Admissions
Page1
7203:
Willful Failure to File Return, Supply Information, or Pay Tax:
Evidence: Admissions
[Dec.
40,211(M)] Clem Moore and
Janice Moore, et al. 1
v. Commissioner
Docket Nos. 8538-79, 8539-79, 8540-79, 8541-79, 8542-79, 8543-79,
8544-79, 21865-80, 46 TCM 473, T.C.Memo. 1983-352, Filed June 15, 1983
[Appealable, barring stipulation to the contrary, to CA-8.--CCH]
[Code Secs.
704 and 761 ]
Partnerships: Partner's distributive share: Liquidations: Employment
distinguished.--A partnership existed where a bank account was
established and supplies were purchased in the partnership name, the
partner denying its existence at times introduced himself to others as a
partner, and that same partner in documents prepared in another lawsuit
described certain property as partnership property. Therefore, the
transfer of that property to another partner was a distribution in
liquidation of a partnership interest and not the payment of wages for
services rendered.
[Code Sec.
7203 ]
Tax Court: Failure to pay tax: Evidence: Admissions.--A complaint filed
by taxpayers in a lawsuit to determine the legal interests of the
parties was admissible as evidence against taxpayers, since it was
verified by them as being true and correct. Also admitted was a brief
filed by taxpayers' attorney in that prior action, since it was a
statement made within the scope of the attorney's agency. Pleadings
filed by taxpayers' opponents in the prior action were inadmissible for
the obvious reason that they did not represent a statement by
taxpayers.--CCH.
D.
Derrell Davis, for the petitioners in docket Nos. 8358-79 through
8544-79. H. David Blair, for the petitioners in docket No. 21865-80.
Rebecca W. Wolfe, for the respondent.
Rebecca
W. Wolfe, for the respondent.
Memorandum
Findings of Fact and Opinion
GOFFE,
Judge:
The
Commissioner determined deficiencies in the petitioners' Federal income
tax for the taxable years as set forth below:
Petitioners Year Deficiency
Clem Moore and FYE
Janice Moore ............ 3/31/75 $11,645.00
Alan F. Moore and
Linda B. Moore .......... 1974 1,060.00
Donna J. Moore .......... 1974 137.16
Andrew N. Moore and
Reba Nell Moore ......... 1974 965.00
Andrew N. Moore, III .... 1974 137.16
Christie E. Moore ....... 1974 137.16
Tera J. Moore ........... 1974 137.16
George L. Davis and
Hester L. Davis ......... 1974 42,491.59
After
concessions, the issues for decision are: (1) Whether petitioners George
L. Davis and Clem Moore were partners in a partnership. Based upon our
resolution of this issue, we must then decide (2) how the various
petitioners should treat, for tax purposes, the transfer of certain
property to George Davis, to wit: as a distribution in liquidation of a
partnership interest or as the payment of wages for services rendered,
and if as wages, whether certain petitioners should recognize capital
gain on the transfer.
Findings
of Fact
Some
of the facts have been stipulated. The stipulation of facts and
stipulated exhibits are incorporated herein by this reference.
All
petitioners resided in the State of
Arkansas
at the time they filed their petitions in this matter.
Petitioners
Clem and Janice Moore filed a joint Federal income tax return for the
taxable year ended March 31, 1975. A statutory notice of deficiency for
the taxable year ended March 31, 1975, was timely mailed to petitioners
Clem and Janice Moore on March 19, 1979.
Petitioners
Alan F. and Linda B. Moore filed a joint Federal income tax return for
the taxable year 1974. A statutory notice of deficiency for the taxable
year 1974 was timely mailed to petitioners Alan F. and Linda B. Moore on
March 19, 1979.
Petitioners
Andrew N. and Reba Nell Moore filed a joint Federal income tax return
for the taxable year 1974. A statutory notice of deficiency for the
taxable year 1974 was timely mailed to petitioners Andrew N. and Reba
Nell Moore on March 19, 1979.
Petitioners
Donna J. Moore, Andrew N. Moore, III, Christie E. Moore, and Tera J.
Moore did not file Federal income tax returns for the taxable year 1974.
On March 19, 1979, these petitioners were timely mailed statutory
notices of deficiency for the taxable year 1974.
Petitioners
George L. and Hester L. Davis filed a joint Federal income tax return
for the taxable year 1974. A statutory notice of deficiency for the
taxable year 1974 was timely mailed to petitioners George L. and Hester
L. Davis on September 29, 1980.
On
March 8, 1961, George L. Davis entered into a contract with Nelse W.
Barnett to purchase certain real property, consisting of approximately
806 acres in
Independence County
,
Arkansas
. As part of the purchase price for the 806 acres, George Davis conveyed
his equity interest in his home and 30 acres to Nelse Barnett. Under the
terms of the contract dated March 8, 1961, George Davis was to pay Nelse
Barnett an additional $10,000 in yearly installments of $500, plus
interest at 6 percent per annum. The first interest payment was due on
January 1, 1962, and the first payment on the principal was due on
January 1, 1964.
George
Davis and Mr. Barnett had a disagreement as to certain additional
obligations of Mr. Barnett under their agreement, so on December 15,
1961, Barnett sold the property to Clem Moore, subject to George Davis'
rights under the March 8, 1961, contract. George Davis then, by oral
agreement, formed a partnership with Clem Moore's son, Andy, to raise
cattle on the Barnett land, in which both he and Clem Moore had an
interest. Under their agreement George Davis and Andy Moore were equal
partners. Clem Moore agreed to lend the partnership, at 6-percent
interest, the money it needed to operate. Andy contributed a herd of
cattle to the partnership.
Davis
was to receive a one-half interest in all the partnership property once
the
Moores
were repaid their investment. They operated on this basis for several
years.
In
1965 Clem Moore, who had bought some land adjoining the land that George
Davis and Andy Moore had been ranching, contributed this land to the
partnership and Andy, Clem and George all became equal partners with a
one-third share each of the partnership. This was done by oral agreement
among the three men. At this time Andy was going off to college.
Clem
Moore kept the books of the partnership. These books consisted of a
single-entry book of account in which he recorded al items of expense
and income and all capital contributions and expenditures. None of the
partners received any profits from the cattle operation. All profits
were applied to repay the working capital loan due to Clem Moore and to
pay Clem Moore for his interest in the land used by the partnership.
Beginning
after Andy went to school, the partnership agreed to pay George Davis
$100 a month to do Andy's share of the work. The partnership, throughout
its history, was indebted to Clem Moore for the capital which he lent
it. The partnership was unable to pay down the principal on this loan,
so the partners agreed that in any month in which George Davis would
forgo his $100 a month payment then $300, or $100 from each partner,
would be applied to offset the principal amount of the partnership debt
to Clem Moore.
From
1961 through 1973 the cattle partnership operated under the name of
Davis and Moore.
In
1970, Clem Moore formed a family patnership with his children and
grandchildren, the other petitioners in this case. Gifts of real
property totaling approximately 2200 acres, including the real property
involved in the cattle operation, were made by Clem and Janice Moore to
the family partnership. At the time this property was transferred from
Clem Moore to the family partnership, Clem Moore acknowledged to his
accountant that George Davis had a "working interest" in the
property. On occasion Clem Moore introduced himself as George Davis'
partner.
In
1971, Clem Moore indicated to George Davis that he wanted to sell all of
the assets of the cattle operation. These assets were not sold because
George Davis objected.
After
the formation of the family partnership, Clem Moore turned the books of
account for the cattle operation over to George and Hester Davis. Hester
Davis opened a bank account for the partnership in the name of Davis and
Moore Farms.
On
April 17, 1973, George L. Davis filed a suit against Clem and Janice
Moore in the Chancery Court of Independence County, Arkansas. On June 6,
1974, this suit was settled pursuant to an agreement between George
Davis and Clem and Janice Moore. As a result of the above agreement,
Clem and Janice Moore transferred approximately 540 acres valued at
$82,940 to George and Hester Davis by deed dated June 6, 1974, and
equipment valued at $5,349.
On
its partnership Federal income tax return for the reporting year 1974,
the
Moore
family partnership reported an ordinary loss in the amount of $74,934
which included a deduction for labor hired in the amount of $88,289 for
the distribution of property to George Davis. It also separately
reported $53,145 as long-term capital gain resulting from the
distribution of property to George Davis. Clem and Janice Moore reported
on their Federal income tax return for the fiscal year ended March 31,
1975, an ordinary loss from partnership income in the amount of $23,980
and a net long-term capital gain from partnerships in the amount of
$17,005, representing their distributive share of the family
partnership's items of income and expense. Alan F. and Linda B. Moore
reported on their Federal income tax return for the taxable year 1974 an
ordinary loss from partnership income in the amount of $5,995 and a net
long-term capital gain from partnerships in the amount of $4,252,
representing their distributive share of the family partnership's items
of income and expense. Andrew N. and Reba Nell Moore reported on their
Federal income tax return for the taxable year 1974 an ordinary loss
from partnership income in the amount of $5,995 and a net long-term
capital gain from partnerships in the amount of $4,252, representing
their distributive share of the family partnership's items of income and
expense. Donna J. Moore, Andrew N. Moore, III, Christie E. Moore and
Tera J. Moore did not file Federal income tax returns for the taxable
year 1974.
George
and Hester Davis did not report any income from the distribution of land
and equipment on their Federal income tax return for the taxable year
1974.
The
Commissioner, in his statutory notices of deficiency for the
Moore
petitioners, determined that the amount claimed by the partnership as
wages paid to George Davis was a settlement of a partnership interest
and therefore not deductible. He also determined that the land
transferred to George Davis was in settlement of a partnership interest
and not a sale of land. Accordingly, he made adjustments to the reported
incomes of Clem and Janice Moore, Alan F. and Linda B. Moore, and Andrew
N. and Reba Nell Moore to reflect increases to their reported ordinary
income to the extent of their share of the claimed wage deduction and
decreases in their reported capital gain to the extent that their
capital gain was attributable to the land distributed to George Davis.
In his statutory notices of deficiency for the
Moore
petitioners who did not file Federal income tax returns for the taxable
year 1974, the Commissioner determined that these petitioners had
taxable income to the extent of their distributive share of partnership
income as that partnership income was determined by the Commissioner.
In
the statutory notice of deficiency for George and Hester Davis, the
Commissioner determined that their taxable income should be increased by
a distribution of $94,113.32 from the
Davis
&
Moore
partnership representing compensation for services rendered.
Ultimate
Finding of Fact
George
Davis, Andy Moore and Clem Moore were members of a partnership for
Federal tax purposes. The real property and equipment transferred to
George Davis was a distribution in liquidation of his partnership
interest.
Opinion
In
1961 George Davis entered into a contract to purchase some land on which
he hoped to raise cattle. After transferring certain property to the
seller he and the seller had a disagreement which ultimately resulted in
the seller selling the property to Clem Moore, subject to
Davis
' rights under the contract.
Davis
then went into partnership with Clem Moore's son, Andy, to raise cattle
on the land. They started with
Davis
' interest in the land that was also owned by Clem Moore, with some
cattle that Andy contributed to the partnership and with Clem Moore's
agreement to lend the partnership the money it needed to operate.
Davis
was to receive a one-half interest in all partnership property once the
Moores
were repaid their investment. The profits of the partnership were paid
to Clem Moore as interest on his operating capital loan and to pay him
for his interest in the land.
In
1965 Clem Moore contributed some adjoining land that he had purchased
and became a third, equal partner in the partnership of Davis and Moore.
The
parties eventually had a falling out and
Davis
sued Clem and Janice Moore for his share of the partnership property.
Clem and Janice transferred certain land and equipment to George and
Hester Davis in settlement of this lawsuit. This property had been
transferred by Clem and Janice Moore to a family partnership.
Before
addressing the issues on their merits, we will consider certain
evidentiary questions that were not decided at trial but were briefed by
the parties for our subsequent resolution.
The
Moore
petitioners object to the admission of certain exhibits as evidence.
These exhibits are (1) Ex. 16-P, complaint filed by George Davis in the
Chancery Court of Independence County, Arkansas, in the matter of George
L. Davis versus Clem Moore and Janice Moore (the Complaint by Davis);
(2) Ex. 19-S, entitled Agreement, which represents the settlement
agreement entered into by the parties as a result of the legal action
brought by George Davis (the Settlement Agreement); (3) Ex. 20-T,
Complaint in Equity filed by Clem and Janice Moore in the Chancery Court
of Independence County, Arkansas, in the matter of Clem Moore and Janice
Moore, his wife, versus George L. Davis and Hester L. Davis, his wife,
(the Complaint by Moore); and (4) Ex. 31-AE, a brief entitled Reply to
Amended Memorandum Brief of Defendants, filed by the attorneys for Clem
and Janice Moore in the matter commenced by Clem and Janice Moore as
described in (3), above, (the Moore Brief).
Petitioners
Moore
object to Ex. 19-S, the Settlement Agreement as inadmissible under Rule
408, Federal Rules of Evidence. Rule 408 provides as follows:
Rule
408. Compromise and Offers to Compromise
Evidence
of (1) furnishing or offering or promising to furnish, or (2) accepting
or offering or promising to accept, a valuable consideration in
compromising or attempting to compromise a claim which was disputed as
to either validity or amount, is not admissible to prove liability for
or invalidity of the claim or its amount. Evidence of conduct or
statements made in compromise negotiations is likewise not admissible.
This rule does not require the exclusion of any evidence otherwise
discoverable merely because it is represented in the course of
compromise negotiations. This rule also does not require exclusion when
the evidence is offered for another purpose, such as proving bias or
prejudice of a witness, negativing a contention of undue delay, or
proving an effort to obstruct a criminal investigation or prosecution.
The
evidence the Moore petitioners seek to exclude is the Settlement
Agreement pursuant to which the property in question was transferred
from Clem and Janice Moore and the Moore family partnership to George
Davis. It was this transfer which resulted in the taxable transaction at
issue. Respondent argues that the Settlement Agreement was not offered
to prove the liability of Clem and Janice Moore but to enable the Court
to be fully informed of the transfer. We will admit Ex. 19-S for the
limited purpose of showing the terms of their settlement.
The
Moore petitioners object to the remaining documents in dispute as
"hearsay * * * [that] cannot be admitted as admissions on behalf
of" Clem and Janice Moore. They argue that the Federal Rules of
Civil Procedure provide for very liberal construction of pleadings and
in this context statements in these documents referring to a partnership
between Clem Moore and George Davis do not reflect affirmative
allegations of a partnership nor admissions of a partnership but merely
the draftsman's careless use of language.
