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[65-2 USTC ¶9727]Fred B. Black, Jr., Appellant v. United States of America , Appellee

(CA-DC), U. S. Court of Appeals, District of Columbia Circuit, Nos. 18,926, 18,927, 353 F2d 885, 11/10/65, Affirming District Court, 63-2 USTC ¶9564, 216 F. Supp. 645

[1954 Code Sec. 6531]

Statute of limitations: Criminal evasion: 6-year period.--
On the authority of the Supreme Court's decision in Jaben, 65-1 USTC ¶9408, a tax evasion indictment returned more than 6 years after the filing of a return but within 6 years of the due date of the return was timely. District Court's denial of motion to dismiss affirmed.

[1954 Code Sec. 7201]

Criminal evasion: Fairness of trial: Continuance.--
It was not reversible error for the District Court to deny the taxpayer's request for a long continuance and for transfer of the case back to Missouri , since these questions were within the range of the trial court's discretion. There also was no prejudicial press publicity of the case. One Dissent.BACK

[1954 Code Sec. 7201]

Criminal evasion: Unreported income: Reliance on counsel.--
Court held that the jury could properly infer wilful tax evasion from substantial unreported receipts even though there was no explanation of the use to which the money was put. The Court also rejected the taxpayer's defense that he relied on his attorney and his accountant to prepare his returns and could not be held criminally liable for their unreliability. One Dissent.

Bert B. Rand, Hans A. Nathan, Warren E. Magee, Thomas G. Laughlin, Suite 308, 1730 K St., N. W., Washington, D. C., for appellant. K. William O'Connor, Louis F. Oberdorfer, Assistant Attorney General, John P. Burke, Richard B. Buhrman, Joseph M. Howard, Department of Justice, Washington, D. C. 20530, David C. Acheson, United States Attorney, Frank Q. Nebeker, Assistant United States Attorney, Washington, D. C., for appellee.

Before WILBUR K. MILLER, Senior Circuit Judge, and DANAHER and MCGOWAN, Circuit Judges.

MCGOWAN, Circuit Judge:

These appeals are from convictions under two indictments charging appellant with violations of Section 7201 of the Internal Revenue Code of 1954. 26 U. S. C. §7201. That statute imposes criminal sanctions upon "Any person who willfully attempts in any manner to evade or defeat" federal tax liability. One indictment related to the year 1956; and the other to 1957, 1958, and 1959. The 1959 count was dismissed by the Government at the outset of the trial, but the latter eventuated in jury findings of guilt as to the other years. Concurrent sentences of confinement and fine were imposed.

Counsel have pressed upon us in brief and argument a large number of contentions, which vary greatly in their nature and substance. As befits the seriousness of the consequences faced by appellant, we have examined them all, although we think it neither feasible nor necessary to deal with each of them herein. The central and most substantial issue presented is whether a jury could permissibly have found from the evidence that appellant's conduct came within the proscription of the statute. Although appellant's unsystematic and unorthodox manner of operations leaves some obscurities as to both method and motive, we believe the jury was entitled to find as it did. Before coming to grips with that major question, we dispose of some of the other issues. In no instance have we found occasion to disturb the convictions.

I

1. The Statute of Limitations

Appellant contends that prosecution under the indictment relating to 1956 was barred by the lapse of time. This issue was first raised by a motion to dismiss in the court where the indictments were first returned in the spring of 1963, i.e., the United States District Court for the Western District of Missouri. That motion was denied by Judge Oliver in an opinion reported at [63-2 USTC ¶9564] 216 F. Supp. 245. It was renewed in advance of trial after the case was transferred at the appellant's request to the District of Columbia in May of 1963. The motion was again denied by Judge Hart.

In view of Jaben v. United States [65-1 USTC ¶9408], 381 U. S. 214, (1965), decided while this appeal was under submission, we need refer to only one aspect of the issue. The charge of evasion in respect of 1956 was first initiated by the filing of a complaint with the United States Commissioner in the Western District of Missouri on January 29, 1963. If this complaint was founded upon an adequate showing of probable cause, it is clear that the 9-months extension proviso contained in the Internal Revenue Code, 26 U. S. C. §6531, was operative and comfortably embraced the time of the subsequent return of the indictment. Jaben ends the arguments as to that adequacy. The representations made to the Commissioner in that case are virtually identical in form and substance with those involved here. They were found to be sufficient by the Supreme Court there. We must take them to be so here.

2. The Fairness of the Trial

Appellant insists that the outcome of his trial was significantly prejudiced in a number of ways, ranging from the denial of his request for a long continuance or a transfer of the case back to Missouri to allegedly improper characterizations by the prosecutor in his opening and closing arguments. We do not find that any of these warrant reversal, and we confine our discussion to those upon which appellant's principal reliance is placed.

As noted above, this case was, at appellant's request, transferred in May of 1963 from Missouri to the District of Columbia for trial. The District Court here granted appellant extensive discovery, which was to be completed by January 15, 1964, and the trial was scheduled for February 17 thereafter. On February 4, appellant asked for a continuance until after the elections in November. He represented that, beginning in September, 1963, the linkage of his name in the press with that of one Rob ert Baker had created political overtones which would make a fair trial impossible. The Chief Judge heard the motion, and rejected the request for a continuance until after the elections, although he did fix April 13 as the new trial date. He explicitly held that there was no reason to think that a fair trial could not be held in the current atmosphere. Early in April appellant again sought a continuance, or, alternatively, a transfer of the case back to Missouri . These motions were heard and denied by Judge Hart, who was of the view that the scattered references in the papers to appellant from September, 1963, to February, 1964, did no create an unduly prejudicial atmosphere. Judge Hart thought that appellant exaggerated the degree to which the citizens of Washington were aware of his existence--a surmise which was later supported by the fact that no one on the jury panel responded affirmatively to the voir dire question by defense counsel as to whether they had ever heard of the defendant.

The questions of the continuance and the transfer were well within the range of discretion committed to the trial court in the dispatch of its business; and we find no indication that this discretion was abused in any way. Judge Hart examined with care the material submitted in support of the continuance; and he gave similar attention to the request for transfer, although that came at an unjustifiably late point in the proceedings. We have no occasion to disagree with his conclusions.

A second area of complaint relates to assertedly prejudicial press publicity occurring in the course of the trial. The jury were repeatedly cautioned to avoid the communications media with respect to the case. A mistrial was asked shortly after the trial started because of one headline in a Washington newspaper: "Baker Associate Black Goes On Trial for Evading $91,000 in U. S. Taxes." Although this is hardly a model of journalistic restraint under the circumstances, the jury had been cautioned earlier, and the defense did not press a suggestion that the jurors be interrogated about this headline. The defense did not request at the outset that the jurors be sequestered throughout the trial and, indeed, appeared to be considerably less than happy (to the point of objection, indeed) with the court's sua sponte determination to effect such sequestration midway through the trial.

Our reading of the record suggests that the defense was quite conscious of the tactical pitfalls involved in too much insistence by it on elaborate and repetitive cautionary directions to the jury. It strikes us in the large that, once the trial had started, it was conducted just about as the defense preferred it to be, caught as it was in this perennial dilemma of over- or under-emphasizing the special circumstances of the defendant. When an adverse jury verdict is being appealed, this dilemma, of course, dissolves in the singleness of the purpose to get a new trial and a new chance with another jury. Thus, the prejudice proclaimed upon appeal may not have seemed to be such before the jury spoke. We, in fairness to the trial court as well as to appellant, must appraise it in the latter context; and we find no error.

