;

Because it would be hearsay and, again, I cannot cross examine the paper, obviously, without having the party assigned to compiling the figures on it before us.

We object on that basis.

Judge Tuttle considers this to raise three grounds:

(1) that the document was hearsay;

(2) that the witness laying the foundation for its introduction was someone other than the preparer; and

(3) that the witness laying the foundation was unable to personally attest to the accuracy of the document.

This characterization seems to be unduly narrow.

The purpose of requiring objections and grounds is "to inform the trial judge of possible errors so that he may have an opportunity to reconsider his ruling and make any changes deemed advisable." Fort Worth and Denver Railway Co. v. Harris, 230 F. 2d 680 (CA-5, 1956). There can be no real doubt that all present and participating knew that the subject matter of the trial incidents that have been described was the question of whether the printout had been authenticated as required by the Business Records Act. Documents just introduced had been so authenticated and by the testimony of the same witness. When this exhibit was offered without any proffer of authentication evidence defense counsel conducted a voir dire and then objected.

Even a general objection may be sufficient "where the nature of the specific objection that could have been made was otherwise readily discernible by the court." 8A Moore 's Federal Practice, §51.02 p. 51-5. The objection in this instance was not the generalized "I object" nor the grounds the vague abracadabra of "incompetent, irrelevant and immaterial." There was no delay, no concealment of nonapparent grounds, no tactical plant of an innocent looking bomb to be exploded on appeal. It is distingenuous to treat this matter as though everyone has discovered for the first time on appeal, and to his surprise, the point which the defendant was seeking to call to the judge's attention. It raises from the grave in another form the long-buried requirement of stating specific and tedious exceptions. In Miles v. Texas Compensation Insurance Co., 220 F. 2d 942 (CA-5, 1955), only a generalized objection on the ground of immateriality was made to highly prejudicial testimony. This court, nevertheless, reversed, saying: "[I]n view of the grossly prejudicial character of the testimony, indulgence in subtle refinements of procedure to defeat appellant's right to have his wife's claim for compensation tried on its merits is not justified." Id. at 946. See also, Hartford Accident & Indemnity Co. v. Bank of Commerce, 170 F. 2d 94, 95 (CA-5, 1948).

Beyond the overall clarity of what the relevant trial events were all about, the wording of the objection, considered alone, does not permit the narrowing construction imposed by the majority. While not phrased with clinical precision, defense counsel's statements were necessarily directed primarily, if not solely, to the stage before data was put into the computer. The "party assigned to compiling the figures" was someone who worked with them before they went into the machine. No one "compiled the figures" after they came out of the machine. Counsel raised the fact that he had no way to test the accuracy, correctness or reliability--whatever the term one chooses--of the words and figures on the paper and that until there was some way for him to do so the paper was inadmissible. The majority's characterization of this as limited to the inability of the foundation witness to say that the figures were accurate disregards the objective of the Act which does not intend the interest of accuracy be met by someone's saying that what is written on the paper is correct--indeed that is what the Act is intended to make unnecessary. ¹ Rather, as previously discussed, the inference of accuracy is drawn from proof of the business' regular use of the records of which the data is a part.

I must, and I do, dissent.

¹ Parenthetically, the witness here was not even willing to make such a statement.

 

[75-1 USTC ¶9497] United States of America , Plaintiff-Appellee v. Kenneth R. Farris, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 74-1822, 517 F2d 226, 5/30/75 , Affirming unreported District Court decision

[Code Sec. 7203]

Crimes: Failure to file returns: Data compilations: Admission into evidence: Related offenses.--The taxpayer was properly convicted of failing to file 1969 through 1971 income tax returns. It was not error to admit into evidence certified computer print-outs of his tax records since the print-outs were self-authenticating. Nor was it error to permit the government to introduce evidence that the taxpayer had failed to file in other years, for evidence of related offenses is admissible.

James R. Thompson, United States Attorney, Gary L. Starkman, John W. Cooley, Assistant United States Attorneys, Chicago, Ill., for plaintiff-appellee. Philip S. Guistolise, One First National Plaza, Rm. 5200, Chicago, Ill., Norman M. Garland, 2315 N. Halsted St., Chicago, Ill., for defendant-appellant.

Before FAIRCHILD, Chief Judge, CUMMINGS and SPRECHER, Circuit Judges.

SPRECHER, Circuit Judge:

The novel issue raised by this appeal is whether officially certified computer data compilations are self-authenticating. ¹

[Issues]

I. Defendant Kenneth R. Farris was charged in a three-count indictment with wilfully and knowingly failing to file income tax returns for the calendar years 1969, 1970 and 1971 in violation of 26 U. S. C. §7203. A jury found defendant guilty on all counts and the district court sentenced him to one year imprisonment on the first two counts, to be served consecutively, and one year imprisonment on count three to be served concurrently with the other sentences.

Defendant raised four issues on appeal: (1) it was error to admit into evidence the output of a computerized data system without showing the accuracy of the system even though such evidence was officially certified; (2) it was error to admit evidence of defendant's prior and subsequent acts of failure to file income tax returns; (3) the instructions as to specific intent were improper; and (4) it was error to exclude evidence supportive of defendant's good faith belief that he was not required to file income tax returns.

[Computer Data]

II. The government introduced evidence of defendant's failure to file income tax returns during the years 1965 through 1973. Part of this evidence consisted of computer print-outs of defendant's tax records certified by the Secretary of the Treasury. The computer records were maintained at the National Computer Center at Martinsburg , West Virginia .

In regard to admissibility, 28 U. S. C. §1733(b) provides that "[p]roperly authenticated copies or transcripts of any books, records, papers or documents of any department or agency of the United States shall be admitted in evidence equally with the originals thereof." Here the questioned documents were copies or transcripts of records of the Treasury Department of the United States .

The original records, the copies or transcripts of which are "equally" admissible, are admissible under 28 U. S. C. §1733(a) "to prove the act, transaction or occurrence, as a memorandum of which the same were made or kept."

In regard to whether the copies were "properly authenticated," Rule 27 of the Federal Rules of Criminal Procedure provides that "[a]n official record or an entry therein or the lack of such a record or entry may be proved in the same manner as in civil actions."

Civil actions are governed by Rule 44 of the Federal Rules of Civil Procedure which provides in subdivision (b) that:

A written statement that after diligent search no record or entry of a specified tenor is found to exist in the records designated by the statement, authenticated as provided in subdivision (a)(1) of this rule . . . is admissible as evidence that the records contain no such record or entry.

FED. R. CIV. P. 44(b).

Rule 44(b) requires a "written statement" supported by the (a)(1) authentication. Here the statement by the Director of the National Computer Center of the Treasury Department reads as follows:

We have completed a search of our individual master file for a Kenneth R. Farris, SSN 542-44-5273. The results of this search are attached [the attachment consisting of computer print-outs indicating no filings of income tax returns for the years 1967, 1968, 1969, 1970 or 1971].

The statement complies with Rule 44(b) except that it does not include the word "diligent." We agree with the conclusion of the Tenth Circuit Court of Appeals in United States v. Dola, 482 F. 2d 1005 (10th Cir.), cert. denied, 414 U. S. 1071 (1973).

There has been substantial compliance with the rule, and reversing this case simply because the certificates failed to recite the word "diligent" would protect no substantial right of appellant and would indicate nothing but a total capitulation to form over substance.

Id. at 1007.

The Rule 44(a)(1) authentication requires a certificate that the officer making the statement has legal custody of the record. The certificate may be made by any public officer having a seal of office, authenticated by the seal of his office.

Here the certificate bears the seal of the Treasury Department affixed "[b]y direction of the Secretary of the Treasury" by the Acting Chief of the Disclosure Staff of the Internal Revenue Service and reads:

I certify that the annexed is a true copy of a memorandum dated September 6, 1974, from the Director, National Computer Center , to the Acting Chief, Disclosure Staff, Internal Revenue Service, National Office, to which copies of transcripts of account concerning Kenneth R. Farris are attached on file in this Department.

In United States v. Merrick [72-2 USTC ¶9572], 464 F. 2d 1087 (10th Cir.), cert. denied, 409 U. S. 1023 (1972), the Tenth Circuit said:

Copies authenticated by the IRS District Director in Denver , Colorado , were received in evidence. The Director certified that each copy is a true copy of the identified return "on file in this office." This is enough to satisfy the requirements of 26 U. S. C. §7513(c), 28 U. S. C. §1733(b), Rule 27, F. R. Crim. P., and Rule 44(a)(1), F. R. Civ. P.

Id. at 1092-93.

The defendant, however, has argued that the foregoing analysis does not apply where, as here, the copies or transcripts consist of what he calls "the output of a computerized data system." The answer is simply that when 28 U. S. C. §1733(b) was enacted and when Rules 27 and 44 were promulgated records were not computerized as they are now. A statute or rule drafted now which refers to records or documents takes the computer age into consideration. When Rule 34 of the Federal Rules of Civil Procedure was amended in 1970, it spoke of the production of documents including "data compilations."

When the Federal Rules of Evidence were drafted in 1972, they provided for the admissibility of records, including "data compilations, in any form," to prove the nonoccurrence or nonexistence of a matter (FED. R. EVID. 803(7)), self-authentication of public records "including data compilations in any form" (FED. R. EVID. 902(4)) and the use of certified copies of public records "including data compilations in any form" (FED. R. EVID. 1005).

The Advisory Committee's Note to Rule 803(6) where the term "data compilation" was first used in the Rules of Evidence, said:

The expression "data compilation" is used as broadly descriptive of any means of storing information other than the conventional words and figures in written or documentary form. It includes, but is by no means limited to, electric computer storage. The term is borrowed from revised Rule 34(a) of the Rules of Civil Procedure.

FED. R. EVID. 803(6) (Advisory Committee's Note).

There was no error in admitting the self-authenticated official computer print-outs. ² It should be noted also that defendant testified on his own behalf and admitted on several occasions that he had filed no tax returns from 1965 through 1971 (Tr. 179, 183-85).