Although
the Moore petitioners do not refer to the Federal Rules of Evidence in
stating their argument, they presumably rely on the general Rule 802,
Federal Rules of Evidence, that hearsay is not admissible except to the
extent provided in the Federal Rules of Evidence. Respondent, however,
maintains that the disputed documents are not hearsay because they
represent admissions by a party-opponent under Rule 801(d)(2), Federal
Rules of Evidence. The pertinent part of that rule provides:
(d)
Statements which are not hearsay.--A statement is not hearsay
if--
*
* *
(2)
Admissions by party-opponent.--The statement is offered against a
party and is (A) his own statement, in either his individual or a
representative capacity, or (B) a statement of which he has manifested
his adoption or belief in its truth, or (C) a statement by a person
authorized by him to make a statement concerning the subject, or (D) a
statement by his agent or servant concerning a matter within the scope
of his agency or employment, made during the existence of the
relationship, or (E) a statement by a co-conspirator of a party during
the course and in furtherance of the conspiracy.
Ex.
16-P, the Complaint by Davis, is not admissible as an admission by Clem
and Janice Moore for the obvious reason that it does not represent a
statement by the Moores. Neither the Davis petitioners nor respondent
provide an alternative reason for admission. Accordingly, it will not be
admitted as evidence.
Exs.
20-T and 31-AE are Clem and Janice Moore's complaint in the legal action
that they instituted and a brief prepared on their behalf in the same
matter. Ex. 20-T, the Complaint by Moore, was verified by Clem Moore,
stating "on oath that the matters and things set forth in the
foregoing complaint are true and correct to the best of his knowledge
and belief." The Complaint by Moore is clearly admissible under the
adoptive admission exception from the definition of hearsay of Rule
801(d)(2)(B). United States v. Morgan, 581 F.2d 933 (D. C. Cir.
1978); United States v. Johnson, 529 F.2d 581 (8th Cir. 1976).
Ex. 31-AE, the Moore Brief, is admissible as not hearsay under Rule
801(d)(2)(D) because a brief submitted by an attorney on behalf of a
party in a lawsuit commenced by that party is clearly a statement made
within the scope of the attorney's agency. The arguments on which the
Moore petitioners rely more appropriately bear on the weight to which
this controverted evidence should be given, and we will be considerate
of these arguments in that context.
We
will now turn to the substantive issues. Whether a partnership exists
for Federal tax purposes is a question of Federal rather than state law.
Estate of Kahn v. Commissioner [74-2
USTC ¶9524 ], 499 F.2d 1186, 1189 (2d Cir. 1974). The
essential question is whether the parties intended to, and did in fact,
join together for the present conduct of an undertaking or enterprise.
See Commissioner v. Culbertson [49-1
USTC ¶9323 ], 337 U. S. 733 (1949). This determination is
factual by its very nature. In making the determination we will consider
numerous factors, none of which is conclusive. Luna v. Commissioner
[Dec. 26,967 ], 42 T. C.
1067 (1964).
We
have found as a fact that George Davis, Andy Moore and Clem Moore were
partners in a partnership. While Clem Moore denies this, he was not
forthright with the Court as to his son's involvement in the events. We
did not find him to be a credible witness, based upon our general
impression of his demeanor and his testimony at trial. In contrast, we
found George and Hester Davis to be forthright and credible. We need not
base our decision solely on the testimony, however, as there is
substantial objective evidence that the parties held themselves out to
be and in fact operated as a partnership. Supplies were purchased in the
name of Davis and Moore. Clem Moore did not object to this and more
often than not personally paid the bills. Cattle were sold under the
name Davis and Moore. A bank account was established under the name
Davis and Moore Farms. Clem Moore on occasion introduced himself to
third parties as a partner. After the parties resolved the Davis suit by
a Settlement Agreement, Clem and Janice Moore sued the Davises on the
basis of that Settlement Agreement, maintaining in the documents that
were prepared by their attorney, one of which Clem Moore verified as
true, that the property in question was partnership property.
The
Moore petitioners argue that the nature of the agreement between the
Moores and Davis could not constitute a partnership because Davis
contributed no property to the relationship and was only promised a
future interest of the cattle operation assets when Clem Moore was
repaid with interest. This argument ignores the interest of the Davises
in the land used by the cattle operation. We have found, on the basis of
the contract which he entered into with Mr. Barnett and pursuant to
which he transferred his equity interest in his home and 30 acres to Mr.
Barnett, that he had an interest in this land. Clem Moore purchased this
property subject to George Davis' rights under that contract.
Having
decided that a partnership existed, we agree with petitioners Davis and
the respondent that what the Davises received pursuant to the Settlement
Agreement was a distribution in liquidation of a partnership interest
and not the payment of wages for services rendered.
Decisions
will be entered for the respondent in docket Nos. 8538-79 through
8544-79.
Decision
will be entered for petitioners in docket No. 21865-80.
1
Cases of the following petitioners are consolidated herewith: Alan F.
Moore and Linda B. Moore, docket No. 8539-79; Donna J. Moore, docket No.
8540-79; Andrew N. Moore and Reba Nell Moore, docket No. 8541-79; Andrew
N. Moore, III, docket No. 8542-79; Christie E. Moore, docket No.
8543-79; Tera J. Moore, docket No. 8544-79; and George L. Davis and
Hester L. Davis, docket No. 21865-80.
[92-2
USTC ¶50,317] In re Joseph Donald Ermenc, Debtor. Joseph Donald Ermenc,
Plaintiff v. U.S.A., Internal Revenue Service, Defendant
U.S.
Bankruptcy Court, No. Dist. Ind., Hammond Div., Gary/Lafayette,
89-60477, 4/27/92
[Code Secs.
6871 and 7201 ]
Criminal tax evasion: Guilty plea: Collateral estoppel: Bankruptcy
proceedings.--
The tax obligations of a bankrupt who pleaded guilty to criminal tax
evasion under Code Sec.
7201 were not dischargeable in bankruptcy. The fact that the
criminal conviction resulted from a guilty plea, rather than from a
trial on the merits, did not preclude the bankruptcy court from giving
collateral estoppel effect to the conviction. A copy of the debtor's
indictment had not been filed with the bankruptcy court and it was not
clear for what tax year the debtor had been convicted. However, the
debtor's Statement of Material Fact and the United States' reply brief
established that the debtor had been convicted for one tax year. With
regard to the remaining years in question, the debtor's Statement of
Material Fact was in essence an admission that he had engaged in a
course of conduct that included filing W-4 forms--on which he falsely
claimed to be exempt from federal withholding or claimed allowances in
excess of those he was legally entitled to--and intentionally failing to
file his federal income tax returns.
Memorandum Opinion and Order
LINDQUIST,
Bankruptcy Judge:
This
Adversary Proceeding comes before the Court on a Motion for Summary
Judgment pursuant to Fed. R. Civ. P. 56 filed by the United States of
America (hereinafter: "USA") by its agent the Internal Revenue
Service (hereinafter: "IRS") on January 7, 1992.
The
Plaintiff and Chapter 7 Debtor, Joseph Donald Ermenc (hereinafter:
"Debtor") filed his complaint versus the USA on October 26,
1990 in two counts.
Count
I of the complaint prays that the Court, pursuant to 11 U.S.C. §505(a) , determine the
federal income tax, interest and penalties due by the Debtor to the USA
for the following tax years: 1978, 1979, 1980, 1983, 1984, 1985, 1987
and 1988. (The Debtor commenced his Chapter 7 case by filing a petition
on March 30, 1988).
Count
II of the Debtor's complaint prays that his income tax debts to the USA
for the tax years 1978, 1979, 1980, 1981, and 1982 should be held to be
dischargeable pursuant to §523(a)(1). Although, the Debtor does not set
out the precise provision of the Bankruptcy Code that is applicable, he
asserts that although the tax returns for the foregoing years were not
timely filed, the returns were filed over two years prior to the filing
of the Debtor's petition and thus apparently the Debtor is asserting
that these taxes are dischargeable pursuant to §523(a)(1)(B)(ii) .
The
USA's answer filed on August 16, 1991, to the Debtor's complaint alleges
that the Debtor committed fraud by willfully and knowingly filing false
and fraudulent W-4 forms with an intent to evade or defeat taxes and/or
willfully and knowingly failed to file his income tax returns for the
tax years 1978 through 1982 with the intent to evade or defeat federal
income taxes. See, 11 U.S.C. §523(a)(1)(C).
The
USA filed its proposed Findings on January 7, 1992 in support of its
Motion for Summary Judgment. These proposed findings state as follows:
1.
Plaintiff brought this action seeking a determination of his 1978-1980,
1983-1985, and 1987-1988, federal income tax liabilities pursuant to 11
U.S.C. §505 , and a determination
of the dischargeability of his 1978-1982 federal income tax liabilities
pursuant to 11 U.S.C. §523.
2.
Plaintiff has orally withdrawn his request for tax determination under
11 U.S.C. §505 , thus, the issue to
be determined by the Court is dischargeability of his 1978-1983 (sic,
1982) federal income tax liabilities.
3.
During 1978-1982, plaintiff engaged in a course of conduct which
included filing Forms W-4, Employee's Withholding Allowance
Certificates, falsely claiming to be exempt from federal withholding or
claiming allowances in excess of those he was legally entitled to, and
intentionally failing to file his federal income tax returns.
4.
The outcome of this course of conduct was to substantially reduce the
federal income tax withheld from plaintiff's wages during 1978-1982 and
to hinder the ability of the Internal Revenue Service to assess and
collect plaintiff's federal tax liabilities during those years.
5.
In Case No. HCR 86-32, plaintiff was convicted of three counts of
willfully attempting in any manner to evade or defeat tax, pursuant to
26 U.S.C. §7201 , for the years
1978-1980.
The
Debtor on February 4, 1992 filed his Statement of Material Fact which
stated as follows:
1.
That Plaintiff has no disagreement with Defendants finding of fact 1
thur (sic) 4.
2.
That on July 10, 1986, in Case No. 86-32, plaintiff was convicted of one
count of Failure to File Income Tax, pursuant to 26 U.S.C. section 7201 , for the year
1978, and Count Two and Three of the Indictment for the years 1979 and
1980 was dismissed. (A copy of The Judgment and Probation Order is
attached hereto).
Because
the Debtor has no disagreement with the USA as to the USA's proposed
finding of Number 2, supra, Count I of the Debtor's complaint to
determine the amount of the Debtor's tax liability to the USA pursuant
to §505(a)
is no longer an issue before the Court.
Thus,
the only issues before the Court are those raised by the Debtor in Count
II in which he prays that the Court determine the Debtor's tax
liabilities for the years 1978 through 1982 be adjudged dischargeable
pursuant to §523(a)(1). 1
The
USA in its brief filed on January 7, 1992, correctly points out that a
criminal conviction under 26 U.S.C. §7201
2 operates as
a collateral estoppel on the issue of civil fraud under 26 U.S.C. §6653(b),
3 citing,
Plunkett v. Commissioner [72-2
USTC ¶9541 ], 465 F.2d 299 (7th Cir. 1971).
It
should also be noted that the precedents addressing the imposition of
civil fraud additions under 26 U.S.C. §6653(b) provide persuasive
guidance for construing 11 U.S.C. §523(a)(1)(C). In re Carlen, Case
No. 90-60855 (Carlen v. Dept. of Treasury, Adv. Pro. No. 90-6187)
(Bankr. N.D. Ind., November 4, 1991) (J. Lindquist, unpub. opin.); In
re Gilder, 122 B.R. 593, 595 (Bankr. M.D. Fla. 1990); In re
Graham [90-1
USTC ¶50,072 ], 108 B.R. 498, 502, N. 6, (Bankr. E.D. Pa.
1989); In re Kirk, 98 B.R. 52, 54-55 (Bankr. M.D. Fla. 1989), citing,
In re Harris, 49 B.R. 223, 226 (Bankr. W.D. Va. 1985); Modified
on either grounds, 59 B.R. 545; In re Carapella [89-2 USTC ¶9525 ],
105 B.R. 86, 87 (Bankr. M.D. Fla. 1989); In re Hopkins, 1991
Bankr. Lexis 548, Bankr. L. Rep. (CCH), P. 73,988 (Bankr. N.D. Ohio
1991); In re Ball, 1990 Bankr. Lexis 2045 (Bankr. E.D. Ark.
1990). In addition, 26 U.S.C. §7201(a) should be
construed in the same way as 11 U.S.C. §523(a)(1). See, In re
Gathwright, 102 B.R. 211, 213 (Bankr. D. Ore. 1989) (phrase
"willfully attempted in any manner to evade or defeat such
tax" in §523(a)(1)(C) should be interpreted in the same manner at §7201(a) of the IRC, i.e.
it is a felony to willfully attempt in any manner to evade or defeat a
tax imposed by title 26 or the payment thereof); In re Peterson [92-1
USTC ¶50,216 ], 132 B.R. 68-71 (Bankr. D. Wyo. 1991)
(Construing "willfully", "attempted", and "in
any manner" consistently with §§6653
and 7201 of the IRC).
The
fact that the Debtor plead guilty to tax evasion under 26 U.S.C. §7201 which resulted in a
federal criminal conviction, rather than the criminal conviction arising
out of a trial on the merits, does not preclude this Court from giving
collateral estoppel effect to that criminal conviction in a subsequent
§523(a)(1)(C) nondischargeability proceeding in this Court, such as the
one sub judice. The Seventh Circuit in Appley v. West, 835
F.2d 1021 (7th Cir. 1987) stated as follows:
Collateral
estoppel, or issue preclusion, may be applied in civil trials to issues
previously determined in a criminal conviction. Otherson v.
Department of Justice, 711 F.2d 267, 271 (D.C. Cir. 1983).
Similarly, a guilty plea may be used to establish issue preclusion in a
subsequent civil suit. "In this Circuit, a criminal conviction
based upon a guilty plea conclusively establishes for purposes of a
subsequent civil proceeding that the defendant engaged in the criminal
act for which he was convicted." Nathan v. Tenna Corp., 560
F.2d 761, 763 (7th Cir. 1977) (applying the law of the Seventh Circuit
to decide the effect, in a diversity case under Illinois law, of a
guilty plea in a federal district court).
When
Mr. West pleaded guilty to the two counts of mail fraud, he effectively
pleaded guilty to all of the material facts alleged in the indictment on
those two counts. See, LaMagna v. United States, 646 F.2d 775,
778 (2d Cir.) (citing McCarthy v. United States [69-1 USTC ¶9312 ],
394 U.S. 459 (1969), cert. denied, 454 U.S. 898 (1981); Tom v.
Twomey, 430 F. Supp. 160, 162 (N.D. Ill. 1977). See generally, 1 C.
Wright, Federal Practice and Procedure ¶175 at 623-24 (1982).