A mistrial was sought at the time of the prosecutor's opening statement because of a characterization of appellant as one who held himself out as informed and influential in the ways of Washington . The trial court denied the request, but was alert to instruct the jury as to the non-evidentiary nature of opening statements and that it should not form opinions on the basis of them. It is also asserted that the trial was unfair because the prosecution lost no opportunity to refer to the parties and entertainments involved in appellant's expenses. The thrust of these arguments is essentially that appellant was tried, in substance if not in form, for some vaguely criminal offense of influence-peddling in addition to, or instead of, that of income tax evasion; and that determination of the latter charges must certainly have been affected by the former. The nature of appellant's own evidence was necessarily such, however, as to suggest that appellant's business activities were not of a wholly conventional nature; and we do not think the comments at the trial equated this with illegality. It was in appellant's interest to show large expense deductions, and he made the most of it. This could not help but paint the picture of a somewhat unusual business activity. Thus, such difficulties as this may have caused appellant seem to us inherent in his situation when accused of tax fraud--an accusation which was first made in Missouri long before his activities in Washington began to be revealed there. We do not believe that the record contains reversible error because of the references now claimed to be prejudicial. ¹

II. The theory of the Government's case against appellant is that, in respect of the years 1956-58, he received a total of $140,087.04 in income items which were not reported on his returns. Appellant's response to this, so it seems to us, is alternative in nature: He agues, first, that the Government failed to prove that these items were not reimbursements for expenditures made by him for the benefit of certain clients, involving no taxable gain to himself; and, secondly, that, even if the receipts did represent taxable income, he lacks the requisite criminal intent since he relied upon agents to prepare his returns from the information, assertedly complete, available to them. We examine these two points in their logical order, as just stated, and against the evidence of record relevant to each.

There is no significant dispute that appellant did receive some $140,000 more than he reported. This was made up of payments received from one individual and four companies. These last paid appellant other sums during the same period, which sums were shown on Forms W-2 or 1099 ² filed by the payors, and which were included in appellant's returns. Appellant's returns as filed listed substantial amounts of expense deductions, but there was in each case a balance of taxable income; thus, the expenses claimed did not absorb the receipts reported, much less those that were not.

Appellant, a native of Missouri , was in the consulting and public relations business. In 1955 he set up a Missouri corporation in Joplin , known as Blyco Corp. It was organized for him by his long-standing friend and attorney, Ralph Baird. The corporation had space in Baird's Joplin law office, and Baird was one of the corporation's officers and stockholders. Although Blyco Corp. was apparently designed to be the vehicle for appellant's business operations, he continued to function independently and for his own account. The record does not disclose clearly why this was so. It only shows a considerable overlapping of his and Blyco's activities.

The way the unreported receipts in question came to appellant requires at least a summary of his relationships with the five payors:

1. Darby.

Mr. W. E. Darby, the head of a Little Rock insurance company, retained appellant in 1956 to find out why a registration statement was being delayed at the S. E. C. Darby said the agreement was to reimburse appellant for expenses, with no fee to be paid unless appellant gave satisfactory service. Appellant submitted three unitemized bills for expenses, and received three checks in payment therefor, totalling $7,770.50. Darby said he did not know how, or for whose benefit, the money was spent; and he filed no W-2 or 1099. The three checks were deposited in appellant's personal bank accounts.

2. Jones Bros. Construction Co.

The head of this Joplin company testified that appellant was retained in 1955 to pursue business contacts. For 1956-58, salary is shown as having been paid each year, and these amounts are reported. In each of the three years there were substantial expense reimbursements (1956-$10,160; 1957-$21,208.30; 1958-$30,000). Of these, only one--the 1957 total--was reported by appellant; and the record contains a letter written by him in March of 1958 to Jones, protesting the filing of a Form 1099 in respect of this amount. Jones had no itemization of how these sums were spent, although it charged them to engineering services.

3. M-P Construction Co.

This Carthage , Missouri , contracting firm retained appellant to find some work it could bid on. Appellant asked for expense reimbursements from time to time, receiving payments of $10,500 in 1956, and $6,500 in 1957. The former was reported but the latter not. No itemization was obtained by the payor, and no Forms 1099 were issued. (The 1956 payment appears to be the one case in which appellant reported an income item on his tax return which had not been reported on a Form 1099.)

4. Howard Foundry Co.

Appellant was retained in 1955 by this Chicago company at a weekly salary plus expenses. Appellant submitted vouchers for expenses from time to time, without itemization; and they were paid. The problem which engaged appellant's attention was a renegotiation matter which was eventually transferred, as the client apparently wished it to be, from the Justice Department to the Air Force. Some checks were made payable to appellant, others to hotels of his designation. No Forms 1099 were issued, although the salary payments were covered by Forms W-2.

5. Aeronca Manufacturing Company.

Appellant was hired by this company as a consultant with respect to (1) dealing with Government prime contractors and (2) Government procurement matters generally. Appellant was to be paid for his services, together with reimbursement for expenses. Total payments of $14,430 in 1957 were reported by appellant, but $26,000 received by appellant in 1958 was not shown in his return. No itemization in respect of this money was submitted by appellant, and no Forms 1099 were filed by the payor, assertedly through inadvertence.

For each of the years in question, appellant claimed, and was largely allowed, certain deductions on his return. These deductions appear similar to the transactions for which appellant was presumably being reimbursed by the payors just mentioned. Thus it is that appellant may fairly be taken to know that he needed to report these receipts and submit his own expense deductions to the Government by an appropriate deduction in his return. He appears not to have operated on the assumption that his payors' expenses, paid for by him with their funds, was a matter between them and the Government as to which he had no responsibility. Such an assumption is, of course, hardly compatible with appellant's failure to submit to the payors itemized explanations of the expenses for which reimbursement was assertedly being made.

The question would seem to be whether the Government is entitled to get to the jury on a showing of substantial unreported receipts of alleged expense reimbursements, when there is no explanation by either the payor or the payee of what use was made of the money. Here there is no issue as to whether appellant received the money. Neither is there any doubt that it was omitted from his income tax returns. It is now characterized as reimbursement of expenses, but the fact and nature of those expenditures are not established. May the jury infer wilful evasion, within the meaning of the statute, from this evidence? We are not unmindful that this is a criminal case, and that the proof is to be weighed in an appropriately exacting balance. We think, however, that in this state of the record the jury could, if it chose bring in a sustainable verdict of guilty. ³ There is that in the evidence which could justify a conclusion that appellant wilfully followed a course of evading his income tax liabilities by arranging to receive large sums of money for which he did not account in any way. Where the Government was known to be on notice by means of W-2 or 1099 forms, there was reporting of sums received; and, where such notice did not exist, reporting was ordinarily withheld. This is a recognizable pattern which emerges from the Government's case, and which could have caused the jury reasonably to conclude that it constituted a conscious and knowing deception.

We turn now to appellant's defense that the most he was guilty of was hiring incompetent and unreliable agents to handle his income taxes--a lapse which may perhaps expose one to civil penalties for failure to pay the taxes properly owing, but not to criminal punishment.

The relationship between appellant and his associates, Ralph Baird and James Muskrat, is central to this issue. Baird, as has been said, was an old friend. He had served as appellant's attorney on various occasions since the beginning of his practice in 1938. When the appellant desired to establish his own public relations business in 1955, he used a room in Baird's Joplin, Missouri, law office as headquarters, most of appellant's time being spent travelling or in Washington. And, from this date, Baird played a prominent part in appellant's business, including the role already described in respect of Blyco Corp. He drafted contracts for appellant, as well as engaging in some travel and consultation work on his behalf.

