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[64-1 USTC ¶9316]United States of America v. Morris C. Goldberg, also known as Moe Goldberg and M. C. Goldberg, Appellant

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 14,148, 330 F2d 30, 3/17/64, Affirming District Court, 62-2 USTC ¶9638, 206 F. Supp. 394

[1954 Code Sec. 7201]

Criminal evasion: Admission of evidence: Books and records improperly taken by employees.--It was not error to admit in evidence books and records of the taxpayer which had been taken by two of his employees and later turned over to the government.

[1954 Code Sec. 7201]

Criminal evasion: Instructions to jury: Corporate distributions.--There was no error in the trial judge's failure to instruct the jury on the limitations on taxability of corporate distributions. It was not necessary to label the funds the taxpayer took from his corporation.

[1954 Code Sec. 7201]

Criminal evasion: Consistency of verdicts.--Verdicts on counts alleging individual liability of the taxpayer were not repugnant to verdicts on counts involving his corporations.

[1954 Code Sec. 7201]

Criminal evasion: Improperly qualified juror.--Motion for mistrial was properly denied where one unqualified juror was replaced by an alternate, since all jurors who passed upon the case were qualified.

[1954 Code Sec. 7201]

Criminal evasion: Jurisdiction: Situs of preparing return v. situs of filing.--Evidence indicated that returns were prepared in Pennsylvania , thus giving Pennsylvania District Court jurisdiction.

J. Shane Creamer, Assistant United States Attorney, 4042 U. S. Courthouse, Philadelphia , Pa. 19107 , for appellee. Thomas D. McBride, Wolf, Block, Schorr & Solis-Cohen, 12th Floor, Packard Bldg., Philadelphia, Pa. 19102, for appellant.

Before BIGGS, Chief Judge, MCLAUGHLIN and GANEY, Circuit Judges.

Opinion of the Court

GANEY, Circuit Judge:

The appellant here, Morris C. Goldberg, was convicted after a trial by a jury in the District Court [62-2 USTC ¶9638] for the Eastern District of Pennsylvania, under an indictment wherein he was jointly charged with Rudolph Csicsek (hereinafter known as "Rudy") with several offenses concerning income taxes, due from him personally, as well as from some corporations, thirteen in number, which he allegedly controlled. The indictment contained fifty-one counts and covered the years 1955 and 1956, pursuant to 26 U. S. C. Sec. 7201 (1954).

Rudy subsequently plead nolo contendere, later numerous counts were withdrawn, and the only ones submitted to the jury were one, two, three, four, five, seven, eight and nine. A verdict of guilty on all counts was rendered by the jury and later the court granted the appellant's motion in arrest of judgment as to count one. Accordingly, on this appeal we are concerned only with counts two, three, four, five, seven, eight and nine.

The respective counts are as follows: Count two charged the appellant, Goldberg, with wilfully and knowingly attempting to evade a large part of his individual taxes owing to the Government by filing and causing to be filed a false and fraudulent individual income tax return for the year 1955. Count three charged the appellant with the same offense for the year 1956. Count four charged the appellant, as President of the Pennsylvania Coat and Apron Supply Co. of New Jersey, with wilfully and knowingly attempting to evade a large part of the taxes owing by that corporation for the period January 1, to September 1, 19 55, by filing and causing to be filed a fraudulent tax return for that corporation. Count five charged the appellant, as President of the Pennsylvania Laundry Co., with the same offense for the calendar year 1955. Count seven charged the appellant, as President of the Pennsylvania Coat and Apron Supply Co., a Pennsylvania corporation, with the same offense for the calendar year 1956. Count eight charged the appellant, as President of Anderson's Empire Coat, Apron and Towel Supply, Inc., with knowingly and wilfully evading a large part of the taxes due and owing to the Government by that corporation, by causing to be prepared and causing to be filed in the District of Camden, Camden, New Jersey, a false and fraudulent return for that corporation for the calendar year 1955. Count nine charged the appellant, as President of Anderson's Empire Coat, Apron and Towel Supply, Inc., with the same offense for the calendar year 1956.

The record discloses that the appellant, as President of some thirteen corporations which were engaged largely in the linen supply business, directly or indirectly owned all of the stock in these corporations. In addition to the corporations here above mentioned, there must be included also the Keystone Coat and Apron Manufacturing Corp., the Keystone Mercantile Corp. and Gold Tex Fabrics Corp.

On December 31, 19 54, the Loans and Exchange Accounts in appellant's corporations showed that he was personally indebted to them in the sum of $387,390.14, largely carried on the books of the Keystone Coat and Apron Manufacturing Corp. and the Keystone Mercantile Corp., and as of June 22, 19 55, this amount had been reduced to the sum of $280,000.00. These Loans and Exchange Accounts were made up of checks issued by the corporations to the appellant for his personal use and deposited in banks to his personal account and, additionally, amongst other things, in connection with oil gas leases, race track betting, as well as checks made payable to other individuals or corporations at appellant's direction and included the years 1955 and 1956.

In order to meet expansion programs and to have a more efficient operation of his business, the appellant sought a long-term loan of $2,000,000 from the Jefferson Life Insurance Company early in 1955. The insurance company advised him, after making a survey of his various corporations, including visits to his plants, that they would grant the loan if his personal indebtedness to the corporations was reduced by $120,000, as of September 1, 19 55, and if the Pennsylvania Coat and Apron Supply Co. became merged with the Pennsylvania Laundry Co., as of that date. This seemed like an impossible requirement and the appellant attempted to borrow $280,000 in June of 1955 from a certain bank in Philadelphia, but being unable so to do, he undertook to meet the insurance company's requirement by proposing to it in a letter dated June 18th, that he reduce his indebtedness, as evidenced by his Loans and Exchange Accounts in 1955, by paying off $70,000 in July, $90,000 in August, and $10,000 a month as a minimum thereafter. As of September 1, 19 55, the merger of the Pennsylvania Coat and Apron Supply Co. with the Pennsylvania Laundry Co. was completed and the appellant's personal loans to his various corporations were reduced so that the loan from the Jefferson Life Insurance Company of $2,000,000 was granted, although his income was $50,000 from Keystone Coat and Apron Supply Co. and $9,766 additional income, making an adjusted income of $59,766 for the year 1955, and he made no resort to outside borrowing.

Through a series of financial operations tedious in nature, the lengthy record discloses a complex accounting practice, yet simple in the results sought to be achieved--the filing of fraudulent tax returns--which we shall briefly review. Rudy was employed by the appellant for the period from October, 1946, to June of 1956, and then from September or October of 1956, to June of 1958. He started as a bookkeeper with the appellant, later became an accountant, then became controller of all his corporations and finally administrative assistant to him, in which capacity he had supervision and control of all the books and records of the corporations covering the years set forth in the indictment, to wit, 1955 and 1956.

The record discloses that in January of 1955, Rudy was called into the appellant's private office and there appellant told him he should take the cash and sales journals of the Pennsylvania Coat and Apron Supply Co., beginning with January, 1955, and rewrite them by reducing the cash sales, as shown from the cashier reports, which reflected the cash collected by drivers of the appellant, in an amount that would be around $3,500 per week, not in the same amount, each and every week, but on an over-all period which would average out to $3,500 per week. After re-writing the original sheets, the amounts so reduced were to be credited to appellant's Loan and Exchange Accounts in his corporations showing, in effect, a repayment in the same amount by the appellant. Pursuant to these instructions, Rudy worked up the payment sheets which were rewritten on a weekly basis, whereas they had been written on a daily basis, and showed them to the appellant who told him that was the way he wanted the matter done. However, since it required a great deal of time to so do, the appellant suggested that it be turned over to someone else, and Rudy mentioned Dan Ferrari, who handled the books of the Pennsylvania Coat and Apron Supply Co., and appellant approved thereof and advised Rudy to instruct Ferrari as to how the cash and sales journals were to be written and the same amounts credited to his Loan and Exchange Accounts. The appellant gave specific instructions that after the cash and sales journals had been rewritten, the original records should be destroyed by both Rudy and Ferrari, who did all the rewriting of the sheets, which, as stated, showed reduced cash income and a corresponding credit to appellant's Loan and Exchange Accounts in the various corporations. However, they did not destroy them, but placed the originals in files in their offices under their custody and control, never advising the appellant of their so doing, the larger part of which Rudy gave to the Government.

An instance typical of the operation which was carried on by Rudy is that of the Pennsylvania Coat and Apron Supply Co. of New Jersey. Here, the original cash receipts and sales journals for this corporation showed a total income through sales for the month of January, 1955, of $147,599.50. When rewritten by him, pursuant to the appellant's instruction, the cash receipts and sales totaled sales of $133,599.50, or a reduction in cash sales of $14,000.00, and then this exact sum was shown as a repayment to the appellant's Loan and Exchange Account. For the same corporation for the month of February, 1955, the original receipts and sales journals showed total cash sales of $143,504.82, which cash sales were rewritten by Rudy, at the appellant's instruction, to show a total cash sales of $128,504.82, or a reduction in cash sales of $15,000.00, which was carried over to the appellant's Loan and Exchange Account as an alleged repayment by the appellant.

Ferrari carried on the operation, as directed by Rudy, by rewriting sales journals and crediting the amount to the Loan and Exchange Accounts and during an interim period when Rudy had left appellant's employ, out of an abundance of caution, he questioned appellant in June of 1956, and appellant told him to carry on as Rudy had previously told him, which he did, until he left appellant's employ in April of 1958. Typical of the operation carried on by Ferrari was Anderson 's Empire of Atlantic City for July, 1955. Here the original record showed total sales in the cash receipts and sales journal of that corporation for that month of $119,173.68 and the rewritten record by Ferrari showed total sales for that corporation of $79,173.68, or a difference of $40,000.00. On the front of the rewritten sheet was a notation in quotation marks, "A July 1955 M", which indicated to Ferrari that $40,000.00 was to be the amount of the sales reduction, as directed by Rudy, as the notation was in his, Rudy's, handwriting. Here, again, the $40,000.00 was credited to appellant's Loan and Exchange Account.

It would serve no useful purpose to recite the exceedingly numerous rewritten sheets during 1955 and 1956, showing reductions in cash sales and an identical credit to appellant's Loan and Exchange Account covering the years laid in the indictment. Suffice it to say the Government's contention is that the appellant by causing the repayments to his Loan and Exchange Accounts in the amounts of the falsely reduced sales were income to him in those years, if when he withdrew the funds, his intention was to repay them, and the trial court specifically so charged. The jury found an intent to repay these personal funds and thus was created income to him in those years.

[Admissibility of Records]

The admission into evidence of the rewritten sales sheets, on which the Government predicated the allegations in the indictment, that the appellant had defrauded the Government in the filing of his personal returns as well as those of the corporations--since both the personal and corporate returns were based on these sheets--while vigorously fought on other grounds, during the trial of the case, neither in argument nor in their briefs, did counsel deny that the comparison of the original sales records with them and on which the returns were made in Pennsylvania Coat and Apron Supply Co. of New Jersey for 1955, Pennsylvania Laundry Co. for 1955, Pennsylvania Coat and Apron Supply Co. for 1956, as well as Anderson's Empire for 1955 and 1956, had been substantially understated.

Ferrari was in the employ of the appellant, as an accountant from April, 1953, until April of 1958, and rewrote most of the records hereinabove adverted to, from March of 1955, until the end of December, 1956, the years in question. When he left in 1958, he took with him, without the permission of the appellant, records pertaining to the sales of Pennsylvania Coat and Apron Supply Co. of New Jersey, and Anderson 's Empire and turned them over to the Government on August 5th, 1958. He was the first person to contact the Government agents, which he did by telephoning the Internal Revenue Service on August 2nd, 1958, making an appointment with the Government agents for August 4th, 1958.

Raymond Dombkiewicz was an accountant and office manager for the appellant from October, 1954, until August, 1958, and during the year 1955, he was an accountant for Keystone Coat and Apron Manufacturing Corp. and for Gold Tex Fabrics Corp. In August, 1958, he left the appellant's employ, at which time he took with him records pertaining to the appellant's Loan and Exchange Accounts with Pennsylvania Coat and Apron Supply Co. of New Jersey, as well as the same corporation of Pennsylvania , and cashier reports concerning the sales of these corporations and those of Pennsylvania Laundry. These records covered the years 1955 and 1956. Dombkiewicz and Ferrari discussed the case with the agents on August 4th, 1958, and on August 5th, they both filed applications for informer's fees and after so doing, they turned over the records they had taken from the appellant to the Government agents. In the instance of Rudy, however, he had been indicted on February 16, 19 61, had changed his plea from guilty to nolo contendere on April 14, 19 61, and turned the records he had taken over to the Government agents on April 18, 19 61. However, previous to their being turned over, he had received definite assurance from the United States Attorney and, by a simile, from the court, that if he cooperated with the Government he would not go to jail. This cooperation envisaged, among other things, the turning over of any documentary evidence he might have, though it is clear that neither the United States Attorney nor the Government agents knew what the documents were, which he had in his possession and which he turned over, until they examined them.

It is clear beyond contradiction that in the instances of the three main Government witnesses, Rudy, Dombkiewicz and Ferrari, the Government had no part or knowledge that they were going to take the records they turned over. Rudy's own counsel or the United States Attorney knew nothing thereof, until after Rudy's plea was changed and, with respect to Ferrari and Dombkiewicz, the uncontradicted evidence discloses the taking of the records prior to any communication with any Government officials. The most that can be said for the appellant's case is that in the case of Rudy, he had the assurance that, by cooperating, he would not go to prison and, in the instances of Dombkiewicz and Ferrari, they were to receive an informer's reward. At best this went to the credibility of these witnesses whom the jury saw and heard and, by their verdict, finally believed, and, as the lower court phrased it, the Government was "the unwitting beneficiary" of their wrongful taking. Was their admission error?

We think the documents and records were clearly admissible under Burdeau v. McDowell, 254 U. S. 465. Here, certain of McDowell's business associates had taken from his safe, without his knowledge, certain documents and had turned them over to Government officials. McDowell then filed a petition seeking their return, as they were about to be presented to a Grand Jury. Here, the evidence established that no Government official had participated in or had been connected with the taking and that since the documents came into their possession without a violation of McDowell's rights by any Government authority, the Government could retain them and use them as evidence. In our instance, additionally, the records were not personal records of the appellant, but belonged to the various corporations concerned and since they were, the appellant had no basis on which to object to their admission. United States v. Guterma, 272 F. 2d 344; Lagow v. United States , 159 F. 2d 245.

The appellant contends the force and effect of Burdeau v. McDowell, supra, has been greatly weakened, if not changed, by Elkins v. United States, 364 U. S. 206. Here, state officers had seized certain tape recording and a recording machine as the result of an unlawful search and seizure which had, in no wise, been participated in by any federal officer and the court held that the evidence so seized could not be used in the trial of the case and set aside the defendant's conviction. This case reversed the trend of previous federal decisions by refusing to admit evidence offered as the result of an illegal search and seizure by state officials even where no participation was had by federal officers. However, here again the court was only concerned with state action and its ruling, in no wise, impaired Burdeau v. McDowell, supra. While the appellant contends that "The imperative of judicial integrity", coined in this case, would be violated in principle, just as much by a private individual, it is paradoxical that the appellant here should invoke that doctrine when the material offered in evidence against him was the true and actual records of his corporation's sales, which were to be destroyed at his specific direction, and in the face of this fraudulent scheme, to give him the cloak of its protection would be most unseemly.

The next error the appellant complains of was the admission by the court of Exhibit D7. D7 was first brought out on the cross-examination of Rudy by the appellant and consisted of a summary made in his handwriting, which the appellant contends was the actual closing inventories of the corporations here involved. The amount of the inventories shown thereon was substantially less than the closing inventories stated in the tax returns filed by the respective corporations and the contention of the appellant is that the difference shown on the inventories on D7 and the inventories reported in the tax returns were equal to the amounts by which the sales were understated. However, it was not brought out and the record does not disclose where Rudy got the figures, whether they were accurate or imaginary, whether he got them from the books of the corporations or from the firm which audited the books. In contained certain erasures, overwriting, marks crossed through, and additional figures written above the same. As has been stated, the summary was brought out during Rudy's cross-examination and yet counsel for appellant made no attempt to question him about it, and the physical condition of Rudy made it impossible for the Government to later recall him in rebuttal and make explanation in connection therewith.