Accordingly, the material facts of the indictment in Counts I and XII
may be established in the present action through the use of collateral
estoppel. Ms. Appley, however, has the burden of establishing which
issues were actually determined in her favor by the guilty plea. See, Davis
& Cox v. Summa Corp., 751 F.2d 1507, 1518 (9th Cir. 1985).
See
also, Instituto Nacional De Comercializacion Agricola (Indeca) v.
Continental Illinois National Bank, 858 F.2d 1263 (7th Cir. 1988).
The
Seventh Circuit in Nathan v. Tenna Corp., 560 F.2d 761 (7th Cir.
1977), cited with approval in Appley, supra, clearly stated as
follows:
In
this Circuit, a criminal conviction based upon a guilty plea
conclusively establishes for purposes of a subsequent civil proceeding
that the defendant engaged in the criminal act for which he was
convicted. Plunkett v. Commissioner of Internal Revenue [72-2 USTC ¶9541 ],
465 F.2d 299, 305-07 (7th Cir. 1972). Accordingly, Nathan's guilty plea
to federal mail fraud charges for splitting commissions with Bryza
conclusively establishes that his conduct was criminal, and Nathan may
not present evidence to the contrary in this civil proceeding. Hence, no
material issue exists as to whether Nathan engaged in illegal conduct.
In
Plunkett v. Commissioner of Internal Revenue [72-2 USTC ¶9541 ],
465 F.2d 299 (7th Cir. 1971), which was cited favorably in the Nathan
case, the Seventh Circuit stated:
[P]lunkett
argues that the Tax Court erred in determining that his conviction in
1967 for income tax evasion for the years 1960 through 1963 collaterally
estopped him in the subsequent civil proceedings from denying that the
returns for those years were fraudulent. The Commissioner introduced no
affirmative evidence of fraud in the Tax Court but relied on the returns
and Plunkett's plea of guilty and his criminal conviction to sustain the
imposition of the 50 percent "fraud penalty," 26 U.S.C. §6653(b).
Most
courts faced with the question have held that a prior conviction for tax
evasion after a trial on the merits operates as a collateral estoppel on
the issue of civil fraud in a fraud penalty proceeding. The criminal
conviction necessarily carries with it the ultimate factual
determination that the underpayments of tax were "due to
fraud" within the meaning of section 6653(b). E.G., Moore v.
United States [66-1 USTC ¶9399 ],
360 F.2d 353 (4th Cir. 1965), cert. denied, 385 U.S. 1001, 87 S.
Ct. 704, 17 L. Ed. 2d 541 (1967); Armstrong v. United States [66-1 USTC ¶9119 ],
354 F.2d 274, 173 Ct. Cl. 994 (1965); Tomlinson v. Lefkowitz [64-2 USTC ¶9623 ],
334 F.2d 262 (5th Cir. 1964), cert. denied, 379 U.S. 962, 85 S.
Ct. 650, 13 L. Ed.2d 556 (1965); Amos v. Commissioner of Internal
Revenue [CCH Dec. 27,012 ],
43 T.C. 50 (1964), aff'd, [66-1 USTC ¶9130 ],
360 F.2d 358 (4th Cir. 1965). Two recent decisions of the Tax Court
reiterate this principle, C.B.C. Super Markets, Inc. v. Commissioner
of Internal Revenue [CCH Dec. 30,061], 54 T.C. 882 (1970), and Rodney
v. Commissioner of Internal Revenue [CCH Dec. 29,844 ],
53 T.C. 287 (1969).
We
note that there is strong authority holding that a guilty plea is an
admission of all the elements of a formal criminal charge. McCarthy
v. United States [69-1
USTC ¶9312 ], 394 U.S. 459, 466, 89 S.Ct. 1166, 22 L.Ed.2d
418 (1969); Kercheval v. United States, 274 U.S. 220, 223, 47
S.Ct. 582, 71 L.Ed. 1009 (1927).
In
Arctic Ice Cream Co. v. Commissioner of Internal Revenue [CCH Dec. 27,013 ],
43 T.C. 68 (1964), a corporate taxpayer was held to be collaterally
estopped from denying fraud in a civil proceeding by its previous
conviction for tax evasion based upon a guilty plea. In upholding the
imposition of a civil fraud penalty, the court declared:
"It
is not material that Arctic's conviction was based upon a guilty plea,
because for purposes of applying the doctrine of collateral estoppel, as
well as for other purposes, there is no difference between a judgment of
conviction based upon such a plea and a judgment of conviction rendered
after a trial of the merits. . . . Artic's plea of guilty to this
indictment was therefore a conclusive judicial admission that its return
for 1946 was false and fraudulent and that the deficiency in tax which
was the necessary result of its being filed was due to fraud with intent
to evade tax." [CCH Dec. 27,013 ]
43 T.C. at 75.
See
also Otsuki v. Commissioner of Internal Revenue [CCH Dec. 29,807 ],
53 T.C. 96 (1969) (dicta).
On
February 4, 1992, the Debtor filed a certified copy of the Debtor's
Judgment of Conviction in the Federal District Court for the Northern
District of Indiana, Case No. HCR--00032-01, in which the Debtor plead
guilty to one count of 26 U.S.C. §7201 --"Failure to
pay Income Tax". Counts II and III were dismissed by the USA.
Because a copy of the Indictment was not included, it is not clear for
what tax year the Debtor was convicted. The Debtor's statement of
Material Fact asserts, without any supporting competent evidence, that
he was convicted for the tax year 1978 pursuant to Count I, and that the
dismissal of Counts II and III related to the tax years 1979 and 1980.
However, the USA in its reply brief admits that the Debtor was only
convicted for the 1978 tax year.
Thus,
based upon the applicable law, when the Court enters its final order in
this Adversary Proceeding, it will grant the USA's Motion for Summary
Judgment as to 1978, and find that his tax obligations for that year are
nondischargeable in his bankruptcy, pursuant to §523(a)(1)(C) based on
his plea of guilty to Count I of the indictment.
The
USA argues in both its initial brief, and its reply brief, that the
record shows that the Debtor filed W-4 forms in which he falsely claimed
to be exempt from withholding, or claimed allowances in excess of those
he was legally entitled to, and intentionally failed to file his federal
income tax returns as to all four years in question, and thus all tax
debts arising out of all four tax years are nondischargeable pursuant to
§523(a)(1)(C), citing, among other authorities, Granado v.
United States [86-1 USTC ¶9453 ],
792 F.2d 91 (7th Cir. 1986), and In re Harrison, 91-1
USTC ¶50,078 (Bankr. N.D. Ind. 1991), which held that the
filing of false W-4 withholding forms, in combination with an
individual's willful failure to file an income tax return provides clear
and convincing evidence of fraud under 26 U.S.C. §6653(b).
The
Court does not quarrel with the above general propositions of law as
posited by the USA. However, there is not competent evidence in the
record, as required by Fed.R.Civ.P.56(c) and (e), either by way of
affidavits, discovery responses, or certified records to support the
USA's Motion as to those tax years other than 1978.
Supporting
Memorandum, not sworn or in affidavit form making factual assertions,
even if accompanied by exhibits does not meet the requirements of Rule
56(e), and cannot be relied upon by the Court as establishing a basis
for summary judgment. Macklin v. Butler, 553 F.2d 525 (7th Cir.
1977); Smith v. Mack Trucks, Inc., 505 F.2d 1248 (9th Cir. 194); Goldman
v. Summerfield, 214 F.2d 858 (D.C. Cir. 1954).
However
"admissions in the brief of the party opposing the motion may be
used in determining that there is a genuine issue as to any material
fact, since they are functionally equivalent to 'admissions on file'
". United States of America v. Oneheckler-Koch Rifle, 629
F.2d 1250, 60 A.L.R. Fed. 293 (7th Cir. 1980), quoting, 10 C.
Wright & A. Miller, Federal Practice and Procedure, §2723 at
490 (1973).
The
Debtor in his Statement of Material Fact filed on February 4, 1992,
stated he had no disagreement with the USA's Findings of Fact one
through four filed on January 7, 1992. Thus, the Debtor, in essence,
admitted that during 1978 through 1982 he engaged in a course of conduct
which included filing forms W-4, Employees' Withholding Allowance
Certificates, falsely claiming to be exempt from federal withholding or
claiming allowances in excess of those he was legally entitled to, and
intentionally failing to file his federal income tax returns. (See,
USA's Findings of Fact, Number 3). The Plaintiff also did not disagree
with Findings of Fact Number 4 submitted by the USA, that the outcome of
this course of conduct was to substantially reduce the federal income
tax withheld from the Plaintiff's wages for 1978 through 1982, and to
hinder the ability of the Internal Revenue Service to assess and collect
the Plaintiff's federal tax liabilities during those years.
In
order to establish that the tax debts are nondischargeable under 11
U.S.C. §523(a)(1)(C), the USA must prove that the Debtors' actions were
deliberate, not accidental, and done with fraudulent intent. In re
Meyers, 1990 Bankr. Lexis 2254 (Bankr. W.D. Wash. 1990); In re
Gathwright [89-1 USTC ¶9346 ],
102 B.R. 211, 213 (Bankr. D. Or. 1989). Since direct proof of an
individual's intention is difficult to establish, proof of the
taxpayer's intent may depend upon circumstantial evidence and reasonable
inferences properly drawn from the evidence in the record. In re
Graham [90-1
USTC ¶50,072 ], 108 B.R. at 501-02 (Bankr. E.D. Pa. 1989), citing,
Korecky v. Commissioner [86-1 USTC ¶9232 ],
781 F.2d 1566 (11th Cir. 1986); Toussaint v. Commissioner [84-2 USTC ¶9839 ],
743 F.2d 309 (5th Cir. 1984); Stone v. Commissioner [CCH Dec. 30,767 ],
56 T.C. 213 (1971); In re Carapella [89-2 USTC ¶9525 ],
105 B.R. 86, 89 (Bankr. M.D. Fla. 1989), and In re Kirk, 98 B.R.
51, 55 (Bankr. M.D. Fla. 1989). However, as stated in Zell v.
Commissioner of Internal Revenue Service [85-2 USTC ¶9698 ],
763 F.2d 1139 (10th Cir. 1985) fraud means "actual, intentional
wrongdoing, and the intent required is the specific purpose to evade a
tax believed to be owing." Fraud will never be presumed or implied.
Id.
The
Court would also note that based on the assertions of the USA that the
taxes for the years 1979, 1980, 1981 and 1982 are also not dischargeable
pursuant to §523(a)(1)(C), this Adversary Proceeding may compel a
determination by the Court of whether the debtors intentionally
submitted fraudulent tax returns, or W-4 withholding forms, whereby he
willfully attempted to evade or defeat a tax, which sounds in fraud. As
a general rule, fraud and tort actions are generally not disposed of by
summary judgment, because they typically involve a myriad of factual
issues. Aldeman-Tremblay v. Jewell Companies. Inc., 859 F.2d 517
(7th Cir. 1988), citing, Gracyalmy v. Westinghouse Electric Corp.,
723 F.2d 1311, 1316 (7th Cir. 1983), and Iva C. Wright, A. Miller and M.
Kane, Federal Practice and Procedure, §2727 (1983).
To
the extent that the resolution of the dischargeability of the tax debts
involves the resolution of issues involving fraud or willfulness, it
obviously raises highly disputed and factually material issues based on
the credibility of witnesses, genuine and material issues as to state of
mind, reasonableness of reliance, and other subjective matters
peculiarly within the knowledge of the opposing parties which the Court
may have to weigh in a context where conflicting versions of the facts
are often presented. Cases in which motive or intent play a leading role
are peculiarly inappropriate for disposition by summary judgment. Askew
v. Bloemaker, 548 F.2d 673 (7th Cir. 1976). See e.g., Matter of
Seiler, 29 B.R. 33 (Bankr. N.D. Ind. 1983); In re Proof of
Pudding, Inc., 10 B.R. 459 (Bankr. S.D.N.Y. 1981), citing,
Freidman v. Meyers, 482 F.2d 435, 439 (2d Cir. 1973). Summary
judgment is not appropriate where a trial, with its opportunity for
cross-examination and testing credibility of the witnesses might
disclose a picture substantially different from that given by
affidavits. United States v. Perry, 431 F.2d 1020, 1022, 19
A.L.R. Fed. 537 (7th Cir. 1970).
However,
in the case at bar, the admissions filed by the Debtor's counsel in his
Statement of Material Fact removes the necessity for a trial on the
merits as to tax years 1979 through 1982. By his admissions, all of the
material elements necessary to find that his tax obligations for the tax
years 1979 through 1982 are nondischargeable pursuant to 11 U.S.C. §523(a)(1)(C)
are present, even though he did not plead guilty to criminal charges
based on either 26 U.S.C. §7201 , or 26 U.S.C. §6653(b) for
those years.
As
this Court stated in Harrison v. U.S. (In re Harrison) 91-1 USTC,
¶50,078 (Bankr. N.D. Ind. 1991):
The
element of deception which constitutes clear and convincing evidence of
fraudulent intent is often an individual's filing of W-4 forms claiming
to be exempt from income tax or claiming excessive allowances (which has
the effect of reducing or eliminating employer withholding of income
tax). Addressing facts nearly identical to those herein, courts,
including the U.S. Court of Appeals for the Seventh Circuit, have
overwhelmingly held that the filing of false W-4 forms, in combination
with an individual's willful failure to file an income tax return,
provides clear and convincing evidence of fraud under Section 6653(b).
See Granado v. United States, supra [86-1 USTC ¶9453 ],
792 F.2d 91, 92 (7th Cir. 1986); Zell v. Commissioner, [85-2 USTC ¶9698 ]
763 U.S. 1139, 1143 (10th Cir. 1985); . . .
*
* *
The
Seventh Circuit has held that, in the context of the criminal charge of
tax evasion (a felony), the failure to file income tax returns in
combination with filing false Forms W-4 during a given year, will
support a criminal conviction of tax evasion (26 U.S.C. §7201 ) for that year. United
States v. Copeland, 786 F.2d 768, 770 (7th Cir. 1985); see also, United
States v. Parkinson [87-1 USTC ¶9370 ],
602 F.Supp. 121, 122 (N.D. Ill. 1984).
In
Granado v. Commissioner [86-1 USTC ¶9453 ],
792 F.2d 91 (7th Cir. 1986), the taxpayer had (1) filed false W-4 forms
and (2) failed to file income tax returns for 1980 and 1981:
Additionally, the taxpayer in Granado notified the IRS that he
was filing the false W-4 forms. However, the Seventh Circuit affirmed
the decision of the tax court imposing the fraud addition, despite the
"open defiance" defense of the taxpayer, . . .