At the direction of appellant, Baird obtained the services of an accountant, James Muskrat, to prepare appellant's personal tax returns. Muskrat prepared appellant's returns for the years in question and also prepared the Blyco Corp. returns for 1957 and 1958. Appellant's files, records, and bank statements were available to him. But Muskrat's instructions were indefinite, and the supervision exercised by appellant was sporadic. When Muskrat did not know how to handle a particular item, he would consult with Baird.

Appellant maintains that Baird and Muskrat possessed all the information necessary for preparing an accurate return and that he relied upon them to do so. ⁴ He testified that Baird was responsible for maintaining, assembling and keeping the records of his activities; that all records accumulated during his travels were sent to Baird; and that the entire accounting operation for both his own activities and those of Blyco Corp. were entrusted to Baird and Muskrat. He further testified that he kept Baird informed of all his receipts. ⁵

If appellant did in fact account so fully to Baird, Muskrat was apparently unaware of it. He testified that he had no knowledge of most of the checks that were alleged to be unreported income, although he could not be sure that there was not, somewhere in the correspondence files, documentation of those receipts. Nor did the manner in which Muskrat prepared the appellant's returns reflect the existence of any regular method of accounting to the Joplin office.

For the 1956 return, Muskrat was given a listing of hotel expenses, W-2 forms, and bills. Appellant was present while the return was being prepared, and both appellant and Baird orally gave Muskrat information as to what was to go into the return. Appellant, although personally present and actively participating, did not advise Muskrat of any income except that shown on the return.

More time was spent in preparing the 1957 return, but again the procedures followed seem haphazard. Muskrat testified: "I carried on what I had started on the 1956 return, with no clear setting out of duties or instructions or anything. Just the ultimate result to accumulate the information for the tax return." His primary concern was obtaining a total on expenses; and, again, some expense information was obtained orally from both Baird and appellant. Muskrat wrote appellant, questioning him as to his income for 1957, but there is no indication that the letter was ever sent. In any event, Muskrat discussed Black's income with Baird, and the income used on the return was that reflected in either 1099 or W-2 forms.

That Muskrat was not receiving adequate information seems evident from his changed procedure in constructing the 1958 return. Because he was dissatisfied with the way previous returns had been put together and because appellant's business was expanding, Muskrat began, on his own initiative, to maintain books for the appellant. ⁶ These books contained an income account in which he entered all income items, as well as other unidentifiable deposits that were necessary to balance the books. He would ask Baird about the unidentifiable items, sometimes receiving an explanation. At the end of the year, income reflected on 1099 and W-2 forms exceeded the amount stated in the income account, so he did not attempt to reconcile the two, but merely used the income reflected on the forms in making up the return.

Baird, on the other hand, showed a greater familiarity with appellant's affairs. He admitted knowing of most of the compensation arrangements appellant made with the five employers in question, but he denied knowledge of some particular receipts. As to the checks from W. E. Darby, Baird testified that he was satisfied from his own participation in the matter that the checks represented expenses incurred on behalf of Darby. Although he disclaimed knowing how much appellant had received, he testified that he knew of the arrangement with Jones Brothers Construction Co. He knew of appellant's relationship with the M-P Construction Co. And the arrangements with Howard Foundry and Aeronca were also familiar to him.

Baird insisted, however, that his responsibility was limited to accumulating expense information and that it did not extend to assembling appellant's income data. ⁷ But the record suggests otherwise. Whatever his precise responsibilities, he did engage to some extent in preparing income information for appellant's return. He advised Muskrat on the treatment of various receipts. On at least one occasion he wrote the appellant to obtain information about his receipts. Furthermore, since he was responsible for the Blyco Corp. tax returns, which included allocating income between the overlapping activities of appellant and Blyco, any failure by Baird to consider appellant's receipts seems improbable. There is correspondence between Baird and the appellant designating specific sources of income as belonging to the corporation. That letter, in March, 1958, clearly shows Baird's participation in the reporting of appellant's income. The letter concerned appellant's estimated declaration of taxes for 1958; in it, Baird reviewed appellant's income (based on certain assumptions) and outlined two methods for arriving at the estimated declaration. The inference is clear that Baird's participation with Muskrat in the preparation of appellant's tax returns was not limited to expenses. Rather, the conclusion suggested is that Baird was overseeing all of Muskrat's performance.

From this testimony, very little appears either to support or to refute appellant's testimony that information as to every receipt was passed to Baird in Joplin . Muskrat's testimony suggests that there was no such reporting, or at least that the manner of doing so was so disorganized as to have been of no assistance to him. Even the expense deductions, for example, could not be completed without obtaining information from the appellant. Baird, the central figure in this controversy, was not questioned about the adequacy of the information that he received from the appellant, although he did state that what he received was made available to Muskrat and that he did not know of many of the specific transactions that were unreported. That Baird did know generally of the appellant's compensation arrangements and did know that some of appellant's receipts were not reported on the tax returns, of course, does not necessarily mean that appellant told Baird of his receipts. Equally reasonable is the explanation that Baird acquired such information in the course of other duties on behalf of the appellant.

This raises critically the question of appellant's reliance on Baird and Muskrat. How is Baird's failure to ensure the accuracy of appellant's return, in light of his knowledge of the unreported receipts, to be understood? That he was negligent is belied by the fact that during this same period the accounting for Blyco proceeded in a more orderly fashion. Counsel for the appellant suggests that perhaps Baird's behavior can be attributed to his self-interest in seeing that Blyco Corp. obtained the benefit of appellant's deductions. This allegation, however, is supported only by some evidence that the deductions on Blyco's returns increased in 1958 while those of appellant diminished. Furthermore, no glimmer of such behavior emerged from Muskrat's testimony, and he was preparing the returns for both parties.

For some reason, Baird did not think it necessary to report the receipts that were not reflected on 1099 forms. ⁸ Apparently, this was not a decision based upon Baird's understanding of the reporting requirements. ⁹ In any event, the inference seems reasonable that, in this matter, appellant placed something less than reliance on Baird and that appellant was not unaware of the omission of substantial receipts from his tax returns.

The record below does not show appellant to be unconcerned with the preparation of his tax returns. To the contrary, he personally participated to a considerable extent in their preparation. In 1956 he was present while the returns were prepared, assisting by examining his bank statements to locate deductible items. Other returns were not completed without obtaining his advice on various expense deductions. Appellant was well aware of the tax implications of his compensation arrangements, to the extent of demanding that the amounts paid him for expenses be not reflected on 1099 information returns because it would burden him with a higher tax. ¹⁰

Nor does appellant's characterization of Baird as the person with complete responsibility for the financial aspects of his business appear strictly accurate. Expense checks were frequently mailed directly to the appellant, by-passing the Joplin office. Other checks, at appellant's request, were made payable to and sent directly to the hotels appellant was using. Often appellant would request additional money from his employers, and on at least one occasion he complained about delinquent payments. When this is added to his previously established concern that expense money be not reported on 1099 forms and his obvious awareness and control of the financial arrangements he made, the conclusion that appellant was quite the master of his own business seems thoroughly justified.

From this evidence, a jury could certainly infer that the accountant, Muskrat, did not have adequate information. Whether the appellant notified Baird of all of his receipts is perhaps less clear. The reporting to Baird occurred, if at all, in an informal manner, and its completeness is left very much in doubt by the record. Few indicia of any regular method of reporting are present. Checks and letters regularly by-passed the Joplin office. The accountant who was supposed to have access to these materials gave credible testimony of never having seen the items. Indeed, the construction of the returns themselves suggests a lack of information.