It is submitted that there was no error in the admission of D7, inasmuch as the court charged that if the jury believed that D7 correctly stated the actual closing inventories and, as a result, the expenses of Pennsylvania Coat and Apron Supply Co. of New Jersey for 1955, Pennsylvania Coat and Apron Supply Co. of Pennsylvania for 1956, Pennsylvania Laundry Co. for 1955, and Anderson's Empire for 1955 and 1956, were understated in the returns to an amount equal to any understatement of sales, there would be no taxable income due the Government, in which event they should find the appellant not guilty on counts four, five, seven, eight and nine. It is submitted that his instruction is correct and that appellant was, in no wise, prejudiced. The appellant's contention is that it should have been accepted as accurate forthwith since the Government had the burden of investigating the truth or falsity of the closing inventories, citing Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121. However, this case is, in no wise, apposite, since that was a tax evasion case in which the Government relied on certain net worth computations by it and the court held it was requisite, where certain leads were used to prove the defendant's guilt, that the Government had the burden of investigating them and, failing to so do, the Government's case was insufficient to go to the jury. Here, the appellant requested that the court charge that the Government had the burden of investigating the truth or falsity of the closing inventories in D7 and since they did not, the jury could conclude that the Exhibit D7 showed the actual closing inventories without proof of its correctness by the appellant. Here, however, as the court points out, the inventory figures on the tax returns filed were the corporate taxpayer's own figures, not the Government's, and it could not require of the Government the duty of determining which figures were correct, that of appellant's corporate returns or an entirely different set of figures compiled by the corporation's own accountant brought on the record by the appellant. Additionally, the record discloses that the Government agents made every attempt to check into the inventories and the condition of every one of the corporations here involved, by making repeated requests for inventory information, but they were unable to secure the same and they had nothing else to do but assume that the inventory returns were correct.

The next alleged error on the part of the court is its refusal to instruct the jury, as requested in appellant's Point for Charge 4, which reads as follows:

"Even if you are convinced beyond a reasonable doubt that there was a conspiracy between Goldberg and Csicsek which, as alleged in the indictment, began on or before January 1, 19 54, then such a finding would be inconsistent with the theory upon which the prosecution rests on the charges contained in Counts 2 and 3 of the indictment, and you must then find Goldberg Not Guilty on Counts 2 and 3."

It is the contention of the appellant under this proposed Point of Charge that the conspiracy count of the indictment charging Rudy and the appellant with conspiring, beginning on or before January, 1954, to evade and defeat appellant's income tax for the years 1955 and 1956, by making false and fictitious entries in the books and records of the corporations controlled by the appellant, was tantamount to averring that there never was any real indebtedness owed by the appellant to his corporations and if there ever was any realizable income, it was from the withdrawals of funds from them. The contention, more particularly set forth on page 33 of the appellant's brief, states, with reference to count one, "Thus, if this charge is correct, there never was any real indebtedness incurred by Goldberg, and if he had any income, it was realized when he withdrew funds from the corporations and not when credits were made to his Loan and Exchange Accounts. The inconsistency which the appellant asserts is that a finding of guilty on count one precludes the finding of guilty on counts two and three, the substantive counts. With this we disagree. All of the overt acts in the first count were withdrawn before the case was submitted to the jury, with the exception of overt acts Nos. 25 and 26, which charged the filings of fraudulent returns for the years 1955 and 1956. However, appellant here takes the position that since the conspiracy as alleged, began on or before 1954, when there was owing by the appellant more than $300,000, as of December 31, 1954, the withdrawals it represented were income to him at the time, which was for a taxable period previous to the years 1955 and 1956, as laid in counts two and three, and, accordingly, there is a contradiction therein. However, the false entries by which the conspiracy was to be accomplished, as alleged in count one, were not the withdrawals in 1954, nor at any later date, but the false entries on the sales sheets in 1955 and 1956, and there crediting to his Loans and Exchange Accounts.

As the case went to the jury, there was then no necessity for the trial court to give Point for Charge No. 4, since it did charge the jury with respect to Point No. 3.

"If you find that at the time defendant withdrew funds from any of the corporations involved in this case, he had no intent to repay the funds withdrawn, then such withdrawals constitute income to him in the year they were withdrawn, and the credits which he may have received subsequently do not constitute taxable income to him and are insufficient to justify a guilty verdict on Counts 1, 2 and 3 of the indictment."

Again the conspiracy in count one recites the receipt of income during 1955 and 1956, from Pennsylvania Coat and Apron Supply Co., a New Jersey corporation, Anderson's Empire Coat, Apron and Towel Supply Co., a New Jersey corporation, and Pennsylvania Laundry Co., a Pennsylvania corporation, which he failed to report in his returns for those years, by causing to make false and fictitious entries in the books of these corporations. These were the entries made by the rewritten sales sheets. Furthermore, the appellant's repeated contention that the withdrawals were income in spite of the charge in Point No. 3, and in the face of the appellant's own testimony that the withdrawals constituted an indebtedness, cannot be sustained and impels the definite conclusion that there was no error in failing to charge Point No. 4. It is to be remembered, however, that while the court granted the appellant's motion for arrest of judgment as to count one, it was after the verdict and has no bearing on the merits here discussed.

[Instructions to Jury]

The next error alleged by the appellant is that the trial judge failed to instruct the jury as to the limitations on the taxability of corporate distributions. The trial judge, during the course of his charge, had adverted to the inclusion of dividends in gross income, but later withdrew what had been said concerning it and told the jury to totally disregard it and that, in determining the ultimate taxable income, there was no necessity for the jury to consider the definition of dividends or the exceptions thereto. Here again, counsel repetitively urged that the credits received by the appellant when his Loan and Exchange Accounts were credited came to him as a corporate distribution in the nature of a dividend and that something necessarily had to be said with respect to the limitations of these distributions imposed under the Internal Revenue Code, 26 U. S. C. Sec. 316. It can only be repeated again that the Government's case, the indictment and the evidence introduced in proof of the charges had nothing to do with dividends, but that the income was only realizable to appellant when his indebtedness to the corporations, as shown in his Loans and Exchange Accounts, were repaid.

It is contended by the appellant that some authorities, in civil cases, denominate withdrawals as loans, and treat them in fact as dividends which constitute taxable income to the recipient at the time of the withdrawal, strongly relying on Spheeries v. Commissioner [61-1 USTC ¶9143], 284 F. 2d 928 and Roschuni v. Commissioner [59-2 USTC ¶9748], 271 F. 2d 267. The appellant can find no support in these cases, for his contention merely buttresses the position of the Government. In these there were findings of fact that the withdrawals were not borrowings, but dividends. However, in Spheeries v. Commissioner, supra, at p. 931, the court specifically stated that it used as a guide, in its determination thereof, the subjective intention of the parties which was exactly the same instruction which the lower court gave to the jury and they determined, by their verdict, that they were borrowings.

This view is pointed up in Davis v. United States [55-2 USTC ¶9685], 226 F. 2d 331, 335, where it is stated: It is not necessary to go into the legality of the so-called distribution by appellant's wholly owned corporation to himself, or his extraction of the cash from the corporation, as it clearly appears that through the fraudulent transactions in which he was engaged, he received the cash over which he had complete control, which he took as his own, treated as his own, which resulted in economic value to him, and for which he probably never would have been required to account, had it not been for the discovery of the fraud on the revenue which he was perpetrating. Briggs v. United States, 4 Cir., [55-2 USTC ¶9551] 214 F. 2d 699. . . . Appellant makes much of the fact that the government has not fixed a label of some kind on the funds that he took from his corporation. It is not necessary to describe them as additional salary, illicit bonuses, or commissions, or anything more than wrongful diversions, since, as above mentioned, substance controls over form, and taxation is concerned with the actual command over the property taxed. To the same effect is Cohen v. United States [62-1 USTC ¶9202], 297 F. 2d 760, 768. Accordingly, we see no error in the court's failure to instruct the jury concerning limitations on the taxability of corporate distributions.

[Consistency of Verdicts]

The next ground alleged as error is that the verdict on counts two and three and on counts four, five, seven, eight and nine are repugnant to one another and the evidence could not support the verdicts on the former and the latter. The contention of the appellant is that ". . . the money coming from the suppressed sales was either income to the corporation or to Goldberg, but could not be income to both." The argument runs that what appellant did constituted embezzlement and under the law as it existed at that time, embezzled funds were not income in that the appellant had no corporate authority for any of the withdrawals. Here, the appellant, in support of his view, cites Commissioner v. Wilcox [46-1 USTC ¶9188], 327 U. S. 404. If we examine the facts in that case, it shows that Wilcox was merely a salaried bookkeeper employed by a Transfer and Warehouse company and that various sums of money which he had collected from customers, which were owing to his own company, he took and converted to his own use making no record of the sums he had so taken on the books of the company. Here, the court held under 26 U. S. C. Sec. 22(a) that embezzled funds were not taxable.

In order to thoroughly appraise Wilcox, supra, we must consider Rutkin v. United States [52-1 USTC ¶9260], 343 U. S. 130, wherein it was held that extorted funds were taxable income. Here, the facts showed that Rutkin had failed to report in his income tax return $250,000 which the jury found he had extorted by threats from one Reinfeld. The court, referring to Wilcox, supra, stated specifically that it had confined its decision solely to the facts of that case. Accordingly, as stated in Marienfeld v. United States [54-2 USTC ¶9489], 214 F. 2d 632, 637, the line of demarcation between the two cases must be determined by the facts in the individual case and it is submitted the facts in this case more clearly favor Rutkin v. United States, supra, in conformity with a similar comparison in this court by Kahn v. Commissioner [54-1 USTC ¶9144], 210 F. 2d 247. Finally, in James v. United States [61-1 USTC ¶9449], 366 U. S. 213, 217, Wilcox, supra, was specifically overruled and in so doing the court stated: "Examination of the relevant cases in the courts of appeals lends credence to our conclusion that the Wilcox rationale was effectively vitiated by this Court's decision in Rutkin." Accordingly, since Rutkin was decided in 1952, we must now hold that even if appellant's conduct was embezzlement, the income was taxable, since Wilcox was decided in 1946.

The rule is well established that unlawful, as well as lawful gains, comprise taxable income whenever the person receiving it, as a practical matter, has such control over it that he derives realizable economic value from it, Burned v. Wells [3 USTC ¶1108], 289 U. S. 670, 678; Corliss v. Bowers [2 USTC ¶525], 281 U. S. 376, 378.

It is submitted the issue here concerns itself with whether money fraudulently taken by a person who owns and controls certain corporations and treats the same as an indebtedness intending to repay it, is an embezzler in the sense that he was so determined, under the facts in the Wilcox case. Appellant was not, in any sense, an employee, as Wilcox was, for in fact he was the real owner and an employer himself. Here, there was no such taking, as in the Wilcox case, where actual cash was taken by Wilcox and put in his own pocket without making any record thereof on the books of the company. Here was a scheme, fraudulent, deliberate and devious, persisted in for years, of taking from his corporations unreported income in excess of $300,000, as of December 31, 19 54, as well as large sums during 1955 and 1956.

Here, we must remember money actually came into the business of these corporations in the form of cash; it was under their custody and control and recorded on their books and this money so recorded was fraudulently diverted or taken from the corporations at the direction of the appellant by rewriting the records and showing their corporate income reduced by large amounts and authorizing the original corporate records to be destroyed, facts which no case cited by the appellant is comparable to. Further, it is not this Court's province to differentiate legal issues between the appellant and his corporations, yet even so, it has been held that a defendant cannot be guilty of embezzlement of funds from his wholly owned corporations as here, United States v. Augustine [51-1 USTC ¶9247], 188 F. 2d 359, Kann v. Commissioner, supra, for as said in Corliss v. Bowers, supra, ". . . taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed--the actual benefit for which the tax is paid."

The appellant relies heavily upon J. J. Dix, Inc., v. Commissioner [55-2 USTC ¶9648], 223 F. 2d 436, as a comparable civil case. In that instance, the court upheld the taxation of the funds to the corporation but ruled, as to the stockholder, the monies received were the proceeds of his embezzlement and under the law existing was not taxable income. However, in the Dix case, supra, the Tax Court found that for the period in question $196,870.60 realized from corporate sales was secretly deposited in two banks and the amount so received was not recorded on their books nor included in their gross receipts on its tax returns. The corporation was controlled by one Jacob Dix, who through the domination of his son, fraudulently withheld the re-entry of these receipts from the corporation books and the Tax Court found that the gross income had been understated in the amount above described and fixed a tax deficiency of $62,054.23. As to Jacob Dix, the president of the corporation, he realized taxable income of some $56,000.00, which was the amount of the corporate funds he misappropriated, by simply drawing the money from the corporate bank account and diverting it to his own personal use which he, likewise, did not report as income. While the Tax Court held that diverted income from corporate sales was taxable, it relied on Wilcox v. Commissioner, supra, and held that mere withdrawal of the funds by the president of a one-man corporation was more similar to the Wilcox case than to Rutkin v. United States, supra, but, as we have pointed out above, little, if any, vitality remains in Wilcox. The holding of the Tax Court, with respect to the defendant, Dix, here again can be distinguished from our case, as the misappropriation by him of drawing funds from the bank is not, in any wise, like the devious, fraudulent scheme devised by the appellant. Additionally, while civil tax cases may be helpful under appropriate circumstances to draw analogies, they are to be distinguished from criminal cases especially with respect to the nature of the proof required. This is plainly stated in a civil tax case, Simon v. Commissioner [57-2 USTC ¶9989], 248 F. 2d 869, 876; "In criminal income tax evasion cases, the exact amount of the tax evaded is not an important consideration. In criminal cases, it is necessary to prove only that the tax on some income has been fraudulently evaded. On the other hand, in civil proceedings for the collection of tax, an accurate determination of the accumulated corporate earnings is necessary to determine the amount of tax liability."

Accordingly, the individual liability of the appellant, as alleged in counts two and three, is, in no wise, repugnant to counts four, five, seven, eight and nine, which taxed the corporate income, for the reduction of his Loan and Exchange Account was an economic benefit to him, income, since his indebtedness to his corporations was reduced, and the rewriting of sales sheets diminished corporate income, each being separate and distinct schemes, and the ends of justice require them to be treated as such.

The next ground for error alleged by the appellant concerns itself with the admission of several letters handed to appellant, addressed to the respective corporations which he owned and controlled. There were two letters, one addressed to the Pennsylvania Coat and Apron Supply Co. and the other addressed to the Pennsylvania Laundry Co., both dated November 19, 19 58, requesting permission to examine the books and records of the companies for the years 1954 and 1955. The trial court admitted the letters. Appellant's complaint is that they might possibly have been harmful to him since his cooperation in the investigation might have incriminated him under the Fifth Amendment. Here, again, the letters were addressed to the corporations and not to the appellant and, accordingly, as adverted to heretofore, he had no right to claim the Fifth Amendment with respect to the examination of the corporations' books and records. Furthermore, the trial court admitted the letters for the limited purpose of showing a request by the Government, addressed to both corporations, for the purpose of examining their books. This was the first occasion the Government agents had ever met appellant and they apprised him, orally, of the Government's desire to investigate both corporations, which was the sole content of the letters. We see no error in their admission.

[Unqualified Juror]

The next ground alleged as error is the denial of the appellant's motion by the trial court for a mistrial because one of the twelve jurors, Ida B. Robinson, had not been properly qualified to serve as a juror.