Accordingly,
even though the Debtor did not plead guilty to tax evasion pursuant to
26 U.S.C. §7201 for the tax years
1979 though 1982, by his Statement of Material Fact he has admitted all
the necessary elements of §523(a)(1)(C) required for this Court to find
that there are no genuine issues of material fact, and that as a matter
of law his tax obligations for those years are nondischargeable.
It
is therefore,
ORDERED,
ADJUDGED, AND DECREED, that
the USA's Motion for Summary Judgment as to the tax years 1978, 1979,
1980, 1981, and 1982, is granted, and that the taxes due and owing by
the Debtor for those years are nondischargeable pursuant to 11 U.S.C. §523(a)(1)(C).
The
Clerk shall enter this Judgment on a separate document pursuant to
Fed.R.Bk.P. 9021.
1
Section 523(a)(1) of title 11 of the United States Code states as
follows:
(a)
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of
this title does not discharge an individual debtor from any debt--
(1)
for a tax or a customs duty--
(A)
of the kind and for the periods specified in section 507(a)(2) or
507(a)(7) of this title, whether or not a claim for such tax was filed
or allowed;
(B)
with respect to which a return, if required--
(i)
was not filed; or
(ii)
was filed after the date on which such return was last due, under
applicable law or under any extension, and after two years before the
date of the filing of the petition or
(C)
with respect to which the debtor made a fraudulent return or
willfully attempted in any manner to evade or defeat such tax;
(emphasis supplied).
2
Section 7201 of title 26 of the United States Code states as follows:
Any
person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, shall be fined not more than $100,000 ($500,000 in the case of
a corporation) or imprisoned not more than 5 years, or both, together
with the costs of prosecution. (emphasis supplied).
3
Section 6653(b) of title 26 of the United States Code states as follows:
(b)
Fraud.
(1)
In general. If any part of any underpayment (as defined in subsection
(c)) of tax required to be shown on a return is due to fraud, there
shall be added to the tax an amount equal to the sum of--
(A)
75 percent of the portion of the underpayment which is attributable to
fraud, and
(B)
an amount equal to 50 percent of the interest payable under section 6601 with respect
to such portion for the period beginning on the last day prescribed by
law for payment of such underpayment (determined without regard to any
extension) and ending on the date of the assessment of the tax or, if
earlier, the date of the payment of the tax.
(2)
Determination of portion attributable to fraud. If the Secretary
establishes that any portion of an underpayment is attributable to
fraud, the entire underpayment shall be treated as attributable to
fraud, except with respect to any portion of the underpayment which the
taxpayer establishes is not attributable to fraud.
(3)
Special rule for joint returns. In the case of a joint return, this
subsection shall not apply with respect to a spouse unless some part of
the underpayment is due to the fraud of such spouse.
[72-2
USTC ¶9646]United States of America v. Norman Pawlak, Defendant
U.
S. District Court, So. Dist. N. Y., 71 CR. 363, 352 FSupp 794, 8/23/72
[Code Sec. 7201]
Crimes: Tax evasion: Willfulness: Evidence.--The taxpayer was
found guilty of four counts of tax evasion where the evidence showed
that his attempt to evade tax was willful. Testimony of credible Revenue
Agents as to admissions of the taxpayer and statements by his accountant
was supported by independent evidence presented by the Government. In
addition, the Court found circumstantial evidence and evidence of
willfulness subsequent to the filing of the returns in question.
Memorandum
TENNEY,
District Judge:
From
February 4, 1972 until February 18, 1972 the defendant Norman Pawlak
(a/k/a Norman Paris) was tried before this Court without a jury on four
counts of violating 26 U. S. C. §7201 which provides that "[a]ny
person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall be guilty of a
felony. . . ." Specifically, indictment 71 Cr. 363 charges that the
defendant willfully attempted to evade his income taxes for the years
1964-67. Employing the bank deposits method of proof, the Government, as
will be demonstrated infra, has proven the defendant's guilt
beyond a reasonable doubt.
[Elements
of Crime]
The
essential elements of the crime are three: (1) an additional substantial
tax must have been due and owing; (2) the defendant must have attempted
to evade or defeat the tax; and (3) the attempt must have been willful.
Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 351
(1965); Holland v. United States [54-2 USTC ¶9714], 348 U. S.
121, 139 (1954); Spies v. United States [43-1 USTC ¶9243], 317
U. S. 492 (1943); United States v. Coppola [69-2 USTC ¶9735],
425 F. 2d 660, 661 (2d Cir. 1969); United States v. Levy [71-1
USTC ¶9274], 326 F. Supp. 1285 (D. Conn.), aff'd [71-2 USTC ¶9684],
449 F. 2d 769 (2d Cir. 1971).
The
defendant has conceded that the Government established the first
element, that a substantial additional tax is owing (Memorandum of Law
at 1-2) although defendant does question the total amount. The
Government, however, need not prove the precise amount by which
defendant understated his income. "[T]he prosecution meets its
burden when it shows that income was underreported by a substantial
amount." United States v. Marcus [68-2 USTC ¶9599], 401 F.
2d 563, 565 (2d Cir. 1968), cert. denied, 393 U. S. 1023 (1969).
The Government has shown that a breakdown of defendant's income and tax
liability over the four years in question is as follows:
Summary
of Alleged Taxable Income & Tax Liability
Taxable Income
Year Per Return Corrected Increase
1964 ..... $ 42,681.28 $102,268.37 $ 59,587.09
1965 ..... 33,037.29 90,331.55 57,294.26
1966 ..... 17,921.61 66,568.58 48,646.97
1967 ..... 25,297.82 39,261.54 13,963.72
Total .... $118,938.00 $298,430.04 $179,492.04
Tax Liability
Year Per Return Corrected Deficiency
1964 ..... $14,254.05 $ 49,377.12 $35,123.07
1965 ..... 9,095.66 39,378.93 30,283.27
1966 ..... 3,798.05 25,832.72 22,034.67
1967 ..... 6,127.22 11,807.69 5,680.47
Total .... $33,274.98 $126,396.46 $93,121.48
Thus, the amounts of tax due and owing for each of the years 1964-67
are: $35,123.07; $30,283.27; $22,034.67; and $5,680.47 for a total of
$93,121.48. These are without doubt "substantial" amounts. See
United States v. Siragusa [71-2 USTC ¶9730], 450 F. 2d 592 (2d Cir.
1971), cert. denied, 405 U. S. 974 (1972).
The
Government has also met its burden with respect to the second element
since the filing of a false or fradulent income tax return constitutes
an "attempt" within the meaning of the statute, United
States v. Coppola, supra at 661, and there is no doubt the returns
for 1964-67 were false and fraudulent. See also, Sansone v. United
States, supra at 352; United States v. Magnus [66-2 USTC ¶9660],
365 F. 2d 1007 (2d Cir. 1966), cert. denied, 386 U. S. 909
(1967); United States v. Raub [49-2 USTC ¶9422], 177 F. 2d 312,
315 (7th Cir. 1949).
[Willfullness]
The
crucial issue at trial was the question whether the defendant acted willfully
in filing or causing to be filed the false returns for 1964-67. Did the
defendant despite knowing that he had a legal duty to pay the tax due
neverthless voluntarily, intentionally and with the specific and
fraudulent intent to conceal his true income file these false returns? United
States v. Dowell [71-2 USTC ¶9642], 446 F. 2d 145, 147 (10th Cir.),
cert. denied, 404 U. S. 984 (1971); Hayes v. United States
[69-1 USTC ¶9204], 407 F. 2d 189, 195 (5th Cir.), cert. dismissed,
395 U. S. 972 (1969); United States v. Siragusa, supra at 594. In
this regard, it is no defense that the defendant may not have realized
the extent by which he understated his income, Katz v. United States
[63-2 USTC ¶9600], 321 F. 2d 7, 10 (1st Cir.), cert. denied, 375
U. S. 903 (1963). The fact question for this Court is simply whether
defendant knew "that he should have reported more income than he
did for the years involved." Sansone v. United States, supra
at 353.
The
Government can prove defendant acted willfully either through the use of
direct evidence such as admissions by the defendant or through the use
of circumstantial evidence which gives rise to inferences that the
defendant acted willfully. United States v. Spinelli [71-1 USTC
¶9434], 443 F. 2d 2 (9th Cir. 1971). Both types of evidence were
employed in this case.
[Agent's
Testimony]
The
most damaging evidence offered by the Government of willfulness were the
admissions of the defendant to Revenue Agent Lem in the presence of the
defendant's preparer Thomas Axt at a meeting that occurred on August 2,
1968 in Mr. Axt's office. Specifically, Lem testified that when asked
how he could account for the large excess of deposits into just one of
his bank accounts, the Chemical Bank checking account, over the amount
reported as income on his 1966 return, Mr. Pawlak replied that when he
prepared the return he only included those employers and clients who
actually sent him forms 1099 and W-2 and that although he knew some
employers did not send these forms, he did not include them. (Tr. 109).
The defendant indicated that he did not know how much he failed to
report and was apparently surprised to find that the amount was so
great. The defendant also told Agent Lem that he had been following this
practice for years. (Tr. 110).
The
defendant's attorney characterized Lem's testimony as extremely harmful
(Tr. 191) and so has, of course, attacked the credibility of Lem by
pointing out alleged inconsistencies in his testimony and by suggesting
that Lem, a man of Chinese ancestry, may have had difficulty
understanding English which would account for his alleged
misunderstanding of what defendant claims he actually said at the August
2, 1968 meeting. The Court, however, during the course of the trial had
the opportunity to note that Mr. Lem had been in this country since 1941
and there was no evidence during his testimony of any language
diffculty. (Tr. 191). With regard to the alleged inconsistencies in
Lem's testimony, they have been adequately explained by the Government
and need not be discussed in detail. (Government's Reply Memorandum at
17-25). Suffice it to say that the Court directly observed Mr. Lem at
trial both on direct and cross-examination and found him to be a
credible witness. Defendant's contention that Lem was less than candid
with the Court is without merit.
[Independent
Evidence]
Defendant
claims, however, assuming that Lem is believed, there is no independent
evidence corroborating the defendant's admissions, as required by Smith
v. United States [54-2 USTC ¶9715], 348 U. S. 147, 155 (1954). The
independent evidence, however, need only establish either that the
admissions were reliable or that the crime charged was in fact
committed. United States v. Marcus, supra at 565. The
Government's evidence amply meets this requirement especially the
evidence of consistently large understatements, the supplemental lists
of income not backed by W-2's or 1099's which were prepared by defendant
(Gov. Exs. 1756, 1726B), and the fraud referral report of Agent Lem
dated October 10, 1968 which also makes reference to these admissions.
(Gov. Ex. 8C). Smith v. United States, supra at 157; United
States v. Parenti [71-2 USTC ¶9613], 326 F. Supp. 717, 725 (E. D.
Pa. 1971). Certain statements of Thomas Axt were also testified to by
both Lem and Agent Alleva under the theory that Axt was acting within
the scope of his employment and authority when they were made and thus
the statements were admissible against defendant. 1 Hayes v.
United States, supra at 192; United States v. Parenti, supra
at 727, 729. While the reasons behind the corroboration rule would not
appear to apply to the statements of Axt since their reliability should
not be suspect, see Smith v. United States, supra at 153, 155 n.
3, the evidence of the Government amply bolsters the statements of Axt
as well and indicates that the crime was in fact committed.
[Failure
to Call Witness]
As
well as relying on these admissions of the defendant and the statements
of his agent, Axt, the Court has drawn an inference adverse to the
defendant by reason of his failure to call Axt as a witness. While
defendant has argued that where a witness is equally available to both
sides no inference should be drawn against either side, the rule in this
circuit is to the contrary, especially where the witness would naturally
side with one party. United States v. Dibrizzi, 393 F. 2d 642,
646 (2d Cir. 1968); United States v. D'Angiolillo, 340 F. 2d 453,
457 n. 5 (2d Cir.), cert. denied, 380 U. S. 955 (1965); United
States v. Cotter, 60 F. 2d 689, 692 (2d Cir. 1932) (L. Hand, C. J.);
United States v. Krechevsky, 291 F. Supp. 290, 293 n. 3 (D. Conn.
1967). Since Mr. Axt had been defendant's preparer for a number of years
including those covered by the indictment, and is now defendant's
accountant as well as preparer, he would naturally have sided with him.
In fact, Mr. Alleva testified on cross-examination that Axt did send a
letter dated April 1970 to the IRS, and while neither the letter nor its
substance were admitted into evidence, defendant made it clear that Axt
was siding with him. (Tr. 459-463). The inference against defendant,
then, is quite proper.
[Circumstantial
Evidence]
In
addition to the direct evidence of defendant's willful conduct, the
Government offered substantial circumstantial evidence of willfulness.
While evidence of a single understatement of income is not alone
evidence of willfulness, a consistent pattern of underreporting large
amounts of income is evidence from which willfulness can be inferred. Holland
v. United States, supra at 139; United States v. Frank [71-1
USTC ¶9208], 437 F. 2d 452, 453 (9th Cir.), cert. denied, 402 U.
S. 974 (1971); United States v. Procario [66-1 USTC ¶9263], 356
F. 2d 614, 618 (2d Cir.), cert. denied, 384 U. S. 1002 (1966). See
also, H. Balter, Tax Fraud and Evasion §13.3-4 (3rd Ed.
1963). Inasmuch as Mr. Pawlak failed to report nearly $180,000.00 over a
four year period, the evidence on this score is practically
overwhelming.
Large
nondeductible payments or expenditures are also circumstantial evidence
of knowledge and willfulness. United States v. Dowell, supra at
147. At trial the Government offered evidence that the defendant spent
or placed in savings accounts the following amounts over and above the
income reported on his returns for the years 1964-67, respectively:
$60,204.33; $54,361.23; $48,392.26; and $15,942.08. In fact, during
1964, 1965 and 1967 defendant deposited in savings accounts in his name
alone checks he had drawn on the Chemical Bank in the sum of $70,000.00.
One deposit alone was for $25,000.00. Clearly his spending and
depositing these sums of money belie defendant's argument that he was
unaware of how much he actually earned and that he thought he had
reported all of his income.
Failure
to include all of his income in the records he provided his preparer Axt
is further evidence of the willful nature of defendant's conduct. United
States v. Frank, supra; United States v. Dowell, supra at 147; United
States v. Lindstrom [55-1 USTC ¶9490], 222 F. 2d 761, 763 (3d Cir.
1955). The evidence at trial demonstrated that defendant provided Axt
only with W-2's, 1099's and a short supplemental list of employers who
had not provided him with such statements. Agent Alleva testified that
Axt had told him that bank statements which reflected Mr. Pawlak's
income were never made available to him. (Tr. 442). Although defendant
claims they were not complete he also failed to provide Axt with either
his ledger or his diary both of which at least to some degree reflected
his engagements and the payments he received. United States v.