Furthermore, it could reasonably be inferred that appellant, contrary to his own testimony, did not rely completely upon the judgment of Baird and Muskrat. Rather, he appeared to have considerable appreciation for the income tax implications of his activities. His correspondence with Baird suggests that Baird would not make such a decision without consulting appellant. Finally, appellant's participation in the preparation of the returns suggests that Baird and Muskrat did not possess the responsibility he attributed to them.

It may be that some or all of the unreported receipts were not retained by appellant for his personal benefit in the ordinary sense. One engaged in his business has perhaps to face some delicate problems of identification and characterization in the itemization of expenses. It may not be possible to serve both client and Commissioner at the same time. But, if it is the latter who is sacrificed, that choice is no less knowing and wilful because of the harsh dilemma which occasions it. We think this record was such as to enable a jury to fell free of reasonable doubt in its conclusion that appellant made a wilful decision to ignore his responsibilities under the federal income tax law.

Affirmed.

¹ Errors requiring a new trial are also asserted to reside in the trial court's rulings on the admissibility of evidence and its charges to the jury. In the case of the latter, 15 specific instances of error are pressed upon us. In the case of most, if not all, of these claims, the particularity of the objection urged upon appeal was largely absent at the trial. Compare Rule 30, FED. R. CRIM. P., which requires appellate consideration of errors in the charge to be founded upon specificity in the objection made at trial. We have, in any event, examined the reasons given to us for the error in each case, and we see no need to reverse.

Similarly, the questioned rulings on evidence are, in our view, unavailing; and we note in particular only the one which appears to bulk largest in appellant's mind. This was the admission, over objection, of a brief filed with Internal Revenue Service by the Washington attorney representing appellant at the time the latter's affairs were under intensive consideration and when the Service was deciding whether to proceed against him criminally. Appellant's contentions with respect to this document seem to center upon a claim of inadmissibility because (1) the immateriality of possibly prejudicial matter in the brief far outweighed its probative value and (2) the brief was within the attorney-client privilege. As to the former, it is clear that the balancing judgment of the trial judge is what is involved, and we should reverse only if we can say that the balance unmistakably inclined the wrong way. We cannot say that it did. The central importance of the brief is that it shows the receipt of the unreported items of revenue. Its effort was to off-set these by items of expenditure--an effort which varied substantially from what was done at the trial. We think the trial judge was entitled to regard the materiality of this brief as unquestionable.

It seems clear from its face that the brief was not submitted solely as part of a negotiation over a settlement of civil liability, but as a last-chance effort to turn the tide against criminal prosecution. The frankness of its admissions is in this spirit. It is now claimed that the document was privileged, and could not be used against appellant without his consent. But the basic element of consent is not here lacking. There is no claim that the brief was prepared and filed without appellant's knowledge of acquiescence; and under these circumstances, there appears to be no forbidden breach of the attorney-client privilege. See Banks v. United States [53-1 USTC ¶9402], 204 F. 2d 666 (8th Cir. 1953), vacated for reconsideration, 348 U. S. 905, aff'd [55-2 USTC ¶9532] 223 F. 2d 884 (1955), cert. denied, 350 U. S. 986 (1956).

² Form W-2 is the form filed by the employer, reporting compensation paid under circumstances where withholding is necessary. Form 1099 is used to report sums paid where no withholding obligation attaches.

³ Appellant contends that the Government bears the burden of proving that the unreported receipts constituted taxable income, or, phrased another way, that appellant was not entitled to any offsetting deductions. This argument has been rejected in numerous cases. United States v. Bender [55-1 USTC ¶9142], 218 F. 2d 869, 871 (7th Cir.) cert. denied, 349 U. S. 920 (1955), is typical.

"The taxpayer's costs and other factors which would lessen his tax liability are peculiarly within his own knowledge. Accordingly, the law has placed upon him the burden of going forward with the evidence once the Government has established receipts in excess of those reported in his income return. . . .

"This rule is grounded on the realization that it would be virtually impossible for the Government to show the negative fact that a taxpayer had no unreported deductions or exclusions. In such a case the Government, having shown unreported income, is aided by the presumption that the deductions and exclusions listed by a taxpayer in his return are all that exist."

See, United States v. Shavin [63-2 USTC ¶9584], 320 F. 2d 308, 311-12 (7th Cir.) cert. denied, 375 U. S. 944 (1963); Dillon v. United States [55-1 USTC ¶9131], 218 F. 2d 97, 99 (8th Cir.), cert. granted, 349 U. S. 914, cert. dismissed, 350 U. S. 906 (1955); United States v. Stayback [54-1 USTC ¶9345], 212 F. 2d 313, 317 (3d Cir. 1954), cert. denied, 348 U. S. 911 (1955); United States v. Link [53-1 USTC ¶9230], 202 F. 2d 592, 593 (3d Cir. 1953); United States v. Hornstein [49-2 USTC ¶9326], 176 F. 2d 217, 220 (7th Cir. 1949); See also McClanahan v. United States [61-2 USTC ¶9550], 292 F. 2d 630, 631-32 (5th Cir.), cert. denied, 368 U. S. 913 (1961); Small v. United States [58-2 USTC ¶9553], 255 F. 2d 604, 607 (1st Cir. 1958); United States v. Lennon [57-2 USTC ¶9785], 246 F. 2d 24, 37 (2d Cir.) cert. denied, 355 U. S. 836 (1957); United States v. Gannon [57-2 USTC ¶9701], 244 F. 2d 541 (2d Cir. 1957); Wolcher v. United States [56-2 USTC ¶9719], 233 F. 2d 748, 751 n. 4 (9th Cir.), cert. denied, 352 U. S. 839 (1956); United States v. Smith [53-2 USTC ¶9538], 206 F. 2d 905, 910 (3d Cir. 1953); Graves v. United States [51-2 USTC ¶9431], 191 F. 2d 579, 582 (10th Cir. 1951); Barrow v. United States [49-1 USTC ¶9112], 171 F. 2d 286 (5th Cir. 1948).

Of course, appellant was free to show that he was entitled to additional deductions which would offset the amounts received, see Small v. United States, supra, but this record will not support such a finding.

⁴ An investigator, retained in connection with the effort made by the attorney, Bernard, to avoid criminal proceedings, testified that his examination in 1961 of the files maintained in Joplin revealed evidence of all the unreported items.

⁵ "I sent him all checks, all the bank statements, and I sent him all the deposit slips. If I cashed a check some place I made a little note of it and sent it to him, or told him about it by phone. I tried to keep him fully abreast of all the things." The testimony of a public stenographer at a Washington hotel was offered in corroboration. She testified to mailing copies of letters, statements, and airplane tickets to Baird. She stated, "Nothing was ever withheld, held back from Mr. Baird. In fact, Mr. Black had instructed me many times to send copies to Mr. Baird." But she only worked for appellant intermittently, and did not know whether everything pertaining to the appellant's business was sent to Baird. A memorandum, in Baird's handwriting, noting the receipt by appellant of $800 from Howard Foundry, was also offered to corroborate appellant's story.

⁶ "A. I cannot recall when I commencted [sic] to do it. The situation came about partly because of the expanding scope of the operations of Mr. Black.

There were quite a few more companies involved during 1957 than there were in 1956. I was not satisfied with the manner in which I had put in [sic] 1956 or the 1957 return together. It was more or less a developing thing.

"Q. Mr. Muskrat, why were you not satisfied with the manner you put the '56 return together, or the '57 return?

"A. Well, I thought that things should have been kept a little more precisely than they had been for those two other years. However, those two years were gone."

⁷ He later softened that assertion.

"Q. Were you ever, during the time of the preparation of these returns, or at any time for the years 1956, 1957, and 1958 responsible for the collection of information pertaining to the income for the returns for Mr. Black?