Among those summoned for possible jury duty was one Ida B. Robinson, who was No. 85 on the Petit Jury List, and one Lottie P. Robinson, No. 86 on that List. After reporting for duty, Lottie Robinson had been duly excused from possible service by the judge, then in charge of the criminal list, but by inadvertence her tag No. 86 remained in the box containing tags, bearing a number, each of which corresponded to a number before the name of a person on the Petit Jury List. When the first group from which twelve jurors would be chosen was in the process of being selected, the deputy clerk, on the twenty-third draw, drew tag No. 86 from the box, referred to the List and called No. 86 and the name of Mrs. Lottie Robinson. Mrs. Ida B. Robinson, No. 85 on the List, responded and seated herself in seat No. 20 of the first group. She occupied that seat because three of the previous twenty-two persons whose tabs were drawn had been excused for cause because their service on the jury at the time would have been a serious inconvenience to them. When twenty-eight out of thirty-five persons of the first group had been seated in succession, the presiding judge suggested that the persons whose tabs were thereafter drawn be seated in a second group from which the four alternates would be selected. Defendant made no objection to this suggestion. Omitting one that was excused for serious inconvenience, the tags of eight persons were then drawn from the box and the eight persons were directed to sit, in the order that they were called, in consecutively numbered seats.

After the voir dire examination of both groups had been completed, the remaining persons who had been summoned but whose tags had not been drawn were released for duty in another courtroom. Tag No. 85 was never drawn in this case. Thereafter, sixteen members of the first group were withdrawn as a result of their being challenged. This left exactly twelve persons seated in the first group occupying the following numbered seats: Nos. 2, 3, 4, 5, 8, 9, 11, 14, 15, 17, 20 and 23. At the request of the deputy clerk the person seated in No. 14 seat was asked to sit in No. 1, 15 in 6, 17 in 7, 20 (Mrs. Ida B. Robinson) in 10, and 23 in 12. In so doing, the deputy clerk directed Ida, calling her Mrs. Lottie Robinson, to take seat No. 10. Thereafter, the persons sitting in the 2nd, 4th, 5th and 7th seats of the second group were challenged and the remaining four persons were asked to take seats 13 to 16 in the order they were called. This group as a jury of twelve and four alternates were then sworn to try the appellant. Before the trial got underway, by agreement of counsel for both sides, with the approval of the trial judge, the person sitting in the No. 2 seat was replaced by the first alternate juror, No. 13, leaving three alternates. ¹

On the ninth day of the trial, a deputy clerk of court discovered No. 10 juror's true name and informed the trial judge of this fact. When he, in turn, notified counsel for both sides, appellant moved for a mistrial on the ground that juror No. 10 had not been properly qualified to take the oath and serve as a juror. The Government opposed the motion but left it to the trial judge whether to let Ida serve as a juror or replace her with an alternate. The trial judge denied the motion and directed that Ida be withdrawn and replaced by the then first alternate, No. 14. Appellant objected to the replacement. The trial then continued for another fourteen days. Immediately prior to the jury's withdrawal for deliberation after a twenty-three day trial, the two remaining alternates were excused from further duty in the case.

Under Article III, Section 2, and the Sixth Amendment of the Constitution, a defendant is entitled to be tried by a jury of twelve. Patton v. United States, 281 U. S. 276, 288-290; Capitol Traction Co. v. Hof, 174 U. S. 1, 13-16. Had Ida not responded to the calling of the name of Lottie, and since Lottie had been excused, juror No. 11 would have been juror No. 10 and No. 12 would have been No. 11. The first alternate, who became juror No. 2, would have been the 12th juror, and the second alternate, who became juror No. 10, would have been juror No. 2 instead. Thus the appellant was tried by the same combinations of twelve people as he would have been had Ida not answered to the name of Lottie. All of them were present during the testimonial portion of the trial and also when the trial judge delivered his instructions. And, as the trial judge pointed out: "The jurors who passed upon his plea were all properly qualified to serve as jurors, had been carefully examined on voir dire and found acceptable." ² The only difference being that the appellant was deprived of the services of an additional alternate for which he does not complain. Nevertheless, he argues that the jury was illegally sworn from the beginning because of the presence of Ida, and by reason thereof, there was in legal contemplation no jury in which a substitution could be made. The Government concedes that Ida, since she was never called to sit in the first or second group, was subject to being withdrawn from the jury box at the time of the trial judge's action. Did the Court's action require that appellant be awarded a new trial? We do not think so.

Until the passage of the Act of June 29, 19 32, c. 309, 47 Stat. 380, 28 U. S. C. (1940 Ed.) §417a, ³ there was no specific provision in the federal law for the selection of alternate jurors in criminal cases. Since September 1, 19 48, authority for selecting them is derived from Rule 24(c) of the Federal Rules of Criminal Procedure. This Rule provides as follows:

"(c) alternate Jurors. The court may direct that not more than 4 jurors in addition to the regular jury be called and impanelled to sit as alternate jurors. Alternate jurors in the order in which they are called shall replace jurors who, prior to the time the jury retires to consider its verdict, become unable or disqualified to perform their duties. Alternate jurors shall be drawn in the same manner, shall have the same qualifications, shall be subject to the same examination and challenges, shall take the same oath and shall have the same functions, powers, facilities and privileges as the regular jurors. An alternate juror who does not replace a regular juror shall be discharged after the jury retires to consider its verdict . . .."

Appellant maintains that the reference in this subsection of the Rule to "the regular jury" indicates that the alternates are in addition to a jury of twelve which has been properly selected. The jury need not be twelve in number, but may be of a lesser number. Patton v. United States, supra, at p. 299. This is apparently the reason why the subsection uses the expression "the regular jury" as a convenient reference to a group that is selected according to some prescribed rule or established usage.

Appellant also insists that, according to the subsection of the Rule, alternates may only replace jurors "who, prior to the time the jury retires to consider its verdict, become unable or disqualified to perform their duties." This language, appellant argues, clearly means that a regular juror may be replaced only when the reason for his disability or disqualification arises after his selection and before his retirement to deliberate. Had the framers of the subsection, the argument runs, been of the view that a juror could be replaced where the reason for his disqualification existed at the time of his selection, and went undiscovered, until after the jury was sworn and the trial commenced, they would not have used the words, "became unable or disqualified." Appellant appears to lose sight of the fact that the challenge of a juror for cause may be waived by the accused and the prosecutor. Here the appellant, after he learned of the real identity of Ida, could have consented to her serving on the jury. ⁴ Instead he objected to her doing so by asking for a mistrial. It was at this juncture that Ida became "unable or disqualified" to serve on the jury. This could not have been known until appellant raised his objection. That Ida was subject to being withdrawn upon being challenged from the time she responded to the name of Lottie cannot obliterate that fact. At least two Courts of Appeals have decided that Criminal Rule 24(c) does not prevent the replacement of a juror by an alternate after the jury has been sworn. In one, the existence of the disqualifying factor was discovered before testimony was taken. Gillars v. United States , 182 F. 2d 962. In the other, midway during the trial. United States v. Zambito, 315 F. 2d 266, 269, cert. den. 373 U. S. 924. Also see United States v. Gottfried, 165 F. 2d 360, 365, cert. den. 333 U. S. 860. Except for some provisions not material here, Rule 47(b) of the Federal Rules of Civil Procedure is identical to Criminal Rule 24(c). The latter Rule embodies the practice prescribed for civil cases by Civil Rule 47(b). See Note of the Advisory Committee on Rules to subdivision (c) to Criminal Rule 24. In Larson v. General Motors Corporation, 148 F. 2d 319, 322, cert. den. 326 U. S. 745, a case in which the construction of Civil Rule 47(b) was involved, the Court of Appeals for the Second Circuit could see no reason why the words "jurors who . . . become unable or disqualified to perform their duty" should not be construed so as to cover "an ineligibility on the part of a juror that is first discovered after the trial has begun." Accordingly, there was no error in the trial court's denial of the motion for mistrial.

Another alleged error was the admission of certain summaries into evidence, prepared by Government agents and taken largely from the records produced by Rudy, Ferrari and Dombkiewicz. Since we here hold these records admissible, there can be no objection to the summaries prepared from them and, therefore, there was no error in their admission.

[Jurisdiction]

An additional alleged error, although not presented at argument, asserts that the court had no jurisdiction to try the appellant on counts eight and nine, as his returns were filed in Camden , New Jersey . However, these two counts of the indictment are different from counts four, five, six and seven, in that they charge appellant with "causing to be prepared" and "causing to be filed with the Director of Internal Revenue at Camden, New Jersey." However, the record discloses ample testimony on which the jury could and did find that the appellant caused them to be prepared at Philadelphia in the Eastern District of Pennsylvania.

[Judgment of Court]

Accordingly, the judgment of conviction and sentence will be affirmed.

¹ The reason for the replacement does not appear in the record.

² 206 F. Supp. 394, at p. 399 [(E. D. Pa. 1962)].

³ Repealed by Act of June 25, 19 48, c. 645, §21, 62 Stat. 862, effective September 1, 19 48.

⁴ When he learned of the mix-up, counsel for the appellant stated: "I do not and cannot state now that had we been confronted with [Mrs.] Lottie Robinson we would have challenged her . . .." (N. T. p. 984).

 

 

[57-2 USTC ¶10,058]R. H. W. Leathers, Appellant v. United States of America , Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 15,428, 250 F2d 159, 11/22/57, Affirming unreported District Court decision

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

Crimes: Knowingly filing a false return for another: Admission of evidence.--The appellant had been convicted of knowingly filing a false return for a taxpayer. In affirming, the Court of Appeals held that the evidence sustained the finding of a wilful, guilty intent, and that the lower court had not erred in admitting into evidence the books and records of the taxpayer and in restricting the cross-examination of the taxpayer by the appellant's counsel. Nor did the court err in refusing the appellant's motion for a mistrial, since the United States Attorney could properly call attention in his closing argument to the fact that the testimony of the government's witnesses had not been contradicted in a case like this where the appellant was not the only one who could contradict the testimony.

Raymond M. Kell, Clifford B. Alterman, Portland , Ore. , for appellant. C. E. Luckey, United States Attorney, Portland , Ore. , for appellee.

Before HEALY, POPE and CHAMBERS, Circuit Judges.

POPE, Circuit Judge:

Leathers was convicted upon a charge of violating §145(b) of the 1939 Internal Revenue Code by knowingly filing a false return for one Russell A. Peterson for the year 1946. Leathers was an accountant and his client, Peterson, was the proprietor of a fish and crab processing plant near North Bend, Oregon, operated under the name of "Peterson's Sea Foods". They had been acquaintances and friends for a number of years and Leathers had on several earlier occasions made out Peterson's income tax returns.

[Statement of Facts]

In the Spring of 1947, Leathers at Peterson's request, made out the tax return here in question and Leathers attended to the filing of the return. He also paid the tax shown thereon from funds which he had received from Peterson in the manner hereafter described. Upon the return Leathers signed his own name as the person who prepared the return and he also signed Peterson's name on the line provided for the signature of the taxpayer. The return showed net income of $15,910.05, and a total tax of $4010.25. The indictment charges that this was a false and fraudulent income tax return in that Peterson's net income for the year 1946 was $56,910.05 upon which Peterson owed the United States a tax of $28,977.41, all as the defendant Leathers then and there very well knew.

The evidence showed that the return was false and understated Peterson's income to the extent alleged in the indictment. The respect in which it was false was that in the year in question Peterson's total receipts from sales of merchandise were $277,555.64, while the return understated these receipts by exactly $41,000, and showed total receipts of only $236,555.64.

Peterson's bookkeeper, Barrow, who had acted in that capacity for several years, testified that at the end of 1946, he made a recapitulation of the figures making up the receipts and expenses in a form sufficient to supply the necessary information for the making of a tax return. This recap, he testified, was prepared for the expected use of the accountant and a carbon copy was retained in the office. The carbon copy was introduced as a Government exhibit. It disclosed the gross sales figure mentioned above, and listed in detail the business expenses including wages, taxes, insurance, rent, etc. Its substantial accuracy as a transcript of what was shown on the books is not questioned as the books also were produced at the trial and the Government witnesses verified the accuracy of the recapitulation.

[Fraudulent Scheme]

The Government's evidence designed to disclose a wilful falsification of this tax return by Leathers tended to show that he, Leathers, undertook to make this false return as a part of an elaborate scheme to defraud Peterson. Leathers had the complete confidence of Peterson, who was an unlettered man and unfamiliar with the figures of his own books. He told Peterson that his computation of the income and deductions showed that Peterson's income tax for the year 1946 came to "a little over $16,000 Federal and around $4,000 State." Peterson stated that he was short of funds to provide payment of a tax of that amount and Leathers offered to loan him a portion of the required amount. Accordingly Peterson gave Leathers his check for $10,000 and signed notes to Leathers for approximately $10,000 more. However, the federal return made up by Leathers, and not shown to Peterson, stated a total income of $16,410.05, and a total tax of $4,010.25, upon which $600 had been previously paid on declaration of estimated tax. What Leathers then paid on filing this return was only the balance, or $3410.25.

These deceptions thus resulted in Leathers being able to pocket the difference between the amount paid by him on the taxes (which included something under $1000 paid on State taxes) and the $10,000. In addition to that, Leathers had the notes which Peterson gave him for the supposed loan, and it appears from the testimony elicited on cross-examination of Peterson that because he held these notes, Leathers soon wound up in possession of deeds both to Peterson's business and to his home as well. Peterson had to recover his property through litigation in the Oregon courts. ¹ It was not until some time in 1948, when Government agents began interviewing him about the tax return, that Peterson discovered that the $16,410.25 was entered on the return as the net earnings and not as the tax, and that the signature was not his own.

[Defenses]

Appellant asserts that his conviction cannot be sustained because of a lack of proof that he wilfully evaded Peterson's taxes. The argument in support of this contention is based upon an assertion that there was no proof that when Leathers made out the Peterson tax return he had possession of the recapitulation of the book accounts for 1946 which the bookkeeper had prepared, or that he had made up the figures in the return from the books themselves.

Barrow, the bookkeeper, testified that he did not personally deliver the recapitulation sheet, (Government Exhibit 17 at the trial), to Leathers, although he had prepared it for the use of whoever made up the tax return. Peterson's testimony was that he did not give Leathers information relating to his tax return but that he told Leathers he could procure the necessary information from Mr. Barrow. The argument on behalf of appellant amounts to saying that Leathers could not be charged with knowingly or intentionally understating Peterson's income in the return because it was not specifically proven that the recapitulation sheet was ever given or shown to Leathers.

[Evidence Supports Findings]

We are of the opinion that the evidence of a wilful and intentional evasion of a tax was sufficient. In the first place, there is substantial evidence from which the jury could properly infer that Leathers did in fact have the recapitulation sheet, Exhibit 17, when he made up the return. The witness Amos, an intelligence agent in the internal revenue service, testified that when he went to interview Leathers at the office of the latter's attorney, Leathers told him that Peterson had given him some sheets containing data from which to prepare the return, and that he had copied the data on a work sheet. He showed the work sheet to the witness.

An examination of the items of deductions listed by Leathers on the return, show that some 16 of them corresponded precisely with similar items on Exhibit 17, the recapitulation sheet made by Barrow. The jury was warranted in finding that although Peterson testified that he did not hand the recapitulation sheet prepared by the bookkeeper to Leathers, yet Leathers must have come in possession of it before he made the return. If we were to accept appellant's version of the record we would have to assume that the evidence tended to show no more than that Leathers pulled the figures for the return out of the air or drew upon his own imagination. The jury were not required to view the evidence in that light. As previously indicated, the return understated the gross receipts by exactly $41,000 showing $236,555.64, instead of the true amount of $277,555.64. It would tax one's credulity to assert that the figure in the return was arrived at simply by chance.