Procario, supra at 618. Defendant's failure to include on the
supplemental list more than $179,000.00 of unreported income for the
four years, under the circumstances, can be inferred to be more than
negligence. United States v. Dowell, supra at 147.
Additional
circumstantial evidence that the defendant was aware of his financial
situation and in contrast to his contention that he was a musician who
was helpless when dealing with financial matters is the relatively
complete record of business expenses and deductions he was able to
compile during the four years. The evidence demonstrated that defendant
took deductions of $218,300.00 during 1964-67 and that a great deal of
that was backed by documents consisting of 1253 checks and 393 paid
bills, on many of which defendant had noted the nature of the business
expense. Mr. Pawlak also kept records of several business expenses that
had been paid in cash. (Defendant's Reply Memorandum at 25).
While defendant counters that he did not take all of his deductions
(Defendant's Reply Memorandum at 26), those few that he omitted pale
into insignificance when compared to the $218,300.00. Moreover, his not
claiming his mother as a dependent was done for personal reasons not
because he overlooked it or was unable to handle his financial affairs.
[Analogy
to Spies]
Defendant,
on the other hand, argues that the Government has not shown any conduct
on his part of the type from which the Supreme Court held an affirmative
willful attempt could be inferred. Spies v. United States, supra.
It must first be pointed out, however, that the list given by the Court
in Spies was by way of example only and was not intended to be
exhaustive. Moreover, the Government has analogized several of
defendant's acts to those listed by the Court. In Spies, the
Court stated that an
"affirmative
willful attempt may be inferred from conduct such as keeping a double
set of books, making false entries or alterations, or false invoices or
documents, destruction of books or records, concealment of assets or
covering up sources of income, handling of one's affairs to avoid making
the records usual in transactions of the kind, and any conduct, the
likely effect of which would be to mislead or to conceal." 317 U.
S. at 499.
By
way of analogy the Government argues that: (a) defendant's supplemental
list of income can be considered a false document; (b) the records
defendant provided Axt were one set of books while these same records,
his ledger, his diary and his bank statements constituted a second set
of books; (c) the ledger, diaries, invoices and correspondence were
never shown to the preparer and were destroyed; 2 (d)
defendant has been quite effective in concealing the sources of his
income and at trial was able to offer no hint as to where the excess
bank deposits may have originated; and (e) defendant who served as his
own bookkeeper and secretary handled his affairs, as represented by the
arrangement with Coronado Service Co., whereby the transaction as
reported by defendant on his income tax return differed from the real
effect of such transactions on his profits and losses. 3 These
arguments of the Government are not without merit and when taken
together certainly support an inference of willfulness.
[Subsequent
Willfulness]
The
Government has also pointed to certain evidence of willfulness which
occurred subsequent to the actual affirmative acts of filing the
returns. The failure of the defendant to supply his ledger book to Agent
Lem is evidence of such willfulness. United States v. Eley [63-1
USTC ¶9264], 314 F. 2d 127, 132 (7th Cir. 1963). Other such evidence
includes the instances of false statements to Government agents, 4 and
defendant's admission at one point that he was notified by Axt prior to
April 15, 1968 of the pending IRS audit of his 1966 return and his
subsequent filing of an extension of time to file the 1967 return, and
the augmented supplemental list attached to the 1967 return. 5 The argument
is that this conduct creates the inference that defendant was aware that
he earned income for which he did not receive a statement, that he
decided in April 1968 he should report more of his income in light of
the IRS audit of his 1966 return and that he had the records from which
he could compile a more complete record of income than he had in former
years.
Defendant
attempts to explain the 1967 supplemental list by saying that the nature
of his business had changed. While the defendant did refer to a couple
of events during 1967 that he claims made it easier for him to recall
his employers, his story on the whole was not credible. 6 Furthermore,
despite his contentions to the contrary and the testimony of defendant's
psychiatrist, Doctor Ruddick, defendant appeared to have a good memory
that he was careful to exercise only at convenient times. The evidence
also indicated defendant got along remarkably well in society for a man
who allegedly was a "babe in the woods." During the time
period in question defendant was an arranger, composer, performer and
producer; he was his own bookkeeper, secretary and business manager; he
dealt constantly with a number of people, night clubs and companies; he
employed musicians and operated a publishing company; he maintained
numerous bank accounts, kept a running balance in his check book, kept a
diary and a ledger and mailed invoices, copies of which he maintained
until paid; he also provided his accountant with statements from
employers and a supplemental list of income and kept nearly complete
records of his expenses, purchased his own home, and as testified to by
his character witness Chester Feldman was generally quite reliable and
dependable. This is not the picture of a helpless, passive, fearful and
anxious musician who was so wrapped up in his work he was incapable of
existing in the world of reality as defendant would have the Court
believe. The evidence is clear that defendant was capable of willifully
attempting to evade his income taxes.
[Defenses]
Defendant
has raised a number of defenses. The first is that his attempt to evade
paying his tax could not have been willful since he never attempted to
conceal his income but merely put it into bank accounts where it could
be easily discovered. If that were a defense, however, the Government
would never be able to succeed in proving its case by the bank deposits
method.
Defendant
has also offered the testimony of his psychiatrist, Dr. Ruddick, in
support of his claim that he could not have acted willfully. The Court,
however, has been unable to give much weight to Dr. Ruddick's testimony
in light of defendant's decision not to claim insanity as a defense, United
States v. Freeman, 357 F. 2d 606, 622-23 (2d Cir. 1966), and the
general rule in this circuit that psychiatric testimony is not
admissible solely on the issue of willfulness. United States v.
D'Anna, 450 F. 2d 1201, 1204-05 (2d Cir. 1971); United States v.
Baird [69-2 USTC ¶9595], 414 F. 2d 700, 703-04 (2d Cir. 1969), cert.
denied, 396 U. S. 1005 (1970). In fact Dr. Ruddick himself testified
that defendant did not lack any substantial capacity to conform his
conduct to the requirements of the IRS laws and that he believed that
Mr. Pawlak did realize he had to report all of his income. (Tr. 779).
While there is some authority for defendant's offer of psychiatric
testimony on the issue of willfulness, Rhodes v. United States,
282 F. 2d 59 (4th Cir.), cert. denied, 364 U. S. 912 (1960), see
also, United States v. Brawner, Slip Op. 22, 714 (D. C. Cir. June
23, 1972) (en banc), the law is otherwise in this circuit and
"[b]eing sane, he had the capacity to act willfully." United
States v. Haseltine [70-1 USTC ¶9140], 419 F. 2d 579, 581 (9th Cir.
1969). There is an additional and more fundamental reason, however, for
rejecting Dr. Ruddick's testimony. The Doctor testified that the basis
for his conclusion that defendant did not act willfully constituted a
minimal part of his analysis of Mr. Pawlak and furthermore, Doctor
Ruddick was a very biased witness, and much of his testimony just cannot
be believed. Even if it could, Mr. Pawlak's apparent anxiety over money
to which Doctor Ruddick testified could well explain why defendant did
not report all of his income.
Defendant
has pointed to other evidence that he claims rebuts the Government's
charge that he acted with knowledge and willfulness. Specifically, he
refers to his cooperation with the government agents, his good faith
reliance on his employers to provide him with W-2's and 1099's for all
income he earned, his good faith reliance on his accountant to whom he
gave all his cancelled checks, bank statements, W-2's, 1099's and
for whom he signed his income tax returns in blank, and the testimony of
his character witnesses. In support of his claim that he did provide Axt
with his bank statements and that he signed his returns and the request
for an extension of time in which to file his 1967 return in blank,
defendant relies on Ex. Y and the fact Axt had the bank statements on
June 11, 1968.
[Government's
Response]
The
Government, however, has adequately responded to these claims. First,
since defendant did not supply Axt with all of his records, particularly
the bank statements, he cannot claim that he in good faith relied upon
his preparer and Axt was not called to testify. 7 See
Gov. Ex. 1752. Second, Alleva testified that Axt told him that Mr.
Pawlak did go over the returns in his office and did not sign in blank. 8 Third, the
Government seriously questions defendant's contention that he cooperated
and emphasizes that defendant did not provide Agent Lem with the ledger.
See also, Duke, Prosecutions For Attempts To Evade Income Tax:
A Discordant View of a Procedural Hybrid, 76 Yale L. J. 1, 35-36
(1966). Fourth, the evidence does not support defendant's claim that he
relied on his employers to send him W-2's and 1099's.
The
Government points out that Pawlak's statements to Lem, the use of the
supplemental list, the consistent pattern of large understatements of
income, the augmented supplemental list for 1967, defendant's use of his
ledger all belie defendant's assertion that he in good faith relied on
employers to provide him with a statement of all income earned.
Moreover, defendant, himself, testified that he paid his musicians each
year by check and although he deducted their salaries on his return, he
never supplied them with a W-2 or 1099. That Axt had the bank statements
in June 1968 and January 1969 does not help defendant, since Axt had by
that time been requested by Lem to obtain them. Also, Axt denied having
them for the preparation of the returns. Finally, Ex. Y is an undated,
unauthenticated letter that proves nothing.
[Summary]
In
sum, the combination of direct and circumstantial evidence in
this case proves the third element of the crime charged well beyond a
reasonable doubt--that defendant with bad purpose and the specific
intent to evade his income tax, willfully and knowingly filed and caused
to be filed his 1964, 1965, 1966 and 1967 income tax returns.
Accordingly,
and for the foregoing reasons, judgment will be entered finding
defendant guilty beyond a reasonable doubt on counts one through four of
indictment 71 Cr. 363.
1
The statements of Mr. Axt to agents Lem and Alleva have been admitted
for all four years. At trial, the statements of Axt were limited to 1966
and the Court reserved on the other years. The evidence, consisting in
part of Mr. Pawlak's statement to Alleva in the presence of Axt to call
Axt if Alleva needed anything (Tr. 272), the power of attorney signed by
Mr. Pawlak appointing Mr. Axt as his representative and Mr. Axt's
possession of the defendant's records and his preparation of the returns
for the four years, establishes that Axt was the agent of Mr. Pawlak for
the years 1964-67.
2
Mr. Pawlak contended at trial that his ledger book was stolen in a
mugging incident shortly before Labor Day, 1968. While defendant may
have been mugged, it is unlikely that he would have been carrying his
ledger book that night and there is no mention of the book in the police
report covering the mugging. Furthermore, Mr. Pawlak at the August 2,
1968 meeting did not show the ledger, which he allegedly carried with
him at all times, to Agent Lem and never mentioned it. Even defendant's
corroborating witnesses, Doctor Ruddick and Mr. Dahaney, appear to be
referring in their testimony to Mr. Pawlak's appointment diary rather
than his ledger. Finally, the loss of the ledger occurred at a
particularly suspicious time, coming as it did on the heels of Lem's
meeting with Mr. Pawlak.
3
Defendant utilized Coronado Service Company as a conduit for the payment
of the expenses incurred in doing a job. If the advertising agency
employing defendant for a job, e.g. a jingle, were not a signator
to the union contract Coronado would send defendant a bill for all of
the expenses incurred in the production including his salary. Mr. Pawlak
would then pay that invoice and in return receive from Coronado his
salary and a W-2. Subsequently, the advertising agency would reimburse
defendant for the amount of the Coronado bill. The effect of this
arrangement was that defendant netted his salary as represented by the
W-2 from Coronado. On his income tax returns, however, defendant
deducted the amount of the Coronado invoice as a business expense and
yet failed to include as income the amount of the reimbursement from the
advertising agency. Thus, defendant's return showed that he incurred a
loss on the job whereas he made a profit. See Tr. 999-1048. It is
reasonable to assume that a great deal of defendant's unreported income
may have come from similar arrangements as the one diagrammed in Gov.
Ex. 11AA. It is also interesting to note at this point that defendant
functioned as his own bookkeeper and producer for these arrangements,
and that although he claims to be naive when dealing with financial
matters, his testimony concerning the rather complicated Coronado
arrangement indicates that he understood it and its variations quite
well.
4
While the defendant claimed he did not know of the IRS audit until
shortly before the August 2, 1968 meeting with Lem there is strong
evidence that he did know much earlier as evidence by his signing the
April 12, 1968 extension for filing after Axt had received Lem's notice
of the pending audit and by defendant's signing of the power of attorney
appointing Axt to represent him in connection with the 1966 return.
Also, defendant said he expected all of his employers to send him 1099's
and yet he testified that he himself did not send them to his musicians;
defendant testified that Axt always asked for his bank statements and
yet Alleva testified that Axt never received them; defendant testified
that he told Alleva about the ledger and the mugging incident and yet
Alleva testified to the contrary; defendant also testified that he
signed all of his income tax returns in blank and never saw them or went
over them before Axt sent them to the Government and yet Axt informed
Alleva that the defendant did go over the returns and they were not
signed in blank. (Tr. 441).
5
The supplemental list attached to defendant's 1967 return included 17
employers from whom defendant had not received a statement of earnings
whereas in 1965 and 1966 he had listed only four such employers and in
1964 included none. Furthermore, the amount of income he had reported on
his supplemental list in 1964-1966 was an insignificant percentage of
the total reported professional income in those years and yet in 1967
defendant was able to report on the supplemental list 34% of his total
gross professional income.
6
See note 4 supra.
7
Tr. 436-446.
8
Id.
[51-2
USTC ¶9382]In Re: Dan M. White and John H. White
In
the United States District Court for the Southern District of
Mississippi, Nos. 1601, 1602 (Consolidated), May 28, 1951
Penalties: Evidence: Constitutionality: Voluntary disclosure.--Where
taxpayers failed to take advantage of the opportunity to make a
voluntary disclosure before an investigation of their returns was
started, a motion to suppress evidence which they voluntarily gave was
overruled. Their admissions against interest were made without any false
promises or inducements and constituted competent evidence. The
Government's search of books and records was reasonable and was
consented to. No constitutional rights were violated.
Rob
ert Ash and Carl F. Bauersfeld, 550
Munsey Building, Washington 4, D. C., and Forrest B. Jackson, 202
Century Building, Jackson, Mississippi, for petitioners.
Findings
of Fact and Conclusions of Law
Findings of Fact
MIZE,
Judge:
1.
Petitioners are half-brothers, one of whom (Dan M. White) resides in New
Orleans, Louisiana, and the other (J. H. White) in Jackson, Mississippi.
Dan M. White is connected and has been during all times material hereto
with the Industrial Finance & Thrift Corporation in New Orleans,
which is engaged in the brokerage of loans from local finance companies
over the southern states. Two of the local finance companies from which
it accepts paper are the White System of Jackson, and Friendly Finance
Company, located in Jackson, Mississippi, and were the companies through
which J. H. White transacted business. Apart from the rediscount of
paper of the two Jackson, Mississippi, companies with Industrial Finance
& Thrift Corporation, there was no business connection between the
Mississippi and New Orleans enterprises.