"A. I had some measure in it, but I didn't have the responsibility."

⁸ It is not disputed that the unreported receipts were not shown on any W-2 or 1099 form. As to the income that was reported, Muskrat testified that he did not remember whether he saw 1099 forms in 1956, but that he did obtain some oral information from Baird or appellant and that he did have W-2 forms. He stated that he did not know where the income information for the 1957 returns came from if it was not from the 1099 forms. The 1958 return was clearly based on income shown on the forms. Muskrat said he used the forms because he was unable to reconcile the amount with the sum recorded in his books. Baird testified that Muskrat relied on the 1099 and W-2 forms in reporting the appellant's income for the years in question.

⁹ Counsel for the appellant contends that Baird and Muskrat had good and sufficient reasons of their own for not including the unreported checks in the returns, and tried to show that the reason was Baird's understanding of the reporting requirements. Although Baird stated, in testimony that was later struck, that it was his understanding that such items need not be reported, he was positive in his testimony that he was not a tax lawyer and did not give appellant legal advice about his income tax.

¹⁰ On another occasion, appellant wrote Howard Foundry for payment requesting that it not be shown as income to him. Correspondence with Aeronca concerning appellant's compensation arrangement was explicitly concerned with a "better tax deal." Appellant's insistence on operating on a reimbursement of expense basis is further evidence of his tax consciousness.

[Dissenting Opinion]

WILBUR K. MILLER, Senior Circuit Judge, dissenting:

The evidence introduced by the Government in an attempt to show understatement of income in Black's returns for the years in question was so cloudy, and proof of criminal intent on his part was so conspicuously absent, that I am unable to join the majority in affirming his conviction. I think the trial judge should have directed a verdict of acquittal.

Baird, who had long been Black's attorney, and Muskrat, his young and inexperienced accountant, prepared the returns, with very little, if any, participation by Black. Yet they were the principal witnesses against him, probably because, as Baird admitted, a special agent of the Intelligence Division of the Internal Revenue Service threatened him with criminal prosecution if he did not cooperate. Whether Muskrat was similarly threatened does not appear.

Black's files were kept in Baird's office in Joplin , Missouri , where he and Muskrat had full access to them. In preparing the returns, Muskrat selected from the files the materials he thought he would need, but in many instances he relied upon forms W-2 and 1099 without attempting to verify them by comparing them with information contained in the files. He admitted that he could not say the transactions about which he was questioned on direct examination were not represented by some documentation in the files.

Muskrat also testified that on form 1099 there were seven categories of payments to be listed by the payor, but there was no category for expense advancement or reimbursements. Obviously, the payor's inclusion of the latter two items in form 1099 would cause the form to reflect a greater sum than that paid by way of compensation only. Muskrat said when the 1099's and W-2's for 1958 totaled more income for Black than the books showed, he looked no further. If the total had been less, he said he "would have done some more checking." This is indicative of Muskrat's inexperience.

In spite of the possibly coerced cooperation of Black's two associates, the evidence permits, if it does not actually require, the conclusion that Black gave Baird, or the latter otherwise had, full information about his income, and that any understatement of income was due to the negligence of Baird and Muskrat. The record also rather definitely shows, I think, not only that Black had no real part in the preparation of the returns and depended on his attorney and accountant, but also that he had at the beginning instructed them to prepare true and accurate returns.

For example, Muskrat testified that Black told him when he began his work that his affairs were complex, that he was seldom in Joplin to assist in preparing his returns, but wanted them to be as correct as possible. To that end, Muskrat said, Black asked him and Baird to go to Kansas City to consult the Internal Revenue Service to be sure they were preparing the returns correctly. The trip was never made because Baird decided not to go.

It is significant that Muskrat said Black never told him to omit any item of income from his tax return. He testified that he depended on Baird for information and that he saw Black only a few times. And Baird admitted he told Black the amount of his income and his estimated tax, thus showing the latter had no part in the preparation of the returns.

In the circumstances, I think it quite clear that the Government failed to show Black had knowledge of or participated in making any understatement of income for the years under consideration. If there was an understatement, Black is liable for the tax deficiency caused thereby; but he should not be punished criminally for the acts of his subordinates of which he knew nothing. Black was clothed with the presumption of innocence and, in my view, it was never dispelled by proof of guilt beyond a reasonable doubt. Absent evidence of any criminal act on Black's part, the jury should should have been instructed to find him not guilty. United States v. Pechenik, [56-2 USTC ¶9888] 236 F. (2d) 844 (3rd Cir. 1956).

In any event, I am convinced that the trial court erred in denying a defense motion for a mistrial because of inflammatory newspaper articles which had just appeared. It is significant, I think, that the jury which had been allowed to separate until the motion for a mistrial was made, was thereafter held together on the court's own motion. This indicates to me that the trial judge was disturbed by the articles in the papers. And well he might have been. I think the motion should have been granted. Marshall v. United States , 360 U. S. 310 (1959).

For these reason, I dissent.

 

 

[64-2 USTC ¶9881] United States of America , Plaintiff-Appellee v. John R. Thompson, Defendant-Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 28931, 338 F2d 997, 11/20/64, Affirming District Court, 64-2 USTC ¶9500

[1954 Code Sec. 7203]

Criminal evasion: Willful failure to file tax returns.--Taxpayer's conviction for willful failure to file income tax returns was affirmed. On the trial level, the case was tried without a jury and the trial judge did not believe the taxpayer's testimony that an accountant, now deceased, had informed him that there was a "ten-year plan" under which he could lawfully refrain from filing income tax returns for 10 years by simply informing the Internal Revenue Service of an intent to adopt the plan and by filing annual requests for extensions of time to file returns.

Howard T. Owens, Jr., Assistant United States Attorney, Jon O. Newman, United States Attorney, New Haven , Conn. , for plaintiff-appellee. Wallace R. Burke, Maxwell Heiman, 30 Farmington Ave. , Hartford , Conn. , for defendant-appellant.

Before LUMBARD, Chief Judge, MEDINA and MARSHALL , Circuit Judges.

PER CURIAM:

We affirm in open court. The case was tried without a jury and the basic issue was whether the trial judge would believe appellant's somewhat fantastic testimony to the general effect that an "accountant," since deceased, had told him there was a "ten year plan" by which contractors such as appellant could lawfully refrain from filing income tax returns for a period of ten years by simply informing the Internal Revenue Service of an intent to adopt the plan. The trial judge did not believe appellant's testimony. The finding of guilt was also bases on other proof indicating that the failure to file the returns was wilful. The claims of variance and alleged newly descovered evidence do not merit discussion.

Affirmed in open court.

 

 

[51-2 USTC ¶9468]Wanlo R. Olson, Appellant v. United States of America , Appellee

(CA-8), In the United States Court of Appeals for the Eighth Circuit, No. 14,260, 191 F2d 985, October 22, 1951

Appeal from the United States District Court for the District of North Dakota.