[Other Years]

III. Defendant argued that it was error to permit the government to introduce evidence of his failure to file returns in the years 1965 through 1968, 1972 and 1973, years before and after the three years for which he was charged. He also argued the impropriety of admitting evidence of his filing a return and obtaining a refund in 1964.

In United States v. Ming [72-1 USTC ¶9449], 466 F. 2d 1000 (7th Cir.), cert. denied, 409 U. S. 915 (1972), the defendant had been charged with wilfully and knowingly having failed to file federal income tax returns for the years 1963 through 1966. The government proved in addition that the defendant had failed to file returns for the seven preceding years of 1956 through 1962. Judge Hastings said:

It is well established in this circuit that evidence of other related offenses is clearly admissible to prove knowledge and intent of a person accused of a crime. Here, the other offenses involved were identical to those charged. There was no hiatus between the preceding seven years and the four charged. The conduct of the seven immediately preceding years was relevant to the issue of knowledge and intent as tending to show a constant pattern of conduct. This is the recent explicit holding of our court, authored by Senior Circuit Judge Duffy, in United States v. Hampton, 7 Cir., 457 F. 2d 299 (1972). United States v. Marine, 7 Cir., 413 F. 2d 214 (1969), and other relevant cases in this and other circuits as cited in Hampton , with comment.

Id. at 1009.

Here as in Ming, the other offenses involved were identical to those charged and there was no hiatus in regard to either the prior or subsequent offenses in relation to the indictment offenses. The district court gave a proper instruction explaining the limited purpose of this evidence. ³

In regard to the 1964 filing, we previously held in United States v. McCabe [69-2 USTC ¶9622], 416 F. 2d 957 (7th Cir. 1969), cert. denied, 396 U. S. 1058 (1970), where the defendant was indicted for failure to file for 1960, 1961 and 1962 but evidence was adduced that he had filed returns in 1957, 1958 and 1959, that:

The evidence referred to would amply support findings that defendant knew the law required him to file returns and that he deliberately failed to file without justifiable excuse.

Id. at 958.

The same rule applies here. Consequently, no error was committed in admitting the evidence regarding the years immediately prior to and subsequent to the years at issue.

[Other Defenses]

IV. Defendant's final two arguments were both based primarily upon the opinion of a panel of this court in United States v. McCorkle [75-1 USTC ¶9270], 511 F. 2d 477 (7th Cir. 1974), reversing a judgment of conviction. Subsequent to the briefs in the present case, this court sitting en banc reheard McCorkle and affirmed the judgment of conviction in United States v. McCorkle [75-1 USTC ¶9270], 511 F. 2d 482 (7th Cir.), petition for cert. filed, 43 U. S. L. W. 3603 (U. S. May 1, 1975 ).

The instruction given here in regard to the specific intent of wilfulness ⁴ does not differ in any material respect from the instructions on that subject in McCorkle, Id. at 484, n. 2. The instructions in both cases also contained virtually the same language making it clear that the defendant, to be found guilty, knew he was required to file returns. In both cases the evidence was undisputed that the respective defendant had such knowledge.

Finally, in both cases the argument was made that the trial court erroneously limited testimony sought to be adduced by each defendant to prove his claimed belief that he was not required to file income tax returns. We said in McCorkle that "essentially all of the testimony which McCorkle sought to introduce was of no relevance to whether McCorkle intentionally failed to file returns knowing that he was legally obliged to do so." Id. at 487. In the instant case the same observation applies and the trial court's limitation upon the introduction of such testimony was within his well-known sound discretion in this area. United States v. Lehman [72-2 USTC ¶9534], 468 F. 2d 93, 105 (7th Cir.), cert. denied, 409 U. S. 967 (1972).

For the foregoing reasons, the judgment of conviction is affirmed.

¹ This issue has been affirmatively determined by the Federal Rules of Evidence, Pub. L. 93-595, 93d Cong., 2d Sess., approved January 2, 1975, and effective July 1, 1975. See Rules 803 (6), (7), (8), (9) and (10), 902 and 1005.

² Revenue Officer Demuro testified that these particular records were kept in the National Computer Center in Martinsburg, West Virginia, that it was part of the regular and ordinary course of business of the Internal Revenue Service to keep and maintain such records and that these records were kept and maintained in the regular course of such business. While this testimony would support introduction of the computer data under the business records act, 28 U. S. C. §1732, it is superfluous under 28 U. S. C. §1733.

³ The jury was instructed that:

The government has introduced evidence of prior and subsequent failures to timely file federal income tax returns not charged in the indictment.

This evidence has been admitted solely for the limited purpose of determining whether or not the defendant's failures to timely file tax returns for 1969, 1970 and 1971 were wilful. That is, you may consider evidence as to alleged earlier and subsequent acts of a like nature in determining the intent with which the accused did the act charged in the particular count.

⁴ The jury was instructed that:

The specific intent of wilfulness is an essential element of the crime of failure to file an income tax return. The word "wilfully" used in connection with the offense means deliberately, and intentionally, and without justifiable excuse, or with the wrongful purpose of deliberately intending not to file the return which defendant knew he should have filed, in order to prevent the government from knowing the extent of his tax liability.

Defendant's conduct is not "wilful" if he acted through negligence, inadvertence or mistake, or due to his good faith misunderstanding of the requirements of the law.

 

 

[73-1 USTC ¶9426] United States of America , Plaintiff-Appellee v. George C. Walker and Marie H. Walker, Defendants-Appellants

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 72-2667, 479 F2d 407, 4/27/73

[Code Sec. 7203]

Crimes: Willful failure to file return: Error in admission of evidence.--A conviction for failure to file income tax returns was reversed and remanded. Since the trial court improperly admitted evidence pertaining to the net worth of certain of the taxpayer's assets, evidence that was not probative of gross income and would tend to prejudice a jury in a failure to file case, the convention was reversed.

Robert S. Linnell, Assistant United States Attorney (argument) and Dean Smith, United States Attorney, Yakima, Wash., for plaintiff-appellee. George Constable, Seattle , Wash. , for defendants-appellants.

Before TRASK, GOODWIN, and WALLACE, Circuit Judges.

WALLACE, Circuit Judge:

A jury found Walker guilty of failure to file income tax returns for 1965 and 1966 in violation of 26 U. S. C. §7203. No question is raised as to whether he should have filed--his defense was that the failure was not willful. He alleges that the trial court erred in failing to instruct the jury properly as to willfulness, refusing to admit evidence that no tax was due, and improperly admitting evidence pertaining to the net worth of certain of his assets. We concur with the last contention and reverse.

Walker engaged in farming, land levelling and concrete irrigation ditch lining. His wife kept his books. Walker 's income tax returns for 1955 and 1956 had been prepared together and both were filed late. Likewise, his 1957, 1958 and 1959 tax returns were all prepared together and filed late. In both instances, Walker experienced "no trouble" from the Internal Revenue Service.

Walker had his 1960 and 1961 tax returns prepared together but, due to a dispute with his accountant, these returns were never filed. In late 1967 or early 1968, Walker contacted another accounting firm and asked it to prepare his tax returns for 1960 through 1966. Subsequently, he was indicted, tried and convicted of failure to file tax returns for 1965 and 1966.

Over objection, the trial court allowed proof of an increase of $248,241 in Walker 's net worth between 1958 and 1967. Because the facts indicated Walker 's gross income for both years exceeded the statutory minimum, the prosecution had already proved that he was required to file returns. Therefore, this evidence was unnecessary to show the duty to file. Moreover, unrealized increases in net worth resulting from a higher market value are not probative of gross income. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 137-38 (1954); Eisner v. Macomber [1 USTC ¶32], 252 U. S. 189, 214-15 (1920). The admission of this evidence would have a definite tendency to prejudice a jury in a failure to file case where the defense is a lack of knowledge of the need to file. When there is no legitimate basis for admissibility and the prejudice is such that the defendant could not receive a fair trial, a reversal is required.

[Remaining Issues]

Because the case must be retried, we will discuss the remaining issues raised.

The trial court instructed the jury that:

It is the gross income of $600.00 or more, according to the law, that requires one to file an income tax return. Whether the taxpayer's return would show that he owed a tax is irrelevant, and should not be considered by you on the question of the taxpayer's duty to file a return.

Walker contends this instruction is erroneous. We disagree. At most, it presents the possibility of slight confusion because the jury might believe that the instruction also referred to Walker 's defense, but it does not amount to reversible error. ¹

Walker also contends that the trial court erred by refusing to give his following proposed instruction:

If a taxpayer honestly thinks he owes no income tax for a certain year and if he honestly believes that a lack of tax due affects his duty to file a return, such are factors to be considered in determining whether his failure to file a return for that year was willful.

The government's position is that the content of the proposed instruction was essentially covered by the general instruction on willfulness ² and that the trial court has considerable discretion in determining whether to give such an instruction. Suhl v. United States, 390 F. 2d 547, 556 (9th Cir.), cert. denied, 391 U. S. 964 (1968). We agree.

The trial court rejected Walker 's offer of proof that in fact there was no federal income tax owing for any year during the period 1960 through 1966, with the exception of $2,720.87 owing for 1962. The purpose for offering this evidence, and the reason it was admissible was to substantiate Walker 's testimony and sole defense: that he did not think he had to file his returns promptly because he honestly did not think he owed any taxes. Whether or not a jury will believe his story, even with this evidence, only a new trial will tell. But it is obvious that he has the right to introduce this corroborating evidence. If he had taxable income in these prior years, the government could have shown that fact to attempt to have the opposite inference drawn.

Reversed and remanded for further proceedings consistent with this opinion.

¹ For the sake of clarity, however, the instruction might read:

Whether the taxpayer's return would show that he owed a tax should not be considered by you on the question of the taxpayer's duty to file a return. Compare 2 E. Devitt & C. Blackmar, Federal Jury Practice and Instructions §52.30 (2d ed. 1970).

² The court instructed the jury that:

"The word 'willful' as used in this particular statute, that is, Section 7203 of Title 26, United States Code, means with a bad purpose or without grounds for believing one's act is lawful, or without reasonable cause, capriciously, or with a careless disregard whether one has the right so to act. In other words, the prosecution must establish, beyond any reasonable doubt that the failure to file returns was intentional, as opposed to being by accident or other innocent cause."