2.
Criminal complaints have been filed with the United States Commissioner
in the Southern District of Mississippi, charging each of petitioners
with evasion of their 1944 Federal income taxes. The original returns
filed by petitioners with the Collector of Internal Revenue at Jackson,
Mississippi, for the years 1942, 1943, 1944, and 1945, were fraudulent.
Each of the petitioners filed amended returns for the calendar years
1942 to 1945, inclusive, in the circumstances set out separately as to
each petitioner below, the amended returns being filed on dates as
follows:
Dan
M. White, Amended Returns
1942,
filed between March 10 and 15, 1946
1943,
filed April 1, 1946
1944,
filed April 1, 1946
1945,
filed May 29, 1946
John
H. White, amended Returns
1942,
filed August, 1946
1943,
filed early September, 1946
1944,
filed September 6, 1946
1945,
filed September 19, 1946
["Voluntary
Disclosure" Policy]
3.
For many years, the United States Treasury Department has maintained a
policy of not recommending criminal prosecution of taxpayers who have
wilfully made a fraudulent tax return in those cases where the taxpayer,
before an investigation of his returns is under way, makes what the
Treasury calls a "voluntary disclosure" to some revenue agent
or officer of his fraudulent misstatement. In 1946, this policy was
known to the respective accountants in New Orleans and Jackson,
Mississippi, who prepared the amended returns for the taxpayers, and by
the agents of the Bureau of Internal Revenue who made an investigation
of the returns of each of the petitioners. Under date of August 21,
1945, the then Secretary of the United States Treasury, Hon. Fred M.
Vinson, writing as guest columnist in Mr. Drew Pearson's syndicated
column "Washington Merry-Go-Round," announced the purpose of
the Treasury Department to increase its efforts in the detection of
fraudulent evasion of income taxes, and with respect to the
"voluntary disclosure" policy stated as follows:
"The
Commissioner of Internal Revenue does not recommend criminal prosecution
in the case of any taxpayer who makes a voluntary disclosure of omission
or other misstatement in his tax return or of failure to make a tax
return. Monetary penalties may be imposed for a delinquency, for
negligence and for fraud, but the man who makes a disclosure before an
investigation is under way protects himself and his family from the
stigma of a felony conviction. And there is nothing complicated about
going to a Collector or other revenue officer and simply saying, 'there
is something wrong with my return and I want to straighten it
out.'"
This
policy statement came to the attention of both petitioners. The Treasury
policy was further publicized in a release to the press under date of
Friday, October 5, 1945, which also came to the attention of petitioner
Dan M. White.
Separate Findings as to Petitioner Dan M. White
4.
From 1942 and until the latter part of 1945, petitioner Dan M. White was
involved in matrimonial disputes with his first wife as a result of
which he had disguised income on the books of the corporation with which
he was connected, Industrial Finance & Thrift Company, for the
purpose of preventing his former wife finding out his true income, and
for the purpose of evading the payment of income taxes. At the time in
October, 1945, that a final agreement was reached with an agent of his
former wife, petitioner Dan M. White commenced assembling information
necessary to straighten out his accounts to enable him to file amended
returns, but he did not report his intention to file an amended return
to the Collector of Internal Revenue at this time, and at no time did he
advise the Collector of Internal Revenue that his returns were false and
fraudulent, and that he desired to make a voluntary disclosure. By the
time the final executed copy of the property settlement and agreement
was received in February, 1946, he had information ready for a 1942
amended return and a good part of that required for 1943 and 1944, but
did not advise the Collector of Internal Revenue. At that time, he
signed his amended 1942 return and issued a check for it dated about
March 10 or 12, 1946, and left it with his office with instructions to
mail it to the Collector in Jackson, Mississippi, before March 15, 1946.
He understood that he had until three years following the filing of each
return within which to file a voluntary amendment, which understanding
was shared by the Collector of Internal Revenue at Jackson, Mississippi.
Thereupon, in the middle of February, 1946, petitioner Dan M. White left
for Arizona, on the advice of his physician, where he remained until
about March 20, 1946. During the middle of March, 1946, petitioner Dan
M. White corresponded with the Collector respecting the Collector's
request that a 1943 return, in addition to that for 1942 already filed,
be gotten in promptly apparently because of the effect of the Current
Tax Payment Act. At that time, the Collector at Jackson was informed in
writing that petitioner Dan M. White would amend his return for 1943 as
soon as he returned to New Orleans.
5.
Upon petitioner Dan M. White's return from Arizona, he employed a
certified public accountant to assist him with his amended return.
Thereafter, the accountant prepared the amended returns, which were
filed as set forth in Finding 2, above, from information supplied by
petitioner Dan M. White.
6.
After Dan M. White returned from Arizona about the 20th of March, he
engaged Mr. Lankston, the accountant, to prepare his amended returns and
advise him why and that after he had made the mistake in the 1942
return, the amended return, he decided he needed the assistance of an
accountant and wanted to make a full disclosure.
7.
At this time he had already been informed that Mr. Cuvillier, an agent
of the Department, had been to the office of the Industrial Finance
& Thrift Corporation and was making an investigation of their books
and that Mr. Cuvillier had suspended the final examination of those
books until he returned.
8.
An examination of the books of the Industrial Finance & Thrift
Corporation would disclose that there was a discrepancy in the amount of
return made by the corporation and with the aid of the original returns
of Dan M. White it could be determined that Dan M. White had concealed
his income.
9.
On February 28, 1946, Cuvillier began the examination of the tax returns
of the Industrial Finance & Thrift Corporation for the year ending
July 31, 1944, during which examination the commission payments to Dan
M. White were computed and the Thrift accounts were checked to the
extent that an explanation of the discrepancies from Dan M. White became
necessary. While he, White, was out of town from February 28, 1946 to
about March 20, 1946, the revenue agent withdrew from further
investigation until White should return.
10.
When Cuvillier entered the office of the Industrial Finance & Thrift
Corporation on February 28, he advised the persons in charge that he
wanted to see Mr. White or Mr. McKinnon, officers of the company, and at
that time Mr. White being out of town he told Mr. McKinnon he wanted to
start an examination of the return of the company for the year ending
July 31.
[Opportunity
Afforded for Voluntary Disclosure]
11.
Soon after his examination started of the books of the Industrial
Finance & Thrift Corporation he found that the return of
compensation as shown by the books of the Corporation was $60,000.00,
but upon checking he found as a matter of fact it aggregated $92,000.00.
At this time he had not actually examined Dan M. White's return, but Mr.
McKinnon was unable to explain it, and he was unable to get any
explanation from anyone there and was told that Mr. White was the only
one who could explain those things and withdrew on or about March 15.
Prior to his withdrawal it got to the point where he was unable to get
any explanation from those in charge. The purpose of his withdrawal was
to await the return of Mr. White in order to afford him an opportunity
to explain if there was concealed income.
12.
On March 26 he encountered Mr. Lankston, the accountant, and had a
conversation with him in which Lankston stated he had been engaged to
prepare an amended return for Mr. Dan M. White and Lankston told him he
thought it would be better if he, Cuvillier, would wait until he,
Lankston, finished with his audit.
13.
At that time Lankston did not tell him that Dan M. White desired to make
a voluntary disclosure of unreported income and that on April 8 he went
to see Dan M. White and at that time Dan M. White did not advise him
that he was making a voluntary disclosure of unreported income, and that
at no time did Lankston or Dan M. White report to Agent Cuvillier that
he was making a voluntary disclosure of unreported income.
14.
Agent Cuvillier did not have in his custody on either of those dates the
original income tax return for 1944 of Dan M. White, but the
investigation was proceeding as above stated and on April 14, 1946,
William E. Logan, revenue agent, wrote the Collector of Internal Revenue
at Jackson that his office in New Orleans had under consideration the
income tax liability of Dan M. White for 1944 and requested that any
amended return filed for Dan M. White be forwarded to him. On March 18,
1946, Dan M. White wrote the Collector of Internal Revenue at Jackson
with reference to his 1942 amended return and stated that on his return
to New Orleans he would prepare a corrected return for 1942 and 1943,
but at no place in the letter did he mention the 1944 return nor did he
state that he was intending to file a voluntary disclosure of unreported
income for the year 1944 and on March 30, 1946, Lankston wrote the
Collector at New Orleans that he was filing an amended return for the
year 1945 in order to take advantage of the Louisiana community basis,
but did not state that he had made a false return and intended to make a
voluntary disclosure of unreported income.
15.
Mr. Cuvillier in the meantime was selected as a conferee and the White
cases were assigned on May 1 to Internal Revenue Agent E. D. Matheny and
Special Agent Harold Holt of the Intelligence Unit for further
investigation, and these two completed the investigation and on Nov. 17,
1948 took a sworn statement from Dan M. White and from J. H. White and
before taking other sworn testimony they were advised of their right to
have an attorney and that any statements they made could be used against
them and after so being advised, each one made the voluntary statement
as reflected by the record.
16.
The petitioner Dan M. White is an experienced business man and very
bright. He is a lawyer, having been admitted to practice law in
Mississippi but has not engaged in the active practice of law and had
only a short experience as a practitioner.
17.
The petitioners Dan M. White and J. H. White both cooperated fully
throughout the investigation and furnished to the agents all the books,
documents, canceled checks and correspondence as requested, and they at
no time were warned by the agents prior to the date the sworn statements
were taken that the information they were giving to the agents would be
or could be used against them.
18.
At no time during the entire investigation did the government agents
make any inducements or false representations or use any trickery or
make any promises of immunity to either one of the petitioners in
connection with the investigation.
19.
The agents of the Government were duly authorized to make the
investigation of the income tax returns and would have been able to have
discovered the concealed income from an examination of the books of the
Corporation and income tax returns as filed with the Government and the
cooperation that was given by the petitioners was in response to
questions touching their returns and which questions the agents had the
right to ask them provided no false promises of immunity were given or
threats or coercion made. The statements were all voluntarily given. The
agents had a number of conferences, probably one hundred or more, with
Dan M. White and a great number of questions were asked and explanations
were given. The agents were permitted to take some of the records from
Dan M. White's office in order that they might be copied or photostated
and there are now in the files of the Department some of the copies or
photostats but no originals. Neither of the petitioners was ever advised
by any one of the agents or the Treasury Department that criminal
prosecution was being contemplated nor did they tell either of the
petitioners that criminal prosecution was not contemplated.
Separate
Findings as to Petitioner J. H. White
20.
John H. White commenced to assemble information necessary to amend his
1942-1945 returns in April, 1946, and employed a certified accountant,
Mr. J. W. Cocke, to prepare these for him and engaged him about June or
July. Mr. Cocke advised him of the voluntary disclosure policy and that
it was advisable if he had no reason to believe he was under
investigation by the Bureau to inform the Collector's office immediately
of his intention to make good. He filed his amended return for the year
1944 on September 6, 1946, but he did not advise the Collector of
Internal Revenue that he had concealed income and desired to make a
voluntary disclosure until the filing of his amended return.
21.
The examination of J. H. White was started in July, 1946. The
investigation of J. H. White was assigned to the agents in May, 1946,
and after the investigation started, in July, 1946, they contacted Mr.
J. H. White in Jackson and told him his returns for 1942-1945 had been
assigned to them for investigation, and asked if he intended to file any
amended returns and he replied that his original returns were correct
and he did not intend to file an amended return. This conference took
place before the amended return was filed and after the investigation
had started.
Conclusions
of Law
1.
I conclude as a matter of law that the petition to suppress the evidence
should be overruled.
2.
Admissions which are voluntarily made without any false promises or
inducements are competent evidence against one charged with crime. The
policy of the Government holds out to those who had failed to pay their
income taxes [an opportunity to make a voluntary disclosure and]
specifically stated that the voluntary disclosure must be made before an
investigation is started. In this case it is clear that the
investigation of J. H. White had started and it is reasonably clear that
an investigation of Dan M. White had started. The agent, Cuvillier,
discovered the discrepancies in February while investigating the
Industrial Finance & Thrift Corporation and almost immediately Dan
M. White returned, but at no time did Dan M. White tell the agent that
his return for 1944 was false and that he intended to take advantage of
the voluntary disclosure policy. If on that date he had written the
Treasury Department or gone to an agent of the Department and said,
"I have filed a false return and am now preparing to file an
amended return and pay up the shortage", then the policy would be
applicable but he chose not to do this and at no time did he advise the
agents that his returns were false and he desired to correct them.
3.
There is a difference between admission and confession and where an
intelligent man without false promises being made to him voluntarily
makes admissions against his interest, he cannot be heard to say that
his constitutional rights have been violated. See the case of Brister
v. State, 51 So. (2d) 759, Advance Sheet dated May 10, 1951.
4.
There was no unlawful search or seizure, but the search that was made
was consented to and a reasonable one and violated no constitutional
rights of the petitioners.
5.
The facts of this case are different from the facts in the case of In
re Liebster, 1 Fed. Supp. 814 [50-2 USTC ¶9357], and are more
nearly like the facts of Henry Lustig Company, 67 Fed. Supp. 306
[46-2 USTC ¶9318], 163 Fed. (2d) 85 [47-2 USTC ¶9325].
6.
The relief sought by petitioners will be denied and their petition
dismissed.
[54-2
USTC ¶9442]Manson L. Reichert, Petitioner v. Commissioner of Internal
Revenue, Respondent
(CA-7),
In the United States Court of Appeals for the Seventh Circuit, No.
11000. October Term, 1953, April Session, 1954, 214 F2d 19, June 9, 1954
Petition for review of decisions of Tax Court of the United States.
Evidence: Admissibility of testimony before a grand jury.--Taxpayer
claimed the introduction of testimony from a grand jury investigation in
a Tax Court trial was illegal disclosure as it violated the laws
pertaining to secrecy in grand jury proceedings. The Circuit Court held
that the purpose of secrecy in grand jury proceedings is to protect the
jurors, not the one who is indicted, and therefore the taxpayer's motion
to suppress all evidence from such proceedings was properly overruled.
Evidence: Unlawful searches and seizures.--Taxpayer contended
that introduction in a Tax Court trial of testimony before a grand jury
was an unconstitutional search and seizure. The Circuit Court decided
that as there was no contention of any search or seizure of information
or property belonging to the taxpayer, taxpayer had no constitutional
rights involved in the proceeding.
Wilber
T. Dassel for petitioner. H. Brian Holland and Ellis N. Slack for
respondent.
Before
MAJOR, Chief Judge, DUFFY ANDSCHNACKENBERG, Circuit Judges.