Evasion of income taxes charged: Propriety of evidence of net worth: Books for taxable year available: Testimony as to legal advice and bank accounts: Instruction regarding books of account.--Taxpayer was convicted on three counts of an indictment which charged him with attempting to defeat and evade a large part of his federal income taxes in the years 1944, 1945, and 1946, by filing false returns in violation of Code Section 145(b). Objection was made by taxpayer to admission of evidence of his net worth for 1946. He had kept a set of books for that year, on the basis of which the government had reached the conclusion that taxpayer attempted tax evasion. The government submitted the purport of the books, but further along in the trial offered evidence of taxpayer's net worth for the year 1946. The court sustained the government's position, determining that it had rightly sought to corroborate and check its conclusions by reference to other available evidence tending to support its accusation and to show the same tax evasion. The court also concluded that no reversible error was committed by the District Court in striking from the record evidence of details concerning legal advice given to taxpayer to omit certain items of profit from his 1946 tax return. Testimony that such advice had been given was permitted to stand, but the taxpayer's rights were demand to be fully protected. The judgment of conviction was not reversed on the ground that the court erred in not striking testimony regarding a bank account opened in 1947 as being irrelevant when the taxpayer first moved to strike such testimony but in sustaining the motion to strike when further evidence was adduced showing that the deposits were made in 1947. Instructions to the jury regarding books of account and their availability to the government, which conformed substantially with the declaration of law made by this court in Myres v. United States, 174 Fed. (2d) 329, 49-1 USTC ¶9275, were not erroneous.

Francis Murphy submitted brief for appellant. P. W. Lanier, United States Attorney (Joseph A. Struett, Attorney, Chief Counsel's Office, Bureau of Internal Revenue, was with him on the brief), for appellee.

Before GARDNER, Chief Judge, WOODROUGH and THOMAS, Circuit Judges.

WOODROUGH, Circuit Judge, delivered the opinion of the Court:

Wanlo R. Olson was convicted on three counts of an indictment which charged him with attempting to defeat and evade a large part of his federal income taxes in each of the years 1944, 1945 and 1946, by filing false returns in violation of Section 145(b) of the Internal Revenue Code, 26 U. S. C. A. 145(b). In count one it was charged that he returned net income for 1944 in the sum of $3,864.37 and the tax thereon in the sum of $707.00, whereas his net income was $74,269.42 and the tax $47,228.40. In count two, the net income and tax charged to have been returned for 1945 were $4,906.91 and $943.00, respectively, whereas the amounts were in fact $72,963.49 and $46,289.33. In count three the charge was that the net income and tax returned for 1946 were $12,188.87 and $2,937.18, respectively, whereas the true sums were $58,304.73 and $30,683.62. He was sentenced to three years imprisonment and a fine of $10,000 on count one, and to the same penalty on each of counts 2 and 3 "but such sentence on counts 2 and 3 to run concurrently with the sentence imposed in count 1." He appeals. His trial before the court and a jury upon his plea of not guilty extended over more than a week but he submits his appeal upon a condensed record which includes only the parts of the evidence and proceedings he has deemed sufficient to present the four points of error argued and relied on by him for reversal. The record does not include any motion for directed verdict at the conclusion of all the evidence and there is no claim that the evidence adduced at the trial was not sufficient to support the verdict and judgment.

The same counsel who represented the defendant throughout the trial in the District Court of North Dakota and the appeal to this court in the case of Hanson v. United States, 186 Fed. (2d) 61 [51-1 USTC ¶9118], also represented the defendant in this case on his trial and on this appeal. In the Hanson case this court considered at length the question of the sufficiency of the evidence to support the conviction for violations of the same statute here involved and there were doubtless points of similarity in the kind of evidence in the two cases. But beyond stating that the evidence against this appellant supported the verdict of guilty returned against him by the jury, we are called on here to discuss only the particulars presented and relied on by appellant.

[Four Points Argued for Reversal]

The four points presented and argued for reversal are: (1) that the court erred in admitting testimony as to appellant's net worth for the taxing year 1946; (2) that it erred in sustaining objection to defendant's testimony as to certain advice given him by a lawyer; (3) that it erred in denying defendant's motion to strike certain testimony; (4) that it erred in giving an instruction duly excepted to.

[Objection to Evidence of Net Worth in 1946]

1. Enough of the record of the proceedings on the trial has been brought up to show that the defendant kept a set of books showing his income for the year 1946 and the government submitted the purport thereof to the jury. Further along in the trial it offered evidence of his net worth at the beginning and at the end of the year 1946. Both items of evidence (the books and the net worth) tended equally to show that the defendant had received large amounts of income during 1946 and he had made return of only a small fraction or less than ten percent of the tax that he owed in respect to it. But he objected to the evidence of net worth on the ground that it "constituted a mere substitute method in the absence of books, the government having already established that there were adequate books kept for the year."

In making his objection to the evidence of net worth offered by the government the defendant did not point out to the trial court wherein he claimed that the evidence tended to his prejudice. He merely objected generally that it was incompetent and improper. Counsel for the government replied that the tendered evidence of net worth was "entitled to its place in the record as additional evidence or corroborative evidence or evidence which should be considered by the jury under all the circumstances."

On this appeal appellant argues that the evidence "impressed the jury with the notion that appellant's books of account were unreliable" and their unreliability "tended more strongly to indicate bad faith on his part than the failure to keep any books whatsoever in 1944 and 1945."

But we find no merit in the assignment of error. As the defendant kept a set of books for 1946 the government in the first instance determined his correct income and his attempt to evade the tax on it on the basis of the books. But it rightly sought to corroborate and check its conclusion by reference to other available evidence tending to support its accusation and to show the same tax evasion. In the case of O'Connor v. United States, 9 Cir., 175 Fed. (2d) 477 (1949) [49-2 USTC ¶9329], a prosecution under the same statute as is here involved, the government agents employed and there were submitted to the jury three different methods of determining the income of the accused and no error was found in the resulting judgment. In Jelaza v. United States , 4 Cir., 179 Fed. (2d) 202 (1949) [50-1 USTC ¶9149], the opinion of the Court of Appeals shows that it approved the use of three different methods of arriving at income on the trial of a charge of violating the same statute that is here involved. Likewise, in United States v. Chapman, 7 Cir., 168 Fed. (2d) 997 (1948) [48-1 USTC ¶9312], the amount of income was shown by books of account and also by proof of net worth at different times as in this case.

In this case the defendant's books for 1946 tended to show the attempted tax evasion in that year as charged and the comparisons of net worth at different dates added corroboration. Though the government agents did not reach exactly the same results in figures from their studies of defendant's books and his net worth at the beginning and end of 1946, there was enough similarity to afford corroboration. Both studies tended to show his tax returns were grossly false as charged. The record brought up does not show what defense was offered to the government's showing, both by book records and by other corroborating evidence, that in the period covered by the indictment the defendant only returned and paid a little more than 3 percent of the taxes he owed. We find no basis in the record to conjecture that the evidence complained of was otherwise than probative of the offense charged. As was said in United States v. Tandaric, 7 Cir., 152 Fed. (2d) 3, l. c. 6: "It is to be remembered that we must pass upon defendant's contention without regard to technical errors, defects or exceptions which do not affect the substantial right of the parties, 28 U. S. C. A. Sec. 391, and the question whether prejudice results from the erroneous admission of evidence is one of practical effect, when the trial as a whole and all the circumstances in the case are regarded." The first point argued affords no cause for reversal.

[Details as to Defendant's Legal Advice Stricken]

2. As to the second point, it appears that defendant was charged with receiving an item of more than five thousand dollars in 1946 as a result of transactions with one Krick Company. Defendant had loaned one Krick $25,000 and had agreed to take a share of the company's profits in lieu of interest. The amount charged as income represents those profits. The defendant testified that he consulted with a lawyer named Taylor, since deceased, as to whether or not he had to account for the receipts on his income tax, and in response to the question, "What was his advice to you?", testified that he was advised to leave it out for the time being. The record indicates that the defendant desired and was proceeding to state his conversation about the matter with the lawyer verbatim but was interrupted by an objection made by the prosecutor to the narration by the witness of the details of the conversation. The court sustained the objection only as to the narration of such details of conversation, allowing the testimony as to the advice given by the lawyer to stand. There was no offer to prove made on behalf of defendant and the record indicates that defendant's counsel asked the court, "You are not striking out this last sentence?", referring to the advice given by the lawyer, to which the court replied, "It is not being stricken". Defendant's counsel seemed content with the court's answer and pressed the matter no further. In its instruction the court specifically called the attention of the jury to defendant's testimony that "he was advised that he did not have to report the income from a certain $25,000 loan" and it is clear that the defendant's rights in respect to the $5,559.59 item of income in 1946 were fully protected. The part of the record that has been brought up in relation to it presents no error.