Compare Devitt & Blackmar, supra note 1, §52.31.

 

 

 

[72-1 USTC ¶9449] United States of America , Plaintiff-Appellee v. William R. Ming, Jr., Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 71-1083, 466 F2d 1000, 5/26/72, Aff'g unreported District Court decision

[Code Sec. 7203]

Failure to file return: Sufficiency of information: Hostility of the court: Constitutionality of Code Sec. 7203: Admissibility of evidence: Jury selection: Instructions to jury: Admission of returns as evidence: Miranda-type warnings.--The taxpayer's conviction for failing to file a return was upheld by the Court. The following issues were decided against the taxpayer on appeal: (1) The words "said income tax return" used in the information, sufficiently referred to the breach of the duty to file at the time required by law. Accordingly, the District Court did not err in denying the taxpayer's motion in arrest of judgment. (2) The denial of the taxpayer's motion for substitution of judges was upheld. There was no substance to support the charge of bias and prejudice on the part of the District Judge. (3) Code Sec. 7203 was found to be constitutional. Its language met the standard of clarity required of penal statutes by the Fifth Amendment to the Constitution. (4) The District Court did not prejudicially err in denying the taxpayer's challenges to evidentiary matters. (5) The method of selecting the jury was proper. There was no error in limiting each side to three peremptory challenges. (6) The taxpayer was not denied due process under the Fifth Amendment because the Government used two of its peremptory challenges against the only two Negroes in the jury box. (7) The use of the Government's instruction to the jury on the subject of the taxpayer's good reputation, and the rejection of the taxpayer's instruction on the subject of his mental condition did not deny him a fair trial. (8) The admission into evidence of the taxpayer's returns for the years at issue did not violate his Fifth Amendment privilege against self-incrimination. (9) The taxpayer's right to Miranda warnings was not violated by admitting into evidence the testimony of IRS agents derived from audits of the taxpayer's records, obtained during conversations with the taxpayer or statements made by the taxpayer to the agents.

James R. Thompson, United States Attorney, John Peter Lulinski, Jeffrey Cole, Sheldon Davidson, Assistant United States Attorneys, Chicago, Ill., for plaintiff-appellee. R. Eugene Pincham, 840 E. 87th St., Chicago, Ill., Ellis E. Reid, 123 W. Madison St., Chicago, Ill., for defendant-appellant. Stanley A. Kaplan, University of Chicago Law School, 1111 E. 60th St., Chicago, Ill., Maurice Rosenfield, 208 S. La Salle St., Chicago, Ill., Alex Elson, 11 S. La Salle St., Chicago, Ill., Harry Kalven, Jr., 4929 S. Woodlawn, Chicago, Ill., for Maicus Curiae.

Before SWYGERT, Chief Judge, HASTINGS, Senior Circuit Judge, and KILEY, Circuit Judge.

HASTINGS, Senior Circuit Judge.

Defendant William R. Ming, Jr., was charged in four counts of an information, filed April 14, 1970 , with having willfully and knowingly failed to make his federal income tax returns for the years 1963, 1964, 1965 and 1966 to the District Director of Internal Revenue, ¹ in violation of Title 26, U. S. C. A. §7203, being Section 7203 of the Internal Revenue Code of 1954. ²

[Facts]

Following the disposition of the pre-trial motions, this cause was submitted for trial to a jury in the federal district court ³ on October 26, 1970 . The jury returned a verdict on November 2, 1970, finding the defendant guilty on each of the four courts as charged in the information. Judgment was entered on the verdict. Following the denial of defendant's post-trial motions in arrest of judgment and for a new trial, defendant was sentenced to serve four months imprisonment on each of the four counts of the information, the sentences to run consecutively, for a total of 16 months. Defendant was also fined in the sum of $1,250 on each of the four counts, for a total of $5,000, together with the costs of prosecution. Defendant appealed. We affirm.

The basic facts in this case are not in dispute. Defendant did not timely file his federal income tax returns for each of the four years, 1963 through 1966. Defendant did not make such returns when due, that is, on or before April 15 of the year succeeding the calendar tax year involved. Defendant was a person required by law or regulation to make a return for each of the four years in question, his adjusted gross income having exceeded $600 for each of those years. Defendant knew that he was required to make such returns on or before the respective due dates. For the purpose of establishing a pattern of conduct bearing upon the question of willfulness, over objection, the Government established that the defendant failed to timely make his federal income tax returns for the seven preceding tax years of 1956 through 1962.

Testimony introduced by defendant, including his own, was directed to the one issue of whether he had any criminal intent in failing to make his returns when due, i.e., whether he willfully and knowingly failed to do so. We shall subsequently treat the several issues raised concerning such testimony, as well as that excluded by the trial court in its evidentiary rulings.

It should be further pointed out at this juncture that defendant was charged under Section 7203, a misdemeanor statute. He was not charged under Section 7201 with willfully attempting to evade or defeat his federal income tax, a felony statute.

The Information

Defendant contends the district court prejudicially erred in denying his motion in arrest of judgment. He argues that the information is fatally defective because it does not state that he failed to make said income tax return "at the time or times required by law or regulations," the language of the statute. He says that the words used in the information, "said income tax return," do not refer to "the breach of the duty of file at the time required by law." We regard this as an unrealistic reading of the information.

Count I in the information does allege that defendant "was required by law * * * on or before April 15, 19 64, to make an income tax return * * * [and that] he did wilfully and knowingly fail to make said income tax return * * *." (Emphasis added.) We are at a loss to understand how anyone reading the information could fail to understand that "said income tax return" required by law to be made on or before the specified due date could be other than a return to be made at the time required by law.

We are not persuaded by defendant's attack on this information. We find ourselves in agreement with the holding in United States v. Cotter, 1 Cir., [70-1 USTC ¶9371] 425 F. 2d 450 (1970). In Cotter, in considering the language used in an indictment charging a violation of Section 7203 for failure to make a return as "required by law" following the close of the calendar year 1962, the court said: "The fair meaning of 'said income tax return' is the return due on April 15, 19 63." At 452.

Motion for Substitution of Judges

On the morning of the trial, defendant filed a motion for substitution of judges pursuant to Title 28, U. S. C. A. §144. Defendant moved that Judge Hoffman proceed no further because he had "a personal bias and prejudice in favor of plaintiffs, which personal bias and prejudice was not known to defendant until on or about October 23, 1970." The motion was accompanied by defendant's supporting affidavit and a certificate of good faith by his counsel. Disregarding the question of timeliness or lack of it, Judge Hoffman considered the motion on its merits and denied it on the ground that "[t]he motion supported by an affidavit is entirely inadequate and does not meet the requirements of the statute."

Section 144 dictates disqualification only when "the judge * * * has a personal bias or prejudice either against him [the movant] or in favor of any adverse party * * *." Our examination of the affidavit reveals in substance that defendant alleged that Judge Hoffman had a personal bias or prejudice in favor of the United States of America based on the following cited examples of his judicial conduct:

(1) Judge Hoffman refused to grant defendant a continuance in the instant case so that defendant could participate in the appeal of an election case involving the Board of Election Commissioners of the City of Chicago, entitled United States of America v. Kusper, et al., then pending in this court; and

(2) Judge Hoffman, on November 30, 19 66, in defendant's presence, in the case of United States v. White, a narcotics case where a defendant had accused United States Treasury agents of perjury, had characterized the agents as "brave young Treasury agents."

We take judicial notice of the proceedings on appeal in this court in the Kusper case and find no substance there to support the charge of bias and prejudice on the part of Judge Hoffman in favor of the United States . The denial of a simple continuance hardly rises to the dignity of giving "fair support to the charge of a bent of mind that may prevent or impede impartiality of judgment." Berger v. United States , 255 U. S. 22, 33-34 (1921). See Rosen v. Sugarman, 2 Cir., 357 F. 2d 794, 797-798 (1966); Tucker v. Kerner, 7 Cir., 186 F. 2d 79, 83-85 (1950). Cf. Peacock Records, Inc. v. Checker Records, Inc., 7 Cir., 430 F. 2d 85, 88 (1970), cert. denied, 401 U. S. 975 (1971).

To the credit of defendant, we note one of his concluding statements in his supporting affidavit: "Affiant has known Judge Julius J. Hoffman for many years and has a high regard for him and as a result of comments made by the judge on occasion, believes the high personal regard to be mutual."

It was the judge's duty to inquire into the legal sufficiency of the facts stated in the affidavit. A trial judge has as much obligation not to recuse himself when there is no occasion for him to do so as there is for him to do so when the converse prevails. Rosen v. Sugarman, at 797. We conclude that defendant's supporting affidavit to his motion for substitution of judges was inadequate and does not meet the requirements of Section 144. It was not error to deny the motion.

Validity of Section 7203

Defendant contends that Section 7203 "contains vague language and myriad cross references to interrelated enactments and regulations and, as a consequence, is void because it does not meet the standard of clarity required of penal statutes by the Fifth Amendment to the Constitution."

He buttresses his contention by resorting to the well established principle "that a law forbidding or requiring conduct in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application violates due process of law." Baggett v. Bullitt, 377 U. S. 360, at 367 (1964). No one disputes the vitality of this constitutional pronouncement made in holding invalid two state statutes requiring state employees to subscribe to "non-subversive" oaths as a prior condition for public employment. It simply has no application to our consideration of the validity of Section 7203, either on its face or as appplied.

Defendant's argument is predicated on the assumption that the meaning of "willfully fails * * * to make such return" in Section 7203 is to be equated with the meaning of "willful" in Section 7201, the felony statute. However, by comparison, Section 7201 refers to one "who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof." The felony statute requires the affirmative act of evasion, while the misdemeanor is an omission of a duty to make a return. This distinction was clearly recognized by the Supreme Court in Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 350-354 (1965); Spies v. United States [43-1 USTC ¶9243], 317 U. S. 492, 497-500 (1943); and United States v. Murdock [3 USTC ¶1194], 290 U. S. 389, 396 (1933). Following Sansone and Spies is United States v. Schipani, 2 Cir., [66-2 USTC ¶9512] 362 F. 2d 825, 831 (1966), cert. denied, 385 U. S. 934; and Sansone is United States v. Fahey, 9 Cir., [69-2 USTC ¶9450], 411 F. 2d 1213, 1214 (1969), cert. denied, 396 U. S. 957.