SCHNACKENBERG,
Circuit Judge:
This
case is brought to this court by the petition of taxpayer, Manson L.
Reichert, asking for a review of decisions of the United States Tax
Court entered June 18, 1953 [CCH Dec. 19,504], and involves income taxes
and fraud penalties assessed against him for the years 1943 through
1946. Jurisdiction was conferred on this court by section 1141(a) of the
Internal Revenue Code, as amended June 25, 1948, and May 24, 1949 [26 U.
S. C. A. 114(a)]. By its orders the Tax Court determined deficiencies in
income tax payments and fraud penalties amounting to $11,204.15.
Taxpayer
became the chairman of the Republican County Central Committee of
Vanderburgh County, Indiana, in May, 1942, and in November, 1942, he was
elected mayor of the city of Evansville. He held these positions in the
taxable years 1943 through 1947. 1944 and 1946 were campaign years. One
of taxpayer's duties as county chairman was to solicit campaign funds.
In accordance with the method of operation of the Republican Party
contracts were entered into between the Republican United Finance
Committee of Indiana and the Republican County Central Committee of
Vanderburgh County whereby funds collected by the county committee were
to be remitted to the United Finance Committee, with a report of the
names of the contributors. Receipts were issued to each contributor by
the treasurer of the United Finance Committee. Of the total, 65% was to
be returned to the county committee and 35% was to be allocated to the
state committee. The Tax Court decided that a part of the contributions
collected by taxpayer he did not remit to the state committee and he was
therefore subject to an income tax thereon.
Taxpayer
procured the appointment by the secretary of state of Benjamin H.
Bartlett as manager of the motor vehicle license bureau branch office in
Evansville. Bartlett agreed with taxpayer to put the latter's daughter,
Maybelle, on his payroll at a salary of $3600 a year. She was placed on
the payroll, did very little work, and the Tax Court found that what was
paid to her, with the exception of $100 for each of the years 1943, 1944
and 1945, was paid to taxpayer for the assistance he had given in
procuring Bartlett's appointment and was income to taxpayer.
The
Tax Court also found that fraud had been proved.
When
cases Nos. 23495 and 29928 came on for hearing before the Tax Court,
they were consolidated for hearing on the motion of taxpayer's attorney,
who thereupon immediately presented and filed written motions signed and
sworn to by taxpayer under date of October 29, 1951. The motions are
identical and are referred to in the record and herein as the motion to
suppress evidence.
In
substance the motion alleged that the pending cases were based and
founded upon and sprang directly from what it described as the illegal
and unlawful disclosure and delivery by the prosecuting attorney of
Vanderburgh County, Indiana, to the representatives of the Intelligence
Unit of the Bureau of Internal Revenue of the United States Government,
of a transcript of the testimony of witnesses who had appeared before
the Vanderburgh County grand jury. The motion further alleges that the
charges contained in both cases were the direct result of hearings held
before representatives of the United States government and that
"all of the testimony and information then before said government
agents and in their sole and exclusive possession and control was the
testimony of witnesses that had appeared before the Vanderburgh County,
Indiana, grand jury, * * * transcribed * * * and delivered by * * * the
prosecuting attorney * * * to the government agents" as aforesaid.
The motion further sets forth several questions by special agent Shryer
directed to taxpayer and another witness in which Shryer refers to
testimony given by witnesses before the grand jury. Typical is the
following question:
"Mr.
Reichert, in the proceedings of last year under state laws to obtain
indictments against you, various individuals testified under oath before
the Vanderburgh County Grand Jury, as to payment to you of sums of
money. In May '44, Benjamin H. Bartlett stated that just prior to the
primary election that year he turned over to you the sum of $10,300. Did
you receive that money?"
The
motion charged that everything learned by the government representatives
concerning the alleged income tax liability of taxpayer was
"learned illegally and unlawfully and in violation of the
constitutional guarantees of said" taxpayer and,
"specifically, in violation of the Fifth Amendment to the
Constitution of the United States and of the Due Process of Law
provision of the Fourteenth Amendment" thereto, and that the
prosecuting attorney turned the grand jury testimony over to the Bureau
of Internal Revenue and "thereby disclosed the secrets of the Grand
Jury room without an order of any court and without judicial sanction,
and that in so doing violence was done to the Fifth Amendment to the
Constitution and the Due Process Clause of the Fourteenth
Amendment."
The
motion contained a prayer reading:
"*
* * prays that all evidence and properties of any kind or nature,
including all of the testimony herein specifically set out and alleged,
and testimony not herein set out and alleged, so learned by the agents
of the Intelligence Unit, Bureau of Internal Revenue, Treasury
Department of the United States, and any and all Grand Jury testimony of
the Vanderburgh County, Indiana, Grand Jury, and all statements made by
this affiant or by any other witness appearing before said agents,
whether said statements be written or oral, may be quashed and
suppressed, and that all property of whatsoever kind and nature, and
documents, memoranda, books and all other property, and any statements,
whether oral or written, already procured by said agents, be suppressed
* * *".
Although
no counter-affidavit or motion was presented by the government, taxpayer
asked permission to introduce evidence to support the allegations of the
motion and expressed a wish to do this before the case was tried on the
merits. The court refused to permit this course of procedure to be
followed and indicated that it would take the motion under advisement
and rule on it when the evidence was before it, suggesting that
objection be made as the evidence of the government was offered. The
trial proceeded, but taxpayer made no objections to evidence on the
grounds set up in the motion to suppress. At the close of the trial the
court asked taxpayer's counsel if he then proposed to offer evidence on
the matter set forth in the motion. At that time taxpayer's counsel
indicated that he was relying on the matter set forth in the motion
only. It is contended by taxpayer in this court that the questions
raised by the motion to suppress should have been determined in advance
of the trial of the principal case. He relies uponWeeks v. United
States, 232 U. S. 383, 58 L. ed. 652, and other cases. However that
may be, we find it unnecessary to decide that question of practice.
1.
Taxpayer relies upon the following provisions of the Indiana statutes
(Burns' Indiana Statutes Annotated, chapter 9):
9-816.
"Every member of the grand jury must keep secret whatever he or any
other grand juror may have said, or in what manner he or any other grand
juror may have voted on a matter before the grand jury."
9-817.
"A member of the grand jury may, however, be required by any court
to disclose the testimony of a witness examined before the grand jury,
for the purpose of ascertaining whether it is consistent with that given
by the witness before the court; or to disclose the testimony given
before them by any person upon a charge against him for perjury in
giving his testimony or upon his trial therefor."
9-818.
"A grand juror can not be questioned for anything he may say or any
vote he may give in the grand jury relative to a matter legally pending
before the grand jury, except for perjury of which he may have been
guilty in making an accusation or giving testimony to his fellow
jurors."
In
Schmidt v. United States, 115 Fed. (2d) 394, at 396, the reasons
for the oath of secrecy taken by grand jurors are stated by way of a
quotation from United States v. Amazon Chemical Corp., 55 Fed.
(2d) 254, 261,
`(1)
To prevent the escape of those whose indictment may be contemplated; (2)
to insure the utmost freedom to the grand jury in its deliberations, and
to prevent persons subject to indictment or their friends from
importuning the grand jurors; (3) to prevent subornation of perjury or
tampering with the witnesses who may testify before the grand jury and
later appear at the trial of those indicted by it; (4) to encourage free
and untrammeled disclosures by persons who have information with respect
to the commission of crimes; (5) to protect the innocent accused who is
exonerated from disclosure of the fact that he has been under
investigation, and from the expense of standing trial where there was no
probability of guilt. It is obvious that the basis of all but the last
of these reasons for secrecy is protection of the grand jury itself, as
the direct independent representative of the public as a whole, rather
than of those brought before the grand jury.'"
To
the same effect is Goodman v. United States, 108 Fed. (2d) 516,
at 519.
In
Commonwealth v. Kirk, 17 A. (2d) 195, 340 Pa. 346, it was said:
"A
consideration of the best authorities on the subject leads to the
conclusion that the rule is for the protection of the Commonwealth, the
grand jurors themselves and the witnesses, and is not concerned with
'protecting' the accused, whose constitutional and statutory rights are
not affected by it one way or the other."
To
the same effect is State v. Krause, 50 N. W. (2d) 439, at 444,
260 Wis. 313. In that case decisions of the Indiana courts are referred
to, as follows:
"In
State v. Bates, 1897, 148 Ind. 610, 48 N. E. 2, 3, the court in
its decision stated: 'Though obviously proper, and highly important,
that the proceedings of a grand jury should be in secret, one who is
indicted cannot take any advantage of it if they are not. Shattuck v.
State, 11 Ind. 473. The secrecy is not required for his benefit, but
otherwise.'"
The
court in State v. Krause also cited State v. Rothrock, 200
P. 525, 45 Nev. 214, quoting therefrom, as follows:
`The
reasons on which the sanction of secrecy which the common law gives to
proceedings before grand juries is founded are said in the books to be
three-fold. One is that the utmost freedom of disclosure of alleged
crimes and offenses by prosecutors may be secured. A second is that
perjury and subornation of perjury may be prevented by withholding the
knowledge of facts testified to before the grand jury, which, if known,
it would be for the interest of the accused or their confederates to
attempt to disprove by procuring false testimony. The third is to
conceal the fact that an indictment is found against a party, in order
to avoid the danger that he may escape and elude arrest upon it, before
the presentment is made. * * * But when these purposes are accomplished,
the necessity and expediency of retaining the seal of secrecy are at an
end. "Cessante ratione, cessat regula.'""
Inasmuch
as the motion to suppress reveals that the grand jury inquiry now under
discussion occurred in 1947, which was the year prior to the year in
which the income tax liability hearings were held, and there is no
allegation that the said grand jury had not been discharged, one might
reasonably conclude that the need for secrecy as to proceedings before
that grand jury had ceased before the hearing in question.
United
States v. Coplon, 185 Fed.
(2d) 629, is distinguishable from the case at bar because in the Coplon
case evidence against the defendant was obtained by tapping her
telephone wires and a statutory provision (47 U. S. C. A. 605) was held
to forbid the introduction of evidence obtained through information
gained by such unauthorized wire tapping.
We
conclude that, as a matter of Indiana statutory law, the provisions for
secrecy of the grand jury were not for the benefit of taxpayer and hence
he had no statutory right to have his motion to suppress sustained.
2.
But the taxpayer contends that his constitutional rights were invaded.
He relies on cases involving unconstitutional searches and seizures by
means of which sources of information and property were obtained and
used against the person whose rights were invaded by such searches and
seizures.
Such
cases are: Boyd v. United States, 116 U. S. 616, 29 L. ed. 746,
which involved a statute which attempted to require an involuntary
production of a party's private books and papers to be used against him
or his property in a criminal or penal proceeding, or for a forfeiture; Weeks
v. United States, 232 U. S. 383, 58 L. ed. 652, pertaining to a
seizure of an accused's letters and private documents in his house in
his absence by a United States marshal holding no warrant for his arrest
and no search warrant; Silverthorne Lumber Company v. United States,
251 U. S. 385, 64 L. ed. 319, which had to do with knowledge gained by
the federal government's own wrong in obtaining papers by means of
unlawful searches and seizures;Trupiano v. United States, 334 U.
S. 699, 92 L. ed. 1663, 1669, relating to an illegal seizure of property
by government agents, without a search warrant; and McDonald v.
United States, 335 U. S. 451, 455, 93 L. ed. 153, 154, in which
there was search and seizure of articles in the possession of the
defendant in violation of the Fourth Amendment to the United States
Constitution. 1
In
the case at bar there is no contention that there was any search or
seizure of any information or propertybelonging to taxpayer. That
being so, there are no constitutional rights of taxpayer involved in
this proceeding. Hence, no constitutional ground existed for his motion
to suppress evidence.
In
this court petitioner taxpayer in writing submitted his case on the sole
proposition that the Tax Court erred with respect to his motions to
suppress evidence. Therefore what we have hereinbefore said entirely
disposes of this case and the decisions of the Tax Court will be
affirmed.
Affirmed.
1Goldstein
v. United States, 316 U. S.
114, 86 L. ed. 1312, cited by taxpayer, is not pertinent. It involved 47
U. S. C. A. 605, excluding as evidence information resulting from
certain types of interception of messages, it having been previously
held in Olmstead v. United States, 277 U. S. 438, that such
unlawful interception does not amount to a search or seizure prohibited
by the Fourth Amendment.
[62-1
USTC ¶9249]Charles E. Mirschel, Jr. and Katherine C. Mirschel v.
Rob
ert C. Zampano, United States Attorney for the District of Connecticut
U.
S. District Court, Dist. Conn., Civil #9121, 201 FSupp 373, 1/23/62
[1954 Code Sec. 7203]
Crimes: Information obtained in income tax investigation: Suppression
of evidence.--During the course of a civil audit the taxpayer
voluntarily turned over to Revenue Agents copies of his income tax
returns, books and records, ledger sheets, and cancelled checks. In
addition the taxpayer voluntarily consented to an oral question and
answer statement which was taken down and transcribed. Taxpayer's
petition for an injunction against the use of such evidence or its
suppression was denied. It is not necessary that the taxpayer be advised
of possible criminal prosecution or of his right to advice of counsel
since no search has been established and no compulsion was imposed or
threatened.
John
F. Scully, 266 Pearl St., Hartford 3, Conn., for plaintiffs.
Memorandum
of Decision
I. Petitioners' Claim
BLUMENFELD,
District Judge:
The
petitioners claim that their retained copies of federal income tax
returns for the years 1955, 1956, 1957 and 1958, books and records,
ledger sheets, cancelled checks, etc. for those years were obtained by
Internal Revenue Agent Rehm and Special Agent Harman of the Intelligence
Division of the Internal Revenue Bureau and that a Question and Answer
(Q & A) statement of Charles E. Mirschel, Jr. by Special Agent
Harman which was taken down by a stenographer and later transcribed were
all obtained from the petitioners by unreasonable search and seizure and
compulsory self-incrimination in violation of their constitutional
rights under the Fourth and Fifth Amendments.
II.
Availability of a Remedy
Whether
this proceeding instituted by the plaintiffs in their effort to preclude
the defendant, the United States Attorney, from presenting that evidence
to a Grand Jury in connection with possible future criminal proceedings
against them is considered under their alternative request, either as an
action for an injunction against the use of such evidence or for its
suppression under 41(e) of the Federal Rules of Criminal Procedure,
matters little except for the fact that part of the evidence which is
the subject matter here is a Q & A statement which a Rule 41(e)
motion would not reach. In United States v. Murray (2 Cir. 1962)
[62-1 USTC ¶9188], 297 F. 2d 812, docket #26741, decided January 10,
1962, the court held that a Q & A statement was not discoverable by
a defendant in a criminal proceeding under Rule 16 1 because such
a statement cannot be regarded as a tangible object
"belonging" to him. No differences in the characteristics of a
Q & A statement as property, defined in 41(g) 2 and
"seized" under 41(e), 3 or as
property "belonging" under Rule 16 are sufficiently
discernible to merit any distinction in the application of Rule 16 at
one stage of criminal proceedings and Rule 41(e) at an earlier stage.