Other evidence strongly points to the guilty intent. At the time in question Peterson had been drinking heavily and was in no condition to look after his own affairs. Leathers had Peterson's full confidence and in consequence there was an easy opportunity for him to take advantage of that confidence to defraud Peterson through the use of a scheme to understate the income and the tax due and to over-collect from Peterson for the taxes. The circumstances all indicate that he took advantage of this opportunity in carrying out his motive for gain by defrauding both Peterson and the Government. Also significant is the fact that after the Government began investigating the 1946 tax return, Leathers went to Peterson and talked to him at length about the income tax and tried to persuade Peterson to destroy his records. ² This is strong evidence of guilt. "It is today universally conceded that the fact of an accused's flight, escape from custody, resistance to arrest, concealment, assumption of a false name, and related conduct, are admissible as evidence of consciousness of guilt, and thus of guilt itself." Wigmore on Evidence, 3d Ed., §276.

Appellant further argues that Peterson's books were improperly received in evidence and should not have been used against him. There is no substance in this contention. Obviously the books were appropriate for the purpose of showing the true amount of the 1946 income. We have heretofore noted that Leathers was connected with the books because of the circumstance that he must have had access to the recapitulation of the books made by Barrow.

[Cross-examination of Taxpayer]

Appellant also says that the court erred in unduly restricting him in cross-examination of the witness Peterson when he was attempting to show bias, prejudice and interest of such witness, and the latter's prior inconsistent conduct. During this cross-examination of Peterson, it was developed that the witness and Leathers had a civil lawsuit which had gone to the Supreme Court in Oregon, (see footnote 1, supra), and that following the decision of the Oregon Supreme Court, the litigation was settled by an agreement under which Peterson's business and home were returned to Peterson. It was further developed that the effect of the Oregon court's judgment was that Leathers must account to Peterson. It was also brought out that as a part of the settlement between the two, Peterson paid Leathers approximately $3000 in cash. The defense then sought to procure from Peterson an admission that in the course of settlement or negotiation for a settlement Peterson made no demand on Leathers for the approximately $16,000 excess amount, in cash and notes, that Leathers was charged with obtaining from Peterson for the supposed purpose of paying taxes. To this Peterson replied: "He took it from the Federal Government; he didn't take it from me." Defense counsel then asked "Isn't it also true, Mr. Peterson, that in the course of that settlement and as a part of the settlement you did not make any demand and did not require Mr. Leathers to make good any sum to the Federal Government?" This question was objected to on the ground that it would be impossible for Peterson to require Leathers to pay a sum to the Federal Government. The objection was sustained.

We note that during this cross-examination the defense was permitted to show (a) that Peterson had had a lawsuit with Leathers; (b) that the litigation was terminated by a settlement; and (c) that in the settlement, Peterson got back his business and home, and paid Leathers $3000 in cash. Of course the object of this examination was to show bias and hostility on the part of Peterson toward Leathers and to show that the settlement was inconsistent with the present claim of Peterson that Leathers had wrongfully procured some $16,000 from him for taxes which Leathers did not pay. It is difficult to perceive what prejudice the defendant suffered by being prevented from pursuing the inquiry as to whether Peterson required Leathers to make good any sum to the Federal Government.

Appellant further objects that his cross-examination of the witness Peterson was improperly curtailed when the court sustained objections to questions as to whether the Government had indicated to Peterson that he would not be liable for the unpaid taxes for 1946 or as to whether the Government had ever made any demand upon him for payment of those taxes. The appellant's argument is that he had the right to make extended inquiry along this line for the purpose of developing that Peterson had some understanding, or at least a hope, that he would be excused from paying those taxes, and that this would tend to give Peterson a motive to give testimony favorable to the Government.

The record shows that defendant was permitted to elicit from Peterson on cross-examination what in substance amounted to evidence that no demand had been made upon him for the payment of taxes. The question and answer were as follows: "Well, then, let me ask you, what has the Federal Government and the officials told you concerning your liability for these taxes? A. They haven't told me anything as yet." ³ The particular point here made relates to the court's ruling sustaining an objection to the question next following which was "Have they ever indicated to you that you would not be liable for the taxes?" At the time the ruling was made, defense counsel stated the basis for his inquiry, and the following ensued: "Mr. Darling: The basis of that inquiry, it is our understanding that we are at all times entitled to inquire of any witness concerning any interest, any promise of immunity, anything else that he may have obtained from the prosecution in a case like this. The Court: He said the Government has said nothing to him about it. Mr. Darling: Well, I was merely addressing a further question on that same line. Mr. Luckey: If he wants to ask him if he has been promised any immunity or anything, that would be fine. The Court: It is entirely different from whether or not the Government is pressing any claim against him, I will abide with my ruling." Later on in the course of the cross-examination, counsel for the defense again asked: "Well now, since that time has the Government ever made any demand upon you for the payment?" The same objection was again sustained.

It seems clear that in making these rulings the court considered that it was cutting off repetition of an inquiry that the witness had previously answered when he said: "They have not told me anything as yet." It is also apparent that counsel for the Government indicated that no objection would be made to inquiries as to whether Peterson had been "promised any immunity or anything". It would seem that Government counsel was thereby indicating that there would be no objection to an inquiry as to whether the Government had promised either immunity or a release. Defendant was thus able to bring out that Peterson had not been called upon to pay the balance of the taxes and to argue to the jury that Peterson gave his testimony in the hope that he would not be asked to pay the taxes. For reasons satisfactory to the defense counsel he refrained from an inquiry as to whether the Government had promised any release or immunity. In these rulings the trial court did not abuse its discretion.

In respect to the conduct and extent of cross-examination, it has long been the rule that these are matters specially subject to the discretionary control of the trial judge. McCormick on Evidence, §24, p. 47; Wigmore on Evidence, 3d Ed., §944. Blough v. Baltimore & O. R. Co., 2d cir., 164 Fed. (2d) 254, 255. ⁴ The reason for this traditional deference to the discretion of the trial judge in putting a limit to cross-examination is illustrated by what happened here in respect to the attempted continuation of inquiries as to what demands Peterson made on Leathers in connection with the settlement of the civil litigation. Defense counsel were able to elicit that instead of collecting cash from Leathers, Peterson paid Leathers some $3000. It was within the discretion of the trial court to rule that further inquiry was improper for it is plain that if inquiry were extended indefinitely into the terms of that settlement, the court might well find itself trying the collateral issue as to the reasonableness of the settlement. Thus in Meeks v. United States, 9 cir., 179 Fed. (2d) 319, this court held that a defendant might properly elicit testimony on cross-examination of a government witness that the witness and defendant had engaged in a battle in which the witness had been beaten by the defendant. But we ruled that defendant was properly prevented from inquiring into the circumstances of the alleged assault saying, "It is apparent that had appellant been permitted to make the offered proof the court and jury would have been called upon to try a collaterial issue. The ill will and unfriendly feeling of the witness was shown. The details were property [properly] excluded." In so ruling this court followed Lau Fook Kau v. United States, 9 cir., 34 Fed. (2d) 86, 91, where we said in respect to similar rulings: "Both these matters are so largely in the discretion of the trial judge that they can only be reviewed where there has been a manifest abuse of discretion." We hold that there was no abuse of discretion here. It is indeed difficult to perceive how the defendant could have been prejudiced by these rulings.

[Government's Closing Argument]

Finally appellant assigns error on account of the court's refusal of his motion for a mistrial based upon an alleged improper closing argument made by the United States Attorney to the jury. The portions of the argument to which appellant objects were remarks designed to answer arguments which had been made to the jury by counsel for the defense. The United States attorney referred to the defense counsel's argument as to the inferences to be drawn from the terms of the settlement of the civil litigation between Peterson and Leathers. In referring to this Government counsel said: "Where is the settlement if the settlement is so important that the defendant entered into with Mr. Peterson?" Again referring to an argument that had been made that Leathers must have worked from a work sheet other than Exhibit 17 when he made the tax return, counsel said: "Where is such a work sheet? Where is whatever it was that Mr. Leathers showed to Mr. Amos at the office of Vonderheit? If there is another one, where is it, ladies and gentlemen?"

It is the argument of the appellant that only the defendant himself could have testified about the settlement or about the other work sheet and hence that the United States Attorney in commenting upon the defendant's not producing these documents was in effect and substance demanding to know why the defendant did not take the stand and testify. This, it is said, deprived the defendant of due process and of his privilege against self-incrimination and impinged upon his right not to testify.

The premise upon which this argument is based cannot be supported. The record shows that in making the settlement referred to Peterson and Leathers were both represented by counsel and of course Leathers' counsel might have produced the settlement agreement or testified with respect to it. As for the work sheet in question, Amos, the Government agent, testified that the work sheet which Leathers told him he had procured from Peterson was shown to Amos and another agent on an occasion when they visited Leathers and his attorney, Mr. Vonderheit at the latter's office. At that time Amos testified he and the other agent were permitted to examine the work sheet for a brief period. This is the substance of the testimony relating to the work sheet. Certainly there is no basis for saying that Leathers was the only person who could testify with respect to that work sheet for both Leathers and his attorney were present on that occasion. Whatever was said and done then was plainly intended for the ears and understanding of the two Government agents. There was no element of a confidential communication then taking place between Leathers and his attorney, and the knowledge obtained by the attorney on that occasion was in no sense confidential, and his testimony would not be subject to any privilege. ⁵ Cf. Himmelfarb v. United States , 9 cir., 175 Fed. (2d) 924, 929 [49-1 USTC ¶9313]; McCormick on Evidence, §95, pp. 190 to 191.

Since it is apparent that Leathers was not the only person who knew about these matters or could testify to them, the remarks of the United States Attorney did not amount to a comment upon the failure of Leathers to take the stand. As we said in Langford v. United States, 178 Fed. (2d) 48, 55 [56-2 USTC ¶10,079], aside from those special cases where it appears that the accused himself is the only one who could possibly contradict the Government's testimony, the prosecutor may properly call attention to the fact that the testimony of the Government witnesses has not been contradicted. In like manner we think it was not improper here to comment on the failure of defense to produce the settlement or the work sheet.

The judgment is affirmed.

¹ See Leathers v. Peterson, 195 Ore. 62, 244 P. 2d 619.

² "He said, 'Russ,' he said, 'I can turn that property back to you like your home on that Charleston property; but if I do, you owe the Federal money, so much in taxation they will only come in and take it away from you anyway. It will go a lot better if you got any of those record,' he said, 'throw them in the crapper. I haven't got the cash now, but,' he said, 'I will take care of it eventually.'"

³ Defense counsel led up to this inquiry following his prior inquiry, mentioned above, relating to the terms of the civil litigation. The examination proceeded as follows: "Q. (By Mr. Darling): Mr. Peterson, isn't it true that you have taken the position and do now take the position that when you gave the ten thousand dollar check to Mr. Peterson--I mean Mr. Leathers, that when you gave the ten thousand dollar check to Mr. Leathers in March of 1947 or sometime in 1947 and when you gave him notes in the amount of some ten thousand dollars that you gave him that money and notes on the representation made by Mr. Leathers that he was going to use that money in the payment of Federal taxes and State taxes? A. Yeath; the combination of State and Federal tax. Q. Well, then, isn't it true that your position as of this time is that when that happened that he only paid some four thousand dollars on taxes and pocketed the some sixteen thousand dollars? A. That's what it looks to me like. Q. That is the position that you took in the trial of the case between you and Mr. Leathers in the Circuit Court of the State of Oregon , is it not? A. But, really, that money didn't belong to me; it belonged to the Federal Government. It is money that I gave them. Q. That is the position that you took, was it not, that--all during that time? A. Well, now, if he didn't pay the one thing, I don't know as the Federal Government is going to come back after me for collection. If they do, then I owe it. Q. Well, then, let me ask you, what has the Federal Government and the officials told you concerning your liability for these taxes? A. They haven't told me anything as yet."

⁴ "Federal courts have adopted a liberal attitude toward the admission of evidence, otherwise irrelevant and prejudicial, to show bias on the part of a witness. . . . The matter rests largely within the sound discretion of the trial judge."

⁵ "One of the circumstances, by which it is commonly apparent that the communication is not confidential, is the presence of a third person, not being the agent of either client or attorney. Here, even if we might predicate a desire for confidence by the client, the policy of the privilege would still not protect him, because it goes no further than is necessary to secure the client's subjective freedom of consultation . . . and the presence of a third person (other than the agent of either) is obviously unnecessary for communications to the attorney as such,--however useful it may be for communications in negotiation with the third person." Wigmore on Evidence, 3d Ed., Vol. 8, p. 602, §2311.

 

 

[54-1 USTC ¶9370]George Fischer, Appellant v. United States of America , Appellee

(CA-10), In the United States Court of Appeals for the Tenth Circuit, No. 4747--November Term, 1953, 212 F2d 441, April 29, 19 54

Appeal from the United States District Court for the District of Colorado.

Criminal prosecution: Tax evasion: Sufficiency of evidence: Jury instructions: Motion for bill of particulars.--The Government's evidence was sufficient to prove that taxpayer had substantial unreported income from his law practice and from illegal sources in 1949 and 1950. The exact amount of unreported income was unimportant to support a finding of guilty for tax evasion under Sec. 145(b). The appellate courts will not consider jury instructions to which no objections were taken at the time of trial. The trial court did not err in admitting as evidence certain records of a slot machine business from which taxpayer allegedly derived income and a booklet taxpayer wrote in 1943 on keeping records for income tax purposes. The court did not err in directing an attorney to pursue a line of questioning concerning an incident relevant to the trial issue. Nor did the trial court err in denying taxpayer's motion for a bill of particulars where the only purpose that would have been served by granting the motion was that of disclosing in detail the evidence upon which the Government's expected to rely.

Isaac Mellman (Gerald N. Mellman was with him on the brief), for appellant. Clifford C. Chittim, Assistant United States Attorney for the District of Colorado, (Donald E. Kelley, United States Attorney for the District of Colorado, was with him on the brief), for appellee.

Before PHILLIPS, Chief Judge, and BRATTON and PICKETT, Circuit Judges.

PICKETT, Circuit Judge:

The appellant, George Fischer, was convicted on two counts of an indictment which charged him with a willful attempt to defeat and evade a large part of income tax due and owing by him and his wife for the years 1949 and 1950, by filing false and fraudulent joint income tax returns in violation of 26 U. S. C. A. Sec. 145(b). ¹ He appeals from a two-year sentence of imprisonment on the first count, and five years' probation on the second count.

The first count of the indictment charges that Fischer filed a joint return for the year 1949, showing a net income of $6,315.64, upon which there was due a tax of $650.00, when he knew that the joint net income for that year was $9,159.94, upon which there was due a tax of $1,198.32. In the second count it was charged that for the year 1950 a joint return was filed showing a net income of $9,104.20, upon which there was due a tax of $1,237.38, when he knew that the joint net income for that year was $21,203.75, upon which there was due a tax of $4,402.68.

Fischer had been a practicing attorney in Brighton , Colorado , for almost twenty years. He had served as County Attorney for Adams County , and as a State District Judge for two years. During the years in question, in addition to practicing law, he acted as Assistant District Attorney for the First Judicial District of Colorado which was comprised of Adams, Arapahoe, Jefferson, Clear Creek and Gilpin Counties . Most of his work, both in the practice of law and as Assistant District Attorney, was in Adams County .

The basis of the government case is that Fischer failed to report items of income from his law practice and understated others, and that he failed to report income received by him from operators of slot machines in Adams County , Colorado . For the year 1949, Fischer admitted the failure to return fifty-four separate items of income from his law practice which totaled $1,365.85. Most of these items were small, but they included amounts of $50.00, $60.00, $75.00, $100.00, $110.00 and $250.00. In addition, there were fourteen understatements of amounts received which totaled $612.65. An operator of slot machines testified that he entered into an agreement with Fischer whereby one-third of the income from slot machines was to be delivered to Fischer in return for certain protection from prosecution for the operation of the machines. He stated that each week Fischer's share of this income was placed in an envelope by a bookkeeper and that he delivered the envelope and contents to Fischer personally. The bookkeeper testified that one-third of the income from the slot machines was carried on the books as "legal fees" or "legal expenses" and cash representing that amount was placed in separate envelopes. There was evidence that in 1949 Fischer received from this source the sum of $1,022.73. For the year 1950, Fischer admitted receiving from his law practice seventy-seven items of unreported income, which totaled $7,097.93. One of these items was a $4,000.00 fee paid to him on April 3, 19 50, and deposited in his savings account with a Denver bank. In the same year there were also twelve understated items which totaled $663.18. The evidence shows that for the year 1950 Fischer received $3,790.93 as protection money. Fischer denied receiving any of the slot machine payments, and testified that his failure to report the other items of income was the result of oversight, neglect and sloppy bookkeeping, and was not done willfully.