All of these cases were correlated and cited with approval by our court in United States v. Matosky, 7 Cir., [70-1 USTC ¶9210] 421 F. 2d 410, 411-413 (1970), cert. denied, 398 U. S. 904. There the defendant was convicted of a charge of failure to file timely income tax returns for the years 1962, 1963 and 1964, in violation of Section 7203, and the only issue for trial by the jury was that of willfulness. We noted there that defendant's argument "that the test of 'willfulness' is the same under §7203, as it is under §7201" had been rejected in Sansone.

We conclude that Section 7203 is constitutional on its face. In support of defendant's contention that the statute was unconstitutionally applied to himself, he argues that the trial court erred in excluding his proffered testimony of Dr. Lawrence Freedman, a psychiatrist. This witness was asked a series of hypothetical questions by which the defendant offered to prove that his failure to make his tax returns was at least partially caused by emotional pressures and a lack of mental capacity referred to as "anti-materialistic neurosis." Defendant makes no plea of insanity. Since we hold that the meaning of willfulness is as set out in the foregoing authorities, it necessarily follows that the statute was constitionally applied to defendant and the trial court did not err in sustaining the Government's objections to the introduction of such testimony.

Challenged Evidentiary Rulings

The trial court sustained the Government's objections to a variety of questions asked by defendant's counsel both on direct and cross-examination. The record is replete with succeeding offers to prove. Further, defendant's counsel complains of the trial court's adverse rulings in certain aspects of his examination of Government witnesses. We have read the entire record pertaining to these evidentiary rulings and have noted the parade of the jury in and out of the courtroom as required in such instances.

For the most part, defendant's motions in these respects do not merit detailed consideration. The trial court ruled properly when questions were obviously improper as to form; when the evidence sought was irrelevant or immaterial; and particularly so when the answers sought were not proper under the rule relating to the issue of willfulness as we have determined it to be in this case.

A few instances will suffice. There was no dispute that defendant's income tax returns were unseasonably filed and his income taxes were paid when past due. Defendant contends the trial court erred in refusing to allow admission in evidence of his federal income tax returns for the years 1962 through 1968, inclusive, and the work copies of those returns. The trial court denied the introduction of a Xerox copy of an Illinois death certificate with respect to the death of Arthur J. Wilson, formerly defendant's accountant, who had been employed at some time to work on defendant's tax returns but had never completed them. Wilson 's death was not disputed. Defendant unsuccessfully sought to introduce a series of long-hand yellow worksheets purporting to be legal matters in which he had been professionally engaged during the years 1958 through 1970, apparently to establish that he had a busy and demanding law practice. The testimony of various witnesses was excluded where defendant attempted to show that he was more concerned with people than with making money; the detailed manner in which his secretary took care of his personal financial matters; conversations between defendant and his accountant (following Wilson's death) concerning his tax returns which this accountant eventually prepared and were executed and filed by defendant; and numerous other irrelevant personal matters.

It has been clearly established that late filing and late tax payment are immaterial on the issue of willfulness in a Section 7203 prosecution. In Sansone, supra, the Court said:

"[W]e agree that the intent to report the income and pay the tax sometime in the future does not vitiate the willfulness required by §§ 7203 and 7207 * * *." 380 U. S. at 354.

In Spies, supra, the Court said:

"Punctuality is important to the fiscal system, and these are sanctions [referring to willful failure to make a return] to assure punctual as well as faithful performance of these duties." 317 U. S. at 496.

See Fahey, 411 F. 2d at 1214; and Matosky, 421 F. 2d at 413.

It is also obvious that the proffered testimony excluded by such rulings could not serve to impeach a Government clerk who had merely testified that her search in 1968 of Internal Revenue index files did not reveal that defendant's tax returns had been filed. Accountant Wilson 's death was well known to the jury because of defendant counsel's repeated references to it during the trial. Defendant's widespread, busy, private and civil rights-related law practice, together with his distinguished record of public service in a broad range of activities, were fully disclosed to the jury in defendant's personal testimony in his own defense. He was granted wide latitude in such testimony.

Based upon our detailed examination of the entire record relating to all of the challenges of defendant to evidentiary matters, we have concluded that the trial court did not prejudicially err in such rulings and that there are no adequate grounds for a reversal resulting from the same.

Miscellany

A few of defendant's claims of prejudicial error merit only passing comment.

He charges the method of selecting the jury was improper, citing Rule 24(b), Federal Rules of Criminal Procedure, 18 U. S. C. A. ⁴ He now asserts that the trial court erred in limiting each side to three peremptory challenges because the defendant's total punishment could and did exceed one year. The short answer to this is that defendant was charged in one information with four counts of the same offense, a misdemeanor, for which the statutory penalty is not more than one year or a fine or both. He cites no supporting authority. The rule is to the contrary and the trial court properly granted only three peremptory challenges to each side. More than one count properly joined in one indictment or information does not increase the number of peremptory challenges to which a defendant is entitled. It is foreclosed by the statute itself. Nestlerode v. United States , D. C. Cir., 122 F. 2d 56, 58-59 (1941).

Defendant further asserts, without supporting authority, that he was denied due process under the Fifth Amendment because the Government used two of its peremptory challenges against the only two Negroes in the jury box. There was no showing or claim of the systematic exclusion of Negroes from federal juries in the Northern District of Illinois based on an invidious discrimination. The race of the veniremen excused by counsel does not appear in the record. Assuming that the two jurors in question were Negroes, there has never been any suggestion that the prosecution was racially biased or the trial so corrupted. The Government aptly points to the record showing that when the trial judge made his ruling the defense counsel stated in open court: "I think it can be read fairly both ways. We will abide by your Honor's ruling." Defendant later used this ruling as one of his grounds in a motion for a new trial. The trial court did not err in its ruling. See Swain v. Alabama , 380 U. S. 202, 221 (1965).

Defendant charges that he was denied a fair trial due to the trial court's charge to the jury. He asserts the court erred in rejecting his tendered instructions Nos. 6 and 14, and in giving Government's tendered instructions Nos. 3A, 3B, 4, 5, 5A, E, F, Q and T-1. We have reviewed each of such instructions and the instructions given as a whole. Government's instruction No. T was substituted for defendant's No. 6, and is a better and more complete instruction on the subject of defendant's good reputation, subsequently more fully referred to herein. His tendered instruction No. 14 on the subject of his mental condition was properly rejected as going beyond that warranted in a prior holding of this court. Those given by the court have been approved in form or substance by our court or other federal courts. It would unduly prolong this opinion to treat each one in detail. We find no error concerning any of those challenged. Based on our examination of such instructions given as a whole, we are left with the fixed conclusion that the jury was adequately and properly instructed in all respects and that defendant was not deprived of a fair trial as a result thereof. In fact, as we read the instructions as a whole we find they appear to be more favorable to the defendant than to the Government.

Defendant presented a number of eminent and distinguished persons who testified that on April 15, 1971 , the date the instant information was filed, his general reputation for truth and honesty in the community wherein he worked was good. All of such witnesses had had a personal relationship with defendant in the past, either socially or professionally. These witnesses were Mahalia Jackson, gospel singer; Edward Levi, President of the University of Chicago; Ramsey Clark, former Attorney General of the United States; Monsignor John Egan, clergyman and then associated with the University of Notre Dame; Roy Wilkins, Executive Director of the National Association for the Advancement of Colored People; Martin Luther King, Sr., minister of the Ebeneezer Baptist Church, Atlanta, Georgia; R. Jess Brown, educator and Mississippi lawyer; Dominic A. Tesauro, Chicago lawyer and former Regional Administrator of General Services Administration; and Dr. Stanley Korff, Chicago dentist.

On the subject of evidence of defendant's reputation the trial court instructed the jury as follows:

"The defendant, you recall, had introduced evidence tending to establish his good reputation in his community prior to the indictment in this case. Such evidence may indicate to you that it is improbable that a person of good character would commit the crime or crimes charged. Therefore the jury should consider this evidence along with all the other evidence in the case in determining the guilt or innocence of the defendant. The circumstances may be such that evidence of good character alone may create a reasonable doubt of the defendant's guilt, although without it the other evidence would be convincing. However, evidence of good reputation should not constitute an excuse to acquit the defendant if the jury, after weighing all evidence, including the evidence of good character, is convinced beyond a reasonable doubt that the defendant is guilty of the crime or crimes charged in the information."

We consider this instruction to be proper and adequate statement of the applicable law. We must conclude that the jury considered this evidence, along with all the other evidence in the case, in determining that defendant was guilty as charged.

Defendant timely filed a pre-trial motion requesting the trial court to suppress from evidence his federal income tax returns filed for the years 1963 through 1966 and to suppress from evidence the testimony of Internal Revenue Agents derived from audits of defendant's records, obtained during conversations with defendant or statements made by defendant to the agents.

The argument against the use of the tax returns is that such use would be in violation of his Fifth Amendment privilege against self-incrimination. He predicates this argument on the premise that mere failure to make a return must be equated with an attempt to evade or defeat the tax. We have already rejected this premise in considering the validity of Section 7203, supra. To our knowledge no court has held the self-incrimination privilege to be a good defense to a Section 7203 charge of willful failure to make a return. The indication seems to be to the contrary.

The Supreme Court has held in effect that the Fifth Amendment does not protect the recipient of such income from prosecution for willful refusal to make any return under the income tax law. United States v. Sullivan [1 USTC ¶236], 274 U. S. 259, 263 (1927). In United States v. Keig, 7 Cir., [64-2 USTC ¶9563], 334 F. 2d 823, 827 (1964), a prosecution under Section 7203 for willful failure to make income tax returns, we laid down the same rule, citing Sullivan. The argument that the use of such returns as evidence of his obligation to file or as evidence of his gross income would violate his right to due process is similarly untenable.