[Testimony Concerning Bank Accounts Stricken]

3. As to the refusal of the court to strike out testimony.

It appears that defendant disclosed in answers to questions put to him on cross-examination that he had a bank account in California . He said, "Right here I can't say the date when I first opened an account in this California bank. I can't say for sure that the account was opened in 1945". The defendant moved to strike all testimony as to the deposits in the California bank on the ground that they were made in 1947 [after the dates of the offenses charged.] The motion was denied. Later further evidence was adduced and it was shown that the bank deposits in California were made in 1947 and were therefore not relevant. A motion was then made to strike all the testimony with reference thereto, and it was sustained. In striking it out the court admonished the jury to "just disregard it as though it had never been offered."

We find no merit in the contention that the judgment ought to be reversed because the court denied the motion to strike the testimony about the deposits in the California bank in the first place and before the defendant had identified the dates of them as being subsequent to 1947. The court's ruling and admonition fully protected defendant's rights so far as is shown by anything in the record before us.

[Propriety of Instruction Regarding Books of Account]

4. The point last argued is that the following instruction given by the court was erroneous:

"You are instructed that a taxpayer who keeps books of account or any records from which his income can be ascertained is required to produce them at reasonable times for inspection by the Government revenue agents and that the failure or refusal of such taxpayer to produce his books and records is a circumstance which might be considered in determining the issue of wilfully filing a false return. If you find in this case that the defendant did have books of account or any other records from which his net income could be ascertained and that he failed to produce them on reasonable request by the Government revenue agents, you may give consideration thereto in determining the issue of whether or not he wilfully filed a false return or returns."

This instruction, it may be noted, conforms substantially with the declaration of law made by this court in Myres v. United States, 174 Fed. (2d) 329, l.c. 337 [49-1 USTC ¶9275]. There was an appeal from conviction and sentence under the same statute that is involved here, and the court stated:

"The defendant argues that the court erred in instructing the jury that a taxpayer who keeps books of account or records from which his net income can be ascertained is required to produce them at reasonable times for inspection by government Revenue Agents, and that the failure or refusal of such a taxpayer to produce his books and records is a circumstance which might be considered in determining the issue of willfully filing a false return. The defendant asserts that this instruction was highly prejudicial because it implied that the defendant had books or records and that he concealed them from the Revenue Agents. It is true that the defendant had no books of account, but he did have the case files of the firm, some memoranda as to expenses and all of the cancelled checks upon the several bank accounts. That these were helpful to his own accountants in reconstructing his income is apparent. His withholding this assistance from the Revenue Agents was entitled to significance, particularly in view of his professed willingness to help them and his failure to do so. The defendant also contends that the charge in this respect misstated the law and is contrary to the Fifth Amendment to the Constitution of the United States relative to self-incrimination. We fail to see how the defendant's privilege against self-incrimination was in any way involved in this case."

The record brought up in this case indicates that the facts in this case were similar to those in the Myres case in that the defendant here had no books of account for the years 1944 and 1945, and claimed that while he had records for 1946 he had only a few for 1945 and nothing for prior years, but he did have in his office a certain record of "daily recipts", "records of the sales", "the salaries paid", "invoices in a big drawer". His employee, Mrs. Iver Lee, whom he called to testify in his behalf, proved that defendant did have some records for the year 1944. The government agents who heard her testify took the stand in rebuttal and testified that if they had had access to the records testified to by Mrs. Lee it would have saved them one-third of the time they had to spend working out the evidence they adduced. The record brought up does not show that the instruction complained of was prejudicially erroneous.

As we have not found error in the judgment appealed from it is affirmed.

 

 

[68-1 USTC ¶9400]Leonard L. Bursten, Appellant v. United States of America , Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 23725, 395 F2d 976, 5/27/68, Rev'g and rem'g unreported District Court decision

[1954 Code Sec. 6531]

Statute of limitations: Criminal prosecution: Extension of time for filing return: Filing date controlling.--The six-year statute of limitations on a criminal prosecution for willful tax evasion (Sec. 7201) began to run on May 9, 1960, the date that the taxpayer's 1957 return was actually filed due to an extension granted by the Commissioner, and not on April 15, 1958, the date that the return was actually due. Accordingly, an indictment returned on October 12, 1965 was timely. Habig, (Sup. Ct. ) 68-1 USTC ¶9243, 390 U. S. 222, followed.

[1954 Code Sec. 7201]

Tax evasion: Unreported income: Defenses: Advice of tax counsel: Jury instruction.--Where there was testimony to the effect that the taxpayer's failure to report income realized on an assignment of his interest in a land contract was due to advice of his tax counsel, it was error for the trial court to refuse to instruct the jury as to the consequences of such reliance.

[1954 Code Sec. 7201]

Tax evasion: Criminal prosecution: Trial: Improper comment.--Prejudicial statements by the trial court in commenting on the evidence and interrogating witnesses, in the presence of the jury, deprived the taxpayer of a fair trial.

One concurring opinion.

Richard Booth, Suite 1008 , Ainsley Bldg., 14 N. E. First Ave., Miami, Fla., Virgil M. Wheeler, Jr., 712 American Bank Bldg., New Orleans, La., for appellant. Mitchell Rogovin, Assistant Attorney General, Joseph M. Howard, John M. Brant, Department of Justice, Washington, D. C. 20530, James O. Murphy, Jr., Assistant United States Attorney, Miami, Fla., for appellee.

Before COLEMAN and SIMPSON, Circuit Judges, and DAWKINS, Districk Judge.

DAWKINS, District Judge:

This appeal is from a conviction for willful income tax evasion. 26 U. S. C. §7201. ¹ For the reasons hereinafter indicated, we reverse and remand for a new trial.

Appellant, Bursten, a non-Florida lawyer, but who engaged in legal and financial activities there, and was apparently quite a "wheeler-and-dealer," was indicted for evading federal income taxes for 1957. Specifically, the indictment charged him with reporting he had no taxable income in 1957, when in fact he knew that his income for that year was $152,767.14. Income tax which would have been due on this amount would have been $93,093.40.

After a one-week trial, defendant was found guilty as charged. He was sentenced to eighteen months (fifteen months of which were suspended) and fined $5,000. In this appeal Bursten complains of various errors, said to have been committed by the trial court, which will be discussed hereinafter.

Appellant's financial transactions, as detailed in the record, were somewhat complicated. Consequently, we set forth here only the salient facts necessary for clear understanding of the case.

A. The Kadison Corporation. In 1950, three people, appellant, Walter Sawyer (his uncle), and Milton Kadison formed the Kadison Corporation. Each party owned a one-third interest in the stock of that company. Bursten performed necessary legal work for organizing and operating the corporation and also secured its financing. The bulk of its capital was obtained through a $7,000 bank loan upon endorsements of appellant and Sawyer; and also through loans totaling $88,000 from Sawyer's Downtown Motors, a corporation owned by Sawyer. Initially, the purpose of Kadison Corporation was to engage in manufacturing products for the Korean War effort. It was planned that ultimately Kadison was to go into manufacturing non-defense materials. To this end, Kadison secured a contract from the Navy for manufacture of a five-inch rocket motor igniter ring. Profits expected to materialize from this contract did not accrue and the corporation soon went into receivership.