The evidence in this case establishes that Fischer was experienced in the law; that he had substantial unreported income from illegal sources; and that unreported and understated items of income during the taxable periods were continuous and constituted a large portion of his income. These were circumstances from which the jury could properly conclude that Fischer willfully attempted to evade a large part of his income taxes for the periods in question. Graves v. United States , 10 Cir., 191 Fed. (2d) 579, 582 [51-2 USTC ¶9431];United States v. Venuto, 3 Cir., 182 Fed. (2d) 519, 521[50-1 USTC ¶9333]; United States v. Hornstein, 7 Cir., 176 Fed. (2d) 217, 220 [49-2 USTC ¶9326];Halle v. C. I. R., 2 Cir., 175 Fed. (2d) 500, 503 [49-1USTC ¶9295], cert. den. 338 U. S. 949; Stinnett v. United States , 4 Cir., 173 Fed. (2d) 129, 130 [49-1USTC ¶9217], cert. den. 337 U. S. 957; Gleckman v. United States , 8 Cir., 80 Fed. (2d) 394, 401 [35-2 USTC ¶9645], cert. den. 297 U. S. 709; Cf. United States v. Murdock, 290 U. S. 389, 394 [3 USTC ¶1194]. It is not necessary for the government to prove the exact amount of unreported income in cases of this kind. It is sufficient if the evidence shows that the unreported amounts were substantial, and that the failure to report was willful.Holland v. United States , 10 Cir., 209 Fed. (2d) 516, 522[54-1 USTC ¶9177], and the cases there cited.

It is urged that the court committed error in its instructions to the jury by failing to properly define the term "willfully" as used in the statute, and in its instructions relating to reasonable doubt and circumstantial evidence. The court gave a rather extensive and careful definition of the word "willful". It did not state in so many words that to constitute a violation of the statute, the attempt to evade income taxes must be done "with a bad purpose". The instruction on reasonable doubt was in the language usually approved by the courts. After stating what constituted reasonable doubt, the court told the jury that if it did not believe the defendant to be guilty beyond a reasonable doubt, "it is your duty to acquit" him. The objection to the instruction is that it did not say that the jury "must" acquit the defendant if there was a reasonable doubt of his guilt. In determining whether Fischer acted willfully, the jury was told that it is difficult to determine what goes on in the mind of a man, and that this can be determined only from inferences fairly and reasonably to be drawn from proven facts and circumstances including "the kind of evasion, if any, you find the defendant committed". It is contended that this instruction was an attempt to instruct on circumstantial evidence and that it was insufficient.

No objection was taken to any part of the instructions and the defendant did not suggest or offer any additional instructions. ² It is settled law that appellate courts will not consider instructions to which no objections were taken at the time of trial. Fed. Rules Cr. Proc. rule 30, 18 U. S. C. A.; Apodaca v. United States , 10 Cir., 188 Fed. (2d) 932; Ryles v. United States , 10 Cir., 172 Fed. (2d) 72, rev'd. on other grounds, 336 U. S. 949; Thayer v. United States , 10 Cir., 168 Fed. (2d) 247; Berenbeim v. United States , 10 Cir., 164 Fed. (2d) 679, cert. den. 333 U. S. 827. The foregoing rule is subject, however, to the exception that an appellate court has inherent power, upon its own motion, to inquire into the adequacy of a charge in cases where there is grave error which amounts to the denial of a fundamental right of the accused. Fed. Rules of Cr. Proc. rule 52(b), 18 U. S. C. A.; Apodaca v. United States , supra; Ryles v. United States , supra; Madsen v. United States , 10 Cir., 165 Fed. (2d) 507. We have carefully examined the record and find no error in the court's instructions which amount to a denial of any fundamental right of the appellant.

Appellant next assigns as error the admission in evidence of two exhibits and certain testimony. The slot machine operators who testified that Fischer received income, used the firm name of "American Amusement Company". The persons collecting money from the different machines prepared tickets as the collections were made showing the machines from which the money came. These tickets, together with the cash, were brought to the company office and the bookkeeper compiled summary shcets from the tickets which showed the total receipts from the various machines. These sheets were made in the regular course of business and constituted a part of the books of the company relating to its income and were the basis upon which the division was made with Fischer. They were admissible for this purpose. 28 U. S. C. A. Sec. 1732.

The second exhibit was a printed booklet written and published by Fischer in 1943, entitled "Mind Your Own Business". One section of the book was captioned "Income Tax, Keeping Records". In this section the reader is cautioned to "Be sure to keep all dates, amounts and items with some degree of accuracy". It suggested a simple and practical method of keeping records to avoid difficulty in income tax matters. The author points out the pitfalls which he now asserts as a defense and upon which he relies to negative any willfulness on his part when he failed to return all of his income. The booklet was admissible upon the issue of willfulness.

During the direct examination of one of the partners in the American Amusement Company, the court directed the District Attorney to pursue a line of questioning to "find out where, and when, and under what circumstances" an incident occurred. It is contended that this direction transcended the bounds of an impartial presiding judge and tended to convey to the jury that special weight should be given to such testimony. There is no merit to the contention. The trial court is not a mere umpire in the trial of a case. One of its functions is to see that all relevant facts are brought intelligibly to the attention of the jury and it may intervene in the conduct of the trial for this purpose. The court has the power, within reasonable bounds, to question a witness for the purpose of eliciting the truth and there is no reason why it may not direct an attorney to pursue a line of questioning if it is relevant to the case. Glasser v. United States, 315 U. S. 60, 82; Quercia v. United States, 289 U. S. 466, 469;Griffin v. United States, App. D. C., 164 Fed. (2d) 903, cert. den. 333 U. S. 857, new trial granted on other grounds, 183 Fed. (2d) 990; National -- Casualty Co. v. Eisenhower, -- Cir., 116 Fed. (2d) 891; United States v. Gross, 7 Cir., 103 Fed. (2d) 11, 13; United States v. Breen, 2 Cir., 96 Fed. (2d) 782, cert. den. 304 U. S. 585.

Lastly, it is contended that the trial court erroneously denied defendant's motion for a bill of particulars. The motion requested that the defendant be furnished with (1) the nature, source and amount of each item of gross income which the government claimed the defendant received; (2) the type and amount of each item of deduction allowed or disallowed by the government in computing his net income; (3) the source of the government's information as to each item of income, and (4) the nature and amount of each item of gross income not taken from the books of the company. The purpose of a bill of particulars is to define more specifically the offense charged. It is not for the purpose of disclosing in detail the evidence upon which the government expects to rely. Norris v. United States , 5 Cir., 152 Fed. (2d) 808, 811, cert. den. 328 U. S. 850;Kempe v. United States , 8 Cir., 151 Fed. (2d) 680, cert. den. 331 U. S. 843; Rose v. United States , 9 Cir., 149 Fed. (2d) 755; United States v. Wexler, S. D. N. Y., 6 Fed. Supp. 258, aff'd, 2 Cir., 79 Fed. (2d) 526 [35-2 USTC ¶9606], cert. den. 297 U. S. 703. Generally, in criminal cases the granting of a motion for a bill of particulars is addressed to the sound judicial discretion of the trial court and its action will not be disturbed on appeal in the absence of an abuse of discretion. Wong Tai v. United States , 273 U. S. 77; Rose v. United States , 10 Cir., 128 Fed. (2d) 622 [42-2 USTC ¶9500], cert. den. 317 U. S. 651; Gates v. United States , 10 Cir., 122 Fed. (2d) 571, cert. den. 314 U. S. 698; Frederick v. United States , 9 Cir., 163 Fed. (2d) 536, cert. den. 332 U. S. 775; Lett v. United States , 8 Cir., 15 Fed. (2d) 686. ³ The evidence does not disclose that there was any abuse of discretion in the denial of the motion. Fischer knew all of the unreported items of income received from his law practice which would be shown at the trial. Early in the investigation, he advised agents of the Bureau of Internal Revenue that he had not received any payments as protection money to permit illegal operation of slot machines. He stated that he had no other income than that received from his law business and reiterated such denials at the trial. It does not appear that the proof of payments as protection money came as a surprise and no objection was made to its introduction on that ground. It may well be that the motion should have been granted as to the source of the payments received from the slot machines, but the record as a whole does not disclose that the refusal of the court to require this information to be furnished was an abuse of discretion or prejudiced the defendant to such an extent as to warrant a reversal. Rose v. United States , 10 Cir., 128 Fed. (2d) 622.

Judgment affirmed.

¹ This section provides:

"FAILURE TO COLLECT AND PAY OVER TAX, OR ATTEMPT TO DEFEAT OR EVADE TAX. Any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the cost of prosecution."

² At the conclusion of the instructions the following colloquy occurred:

"The Court: Do you have any exceptions?

"Mr. Mellman: None that I think of right now.

"The Court: This is your last chance if you have any. If you have any, I want to know.

"Mr. Mellman: I don't know of any, Judge."

³ InWong Tai v. United States , supra, the Supreme Court said:

"The defendant also made a motion, supported by affidavit, for a detailed bill of particulars, setting forth with particularity the specific facts in reference to the several overt acts alleged in the indictment, with various specifications as to times, places, names of persons, quantities, prices, containers, buildings, agencies, instrumentalities, etc., and the manner in which and the specific circumstances under which they were committed. This motion--which in effect sought a complete discovery of the Government's case in reference to the overt acts--was denied on the ground that the indictment was sufficiently definite in view of the unknown matters involved and the motion called 'for too much details of evidence.'

"The application for the bill of particulars was one addressed to the sound discretion of the court, and, there being no abuse of this discretion, its action thereon should not be disturbed. See Rosen v. United States, 161 U. S. 29, 40; Dunlop v. United States, 165 U. S. 486, 491;Knauer v. United States (C. C. A.), 237 Fed. 8, 13;Horowitz v. United States (C. C. A.), 262 Fed. 48, 49;Savage v. United States (C. C. A.), 270 Fed. 14, 18. And there is nothing in the record indicating that the defendant was taken by surprise in the progress of the trial, or that his substantial rights were prejudiced in any way by the refusal to require the bill of particulars. See Connors v. United States, 158 U. S. 408, 411; Armour Packing Co. v. United States, 209 U. S. 56, 84; New York Central R. R. v. United States, 212 U. S. 481, 497."

 

 

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

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

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

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

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

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

JOHNSEN, Circuit Judge:

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

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

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

[Gross Receipts Not Taken As Basis]

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

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

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

[Taxpayer's Duty to Show Unclaimed Deductions]

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

[Repayments Not Included in Income]

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

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

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

[Inference of Willfulness Warranted]

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

[Statements to City License Collector Admitted]

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

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

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

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

[Exhibits Prepared by Expert Accountants Excluded]

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

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

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

Affirmed.

 

 

[53-1 USTC ¶9336]James Ralph Montgomery, Appellant v. United States of America , Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 14115, 203 F2d 887, April 17, 19 53

Appeal from the United States District Court for the Northern District of Texas.

Evasion of taxes: Evidence: Charges to jury.--There was reversible error in not permitting defendant's counsel to examine notes used by a Government witness. Also the jury should have been cautioned on the consideration to be given to evidence about offenses not being tried, and there was undue restriction on cross-examination by defendant's counsel of a witness as to certain payments to defendant. There was no error in admitting in evidence a joint return not signed by either defendant or his wife, but otherwise adequately identified.

Howard Dailey and Clyde G. Hood, Dallas, Texas, and Clyde W. Mays and Dave Miller, Fort Worth, Texas, for appellant. R. Daniel Settle, Special Assistant to the United States Attorney, Frank B. Potter, United States Attorney and Cavett S. Binion, Assistant United States Attorney, Fort Worth , Texas , for appellee.

Before HUTCHESON, Chief Judge, and HOLMES and RIVES, Circuit Judges.

RIVES, Circuit Judge:

Appellant, defendant below, was convicted of willfully and knowingly attempting to defeat and evade a large part of the income tax due and owing by him and his wife for the years 1948, 1949 and 1950 [26 U. S. C. A. 145(b)]. ¹ Defendant was the sheriff of Tarrant County , Texas , and his trial and conviction followed close upon the heels of the trial and conviction of A. L. Wardlaw, Assistant District Attorney for that County. (See Wardlaw v. United States, No. 14,105 [53-1 USTC ¶9335], decided this day.) The court sentenced the defendant to serve a three-year term of imprisonment on Count III, four years on Count IV, which sentences were directed to run consecutively, and two years on Count I to run concurrently with the sentences imposed on Counts II and III, making a total of seven years to serve. Appellant has appealed from the judgment of conviction assigning thirty-two specifications of error, only a few of which we find it necessary to consider.

There was no error in admitting in evidence the income tax return of the defendant and his wife for the year 1948 notwithstanding the return was not signed by either of them. It was sufficiently identified as their return. It bore the stamp of the Collector's office:

"Rec'd With Remittance Mar. 14, 19 49

75 Coll. Int. Rev. 2nd Dist. Tex. "

The accompanying payment was by check, a photographic copy of which was admitted in evidence, dated March 12, 19 49, payable to the Collector of Internal Revenue and signed by the defendant. One of the witnesses testified that he could tell the check was received with the return, because a serial number was stamped on both the check and the return when they were received by the Collector and the serial number on the two instruments as the same; and, further, that the balance due was shown on the return was the same amount as that for which the check was drawn. In fact, the defendant himself on cross-examination stated that he presumed it was his original return, "It corresponds with everything". Though not signed, the return was filed by defendant as his return, and intended to be received as such by the Collector, and was properly admitted in evidence. Emmich v. United States , 298 Fed. 5 [1924 CCH ¶3481].

At the end of the direct testimony of the witness W. H. Getzendaner, the district judge summarized the result of a lengthy examination as follows:

"It seems that the witness has a recollection of having paid fifty dollars in '48, that he has no definite recollection of making more than one payment. That he made two payments in 1949, he has no definite recollection of paying more. That he made one payment of seventy-five dollars in 1950, but that he is unable to say if he made more, or, when.

"That seems to be the limit of his positive knowledge on the subject."

Defendant's counsel then proceeded vigorously to cross-examine this witness. Among other things, he asked the witness to name other officers to whom he had paid bribe money during the years in question, and upon objection by the Government explained his theory to the court as follows:

"Mr. Hood:

"It affects his credibility in this way, Your Honor, he is testifying in 1948 he paid this defendant fifty dollars to operate a place there in the city limits, with the police department, the investigators of the District Attorney's Office, there are eight constable precincts over there, had jurisdiction over the matter, and Texas Rangers, and State Highway Patrol, and he said he paid fifty dollars to the sheriff. We want to show how the sheriff protected him from all the others; it goes to affect his credibility."

The court permitted the questioning to proceed, but in a short time interrupted as follows:

"The Court:

"We have grave doubt about the correctness of the Court's ruling in compelling this man to testify in the first instance, that testimony had reference to the matter under inquiry. And now, to go into a field that was not under inquiry is, I believe, one in which he could further claim his right of self-incrimination, against self-incrimination. I think I will advise the witness that the order that we entered requiring him to testify in the other case does not further extend, and at the noon hour I am going to examine the authorities, and I may strike his entire testimony."

Defendant's counsel was then permitted to ask some further questions, but not the names of the persons to whom the witness claimed he had paid bribe money. When the session was resumed after the noon recess, the court announced:

"The Court:

"I have studied the law on the subject we had under consideration, and I adhere to my ruling and leave everything stand as it is."