Defendant raises the same Fifth Amendment contentions with reference to the admission of the testimony of the Internal Revenue Agents above mentioned. He appears to rely upon the alleged failure of the agents to give him the warnings required by Miranda v. Arizona, 384 U. S. 436 (1966). He claims this is the logical extension of our holding in United States v. Dickerson, 7 Cir., [69-2 USTC ¶9556] 413 F. 2d 1111 (1969), and that we should re-examine our decision "to apply our holding to interrogations taking place after the date of the decision [July 28, 1969]." Since the interrogations in the case at bar took place before our decision in Dickerson, he is not entitled to its application here. United States v. Gallagher, 7 Cir., [70-2 USTC ¶9506] 430 F. 2d 1222, 1224 (1970), cert. denied, 400 U. S. 956. It is reported that almost all other circuits have rejected our Dickerson application of the exclusionary rule in Miranda to taxpayers in criminal tax investigations. ⁵ We see no need to re-examine our limited prospective application of Dickerson.

We hold that the trial court did not err in denying defendant's motion to suppress.

Brief of Amici Curiae

We granted leave to a group of nine "concerned members" of the bar of this court to file a brief as amici curiae in support of defendant-appellant. We have carefully considered this brief. The members of the group are all eminent lawyers and legal scholars. With commendable candor they admit they "interested themselves in this case because of their regard for and concern about a distinguished colleague at the bar whose long career demonstrates courage, compassion, professionalism and commitment to pro bono publico work in the highest traditions of the bar." In this respect they acknowledge kinship to the "eminent witnesses testifying to his character, reputation and the nature of his professional work," we have hereinbefore referred to. In addition to their personal concern for defendant, they find "a basic and disturbing confusion" underlying the meaning of "willfully," the key term for the requisite state of mind as it is used in Section 7203, the misdemeanor statute. They further suggest that the Seventh Circuit appears not firmly committed to a construction of the term "willfully" in the misdemeanor statute, Section 7203, different from that used in the felony statute, Section 7201, which requires "a state of mind approaching an intent to evade taxes."

We have rejected this contention in our discussion of the validity of Section 7203. With deference to the distinguished amici, we reiterate that our holding in Matosky, 421 F. 2d at 413 following Sansone, Spies, Schipani and Fahey, supra, is fully dispositive of this question in this circuit. Further, we see no "sharp split between the Circuits as to how to handle 'willfully'" in the misdemeanor statute.

Amici, relying upon their statement that defendant's "returns were in and his taxes for the years charged were paid well prior to the time the prosecution was initiated," find that this led the trial court into fatal error. We have already passed upon the court's exclusion of the returns themselves for the years involved and evidence that the taxes were paid before the prosecution was initiated. However, further error is asserted because the trial court admitted in evidence, over objection, evidence that defendant had not timely filed his returns in the seven successive years immediately preceding the years charged, these being barred from prosecution by the statute of limitations.

It is well established in this circuit that evidence of other related offenses is clearly admissible to prove knowledge and intent of a person accused of a crime. Here, the other offenses involved were identical to those charged. There was no hiatus between the preceding seven years and the four charged. The conduct of the seven immediately preceding years was relevant to the issue of knowledge and intent as tending to show a constant pattern of conduct. This is the recent explicit holding of our court, authored by Senior Circuit Judge Duffy, in United States v. Hampton, 7 Cir., -- F. 2d -- (slip opinion No. 18422, March 3, 1972 ). United States v. Marine, 7 Cir., 413 F. 2d 214 (1969), and other relevant cases in this and other circuits as cited in Hampton , with comment. Suggested contrary inferences in other circuits by the amici are readily distinguishable from the case at bar.

Amici further suggests an inability to understand what it is that moves men to fail to file income tax returns; they are astonished by the disproportionate number of misdemeanor cases which involve lawyers; and have noted the uneven sentences given in a number of such cases. We do not profess to have the answers to such questions. We do know from defendant's own testimony that he did not timely make his required tax returns; that he knew he was required to do so; and that he knew he had not complied with such legal obligation. He had no "bona fide misunderstanding as to his liability for the tax, as to his duty to make a return, or as to the adequacy of the records he maintained," as required in Matosky, supra.

Misdemeanor convictions under Section 7203 are not unique insofar as eminent scholars and distiguished members of the bar are concerned. They are well known to all who have had to deal with them. With his outstanding record of service, both public and private, defendant was one of a select group who attracts the immediate sympathetic support of his peers who feel impelled to rescue him from the belated predicament in which he finds himself. This always leads to the willingness of friends of the highest standing to testify truthfully that he was a man of good reputation when he got into trouble. This, in turn, subjects a trial court and jury to great pressures, as it is properly intended to do. On conviction, as in the case before us, not infrequently similar pressures are brought to bear by lawyers who are genuinely concerned with the fate suffered by their colleague. However, on consideration of all issues presented, we cannot in good conscience hold that defendant did not receive a fair trial. In our judgment, he did.

Lurking in all appeals of this character is the inference that the trial court imposed an excessive punishment. The statutory maximum is one year's imprisonment and a fine of $10,000 on each count. The sentence imposed was four months and a fine of $1,250 on each count, the sentences to run consecutively. The sentences were one-third and the fines one-eighth of the maximum, well within the statutory limits. Whether the sentences should have been made to run concurrently or probation granted in whole or in part, is beyond our jurisdiction. Such questions lie within the reasonable discretion of the trial court. Whether or not we would have assessed such penalties is beside the point and we express no opinion on that question. The case does not come within any of the categories of "exceptional cases" concerning excessive punishment as delineated in United States v. Humphreys, 7 Cir., -- F. 2d -- (No. 71-1137, February 25, 1972 , slip opinion pages 5-6), with which opinion we are in agreement.

Without further extending this opinion, we hold that the judgment of conviction and sentence appealed from are in all things affirmed.

AFFIRMED.

¹ Count I is typical of the four counts and reads:

"The UNITED STATES ATTORNEY charges:

"That during the calendar year 1963,

"WILLIAM R. MING, JR.,

defendant herein, who was a resident of the City of Chicago, State of Illinois, had and received a gross income of $17,908.81, that by reason of such income he was required by law, after the close of the calendar year 1963 and on or before April 15, 19 64, to make an income tax return to the District Director of Internal Revenue for the Internal Revenue District of Chicago at Chicago, Illinois, in the Northern District of Illinois, Eastern Division, stating specifically the items of his gross income and and deductions and credits to which he was entitled; that well knowing all of the foregoing facts, he did wilfully and knowingly fail to make said income tax return to said Director of Internal Revenue, or to any other proper officer of the United States, in violation of Section 7203, Internal Revenue Code, Title 26, United States Code, Section 7203."

Count II alleges defendant received a gross income of $28,039.07 in 1964; Count III alleges $29,279.01 in 1965; and Count IV alleges $23,697.36 in 1966.

² Section 7203 reads:

"Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return (other than a return required under authority of section 6015 or section 6016), keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 1 year, or both, together with the costs of prosecution." August 16, 19 54, c. 736, 68A Stat. 851. (Emphasis added.)

³ Trial was had in the United States District Court for the Northern District of Illinois, Eastern, Division, the Honorable Julius J. Hoffman, Judge, presiding.

⁴ Rule 24(b), in relevant part, reads:

"(b) Peremptory Challenges. * * * If the offense charged is punishable by imprisonment for more than one year, the government is entitled to 6 peremptory challenges and the defendant or defendants jointly to 10 peremptory challenges. If the offense charged is punishable by imprisonment for not more than one year or by fine or both, each side is entitled to 3 peremptory challenges."

⁵ Merten's Law of Federal Income Taxation, §55A. 21, Note 13.26, 1972 Cumulative Supplement, Vol. 10, page 18.

 

 

[72-1 USTC ¶9443] United States of America , Plaintiff-Appellee v. Lawrence R. Johnson, Defendant-Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 71-2540, 460 F2d 20, 5/16/72 , Affirming unreported District Court decision

[Code Sec. 7203]

Failure to file return: Evidence admitted in District Court: Privilege against self-incrimination: Insanity instruction: Net worth statement: Voluntary disclosure.--The District Court did not err: (1) In denying the taxpayer's motion to dismiss information on the ground that the requirement to file income tax returns for 1963 through 1966 violated his privilege against self-incrimination; (2) in failing to instruct the jury that evidence concerning the circumstances in which he found himself during the period of alleged criminal conduct was to be determined in considering the issue of insanity; (3) in admitting into evidence a statement showing the taxpayer's net worth; and (4) in not admitting all evidence offered by the taxpayer in respect to the voluntary disclosure made by him to the IRS.

Sidney I. Lezak, United States Attorney, Norman Sepenuk, Assistant United States Attorney, Portland, Ore., for plaintiff-appellee. Stephen B. Hill, Gregory W. Byrne, Souther, Spaulding, Kinsey, Williamson & Schwabe, Twelfth Fl., Standard Plaza, 1100 S. W. Sixth Ave., Portland, Ore., for defendant-appellant.

Before JERTBERG, ELY and HUFSTEDLER, Circuit Judges.

PER CURIAM:

In each count of a four count information, appellant was charged with a misdemeanor crime of wilfully failing to file his United States income tax returns for the four years 1963-1966, in violation of Sec. 7203 of the Internal Revenue Code of 1954. (26 U. S. C. §7203.) ¹

[Facts]

Following a jury trial, appellant was found guilty on all counts. He was sentenced to the custody of the Attorney General for imprisonment for a period of six months and fined the sum of $10,000 on Count One. On each of the remaining counts he was committed to the Attorney General for imprisonment for a period of six months, such sentences to run concurrently with each other and Count One.