Since
the scope of the plaintiffs' remedy would be enlarged under their claim
for an injunction without subjecting them to any increased burden in the
quality or quantity of proof, the court, by agreement of the parties,
has considered the affidavits accompanying the petition and the other
evidence as having been presented at a final hearing upon their claim
for an injunction. That injunctive relief is appropriate upon a proper
showing of facts is not open to question. Perlman v. United States,
247 U. S. 7, 38 S. Ct. 416, 42 L. Ed. 950 (1918); Cf. In re Fried
(2 Cir. 1947), 161 F. 2d 453, 458-459; Austin v. United States (4
Cir. 1961), No. 8317, decided November 21, 1961; Grant v. United
States (2 Cir. 1961) [61-2 USTC ¶9525], 291 F. 2d 227.
III.
Facts
The
investigation and audit of the plaintiffs' 1958 joint income tax return
began when it was taken from a group of returns selected as excess cases
for assignment to new agents to develop their experience. It was
assigned to
Rob
ert Rehm, a newly appointed Revenue Agent, who had only recently
completed a departmental six month instruction course and was still
classified as a traincee. He made an appointment by telephone
conversation with the wife to see the plaintiffs concerning their 1958
tax return. When he arrived at the plaintiffs' store on January 22,
1960, he met Mr. Mirschel and told him his tax return had been assigned
to him for examination and that he would like to look at the books and
records used in preparing their tax return in order to determine the
correct tax liability. Rehm had no thought at all that his investigation
would involve any criminal liability. He showed his commission to
Mirschel. The taxpayer suggested that they work at his home and he took
the agent there and made all the books and records available to him.
After examining these records, the agent tole Mirschel that there were
several discrepancies which Mirschel said he could not explain since he
had not prepared the return.
Thereafter,
another appointment for February 10, 1960 was arranged by telephone for
Special Agent Harman of the Intelligence Division, who entered the case
because of something Rehm had informed him about. Both agents went to
the plaintiffs' home where Harman was introduced to Mirschel as a
Special Agent, Intelligence Division of Internal Revenue Service. Harman
displayed his pocket commission identifying him to Mirschel and stated
to him that he had entered the case because of differences found by Rehm
and that he was in the case to determine whether the error was due to
fraud. In explaining his position to Mirschel, Harman used a
departmental questionnaire form, each question being filled out as he
went along. Harman asked Mirschel for permission to ask questions and
made known to him that Mirschel was not required to answer and that
anything he said might be used against him. Mirschel said he wanted to
cooperate and he did cooperate. Harman told Mirschel he wanted to see
the plaintiffs' copies of their tax returns for the years 1956 through
1959; that there might be fraud; and that he wanted to go through those
and the books and records for those years. He stated to Mirschel that
this would have to be voluntary on his part. Mirschel had his books and
records for 1958 available on that day. He said Harman could come back
and see the other records. Two days later he had those records dealing
with the other years packed up and ready for Harman when he called for
them. They were turned over to Harman voluntarily and Harman typed up a
receipt for them on the plaintiffs' typewriter and signed it for the
plaintiff. Later Mirschel furnished other records to Harman upon
request, sending some of those to him by mail.
Subsequently,
from time to time, Harman got in touch with Mirschel at his store or by
telephone to ask for additional information which Mirschel gave to him.
On June 7, 1960 Harman spoke to Mirschel on the telephone and told him
he would like to have him come to the Internal Revenue Office for the
purpose of taking his statement. Mirschel said he would come in the next
day. On June 8, 1960 Mirschel's appearance was voluntary. Mirschel
stated that he understood he did not have to make any statement which
might incriminate him. He answered Harman's questions voluntarily in the
presence of a stenographer who made notes of the questions and answers.
At no time was Mirschel warned that criminal proceedings might be taken
against him, nor did the agents inform him that he was entitled to be
represented by counsel. After the close of the Q's & A's, Harman
told Mirschel that he was going to write a report recommending criminal
prosecution and told him of the further
admin
istrative processes this would go through and of the opportunities open
to Mirschel at these later stages.
Shortly
thereafter, Mirschel retained a lawyer who wrote to the Director
requesting that the books and records be returned and for a copy of all
statements and of the Q & A interrogation made under oath by
Mirschel to the Internal Revenue Service. When this letter reached
Harman, he called Mirschel's attorney and told him the records would be
returned in a few days. He refused to send a copy of the Q's & A's
to the attorney stating that department policy did not permit this since
the attorney had not been present at the time it was taken, but informed
him that Mirschel could see it and make any corrections in it or refuse
to sign it on any ground.
The
attorney then charged that Mirschel was being deprived of the right to
counsel. Harman explained that if the attorney came with the taxpayer
and the taxpayer signed he could have a copy and that he could come with
him and they could go over it together, but in the heat of the
conversation apparently this was not fully understood by the attorney.
IV.
Conclusions and Opinion
At
the outset, this was a civil audit, pure and simple. It is clear that
all of the material which is the subject matter of this proceeding was
voluntarily turned over to the Revenue agents. Indeed, the petitioners
do not claim otherwise. Nothing received from the taxpayers was obtained
by deception or fraud. The taxpayers were asked to cooperate and they
did cooperate. They were interviewed and oral statements were made by
them. There is no evidence and no claim that this was not willingly
done. They were at all times free to obtain the advice of counsel.
The
gravamen of the petitioners' claim is that they were not told they were
to be charged with a crime or that the investigation was for the purpose
of attempting to secure evidence to convict them of crime.
The
Special Agent did inform the taxpayers that he intended to check the
books and records to determine whether fraud existed. They took the
position at that time that the returns had been prepared by someone else
and that they were unfamiliar with the long form of return, never having
prepared one. Although it has recently been suggested that.
"It
would of course be far preferable, so that it may be made certain that
the choice of the taxpayer be an informed choice, that written warning
be given when the civil audit is suspended as such, and the
investigation becomes one to determine whether criminal or civil fraud
penalties should be sought by the government. This would not only
protect the taxpayer's constitutional rights, but would also obviate
much of the delay in tax cases caused by such motions [petitions] as the
one before us." Smith, Circuit Judge, Grant et al. v. United
States (2 Cir. 1961) [61-2 USTC ¶9525], 291 F. 2d 227, 228,
there
is no present requirement that such a warning flag be hoisted. It has
recently been made clear that there is no
".
. . requirement of warning of possible prosecution on a request by
criminal investigators for information prior to appearance before a
committing magistrate, so long as no coercion is claimed." Grant
et al. v. United States (supra).
There
is no basis for vitiating the voluntary cooperation of the plaintiffs.
The
collateral claim that the voluntariness of the plaintiffs' Q & A
statement is nevertheless tainted by illegality because the plaintiffs
were not informed of their right to seek advice of counsel is also
inapplicable here. The investigation was not one conducted under §6 of
the Administrative Procedure Act (5 U. S. C. A. §1005(a)) which
"applies only to persons 'compelled to submit data or
evidence'," nor was Mirschel's appearance in response to a summons
issued under §7602 of the I. R. C. of 1954. As in United States v.
Murray (supra), this case also is distinguishable from Backer
v. Commissioner (5 Cir. 1960) [60-1 USTC ¶9285], 275 F. 2d 141 and United
States v. Smith (D. C. Conn. 1949), 87 F. Supp. 293. There is no
requirement that the plaintiffs should be informed of their right to
have the advice of counsel.
No
search has been established.
No
compulsion was imposed or threatened.
This
memorandum of decision will constitute the court's finding of facts and
conclusions of law in accordance with Rule 52(a), F. R. C. P.
The
plaintiffs' motion is denied.
The
plaintiffs are not entitled to an injunction against the defendant.
Judgment
may be entered for the defendant to recover his costs.
It
is so ordered.
1
Rule 16, Federal Rules of Criminal Procedure--"DISCOVERY AND
INSPECTION--Upon motion of a defendant at any time after the filing of
the indictment or information, the court may order the attorney for the
government to permit the defendant to inspect and copy or photograph
designated books, papers, documents or tangible objects, obtained from
or belonging to the defendant or obtained from others by seizure or by
process, upon a showing that the items sought may be material to the
preparation of his defense and that the request is reasonable. The order
shall specify the time, place and manner of making the inspection and of
taking the copies or photographs and may prescribe such terms and
conditions as are just."
2
Rule 41(g), Federal Rules of Criminal Procedure--"SCOPE AND
DEFINITION--This rule does not modify any act, inconsistent with it,
regulating search, seizure and the issuance and execution of search
warrants in circumstances for which special provision is made. The term
'property' is used in this rule to include documents, books, papers and
any other tangible objects. As amended Dec. 27, 1948, eff. Oct. 20,
1949; Apr. 9, 1956, eff. July 8, 1956."
3
Rule 41(e), Federal Rules of Criminal Procedure--"MOTION FOR RETURN
OF PROPERTY AND TO SUPPRESS EVIDENCE--A person aggrieved by an unlawful
search and seizure may move the district court for the district in which
the property was seized for the return of the property and to suppress
for the use as evidence anything so obtained on the ground that (1) the
property was illegally seized without warrant, or (2) the warrant is
insufficient on its face, or (3) the property seized is not that
described in the warrant, or (4) there was not probable cause for
believing the existence of the grounds on which the warrant was issued,
or (5) the warrant was illegally executed. The judge shall receive
evidence on any issue of fact necessary to the decision of the motion.
If the motion is granted the property shall be restored unless otherwise
subject to lawful detention and it shall not be admissible in evidence
at any hearing or trial. The motion to suppress evidence may also be
made in the district where the trial is to be had. The motion shall be
made before trial or hearing unless opportunity therefor did not exist
or the defendant was not aware of the grounds for the motion, but the
court in its discretion may entertain the motion at the trial or
hearing."
[2002-2
USTC ¶50,650] United States of America, Appellee v. Myron C. Piggie,
Appellant
(CA-8),
U.S. Court of Appeals, 8th Circuit, 01-2518, 9/16/2002, 2002 U.S. Dist.
LEXIS 18829. Affirming an unreported District Court decision
[Code
Sec. 7203 ]
Compromises: Criminal case: Tax loss determination: Tax loss
calculation: Plea agreement.--The district court properly determined
the tax loss attributable to an individual who had been convicted of
participation in a scheme to deprive universities of the honest services
of college basketball players. The taxpayer contended that the amount of
tax loss was significantly less than that determined by the district
court and that the government had the burden of proving the tax loss.
However, because he stipulated in a plea agreement to the amount of loss
determined by the district court, he could not subsequently challenge
that determination.
William
L. Meiners, United States Attorney's Office, Kansas City, Mo. Myron C.
Piggie, Forrest City, Ark., pro se. Alleen Castellani VanBebber,
Mission, Kan., for appellant.
Before:
RILEY, BEAM and MELLOY, Circuit Judges.
OPINION
RILEY,
Circuit Judge:
In
the mid to late 1990's, Myron Piggie (Piggie) created and pursued a
secret scheme to pay talented high school athletes to play basketball
for his "amateur" summer team. Because the athletes intended
to play college basketball, the scheme produced multiple violations of
National Collegiate Athletic Association (NCAA) rules which require
college athletes to be amateurs. Piggie pled guilty to one count of
conspiracy to commit mail and wire fraud in violation of 18 U.S.C. §371
and one count of failure to file an income tax return in violation of 26
U.S.C. §7203. Piggie appeals the calculation of his sentence and the
amount of the restitution award, arguing the district court 1 misapplied
the United States Sentencing Guidelines (Guidelines).
The
district court based the Guidelines calculation on an evaluation and
comparison of the actual and the intended losses Piggie's actions caused
the high school attended by two athletes, the universities where the
individual athletes were recruited, the NCAA, and the athletes. For the
tax loss calculation, the district court relied on the tax loss
stipulated in the plea agreement. The district court ordered restitution
in the amount of $324,279.87. We affirm.
I.
BACKGROUND
Between
1995 and 1999, Myron Piggie devised a scheme to assemble elite high
school basketball players and compensate them for their participation on
his traveling Amateur Athletic Union (AAU) basketball team, known first
as the Children's Mercy Hospital 76ers and later as the KC Rebels. The
payments were designed to retain top athletes on his team, gain access
to sports agents, obtain profitable sponsorship contracts, and forge
ongoing relationships with players to his benefit when the athletes
joined the National Basketball Association (NBA).
The
pre-sentence report shows Piggie realized at least $677,760 in income
through his scheme. In the plea agreement, Piggie concedes that, as a
result of his fraud, he received a total of $420,401 between 1995 and
1998. Piggie received at least $184,435 from team owner Tom Grant,
$159,866 from team sponsor Nike, and $76,100 from sports agents Jerome
Stanley and Kevin Poston. He further planned on receiving a portion of
his players' compensation when they became professional athletes.
Piggie
received a gross income of approximately $99,100 from these sources
during the 1998 calendar year, and he knowingly and willfully failed to
file a tax return by April 15, 1999. Piggie also failed to file income
tax returns in 1995, 1996, and 1997. In the plea agreement, the parties
stipulated to a total tax loss of $67,662.69 for the period of 1995 to
1998.
Piggie
took portions of the money he was receiving as the coach of this elite
AAU team and made payments to the high school athletes in a clandestine
manner, frequently hiding the money in Nike shoe boxes. All of the
parties intended to keep the payments a secret from authorities. During
the conspiracy, Piggie paid Jaron Rush 2 $17,000,
Korleone Young (Young) $14,000, Corey Maggette (Maggette) $2,000, Kareem
Rush $2,300, and Andre Williams (Williams) $200.
After
accepting Piggie's payments to play AAU basketball, Jaron Rush,
Maggette, Kareem Rush, and Williams submitted false and fraudulent
StudentAthlete Statements to the universities where they were to play
intercollegiate basketball. 3 These four
athletes falsely certified that they had not previously received
payments to play basketball. The athletes delivered through the U.S.
Postal Service signed letters of intent asserting their eligibility.
Based upon the false assertions that these athletes were eligible
amateurs, the University of California, Los Angeles (UCLA); Duke
University (Duke); the University of Missouri-Columbia (Missouri); and
Oklahoma State University (OSU) (collectively Universities) awarded
scholarships to these athletes, enrolled them in classes, and allowed
them to play on NCAA basketball teams.