[Cross-Examination of Government Witness Unduly Restricted]

The Government insists that the effect of that ruling was that the testimony sought to be elicited by defendant's counsel might be considered by the jury. Defendant's counsel evidently understood otherwise, as evidenced by his statement, "note our exception", and his failure further to cross-examine the witness.

If this witness' claim of constitutional immunity was to be denied, and we think that was proper, it had to be denied in toto so as to accord the defendant the benefit of cross-examination however searching. "Cross-examination of a witness is a matter of right", Alford v. United States of America, 282 U. S. 687, 691. See J. E. Hanger, Inc., et al. v. United States , 160 Fed. (2d) 8; Jianole v. United States , 299 Fed. 496. Indeed, cross-examination, as has been often observed, is the surest test yet devised of the truthfulness of a witness' testimony, and its allowance is especially important in the case of a witness who is himself an admitted violator of the law. We think that the action of the court was an undue restriction on the defendants' right to cross-examine this witness.

Getzendaner was the only witness who testified to outright bribery of the defendant. Another witness, Clarence Cleere, was permitted to testify over the defendant's objection that the defendant called him to his office where the following conversation ensued:

"A. He said, 'You haven't been to see me.' I said, 'I didn't know I had anything to come to see you--'

"The Court:

"What is that?

"A. I said, 'I didn't know that I had any reason to come to see you.'

"He said, 'Did you know that operating these pinball games was illegal?'

"I told him that I didn't interpret the law that anything of that device was illegal.

"He said, 'These other boys have come to see me and you never.' He said, 'I want you to bring me fifty dollars a month, to this office, and I am not coming after it.'

"Mr. Dailey:

"We object to that as irrevelant and immaterial and inflammatory, and highly prejudicial, and of no probative force, for the reason this witness will testify, as I understand, that he never paid the sheriff a nickel in his life. If he didn't, what he is saying is highly irrelevant and immaterial and prejudicial and inflammatory.

* * *

"Mr. Hood:

"May I ask the witness a question?

"The Court:

"Yes.

"Mr. Hood:

"Did you ever, in the years 1948, 1949 or 1950, pay the sheriff one dime?

"A. No, sir.

"Mr. Hood:

"We renew our objection as being highly irrelevant and immaterial and inflammatory and prejudicial."

[Jury Should Have Been Cautioned as to Use of Evidence of Offenses Not on Trial]

The district judge could exercise a broad discretion in admitting this type of testimony to show that defendant's "motive in not reporting his illegal gains was to keep as secret as possible the fact that he was receiving income which it was a criminal offense to accept", Chadick v. United States, 77 Fed. (2d) 964 [35-2 USTC ¶9416], as well as "to establish the possible source of the funds used for the expenditures which so substantially exceeded appellant's declared available resources", United States v. Chapman, 168 Fed. (2d) 997, 1000 [48-1 USTC ¶9312]. The fact that the evidence objected to tended to establish that the accused committed offenses other than those charged in the indictment would be no justification for excluding it if it tended also to establish the commission of the crime charged in the indictment, Capone v. United States, 51 Fed. (2d) 609, 619 [2 USTC ¶786]. We think, however, that the jury should have been cautioned that the evidence was admitted only for the light that it might throw on the federal offenses on trial, and that no inference of guilt could be drawn merely from the commission of other offenses different in character. In short, the jury should not convict the defendant of income tax evasion because they concluded that he was a grafter. See Railton v. United States , 127 Fed. (2d) 691; Lurding v. United States , 179 Fed. (2d) 419 [50-1 USTC ¶9159].

Mr. Justice Frankfurter in his concurring opinion in Johnson v. United States, 318 U. S. 189, 202 [43-1 USTC ¶9288], stated: "In reviewing criminal cases, it as particularly important for appellate courts to re-live the whole trial imaginatively and not to extract from episodes in isolation abstract questions of evidence and procedure." When the testimony and the parts of the arguments copied in the record are read in an effort to "re-live the whole trial", we can see the difficulty of the task faced by court and jury in confining their consideration to the federal offenses on trial. That difficulty but emphasizes the precautions that should be observed by the court and the district attorney to insure the defendant a fair trial on the offense alone with which he was charged.

The third and last witness, who was placed on the stand by the Government to testify along the same line as Getzendaner and Cleere, was Ernest Cavitt, a colored man who operated a small tavern where beer was served and where a dice game was sometimes played. He testified that the defendant never asked him to pay anything for "running crap games" and that he did not pay him any bribes, but that he had paid about $25.00 every two or three months just as a gift up to a total which would not exceed $300.00.

There was evidence from the defendant and from his wife of large gifts from a friend, Paul Suggs. The defendant claimed that at a period of his life when he was engaged in professional boxing, he was making considerable money and loaned Suggs $3,000.00 with which to go in business; that Suggs had made a financial success, and was thereafter generous in his gifts to the defendant. Suggs was not offered as a witness, and in explanation the defendant introduced a clipping from a Los Angeles , California , paper regarding the violent death of Suggs and his family. The defendant excepted to the court's charge "because the court has not instructed the jury that it may consider, take into consideration, this defendant may have acquired some moneys from the source of gifts, as testified to in this record." We would not be willing to hold the overruling of this exception to be reversible error in view of the fact that the court in the course of its oral instructions did charge the jury as follows:

"You are also instructed that true, bona fide gifts to a taxpayer are not subject to the payment of income tax. Whether or not a gift or the passing of money or valuables is a true and bona fide gift may be a matter for the jury to consider in the determination of any case involving tax returns."

[In Criminal Case Net Worth Evidence Is Merely Circumstantial]

Under the "net worth-expenditures" method by which the Government undertook to prove the charges contained in the indictment, it was necessary that the increase in net worth or the expenditures, or both added together, justify the finding that the defendant had some substantial unreported income, the exact amount of which need not be proved. United States v. Johnson, 319 U. S. 503, 517 [43-1 USTC ¶9470]. Any gifts or other non-taxable receipts explaining part of the increase in net worth or expenditures must, of course, be deducted, and care must be taken not to include expenditures more than once. United States v. Caserta , 199 Fed. (2d) 905 [52-2 USTC ¶9540]. According to an article in the American Bar Association Journal (March, 1953, Vol. 39, p. 251) describing the method, it is now attempted in almost all fraud cases. In our recent case of Pollock v. United States, No. 14,126, decided February 27, 1953 [53-1 USTC ¶9229], we noted that in a criminal case this kind of evidence "being circumstantial, must exclude in the minds of the jury every reasonable hypothesis other than the guilt of the defendant". In that case, the Government connected up its necessary proof by statements of the taxpayer and of his wife, but we noted that those statements were obtained "after due warning of their constitutional rights". In the present case, Special Agent Baskett testified that the defendant was never so warned, and that he never at any time told the defendant that any document that was surrendered to him or his fellow agents would be used in either a civil or criminal prosecution against him. The defendant testified that, when Baskett and Government Agent Wilson first came to see him about his income tax matters, they told him that it was a routine check up, and that on each occasion he conferred with them, they told him it was purely a civil matter, that they would soon let him know how much taxes he owed, if any, and allow him to pay them, and that at no time was it intimated to him that there might be a criminal prosecution. ²

At the conclusion of the testimony, the Government introduced into evidence over the defendant's objection its Exhibit No. 20, including all figures of claimed expenditures for the years in question, both those taken from the record, testimony from witnesses to whom money had been paid, as well as those testified to by Baskett that he had gained from statements and admissions of defendant and his wife, cancelled checks, receipts and documents which appellant had surrendered to him.

We do not think the circumstances under which the statements of the defendant and of his wife, and the cancelled checks and documents, were obtained were sufficient of themselves to require that that evidence be excluded on the ground of being involuntary as a matter of law, or to require that the Government's Exhibit No. 20 based in part upon such testimony be not admitted in evidence. All of those circumstances were matters which went to the weight or credibility of the testimony thus obtained. Wilson v. United States, 162 U. S. 613, 624; Powers v. United States, 223 U. S. 303, 314; Wood v. United States, 128 Fed. (2d) 265, 269; Nicola v. United States , 72 Fed. (2d) 780, 784 [4 USTC ¶1331]; Shushan v. United States, 117 Fed. (2d) 110, 117; Hanson v. United States , 186 Fed. (2d) 61 [51-1 USTC ¶9118]; Barshop v. United States, 192 Fed. (2d) 699 [51-2 USTC ¶9504].

Baskett was the Special Agent for the Bureau of Internal Revenue assigned to investigate the case. His investigation began in February, 1951, and lasted until March, 1952, during which time he contacted the appellant some twelve to fifteen times and upon each occasion made notes and transscribed them later in the day. The importance of his testimony is indicated by the fact that it occupies 233 pages of the printed record. Shortly after his direct examination began, it became apparent that he was reading from notes and the defendant's counsel objected unless they could see the notes and demanded the privilege of looking at them and reading them themselves. Their objection and demand were overruled and they excepted. ³

When the cross-examination of this witness was begun defendant's counsel renewed their demand to see the notes from which he testified, but again without success. ⁴

The law is now well settled that where a witness while he is on the stand uses any paper or memoranda to refresh his memory in giving his testimony, the opposing side, upon proper demand, has a right to see and examine that paper or memoranda and to use the same in cross-examination of the witness. Morris v. United States , 149 Fed. 123, 126, 127; Lannon v. United States , 20 Fed. (2d) 490, 493; Little v. United States , 93 Fed. (2d) 401, 406.

Of course, a conviction will not be reversed for denial of the right to examine such notes and memoranda if the error does not affect substantial rights of the party. Rule 52, Federal Rules of Criminal Procedure; United States v. Socony Vacuum Oil Co., 310 U. S. 150, 234.

[Denial of Right of Opposing Counsel to See Notes Used by Government Witness Was Reversible Error]

It is not clear from the record how much of this witness' testimony was based upon his references to notes, papers and memoranda, inspection of which was refused to defendant's counsel, but apparently the witness refreshed his recollection from such sources often. His testimony was material and was highly damaging to the defendant. We conclude that the court committed reversible error in denying to the defendant's counsel the right to examine the notes, papers and memoranda which were used by the witness for the purpose of refreshing his memory.

In view of our opinion in Wardlaw v. United States, No. 14,105 [53-1 USTC ¶9335], decided today, and touching some questions raised also in this case, we think that it is not necessary to pass upon the other specifications of error. The judgment of conviction is reversed and the cause remanded for a new trial.

REVERSED AND REMANDED.

¹ "(b) Failure to collect and pay over tax, or attempt to defeat or evade tax. Any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution."

² In this prosecution for felony the unusual situation exists that 26 U. S. C. A. 3761 authorizes the compromising of any civil or criminal case arising under the Internal Revenue laws. See Willingham v. United States , 208 Fed. 137; Rau v. United States , 260 Fed. 131.

³ "Mr. Hood:

"We object to the witness reading from notes on these transactions, unless we can have the notes and look them over.

"Mr. Binion:

"This investigation lasted over a long period of time, and we think that the witness is allowed, under the rules, to use his notes to refresh his memory, and those are the notes that he made for the purpose of refreshing his memory.

"The Court:

"That is the way I understand the rule.

"What is the position of counsel?

"Mr. Hood:

"We object to the witness reading from his notes. We think the correct rule is, if the notes were made at the time of the happening of the transaction, by the witness, then he can refer to them to refresh his memory.

"Can I ask the witness a question?

"The Court:

"Go ahead.

"Mr. Hood:

"Mr. Baskett, you are referring to some notes. Did you make those notes immediately at the time the transaction took place?

"A. Yes, sir, that is right.

"Mr. Hood:

"At the same time?

"Mr. Hood:

"A. After we finished the interview.

"Mr. Hood:

"At a later date?

"A. No, sir, right immediately after his interview.

"Mr. Hood:

"Did you make them in the presence of the defendant?

"A. No, sir.

"Mr. Hood:

"We object to it.

"A. Excuse me, we took notes while we were discussing those things.

"Mr. Hood:

"Are those the original notes you took at the time of the discussion?

"A. We took them, I took them in pencil and then I typed up my notes.

"Mr. Hood:

"And those are not the original notes you took down at the time you were interviewing the sheriff, are they?

"A. That is right.

"Mr. Hood:

"They are not?

"A. No, sir.

"Mr. Hood:

"Your Honor, we object. If he will refer to his original notes, we have no objection.

"Mr. Binion:

"The government's position is this:

"This investigation lasted over a period of time. On the occasions that this witness interviewed Mr. Montgomery, during the interview, as I understand it, he would jot down on a piece of paper the information that he was getting, and at a later date, or later on during the day, whatever it was, he would transcribe those notes, he personally would transcribe those notes in order to make them permanent for him to testify later, if necessary, and to make a report from.

"The Court:

"How much time do you think intervened between the time you jotted down the first note and the time you reduced it to the present form?

"A. It was made the same day.

"The Court:

"I think I will let him look at it to refresh his memory. I think you are really invoking a rule which might apply if it was being offered itself.

"Mr. Hood:

"We would like the privilege of looking at those notes and reading them ourselves.

"Mr. Settle:

"We are not offering the man's notes.

"The Court:

"I will let him testify from his notes.

"Mr. Hood:

"May we look at them?

"The Court:

"When you cross examine him, we will get at that.

"Mr. Hood:

"We except."

⁴ "Q. What did you do during that time, from February until April, you testified you made notes, didn't you?

"A. That is right.

"Q. Let me see those notes?

"Mr. Settle:

"Now, Your Honor, he is asking the witness to show him notes which the witness had, which were not put in evidence, and which he used to refresh his memory from. I don't think he is entitled to look at the notes that the witness has to refresh his memory from, unless they are introduced in evidence, and they were not introduced in evidence.

"The Court:

"I will hear the question.

"Mr. Hood:

"The witness said he was reading from notes.

"Mr. Settle:

"No, he didn't.

"(By Mr. Hood):

"Q. What were you doing?

"A. I was refreshing my memory.

"Q. How did you refresh your memory, unless you were reading them?

"A. Why certainly

"Q. Then you had to read them?

"A. Yes.

"Q. And after you read them you gave that testimony from them?

"A. Yes, sir.

"Q. All right, let me see the notes.

"Mr. Binion:

"We object to that.

"Mr. Hood:

"All right, if they don't want us to see what they have.

"The Court:

"Gentlemen of the jury, you will try the case on the facts that the Court submits to you, and not any suggestion that counsel may make.

"Go ahead with your case.

"Mr. Hood:

"As I understand, I am not allowed to see the notes that he testified from?

"The Court:

"I don't see that that is necessarily proper. If a man makes a memorandum or a record of the thing, I don't think you should go into it.

"Mr. Hood:

"All right, note our exception."

 

 

[54-1 USTC ¶9127]C. O. Hanson, Appellant v. United States of America , Appellee

(CA-6), In the United States Court of Appeals for the Sixth Circuit, No. 11731, 208 F2d 914, December 21, 19 53

Appeal from the United States District Court for the Northern District of Ohio, Western Division.

Criminal penalties: Evidence: Refusal to permit evidence to be introduced.--The company of which appellant was the principal stockholder had sold certain materials in violation of the controlled materials law. To avoid detection of such violation, "M" invoices were issued in these sales and the proceeds thereof were kept by appellant. But to avoid violation of the income tax law, these sales were recorded in the closing inventory at sales price, in such a manner that the profit on the sales would be reflected upon the books of the company. Appellant received the proceeds, and claimed he was holding them for the corporation, while the Government claimed the money was his personal income which had not been reported. The court below refused to permit the introduction of evidence to the effect that all the items on the "M" invoices had been posted on the books of the company in inventory at sales prices. This was reversible error because it deprived appellant of the explanation as to why the money belonged to the company.

Criminal penalties: Circumstantial evidence: Refusal of requested charge.--It was reversible error for the trial court to refuse the charge that where guilt depends entirely upon circumstantial evidence, the burden rests upon the Government to prove its case not only beyond a reasonable doubt but to the exclusion of every reasonable hypothesis of innocence.