The record discloses that during the prosecution period appellant and one Laurence Arnett were equal partners in the partnership of Allied Artists of America, a talent agency located in Portland , Oregon . The principal source of the partnership income was from agent's commissions which were paid to the partnership by various entertainers. The appellant earned, as his one-half share of the partnership gross income, the following amounts: $19,517.31 in 1963, $25,819.27 in 1964, $24,495.89 in 1965, and $26,250.78 in 1966. He failed to file United States income tax returns for each of these years. ²

At trial his defense for failure to file such returns was that such failure was not willful and that he was insane within the rationale of rulings of this circuit on the subject of criminal insanity. ³

Appellant's defense, in substance, was that he was dependent emotionally and psychologically upon his partner, upon whom he relied to do the bookkeeping, and who, during the years in question, suffered from periods of disassociation from reality which incapacitated him, and affected appellant's ability to file returns. Psychiatric testimony was offered in support of his defense. The Government offered psychiatric testimony to show that appellant had no mental disease or defect and he was able to conform his conduct to the requirements of law. The testimony of several lay witnesses was offered by the Government as to appellant's business acumen and his competent, rational behavior during the years in question.

[Alleged District Court Errors]

On this appeal appellant contends that the district court erred:

1. In denying his motion to dismiss the information on the ground that the requirement to file income tax returns for the years 1963 through 1966 violated his Fifth Amendment privilege against self-incrimination;

2. In failing to instruct the jury that evidence concerning the circumstances in which he found himself during the period of the alleged criminal conduct was to be determined in considering the issue of insanity;

3. In admitting into evidence Government Exhibit 79, which purported to show his "net worth" on December 31, 19 66; and

4. In not admitting all evidence offered by appellant in respect to the voluntary disclosure made by him to the Internal Revenue Service.

[Self-Incrimination]

The Federal income tax return for each of the years 1963 through 1966 specifically asked whether the taxpayer had filed a tax return in the preceding year. Appellant claims that a truthful "No" answer to the question would have violated his Fifth Amendment privilege against self-incrimination by furnishing a link in the chain of evidence needed to prosecute him for the crime. The claim is without merit. See United States v. Sullivan [1 USTC ¶236], 274 U. S. 259 (1927); California v. Byers, 402 U. S. 424 (1971); Heligman v. United States [69-1 USTC ¶9258], 407 F. 2d 448 (CA-8, 1969). Appellant's reliance on Grosso v. United States [68-1 USTC ¶15,801], 390 U. S. 62 (1968) and Marchetti v. United States [68-1 USTC ¶15,800], 390 U. S. 39 (1968), and like cases is misplaced.

[Insanity Instruction]

We find no error on the part of the district judge in refusing to give the following instruction offered by the appellant:

"The question of sanity or insanity of Mr. Johnson cannot be determined in a vacuum. Evidence introduced in this case has included facts about the circumstances in which Mr. Johnson was living and working during the years involved, including the illness of Mr. Arnett. You are instructed that this evidence should be considered by you in determining whether Mr. Johnson as a result of mental disease or defect was able to conform his conduct to the requirements of the law."

We have carefully examined all of the instructions given to the jury in this case, and find that the jury was carefully and properly instructed on all issues of law involved, and the duties and responsibility of the jury. None was objected to by appellant.

The court instructed the jury that its verdict was to be based upon all of the evidence which had been admitted. In refusing the proffered instruction, the court simply refused to single out for emphasis a portion, only, of the evidence on a given subject. In doing so he acted well within his discretion.

[Net Worth Statement]

The court properly admitted into evidence the "net worth statement" (Exhibit 79). This exhibit simply summarized a series of exhibits which had been previously introduced into evidence without objection. Its admission was not prejudicial.

[Voluntary Disclosure]

Appellant testified that he made a voluntary disclosure, in the fall of 1967, to the Internal Revenue Service of his failure to file income tax returns for prior years. The court rejected the letter dated December 20, 19 67, written by appellant's attorney to the Internal Revenue Service on the same subject, and rejected similar testimony offered by appellant's accountant.

While we are of the view that all such testimony was irrelevant to the issue of appellant's willfulness in failing to file tax returns for 1966 and prior years, we are satisfied, under the record in this case, appellant suffered no prejudice by the rulings of which he complains.

The judgment appealed from is affirmed.

¹ "§7203. Willful failure to file return, supply information, or pay tax

"Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return (other than a return required under authority of section 6015 or section 6016), keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 1 year, or both, together with the costs of prosecution."

² He failed to file returns for the preceding years 1958-1962, although he earned substantially in excess of $600.00 a year during each of such years.

³ For instance, Wade v. United States , 426 F. 2d 64 (CA-9, 1970).

 

 

 

 

[72-1 USTC ¶9352] United States of America v. Vernon W. Mathews

U. S. District Court, West. Dist. Pa., No. 70-291 Criminal, 335 FSupp 157, 12/13/71

[Code Secs. 446 and 7201]

Crimes: Tax evasion: Reconstruction of income: Net worth method: Wilfulness: Miscellaneous assignments of error: Jury trial.--The jury was rightfully justified in determining that the taxpayer had wilfully attempted to evade or defeat his income taxes. He was thus properly convicted on all four counts of the indictment. The evidence to establish his guilt by use of the net worth method, which was corroborated by a bank deposits analysis, justified conviction. Numerous trial errors claimed, pertaining to admission of evidence and instructions to the jury, were without merit.

Richard L. Thornburgh, United States Attorney, Pittsburgh, Pa., for U. S. Joseph W. Conway, Balzarini, Walsh, Conway & Maurizi, 3113 Grant Bldg., Pittsburgh, Pa., Samuel Y. Stroh, Law & Fin. Bldg., Pittsburgh, Pa., Andrew J. Conner, 1111 Baldwin Bldg., Erie, Pa., Ritchie T. Marsh, 806 Baldwin Bldg., Erie, Pa., for defendant.

Opinion and Order Denying Motion for New Trial or Judgment of Acquittal

KNOX, District Judge:

Defendant was found guilty by verdict of a jury of the crime of wilfully attempting to evade or defeat income taxes imposed upon his personal income for the years 1964, 1965, 1966 and 1967 under the provisions of 26 U. S. C. 7201. ¹ He has filed Motions for a New Trial or Judgment of Acquittal claiming that the evidence was insufficient to convict him or was not sufficient to establish his guilt beyond a reasonable doubt and, in any event, he should be entitled to a new trial. Numerous trial errors are also claimed in the Motion for New Trial.

The evidence showed that defendant for some period of years had operated in [an] IGA (Independent Grocers Association) supermarket in Edinboro, Erie County, Pennsylvania , which the evidence indicated became quite profitable. His income tax returns as filed for the years in question showed tax liability as follows:

                          Gross                Net            Income

                     Receipts             Income               Tax

1964 ....       $634.323.56           $ 2,549.18            $ 0.00

1965 ....       $662.140.61           $ 4,077.33           $ 61.07

1966 ....       $717.758.90           $ 4,502.77          $ 482.64

1967 ....       $810,007.30           $24,382.41         $5,762.04

[Net Worth Method]

The government's evidence to establish defendant's guilt used the net worth method and was corroborated by a bank deposits analysis. The evidence by the net worth method indicated that as of December 31, 19 63, an examination of defendant's assets showed he had a net worth of $217,447.72 and as of December 31, 19 67, he had a net worth of $382,258.92. Obviously, the net income as reported by the defendant on his returns did not account for this. Such a great increase in wealth in such a short period of time obviously could only be attributed to a large amount of income or gifts or inheritances. He further admitted to the agents that the only property he had ever inherited consisted of a few shares of stock in the First National Bank of Edinboro. Defendant took the stand himself and did not attempt to explain the tremendous increase in net worth by inheritance or by gifts. Due allowance was made by the government for increases in market values of securities during the years in question and this also failed to explain the reason for the increase.

Defendant's explanation was that some time in the year 1965 or 1966, he became aware of the fact that there was a great amount of unaccounted for cash and of a great increase in his assets nd finally came to the conclusion that the cash registers in his store were only picking up a total of certain types of transactions and not giving a daily grand total of all the sales in the store. These sales, as required by Pennsylvania Sales Tax Regulations, were broken down into taxable items and nontaxable items such as food. Notwithstanding this, the defendant made no complaint to the cash register distributor who sold him the machines that he was not getting the daily grand total of all transactions. The dealer who sold him the cash register testified in behalf of the defendant but did not claim that there was any mistake in the totals provided by the machines and gave no evidence as to complaints having been made or requests to rectify the situation.

It further appeared that defendant would take his cash register tapes home at the end of each day and enter the totals on a large sheet which was used at the end of the year to provide item I "gross receipts" on Schedule C (business income) attached to his income tax return. These sheets at the end of the year were turned over to his accountant. The latter testified that from these sheets he prepared the income tax returns in question. Immediately upon transcribing the totals from each days sales onto the larger sheets, defendant admitted he destroyed the tapes so that there was no tangible evidence to support the daily totals entered upon the larger sheets. The evidence also showed that the total gross receipts as entered on the federal income tax returns did not correspond with the gross receipts as shown upon the reports required for Pennsylvania Sales Tax purposes. It also appeared that defendant paid out large amounts of cash for the purchases of securities, for the purchase of life insurance and other assets during the years in question. The jury was, therefore, entitled to infer that defendant had destroyed his cash register tapes so that no evidence existed to support the figures shown on the larger sheets which were used for preparing the income tax returns, and that defendant did this deliberately as a part of his scheme to evade taxes. Support for the necessary finding of a wilful attempt to evade taxes was to be found in the following ample evidence.

1. His business background and training at Edinboro State College and Erie Commercial College .

2. His never having bothered to reconcile cash in the register with the tape totals, although he knew how, and his continued daily destruction of the tapes even after "sensing something wrong". The routine audit in 1961 mentioned by taxpayer furnished no justification for this and certainly no estoppel would run against the government on this, particularly in the absence of complete knowledge of the facts.

3. His never having contacted the seller of the cash registers, the National Cash Register Company, regarding "the sales he felt he was missing."

4. The financial statements he presented his bank which disclosed his awareness of yearly increases in his net worth far exceeding the taxable income reported on his returns.

5. His extensive use of cash, although possessing both business and personal checking accounts, to make considerable expenditures; cash payments by him for just one insurance premium, that to the Luthern Brotherhood, substantially exceeded the taxable income he reported in 1964, 1965, and 1966 (Government Exhibit 70).