William A. Belt, Dan H. McCullough, Toledo , Ohio , for appellant. Gerald P. Openlander, Assistant United States Attorney (John J. Kane, Jr., United States Attorney, was with him on brief), Toledo , Ohio , for appellee.

Before MARTIN, MCALLISTER, and MILLER, Circuit Judges.

PER CURIAM:

Appellant was convicted by a jury of knowingly and willfully attempting to defeat and evade the payment of personal income taxes. On appeal, we are primarily concerned with two claimed errors on the trial--the refusal of the trial court to permit certain evidence to be introduced in defense of the charge against the accused, and refusal to instruct the jury as requested.

Appellant was the owner of 1,118 shares of a total of 1,247 shares of the common stock of the Hanson Clutch and Machinery Company. His sister and two brothers-in-law owned 125 shares, and the balance of 4 shares was owned by two other men. Appellant was also the owner of all of the preferred stock of the corporation. An agent of the Bureau of Internal Revenue, Gregory Susko, in checking the books of the corporation, was informed by appellant that in its sales, the corporation issued three types of invoices: "E" invoices for excavators; "C" invoices for clutches; "R" invoices for repairs; and he was further advised that these were the only designations used for invoices on sales by the company. Thereafter, Agent Susko, with a commendable, and remarkable, awareness of his duties, noticed that a certain contractor, Kranz, was using a new Hanson shovel. He thereupon checked the books of the Hanson Company and found that there was no record of the sale of this shovel to Kranz. He interviewed Mr. Kranz and obtained from him the original invoices of the Hanson Clutch and Machinery Company which covered the sale of the shovel to him. At that time, he noticed that the invoice number on the Kranz transaction was M-93. He then called upon the sales manager and chief bookkeeper of the Hanson Company, as well as Mr. Hanson, and inquired whether there were any invoices of the Hanson Clutch and Machinery Company which bore the designation "M". He was told by each of these men that there were no such invoices. Thereafter, the bookkeeper of the company, in response to a subpoena, appeared before the Intelligence Unit of the Treasury Department at Toledo and gave testimony in which he stated that there were numerous sales on which "M" invoices were issued, and that there were possibly several reasons for issuing them, one being to conceal the fact that the company had sold certain materials in violation of the Controlled Materials Plan, provided for by federal statute to conserve materials for government use during the war period. In order to secure such materials for private use, individuals were obliged to procure a priority number from the government. The evidence in the case discloses that appellant Hanson, sometime in 1945, commenced to sell metal products to certain of his customers who had no priority number. The company issued so-called "M" invoices in such sales, which eventually amounted to large sums of money. If these sales showed on the company's books, it would be obvious to anyone inspecting them that the company or its officials were guilty of violation of the Controlled Materials law. In order to avoid violation of the income tax laws on the part of the corporation, it was decided not to enter these sales, as sales, but to record them as items in inventory, not at cost, but at sales price, inasmuch as it is admitted that by placing them in the inventory at sales price rather than at cost price, the profits on the sales would be reflected upon the books of the company so that, at the end of the year when the income tax return was made up for the company, the tax on such profits would be paid even though the transactions had not been entered as sales; and all of the income taxes of the company were duly paid. The checks which were received on these sales, on "M" invoices, were endorsed for deposit only and Mr. Hanson cashed them through some banking arrangement. If, in addition to placing the items so sold in the inventory at sales price, Hanson had turned the money over to the company, the corporate income would have been overstated, and a double tax on such profits would have resulted. He kept the cash in his possession. He testified that he had not only discussed the transaction with his bookkeeper but with the board of directors, consisting of his sister, his mother, and his brothers-in-law, Mr. John Reed and Mr. Sherman White. Mr. Reed testified that Mr. Hanson told them that the money was to be held until it could be properly entered on the books of the company, after the danger of prosecution for violation of the priority regulations had passed. However, before the period of limitations had elapsed for prosecution of the priority violations, the income tax investigation had begun, and appellant's lawyer, Mr. Raymond, told him he should not at that time return the funds to the company as it might indicate some "sense of guilt" or evidence of income tax evasion.

[Refusal to Permit Evidence to Be Introduced]

Mr. Hanson claimed to be holding this money for the company. The government claimed it was his personal income which he had not reported. The crucial point in the case arose when the court refused to permit evidence to be introduced that all the items on the "M" invoices had been posted on the books of the company in inventory at sales prices. We are of the opinion that this was reversible error as it deprived appellant of the one explanation he had why the money claimed by the government to be his unreported income was not his money, but belonged to the company, and that he was, in a sense, only a trustee, or holder of the funds for the benefit of the company. All of the sales on the "M" invoices in question involved priority violations which appellant sought to conceal. Carrying such sales on the books of the company on closing inventory at sales prices reflected the profits on the "M" sales, actually made, on the company books. Appellant was entitled to have such evidence submitted to the jury on the issue whether the money represented by such items, entered in the books as inventory at sales prices, was money belonging to the company which he was holding for it, or whether it was his own personal income.

Appellant requested the trial court to charge the jury that where circumstantial evidence is relied on, the evidence must be such as to exclude every other reasonable hypothesis except the hypothesis of guilt. Stated in slightly changed form, "where guilt depends entirely upon circumstantial evidence, . . . the burden rests upon the government to prove its case not only beyond a reasonable doubt but to the exclusion of every reasonable hypothesis of innocence."Epstein v. United States , 174 Fed. (2d) 754, 769 (C. A. 6). The trial court instructed the jury on proof of guilt beyond a reasonable doubt, but not as to proof by circumstantial evidence to the exclusion of every reasonable hypothesis of innocence. As a result, the appellant's rights were not sufficiently stated by the general charge. SeeHendrey v. United States , 233 Fed. 5, 19 (C. C. A. 6).

The judgment is reversed and the case is remanded to the District Court for a new trial.

 

 

[56-2 USTC ¶9830]Louis C. Smith, Appellant v. United States of America , Appellee

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 15,360, 236 F2d 260, 8/16/56, Affirming an unreported District Court decision

[1939 Code Secs. 41 and 145(b)--similar to 1954 Code Secs. 446(b) and 7202, respectively]

Criminal prosecution for tax evasion: Proof by net increase method: Admissibility of evidence: Instructions to jury.--Taxpayer was convicted on charges of tax evasion under 1939 Code Sec. 145(b) for failure to report substantial amounts of income for 1947. The Eighth Circuit ruled against taxpayer on all of the following assignments of error of the trial court: (1) limitation of the cross-examination of a revenue agent to whether or not taxpayer owned stock in an amusement company, the taxpayer's employer; (2) admission of a net worth statement offered by the government and conclusions of a witness, the revenue agent, and the hypothetical question asked the latter relative to taxpayer's tax and income where an alleged liability representing a claimed loan to taxpayer was not included; (3) admission of certain exhibits used to establish that taxpayer claimed to have no assets while in the penitentiary; (4) admission of the work papers of the accountant for the amusement company prepared in the ordinary course of business; (5) failure to order a mistrial after government counsel improperly asked a witness if the latter's brother, a person other than taxpayer, had been convicted of a crime; (6) failure to enter a judgment of acquittal where taxpayer's explanations of net worth were reasonably susceptible of being checked; (7) failure to give an instruction as to a lesser offense under 1939 Code Secs. 145(a) and 3616(a); (8) instruction relating to gambling income that it made no difference whether the income was lawfully or unlawfully received; (9) instruction that the jury might consider the failure of taxpayer to supply information to the revenue agents; (10) refusal to dismiss the indictment based on the failure to present competent evidence before the grand jury; (11) refusal to dismiss the indictment on the ground that it charged a lesser offense under 1939 Code Sec. 3616(a), and hence the general criminal three-year statute of limitations was applicable; (12) failure to order a mistrial because of a newspaper article concerning the case.

Morris A. Shenker (Sidney M. Glazer was with him on brief), for appellant. Robert C. Tucker, Assistant United States Attorney (Harry Richards, United States Attorney, Charles H. Rehm, Assistant United States Attorney, were with him on brief), for appellee.

Before SANBORN, WOODROUGH and VOGEL, Circuit Judges.

VOGEL, Circuit Judge:

Louis C. Smith appeals to this court from a judgment of conviction entered on June 2, 19 55, in the United States District Court for the Eastern District of Missouri upon a jury verdict finding him guilty under an indictment charging a violation of former 26 U. S. C. A. 145(b) of the Internal Revenue Code of 1939. He was sentenced to imprisonment for a period of one year and one day and fined $2,000.00. The indictment charged that on February 19, 19 48, the appellant did wilfully attempt to defeat and evade his income tax for the year 1947 by filing a false and fraudulent return, wherein he stated that his adjusted gross income for 1947 was the sum of $3,690.04 and that his income tax was $343.00, whereas his adjusted gross income was the sum of $39,984.49 and his tax was $17,749.58.

The appellant's income tax return for the year in question showed wages from an employer, the Plaza Amusement Company, as $1,300.00 and other income as $2,390.04. The other income allegedly consisted of $2,000.00 for miscellaneous gambling, income from the Plaza Amusement Company partnership $211.15, and income from rents and royalties $178.89, wherefrom appellant claimed he owed a tax of only $343.00.

The government attempted to prove its case by the increase in net worth method. Accordingly it had to establish a base or starting point from which increases or decreases of net worth in following periods could be properly figured. This particular case presented unusual difficulty. The appellant had kept no books, records, bank accounts or any of the ordinary media whereby one's financial operations may be traced. Appellant was uncooperative with the revenue agents. When asked the source of his funds, he told one agent they came from an old mail bag and, "Let's just say I dug up an old iron pot." Reference to an old mail bag and buried money may not have been entirely facetious. In 1924 appellant had been convicted and sentenced in the District Court for the Eastern District of Missouri and the Southern District of Illinois to concurrent sentences for receiving, concealing and aiding in concealing and receiving stolen mail and for possession of stolen mail. As a result of those sentences, he was confined in the Federal Penitentiary at Leavenworth , Kansas , until sometime in 1941.

The records indicate that the appellant filed no income tax returns for 1932 to 1941, inclusive. His tax returns for 1942 and 1943 had been destroyed by the government. Certificates of assessment and payments covering appellant's tax accounts for the years 1932 through 1948 were introduced into evidence over objection. Tax returns for the years beginning with 1944 were offered and received.

Appellant did not testify and he offered no witnesses in his behalf.

Numerous points have been raised by the appellant in this court. They will be discussed individually as they appear in appellant's brief.

[Cross-examination Limited to Stock Ownership]

Appellant's first point is that:

"The Court erred in not allowing defendant to cross-examine Revenue Agent Robert Bell as to his investigation of the Plaza Amusement Company and as to statements made relative to the Plaza Amusement Company and in refusing to strike his testimony because of the undue limitation to his cross-examination."

During the cross examination of Bell by counsel for the appellant, the witness was asked if he wasn't really investigating Plaza Amusement Company to determine whether stock was actually held in the names of straw parties. There was no testimony on direct that the witness had conducted such an investigation of Plaza Amusement Company or that stock listed was in the name of straw parties. The question for determination at that point in the trial was whether or not the appellant owned 166 shares of stock in the Plaza Amusement Company and the court limited the examination to that issue and matters directly bearing thereon. To sustain his contention, appellant relies upon two cases wherein the Government was attempting to suppress confidential reports: United States v. Andolschek, 2 Cir., 1944, 142 Fed. (2d) 503; United States v. Beekman, 2 Cir., 1946, 155 Fed. (2d) 580. No such motive for restriction of cross examination was here present. The trial court was merely exercising its discretion to keep the scope of examination with reasonable bounds.

[Net Worth Statement]

Appellant's second point is that:

"The Court erred in admitting into evidence Government Exhibit 35 (net worth statement), in admitting into evidence conclusions of witness Robert Bell and in overruling defendant's objections to the hypothetical question asked witness Robert Bell relative to defendant's tax and income."

While conceding the propriety of admitting a revenue agent's summary of his testimony (United States v. Johnson, 1943, 319 U. S. 503, 519 [43-1 USTC ¶9470]), appellant claims that the summary herein did not find support in the evidence. Exhibit No. 35 is the usual summary, customary in net worth cases, which sets forth in compact form the evidence produced by the government tending, in this case, to establish the appellant's net worth on December 31, 19 46, as $11,224.17 and his net worth on December 31, 19 47, as $34,195.54, an increase during the indictment year of $22,971.37. Adding to this his estimated living expenses and gifts of $4,565.01 and taking into account reserve for depreciation and a non-taxable pension of $248.04, left a total to be accounted for of $27,536.38. Balancing this against his 1947 return left, according to the government figures, an unreported income of $23,597.94 for the indictment year. Each item of asset or liability is based on testimony of government agents admissible for the jury's consideration. The accumulation may not be figure perfect; it might be suspect if it were. It was the government agent's best estimate of the appellant's financial growth during the year in question.

One of the principal objections to Exhibit 35 was that it did not include an alleged liability of $12,000.00, representing a claimed loan in 1947 to the appellant from one Frank Wortman. The information with reference to the claimed loan appeared in this fashion: Edward Wortman was called as a government witness. Because of his hostility, the government was permitted to cross examine him. During the examination, Edward Wortman testified that his brother Frank had made a loan of $12,000.00 to the appellant in 1947. This was the first time the government auditors had heard of such alleged loan. They can hardly be criticized for failure to investigate it prior thereto and we see no error in failing to include it in the summary. It was the bare assertion of a hostile witness made at the trial that his brother had made a $12,000.00 loan to the appellant some years prior thereto. The jurors heard the testimony. They could believe it or not, and certainly the right to cross examine remained with counsel.

With regard to government computations such as we have in question here, the Court of Appeals for the Sixth Circuit in Gariepy v. United States, 1951, 189 Fed. (2d) 459 [51-1 USTC ¶9318], 462, said:

"At best it was, of course, but an estimate, but as an estimate it was entitled to the consideration of the jury because based on substantially the entire evidence in the record. United States v. Johnson, 319 U. S. 503, 519 [43-1 USTC ¶9470], 63 S. Ct. 1233, 87 L. Ed. 1546; Bell v. United States, 4 Cir., 185 Fed. (2d) 302 [50-2 USTC ¶9499]."

In numerous cases this court has approved of the use of summaries similar to Exhibit 35. See Kampmeyer v. United States , 8 Cir., 1955, 227 Fed. (2d) 313, 317 [55-2 USTC ¶9779], and ceased cited therein. We find no error in the admission of Exhibit 35.

[Hypothetical Question]

Appellant's main objection to the hypothetical question asked Agent Bell is on the same ground used in objecting to Exhibit 35, in that the hypothetical question did not include any reference to the $12,000.00 item as a liability of the appellant. We think, in view of all the circumstances, that the question was not improper, even though it did exclude the $12,000.00 item. As referred to heretofore, the only evidence regarding that item came from a hostile government witness who, because of his hostility, was cross examined with the court's permission. Edward Wortman testified that not he but his brother Frank had made a loan of $12,000.00 to appellant. Frank Wortman was not called and did not testify. Bell , in his summary, Exhibit 35, did not include the alleged loan as a liability of appellant. In formulating the hypothetical question, government counsel also omitted the $12,000.00 item. We think it was not error to overrule objection to the question on the grounds stated. The witness was crossed examined by appellant's counsel regarding the alleged loan. The jurors heard the testimony and they could believe or disbelieve whom they wished. In any event, we think it makes little practical difference. The government's evidence and the answer to the hypothetical question tended to show an adjusted gross income of $27,287.98 and a tax liability of $10,319.91. Even if the $12,000.00 item had been established, the amount of understated taxable income was nevertheless substantial. The government is not required to show the exact amount of error. If the understated taxable income be substantial, that is sufficient because the exact amount is not the gist of the offense. Cave v. United States , 8 Cir., 1947, 159 Fed. (2d) 464, 468 [47-1 USTC ¶9171].