6. The false Pennsylvania Sales Tax Returns he filed from September 1965 through July of 1967 and again in December of 1967.

Defendant testified that he was too busy to reconcile cash. Reconciliation of cash with sales as shown on the cash registers would certainly be a normal method for any prudent business man to follow to determine if mistakes were being made by employees or if there was dishonesty or whether the machines themselves were accurate.

He did not attempt to file amended returns or report this matter to the internal revenue agents who later began to question him about his returns.

From this brief recital of the evidence, it is the opinion of the court that the jury was rightly justified in determining that defendant had wilfully attempted to evade or defeat his income taxes. He was thus properly convicted on all four counts of the indictment. As the net worth method does have possible objections, it should be used with great caution. See Smith v. U. S. [54-2 USTC ¶9715], 348 U. S. 147; U. S. v. Calderon [54-2 USTC ¶9712], 348 U. S. 160. The jury was so instructed. ² Nevertheless, the evidence in the instant case was so overwhelming, it is difficult to see how the jury could come to any other conclusion.

Use by the agents of the so-called bank deposit and expenses method also pointed inevitably to the same conclusion with only a small difference in unreported income for each year. Even if the net worth method was not substantiated, the other method likewise justified conviction.

For these reasons, the Motion for Judgment of Acquittal will be denied.

We will now turn to the specific grounds urged for grant of new trial.

Ground 1. Lack of Proof of Wilfulness.

The defendant asserts that the government failed to establish a Section 7201 violation for each indictment year as its proof did not show that the defendant wilfully and with specific intent, attempted to evade the taxable income due and owing the government in each of the years in question. The defendant further asserts that the government failed to offer corroborative evidence as to the defendant's opening cash as of December 31, 19 63, knowing that defendant in the conduct of his business required and held substantial amounts of cash.

In examining the evidence together with all inference reasonably and logically deducible therefrom, it must be viewed in the light most favorable to the government since the jury returned a verdict of guilty as to all four counts. United States v. Minker [63-1 USTC ¶15,458], 312 F. 2d 632 (3d cir. 1962), cert. denied, 372 U. S. 953.

What we have previously said in denying the Motion for Judgment of Acquittal applies equally to this ground for new trial. Further, taxpayer's understatement to the Pennsylvania Department of Revenue disclosed his "attitude toward the reporting and payment of taxes generally". U. S. v. Taylor [62-2 USTC ¶9590], 305 F. 2d 183 at page 185-186 (4th cir. 1962), cert. denied, 371 U. S. 894. In addition, the defendant's repetition of the same pattern of substantial understatements for four consecutive years justifies the inference that his conduct was intentional rather than inadvertent. U. S. v. Frank [57-1 USTC ¶9675], 245 F. 2d 284 (3d cir 1957). Such consistent understatement of income is some evidence of wilfulness. U. S. v. Alker [58-2 USTC ¶9829], 260 F. 2d 135 (3d cir. 1958). As stated in Holland v. U. S. [54-2 USTC ¶9714], 348 U. S. 121, 99 L. ed. 150, 75 S. Ct. 127 (1954):

"The petitioners contend that wilfulness 'involves a specific intent which must be proven by independent evidence and which cannot be inferred from the mere understatement of income'. This is a fair statement of the rule. Here, however, there was evidence of consistent patterns of underreporting large amounts of income, and of the failure on petitioner's part to include all of their income in their books and records. Since, on proper submission, the jury could have found that these acts supported an inference of wilfulness, their verdict must stand."

While the question of whether defendant's admitted failures to pay substantial taxes for the indictment years were wilful is a question of fact for the jury, such wilfulness may be inferred from acts and circumstances as well as from direct proof. U. S. v. Magnus [66-2 USTC ¶9660], 365 F. 2d 1007 (2d cir. 1966); Gaunt v. U. S. [50-2 USTC ¶9412], 184 F. 2d 284 (1st cir. 1950); U. S. v. Brown, 446 F. 2d 1119 (10th cir. 1971). Such wilfulness may be inferred from conduct, the likely effect of which is to conceal. While the element of wilfulness must exist independently the "requisite proof may take a wider range than is normally allowed in support of annexed issues, otherwise there would often be no means to disclose the purpose of the act in which the very gist of the offense may consist." U. S. v. Alker, supra, at p. 148. A recent opinion from the Third Circuit has enumerated findings suggesting fraud: "repeated and substantial understatement of income; an abject failure to keep adequate books and records, misstatements to revenue officers regarding cash reserves at the beginning of the investigated period; excessive dealings in suspiciously large amounts of cash; and a basic lack of credibility in taxpayer's alleged cash hoard." Mazzoni v. Commissioner of Internal Revenue, Nos. 19,338 and 19,339, Third Circuit slip opinion filed November 29, 1971 . "Tax evaders seldom leave tracks and therefore circumstances can be convincing. Though an isolated erroneous tax figure cannot be escalated or pyramided into fraud, a confraternity of similar errors can take on more sinister tax aspects." Webb v. Commissioner [68-1 USTC ¶9341], 394 F. 2d 366 (5th Cir. 1968) at p. 380.

Since it is a well established rule that a defendant may not be convicted solely on his own admissions, such admissions require corroboration. The requisite corroboration may be of two types, i. e., separate evidence tending to demonstrate the truth of the specific fact admitted or evidence tending independently to show that the evasion was attempted and that the defendant was responsible. Smith v. U. S. [54-2 USTC ¶9715], 348 U. S. 147, 99 L. ed. 192, 75 S. Ct. 194 (1954).

In the instant case, it was incumbent on the government to offer corroborative evidence of the defendant's opening cash as of January 1, 19 64. In their opening net worth statements the government allowed an opening cash figure of $10,000 as of January 1, 19 64. Agent Ruggiero's summary revealed expenditures in cash and from unknown sources totalling as follows (trans. pp. 329-330):

                     Unknown

                     Sources               Cash

1964 ....         $23,038.48         $ 2,150.00

1965 ....          16,673.25          20.348.12

1966 ....           6,630.42          22,363.18

1967 ....          23,584.66          21,365.69

The above amounts dwarf by a substantial margin the taxable income reported by the defendant in each of those years. Thus, following the holding in the Smith case, supra, the court finds that there was independent corroboration resulting from the defendant's substantial expenditures, savings and investments which tended to show that he was underreporting his income during the prosecution years. Additional corroboration can be found in the defendant's testimony at trial ³ which was of a type similar to that found to be conclusive corroboration by the Supreme Court in U. S. v. Calderon [62-2 USTC ¶9525], 348 U. S. 160, 99 L. ed. 202, 75 S. Ct. 1861 (1954).

Further corroboration of the item of cash is found on defendant's own testimony at p. 572:

"Q. Can you give me an idea how much cash you may have had at your home at any one time?

A. Well, as business got heavier over the years, you would have to figure eight to ten thousand dollars if you knew you was going over a long weekend. (emphasis added)"

Even if we allowed an additional $5,000 as mentioned by defendant on the stand, this will not affect in any substantial amount the tremendous unexplained increase in net worth.

Ground 2. Limitation of Testimony of Joseph Salvia

The defendant called an expert witness, Joseph Salvia, a Certified Public Accountant, to testify as to the general weaknesses of the net worth income analysis and bank deposit expenditure method. This witness had not made either type of analysis himself with respect to defendant. Furthermore, the defendant's accounts payable, if any, were not in evidence, thus the proffered expert testimony would have been based upon matters not in evidence.

Two circuit courts have approved the preclusion of such proof when offered to demonstrate that, if a cash basis defendant (such as Mathews was) were to shift to an accrual basis of accounting, his unreported income would be diminished or eliminated. U. S. v. Vardine [62-2 USTC ¶9624], 305 F. 2d 60 (2d cir. 1962); Clark v. U. S. [54-1 USTC ¶9291], 211 F. 2d 100 (8th cir. 1954). In Clark , at p. 105, the court reasoned that "it was indisputably clear that the appellant had been reporting his income on a cash basis and not on an accrual basis, and that any hypothesizing of facts which had no probative basis was, therefore, wholly irrelevant and incompetent as a defense to the charge."

If Mr. Salvia had made a contrary analysis of the increase in defendant's net worth or his bank deposit expenditures, to combat the government's case, we would have been only too ready to receive his testimony. As a matter of fact, his failure to do so indicates that the government's case could not be combated.

Ground 3. Depositions of Dr. Barclay.

The defendant offered the deposition of Dr. Paul J. Barclay as evidence of defendant medical condition. Dr. Barclay's depositions were taken during trial because he was leaving the city. The court properly sustained the government's objection to the admission of such evidence for four reasons. First, depositions are to be used in criminal cases only in exceptional circumstances; Rule 15 of the Rules of Criminal Procedure provides for the use of depositions where the "testimony is material and . . . is necessary . . . in order to prevent a failure of justice. . . ." In the instant case, the movant failed to meet its burden of showing the necessity for this deposition. Secondly, the deposition indicates that the defendant was not a psychiatric patient and that Dr. Barclay had treated him for diabetes. The doctor is not a phychiatrist, but is a renowned specialist in internal medicine and diabetes. Thirdly, while the defendant reported occasional periods of insulin shock, Dr. Barclay had never seen the defendant in insulin shock in fifteen years of treatment. Finally, Dr. Barclay nowhere concluded that defendant fell within the Third Circuit test of criminal responsibility, i. e., that at the time of committing the offenses charged, "as a result of mental disease or defect, (he) lacked substantial capacity to conform his conduct to the requirements of the law." U. S. v. Currens, 290 F. 2d 751 (3d cir. 1961).

The court stated on the record that his personal observation of defendant on the stand convinced him of no lack of mental capacity.

Dr. Barclay made clear he was not testifying as to defendant's mental condition. We would certainly respect his opinion at the time of sentence in mitigation, but if he had personally taken the stand during the trial, we would have had to preclude his testimony. It is incredible that defendant would be in insulin shock every time he signed a tax return or made a trip to Erie to purchase securities with cash.

Ground 4. Admission of Summaries of Bank Deposits Analysis and Net Worth Analysis

The court properly admitted and sent to the jury the government's Exhibits 69 and 70, which were the expert witnesses' summaries of the bank deposits reconstruction and of the net worth analysis. These compilations were based solely on the evidence in the case and the jury was instructed that they were admitted only to aid their understanding of the complex evidence in the case. See Holland v. U. S. [54-2 USTC ¶9714], 348 U. S. 121, ⁴ 75 S. Ct. 127, 99 L. ed 150 where the conviction was affirmed, despite introduction of such exhibits.

Grounds 5 and 6. Admission of Income for Prior Years

No error was committed in the admission of government Exhibit 8, representing the defendant's income tax payments from 1946 to 1963 and the prosecutor's argument to the jury regarding it was entirely proper. Exhibit 8 was offered and received for the purpose of laying a foundation for Agent Blizman's testimony as to the maximum income the defendant could have earned, based upon the taxes that he paid from 1946 through 1963. Assuming that defendant spent nothing during this period but saved all his income plus the stock he owned and a gain on the sale of his residence, his total available funds would have been $113,826.73. Nevertheless, the government presented evidence that Mathews had a net worth as of December 31, 19 63, in the amount of $217,447.72.

Since the government in a net worth case is required to negate any contention that the defendant acquired assets or made expenditures in the indictment years with wealth he accumulated in prior years either from sources on which he had already paid taxes or from non-taxable sources, such testimony was necessary to the government's case. See Holland v. U. S. , supra, where it was noted that the government had checked defendant's returns as far back as 1913 to show he could not have saved any appreciable amount of money.

In view of the startling difference between the two figures, the prosecutor's remark in his argument to the jury as to the obvious inference to be drawn from this difference was not improper. As stated in U. S. v. Polack [71-1 USTC ¶9356], 442 F. 2d 446 (3d cir. 1971) at p. 447:

"To say that this remark would have a prejudicial effect on a jury which had listened throughout a long trial to the unfolding of the testimony is to attribute a stupidity and absence of common sense which is incredible in a federal jury."

Finally, the court instructed the jury to concern itself only with charges for the indictment years, ⁵ "while evidence has been introduced with respect to matters for prior years as background and information to determine net worth, you are only concerned with offenses for the years in question." It cannot be assumed that the jury disregarded such instructions. Such evidence was properly admitted to determine beginning net worth and negate the existence of any hoard of cash. That it also revealed intent, design and a past pattern of conduct is something to which we could not blind the jury.

"Now, in this connection, you should bear in mind and are entitled to consider the evidence as to the defendant's income tax returns, and his financial history in the years prior to 1964. These are to be considered by you only for such aid as they may give you in determining the taxable income for the years involved in this case. As I have previously instructed you, he is charged only for these four years, and you are not concerned with anything that might have occurred prior to that."

Ground 7. Requested Instruction No. 10

No evidence was presented in this case that the defendant, Mathews, lacked mental capacity, or that his diabetic condition produced mental incapacity. In fact, defendant's demeanor while testifying at his trial indicated that he was quite rational and articulate. Thus, the court properly refused to give defendant's point for instruction No. 10. What we have previously said with respect to Ground No. 3, the deposition of Dr. Barclay, is also applicable here.

Ground 8. Requested Instruction No. 11

The court properly refused to give defendant's point of instruction No. 11, which sought to inform the jury of the penalties specified for tax evasion upon conviction. It is not the province of the jury to be concerned with what maximum punishment the court can impose as set forth in the statute. To so inform a jury would be prejudicial to the government. These matters are committed to the courts by Acts of Congress.

Ground 9. Lesser Included Offenses

The court correctly refused to charge the jury that it could acquit the defendant of income tax evasion, 26 U. S. C. A. 7201, and find him guilty of the lesser included offenses of wilful failure to pay or wilful filing of a false return under 26 U. S. C. A. 7203 or 7207. The Supreme Court ruled in U. S. v. Sansone [65-1 USTC ¶9307], 380 U. S. 343, 13 L. ed. 2d 882, 85 S. Ct. 1004 (1965) that a lesser included offense instruction is appropriate only where the charged greater offense requires the jury to find a disputed factual element not required for conviction of the lesser offense. Here, as in Sansone, there was no issue other than that of whether defendant's act in filing the tax returns was wilful. That the returns were false and resulted in a tax deficiency was undisputed.

As stated by the Supreme Court in Sansone at p. 352: "If his act was not wilful, he was not guilty of violating either 7201 or 7203." The court reasoned further at p. 353: "here, however, there is no dispute that petitioner's material misstatement resulted in a tax deficiency. Thus, there is no disputed issue of fact concerning the existence of an element required for conviction of Section 7201 but not required for conviction of Section 7207." If the jury in the instant case found as it did, that the defendant's acts were wilful, Mathews was guilty of violating Section 7201 as well as Sections 7203 and 7207, and, therefore, no instruction as to lesser included offenses was required.

Ground 10. Instruction on Absent Witness

The government did not call Agent Guzzy who was briefly assigned to the Mathews case and whose testimony would have been merely cumulative. Thus, Guzzy could not have given testimony that "would elucidate the transaction," Graves v. U. S. , 150 U. S. 118 (1893).

Defense counsel was aware of Agent Guzzy's presence in the courtroom and could have called him as a witness if he believed that Guzzy had any testimony to give that might be favorable to the defendant. While the court permitted both defense and government counsel to comment in their summations to the jury on Guzzy's non-appearance as a witness, it properly refused the requested instruction No. 26 on the failure to call the witness in question. The Third Circuit has commented regarding the presumption in question as follows: "For obvious reasons of practicability, evidence which would be merely cumulative could not raise such a presumption." U. S. v. Restaino, 369 F. 2d 544 (3d cir. 1966). Nothing material which the agents who were called testified to could have been contradicted by Agent Guzzy. Anything Guzzy could have given evidence on was admitted by defendant when he took the stand. Failure to call Guzzy was, therefore, immaterial.

Ground 11. Failure to Suppress Statements

Both Judge Weber, on the pretrial motion to suppress, and the trial judge correctly refused to suppress the non-custodial, voluntary statements and records of Mathews that he gave to the agents. The evidence revealed that the defendant was never arrested, placed in custody, or deprived of his freedom of action by the agents. The defendant, an intelligent businessman, was questioned by the agents either at his place of business, or as a convenience to him in their car parked outside.

The agents were not required to give Mathews the Miranda warnings. As pointed out in U. S. v. Jaskiewicz [70-2 USTC ¶9616], 433 F. 2d 415 (3d cir. 1970), all circuits except the Seventh Circuit have rejected the contention that Miranda applies to non-custodial questioning of taxpayers by agents of the Internal Revenue Service. Thus, the sole question was whether the statement made by the defendant to the agents and the records he produced were given voluntarily. Jaskiewicz, supra; U. S. v. Wheeler [60-1 USTC ¶9306], 275 F. 2d 94 (3d cir. 1960). Defendant took the stand but nowhere testified to any involuntariness on his part or any coercion or trickery by the agents.

Defense counsel argues that although Mathews was not in custody, the interview occurred during a "critical state" of prosecution and he was, therefore, entitled to the Miranda warnings and to counsel is entirely without merit. First, when Miranda warnings were given, defendant never indicated any wish to have counsel present. Second, at the time of the interview, defendant was neither under indictment nor was he arrested or charged or in custody and no prosecution was pending. Donaldson v. U. S. [71-1 USTC ¶9173], 400 U. S. 517, 27 L. ed. 2d 580, 91 S. Ct. 534 (1971).

Other Grounds

Defendant was found guilty June 10, 1971. He reserved the right in paragraph 14 of his original New Trial Motion, filed June 14, 1971, to amend the same after reviewing the transcript of the trial. Defendant on June 25, 1971, filed Additional and Supplemental Reasons Supporting Defendant's Motion for New Trial; Motion for Acquittal. These additional and supplemental reasons are clearly untimely. Rule 33 of the Federal Rules of Criminal Procedure provides that ". . . a motion for a new trial based on any other grounds shall be made within seven days after verdict or finding of guilty or within such further time as the court may fix during the seven-day period." Rule 29(c) is as follows: "If the jury returns a verdict of guilty or is discharged without having returned a verdict, a motion for judgment of acquittal may be made or renewed within seven days after the jury is discharged or within such further time as the court may fix during the seven-day period."

Thus, not having secured additional time for the filing of such motions or additional reasons supporting the same by permission from the court within the seven-day period, the defendant's attempt to reserve the right to file such additions is a nullity. Timeliness of the filing of such motions or additional grounds therefore and the need for the granting of extensions are jurisdictional requirements. U. S. v. Laurelli, 187 F. S. 30 (M. D. Pa. 1960); U. S. v. Kane, 319 F. S. 527 (E. D. Pa. 1970). Nevertheless, this court has reviewed the additional matters raised and finds them entirely without merit.

¹ "Attempt to evade or defeat tax

"Any person who wilfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the cost of prosecution. Aug. 16, 19 54, c. 736, 68 A. Stat. 851."

² Transcript of trial, p. 723. "Now, because the net-worth method of proving an unreported income is arrived at by comparing the net-worth of the defendant at the beginning and at the end of the year, the result cannot be accepted as correct, unless the beginning or starting point is reasonably accurate. The proof need not show the exact value of all assets owned by the defendant at the starting date, but the evidence must show beyond a reasonable doubt that all the assets owned by the defendant at the starting date are insufficient to account for the subsequent increases in his net-worth as shown by the evidence. . . ."

The court at page 746 further affirmed defendant's Request for Instruction No. 22 as follows: "Because the net-worth theory of analysis is so fraught with-danger to the innocent, the court must carefully scrutinize its use." This is affirmed with the modification, "however, here, the Government has relied not only on the net-worth theory, but also on the bank deposit method."

³ Transcript of trial, pp. 572, 629-630.

⁴ Note the Holland case is strikingly similar in that there the defendant had destroyed adding machine tapes.

⁵ Transcript, p. 717.