On this point, appellant cites several cases, including one from this court: Kirsch v. United States, 8 Cir., 1949, 174 Fed. (2d) 592 [595], [49-1 USTC ¶9274], 600-2. In the Kirsch case, there was no evidentiary support for a essential assumed fact and, furthermore, the assumed fact was disproved by the government's own evidence. What constitutes a proper foundation to establish the truth of an assumed fact is largely up to the trial court, but in that case there was no foundation to be found. The revenue agents made not attempt to ground their assumption on adequate investigation; the hypothetical question there used contained an assumption clearly unwarranted. The hypothetical question here used is not subject to the same defect. The other cases cited by appellant are not in point.

[Exhibits of Assets While in Penitentiary]

Appellant's third claim of error is:

"The Court erred in admitting into evidence Exhibits 13, 14, 15 and 19."

These exhibits were used to establish that appellant claimed to have no assets while in the penitentiary. Appellant contends that the exhibits were confidential records not open to the prosecution under Section 2.14, 28 C. F. R. As to Exhibits 13, 14 and 15, appellant is clearly mistaken since Section 2.14 applies only to data gained through a parole hearing before the Board of Parole. Exhibits 13, 14 and 15 are records executed by the appellant himself and were not a part of an oral parole hearing provided for in Section 2.14. Exhibit 19 consists of an interview before the Board of Parole and may be classified as confidential under the regulations. If, however, in was error to admit Exhibit 19, we think it was not prejudicial. Exhibits 13, 14 and 15, standing alone, were sufficient evidence of net worth to establish a starting point. Exhibit 19 was not an essential document upon which the government's case stands or falls. Exhibits 14 and 15 and, to a lesser extent, Exhibit 13 establish the same thing that Exhibit 19 helped establish--that the appellant had no substantial assets during a certain period. The cumulative effect of the exhibits was to partially corroborate the government's opening net worth estimate. We accordingly hold that the admission of Exhibit 19 was not unduly prejudicial to the appellant so as to constitute reversible error.

Appellant further argues that these exhibits were inadmissible because incorroborated. Smith v. United States, 1954, 348 U. S. 147, 155 [54-2 USTC ¶9715], clearly holds that the corroboration requirement applies to admissions, at least where the admission is made after the fact and the statement embraces an element vital to the government's case. On admissions prior to the crime, it was earlier decided that such admissions need no corroboration. Warszower v. United States , 1940, 312 U. S. 342, 347:

"The rule requiring corroboration of confessions protects the administration of the criminal law against errors in convictions based upon untrue confessions alone. Where the inconsistent statement was made prior to the crime this danger does not exist. Therefore we are of the view that such admissions do not need to be corroborated. They contain none of the inherent weaknesses of confessions or admissions after the fact. Cases in the circuits are cited by petitioner to the contrary. In Gulotta v. United States, ¹ the decision turned on the similarity of confessions and admissions rather than upon any differences between admissions before and after the fact. In Duncan v. United States (68 Fed. (2d) 136) and in Gordnier v. United States (261 Fed. 910) the conclusion was reached without any comment upon this difference. Our consideration of the effect of admissions prior to the crime leads us to the other conclusion (citing Miles v. United States, 103 U. S. 304)."

In addition thereto, appellant's tax returns subsequent to his release from prison and prior to the indictment sufficiently corroborate the exhibits in question. Smith v. United States, supra, at pages 157 and 158.

[Work Papers of Accountant]

Point No. 4 is:

"The Court erred in admitting into evidence Exhibits 21A to 21W, identified as work papers of George Frank."

George Frank was the accountant for the Plaza Amusement Company. These records were prepared by him in the ordinary course of business and contemporaneously with the issuance of stock to the stockholders of Plaza Amusement Company. In support of his contention, appellant cites the case of Hayes v. United States, 10 Cir., 1955, 227 Fed. (2d) 540, 544 [55-2 USTC ¶9761]. That case is not comparable. The exhibit offered in the Hayes case was prepared by a tax expert long after the events it was attempting to portray and in preparation for trial. It was properly denied admission. The admissibility of records and entries made in the regular course of business is today unquestioned. United States v. Mortimer, 2 Cir., 1941, 118 Fed. (2d) 266, cert. den. 314 U. S. 616. This is especially true in United States courts. 28 U. S. C. A. §1732. Of course, other circumstances, such as "lack of personal knowledge by the entrant or maker, may be shown to affect its weight, but such circumstances shall not affect its admissibility".

[Question on Conviction of Another]

Appellant's fifth point is:

"The Court erred in overruling defendant's motion for a mistrial after Government counsel asked witness Edward Wortman if his brother Frank Wortman had been convicted of a crime and sentenced to 10 years."

Edward Wortman, the president of the Plaza Amusement Company, had testified in behalf of the government. The government was allowed to interrogate him as a hostile witness. A number of questions were directed to him concerning his brother Frank Wortman. The witness testified that his brother had been sentenced to jail by Judge Moore for refusing to tell a grand jury where he lived. He was then asked the following question:

"Q. For further purpose of identification, sir, I will ask you if this is the same Frank Buster Wortman who was sentenced in 1934 to 10 years on a charge of resisting a United States Officer?"

Objection to the question was promptly sustained but appellant's motion for a mistrial was overruled. Appellant claims that the statement or question of government counsel was of such an exceptionally prejudicial character that no statement by the court could remove the harmful effect caused by it. Of course, the question should not have been asked and it having been asked would have justified an instruction to the jury to disregard the question. We think, however, that failure to grant a mistrial was not reversible error. See and compare: Dolan v. United States , 8 Cir., 1955, 218 Fed. (2d) 454, 460; Davis v. United States , 8 Cir., 1956, 229 Fed. (2d) 181, 186-187. In the first place, the improper question referred to a brother of the witness, not to the appellant himself. Only by resort to a circuitous type of reasoning could it be conceived that testimony regarding the prior conviction of a witness' brother was tantamount to a hostile reflection upon the character of appellant. Secondly, the trial judge was in a far better position to determine whether prejudice had resulted than are we. He saw the jurors, the witnesses and the appellant, and it very apparently was his considered judgment that the improper question about a witness' brother had not prejudiced the appellant. We will not disturb his conclusion.

[Net Worth Explanations Insufficient]

The sixth point raised on appeal is that:

"The Court erred in overruling appellant's motion for judgment of acquittal at the close of the entire case."

Appellant herein attacks the sufficiency of the evidence to justify conviction and claims that the government failed to establish with reasonable certainty an opening net worth to serve as a starting point on which to calculate any increases in the appellant's assets. The government's theory was that Exhibits 13, 14, 15 and 19, plus certificates of assessment and payments beginning with the year 1932 and his tax returns for the years 1944, 1945 and 1946 established that the appellant had no assets of any substantial consequences prior to December 31, 19 46, at which time it was claimed that his net worth totalled $11,224.17. The establishment of a net worth starting point cannot be done with mathematical certainty and each case presents its own peculiar difficulties. The appellant was asked by the government investigators during their investigation of the case if he would give them a net worth statement. This he refused. He was then asked for his records and he replied that he did not keep records. He was asked if he had any bank accounts, brokerage accounts, safety deposit boxes or if he owned any property. He replied in the negative. He was then asked for the source of his funds and he stated that they came from an old mail bag and later in the conversation added, "Let's just say I dug up an old iron pot." He further stated to the investigators that he did not have income except from salary and that he was of the opinion that he did not have to keep records in those circumstances.

Under Holland v. United States, 1954, 348 U. S. 121, 138 [54-2 USTC ¶9714], the government may not "disregard explanations of the defendant reasonably susceptible of being checked". Appellant complains here that:

"No effort was made to check defendant's statement that his funds came from an old mail bag. Such a statement should have been checked in view of the nature of defendant's conviction for mail robbery as well as his statement to the Parole Board that he had received $3000.00 from the robbery."

Old mail bags and old iron ports are hardly the explanations "reasonably susceptible of being checked" referred to by the Supreme Court in the Holland case. We think, from a complete review of the evidence, that there was sufficient justification for the jury's conclusion that on December 31, 19 46, the appellant's net worth was approximately $11,224.17 and that his net worth on December 31, 19 47, was approximately $34,195.54. These figures were based on the agent's testimony and the records introduced, which were sufficiently authenticated to justify the presentation to the jury and sufficient to justify a denial of appellant's motion for judgment of acquittal.

[Lesser Offense]

Appellant's seventh point is that:

"The Court erred in not instructing the jury as requested as to a lesser offense under Section 145(a) (sic) of the Internal Revenue Code, and as to a lesser offense under Section 3616(a) of the Internal Revenue Code."

Since preparation of appellant's brief, the Supreme Court affirmed this court in Berra v. United States, (221 Fed. (2d) 590) 351 U. S. 131 [55-1 USTC ¶9382], and held, at page 135:

"The only question before us is whether the jury should have been allowed to decide whether it would apply §3616(a) rather than §145(b), and that we hold was not for the jury. It was, therefore, not error to refuse the requested instruction."

[Instruction Relating to Gambling]

Appellant's eighth point is that:

"The Court erred in instructing the jury that it makes no difference whether income was lawfully or unlawfully received and that they could find an intent to commit the crime charged even though it is coupled with an intent to suppress information as to acts which are criminal in other ways."

The giving of the challenged instruction is supported by the appellant's admission in his income tax returns that he had some income as a gambler and by his further statement that the source of his income might be from a mail beg or an old iron pot. Injection into the instructions of the possibility of the money being gained from illegal sources was fully supportable from the evidence. Certainly, otherwise relevant evidence does not become incompetent because it incidentally proves commission of independent offenses. Hardy v. United States , 8 Cir., 1952, 199 Fed. (2d) 704; Bram v. United States , 8 Cir., 1955, 226 Fed. (2d) 858. The exclusionary rule that prior offenses are not admissible against a defendant is not one of unbending rigidity. Thus, the rule will not be given application where the evidence is used to establish some material aspect of the prosecution's case. With equal vigor it is true that the rule may be disregarded in the court's instructions under proper circumstances. We have reviewed the court's entire charge and do not find it unfair to appellant.

[Taxpayer's Failure to Supply Information]

Appellant's ninth point of error is that:

"The Court erred in instructing the jury that in arriving at their verdict they might consider the failure of defendant to supply information to the revenue agents."

The court herein instructed the jury:

"Any failure on the part of the defendant to supply any information for the purpose of the computation, assessment, or collection of his income tax, which you find to be unjustified or inexcusable, is a circumstance which may be considered in your determination of his guilt or innocence."

The court further instructed the jury that if relevant leads were not furnished to the agents, the government was not required to

"* * * negate every conceivable source of nontaxable funds, and if the defendant failed to supply information to the agents in that regard, you may take such failure into account."

This court, in Myres v. United States, 1945, 174 Fed. (2d) 329 [49-1 USTC ¶9275], cert. den. 338 U. S. 849, and Olson v. United States , 1951, 191 Fed. (2d) 985 [51-2 USTC ¶9468], approved similar instructions. Appellant would distinguish the instant case on the theory that in the Myres and Olson cases the taxpayers were not advised that they were not compelled to furnish information. Here the appellant, in response to his question to the agent as to whether or not he was compelled to give a net worth statement, was told that he did not have to. The appellant then said that he would not give a net worth statement and further stated that he did not have records. In dealing with a similar instruction, the Court of Appeals for the Fourth Circuit, in Beard v. United States, 1955, 222 Fed. (2d) 84, 93 [55-1 USTC ¶9400], cert. den. 350 U. S. 846, stated:

"Moreover, the instruction related to the duty imposed by the taxing statutes upon the defendant to keep records of his transactions so that the extent of his liability to income tax might be ascertained; and therefore the case falls within the rule laid down in Shapiro v. United States, 335 U. S. 1, 68 S. Ct. 1375, 92 L. Ed. 1787, which reviewed a conviction of violating the regulations under the Emergency Price Control Act and held that it was proper for the jury, in determining the issue of the defendant's guilt, to consider the business records of the defendant produced by him under a subpoena issued by authority of the statute. It was held that all records which Congress, in the exercise of its constitutional powers, may require individuals to keep in the conduct of their affairs relating to the public interest become public records in the sense that they fall outside the constitutional protection of the Fifth Amendment."

In the instant case, the appellant under the law was required to keep records. He stated that he did not do so. The fact that he did not keep records or the fact that he did keep records and refused to disclose them was a proper subject for comment by the court and we find no error in the instruction given.

[Instruction Relating to Grand Jury]

Appellant's tenth point is that:

"The Court erred in overruling defendant's motion to dismiss the indictment based on the failure to present competent evidence before the Grand Jury, and the Court erred in not allowing defendant to ask every witness at the trial whether or not he testified before the Grand Jury in connection with this case."

During the pendency of this appeal, the Supreme Court, in Costello v. United States, 1956, 350 U. S. 359 [56-1 USTC ¶9321], determined this issue adversely to appellant's contention. After a review of the historical basis for grand jury proceedings, the Supreme Court ruled affirmatively on the question of whether or not a conviction could be sustained where only hearsay evidence was presented to the grand jury. The Fifth Amendment requires nothing more than that the grand jury be legally constituted and unbiased.

[Not Lesser Offense Barred by Limitations]

Appellant's eleventh point is that:

"The Court erred in overruling defendant's motion to dismiss the indictment on the ground that the indictment was barred by the statute of limitations."

It is the appellant's contention that:

"* * * the indictment charged an offense under Section 3616(a), and that the general criminal statute of limitations, 18 U. S. C. 3281, then three years, was applicable."

This issue is, then, dependent upon whether or not Section 3616(a) is applicable to income tax offenses. In Dillon v. United States , 8 Cir., 1955, 218 Fed. (2d) 97 [55-1 USTC ¶9131], ² and Berra v. United States, 8 Cir., 1955, 221 Fed. (2d) 590 [55-1 USTC ¶9382], this court held that Section 3616(a) was inapplicable to income tax cases. In affirming this court in the Berra case (351 U. S. 131), the Supreme Court did not pass upon that issue but limited its decision to the narrow question of whether the jury should have been allowed to decide whether it would apply Section 3616(a) rather than Section 145(b), and stated that that was not for a jury's determination. On the basis, then, of our decisions in the Dillon and Berra cases, we determine this issue against the appellant.

[Newspaper Article Not Prejudicial]

Appellant's twelfth point is that:

"The Court erred in overruling defendant's motion for a mistrial because of a newspaper article concerning the case and did not properly interrogate the jurors relative to the prejudicial newspaper article."

On the first day of trial, at the conclusion of the opening statement, the court gave instructions to the jurors with reference to their duties and responsibilities. They were told not to read newspaper articles as they might tend to confuse them. The court stated:

"If anything appears in the newspapers from now on during the trial of this case the Court will direct you not to read the article, and I hope that you will be responsive to that direction and will not attempt to read it. If you read articles printed in the newspaper you will very frequently find that they are not correct, and they do not get every side. It is evidence of the poorest type."

On the following day counsel for the appellant offered in evidence a newspaper article which he claimed was "* * * so colored as to unduly bias and prejudice the jury, and it appeared in the St. Louis Globe Democrat, the only morning paper, appeared in the evening issue of last night as well as this morning's issue." Appellant thereupon moved for a mistrial because of the article.

The court stated:

"The Court directed the jury not to read any newspaper articles that might appear, and if any did appear the Court will assume the jurors observed the direction of the Court. The motion is overruled."

Subsequently counsel for appellant asked the court:

"May I ask the Court to inquire of the jury if they read this article?"

The court replied:

"Yes. I will ask them if any juror violated the instructions of the Court and read the article, if they did, hold up your hands."

No hands were raised. We think the matter came clearly within the discretion of the trial court. In addition, it does not appear that any of the jurors saw or read the artical complained of. No abuse of discretion is shown where the trial court, under such circumstances, denies the motion for mistrial. Affirmed.

¹ 113 Fed. (2d) 683, a case from this circuit and relied upon by the appellant as support for his contention.

² Certiorari granted 349 U. S. 914, later dismissed 350 U. S. 906.