Subsequently, during 1952, 1953, and 1954, Bursten claimed various losses in connection with Kadison's failure. During those years the Internal Revenue Service allowed appellant various amounts of actual losses. After filing his 1954 income tax return, he was left with $5,084.40 in losses which could be deducted in future years.

B. The East Corporation. In 1950, East Corporation was formed to take title to Bon-Air Apartment Buildings, then under construction. Appellant and his wife, Lucile Bursten, held 16 of the 80 shares of stock issued by this corporation, for which appellant paid the nominal sum of $300.00. Sawyer was also a stockholder therein, as well as other persons whose interests are not pertinent to this prosecution. In 1951 appellant borrowed some $10,000 from Sawyer and gave a note secured by pledge of the 16 shares of East Corporation stock owned by appellant and his wife to Sawyer as collateral for the loan. When the note was not paid timely, Sawyer had these 16 shares transferred to his [Sawyer's] name on the books of the corporation.

C. The Boca Ciega Land Contract. January 25, 1955, appellant entered into a contract with Hyman Green, of Irving Green & Associates, whereby the Greens were to purchase certain tracts of land in Florida and appellant was to perform legal services connected with development of that real estate. Both parties were entitled to a fifty per cent interest in the land to be acquired, contingent upon repayment of all funds advanced by the Greens. (Government Exhibit No. 1.) August 26, 1957, appellant assigned all of his interest in this contract to the Greens for $160,000.

D. The 1957 Tax Return. May 9, 1960, I. R. S. received an income tax return from appellant marked "Amended" [1957] Return. This return was dated November, 1959. The Service had no record of any prior return from him for the year 1957.

In filing this return, appellant reported a capital gain of $156,000 ($160,000 less certain sales expenses) on disposition of his interest in the Boca Ciega Land Contract. As an offset against this gain he claimed a carry-over capital loss of $140,000, described in the following manner (Government Exhibit No. 8):

"Carry-over Loss from previous returns of Kadison Corp. Loss, which was determined in Internal Revenue Service audit of 1959 to be a Capital Loss--Fair market value of property in excess of $140,000."

Appellant also claimed a $14,000 "loss" ² on his 1957 return resulting from his legal practice. Thus he reported no taxable income on his return for 1957.

Upon receipt of this 1957 income tax return, I. R. S. conducted a thorough investigation in an attempt to find the basis for the $140,000 capital loss. When their investigation failed to substantiate appellant's claim of that loss, this prosecution ensued.

At trial, the Government offered testimony from Special Agent George Vilas which tended to show that his investigation of the $140,000 loss revealed that this loss could not be substantiated in any manner. Moreover, the Government presented the testimony of Michael Zier, who was accepted as an expert in the field of income tax declarations. Zier reiterated the Government's contention that there was no basis for the $140,000 loss carry-over. He also testified that, under the law and regulations, the $160,000 treated as capital gain from the Boca Ciega Land Contract should have been treated as ordinary income instead of capital gain. He based his analysis on the fact appellant received these monies for legal services performed by him in consummation of that land contract. Zier concluded that a complete analysis of appellant's return showed that he should have reported a net income of $145,497.96. The tax due on this amount would have been $87,871.85. En passant, we must note that Zier's computations were not in exact accord with the charges in the indictment, although they were not materially different.

Bursten defended by seeking to show that the $160,000 reported as capital gain resulted from his alienation of an interest in immovable property. When questioned about the $140,000 capital loss carry-over, Bursten attempted to explain that loss in the following manner:

He asserted that the $140,000 loss claimed for 1957 was not actually a carry-over loss from Kadison Corporation. Instead he testified that in 1957 his wife threatened to sue both him and Sawyer for the sixteen shares of stock which had been transferred to Sawyer as a result of his prior loan to appellant. In order to pay his wife for her stock, appellant transferred to her a two-thirds interest in certain Florida real estate which he had acquired. Further testimony revealed that appellant acquired this property from one Wells, after assuming the debt Wells owed upon it. Bursten then testified that he borrowed money from two banks to pay off the indebtedness on the property and thus acquired title thereto from the actual owners, whose names were Lightsey. He testified that he paid some $220,000 for this property and that a two-thirds interest therein, which he transferred to his wife, would have a value of approximately $140,000. According to appellant, this was the basis of the capital loss carry-over which he reported on his 1957 tax return.

Bursten further stated that he claimed this loss in 1957 because he was specifically advised to do so by his tax counsel, William J. Goldworn. Goldworn, accepted by the Court as an expert in income tax matters, testified that he had represented both Mr. and Mrs. Bursten in their tax affairs through 1957, and in some instances thereafter. He further declared that Mrs. Bursten initially came to him because she was unhappy with what had happened to the East Corporation stock.

Concerning the 1957 return, Goldworn testified that Bursten brought to him several contracts dealing with his various land transactions. They then discussed the propriety of appellant's reporting certain of these transactions as gains and losses on his 1957 income tax return. Goldworn said that, since the purchase price of the land from the Lightseys was $220,000, and "since his [Bursten's] wife had a two-thirds interest in it which had been--he had purchased certain stock from her for that interest--then the value of the stock would be what he [Bursten] paid her for it if it was an arm's length transaction and that, therefore, two-thirds of $220,000 was approximately $140,000." (Tr. 676) Goldworn then stated that, in his opinion, the transaction was indeed an arm's length transaction.

The Government countered by asking Goldworn whether he knew such losses were not deductible under Section 267 of the Internal Revenue Code of 1954. Goldworn replied that in his opinion such an "arm's length transaction" as the one he had described was not within the reach of Section 267.

As noted, at the close of the evidence and after the jury was charged by the Court as to the law, appellant was convicted of willful evasion of income tax due in 1957. We now proceed to consideration of the specific issues presented by this appeal. While appellant has set forth a nine-point argument in brief, we find it necessary to rule upon only three of these, which are definitely dispositive of the appeal. ³

I. The first question presented is whether this prosecution was barred by the expiration of the applicable six-year statute of limitations (IRC of 1954, §6531). In this and the following remarks, we naturally intimate no opinion as to appellant's guilt or innocence.

Appellant's 1957 tax return, actually due April 15, 1958, due to extensions granted for filing time, was not submitted until May 9, 1960. The indictment was returned October 12, 1965, some five years and five months after the filing of the 1957 return. Since the applicable period of limitation under Section 6531, as interpreted by appellant, would have run from the initial due date for the filing of the return, prosecution would be barred if the statute began to run when the return became due; but it would have been timely instituted if the statute ran only from the date the return was filed.

In Hull v. United States [66-1 USTC ¶9259], 356 F. 2d 919 (5 Cir. 1966), we held that the statute began running from the date the return was due. Appellant contends that our decision in Hull is controlling and, therefore, that institution of prosecution in this case has come too late.

When the case was argued, United States v. Habig [67-1 USTC ¶9415], 270 F. Supp. 929, was pending in the Supreme Court. The Limitations issue presented in that case was identical to this one, and we, therefore, withheld judgment on this case until the Supreme Court acted definitively.

Habig was indicted August 12, 1966. The income tax returns involved there were filed August 12 and 15, 1960. Habig contended that the critical date was not when the returns actually were filed, but that when they were due to be filed.

In a thoroughly documented opinion which traces the full legislative history of I. R. C. Sections 6513 and 6531, the Supreme Court, in a unanimous opinion written by Mr. Justice Fortas, and in effect overruling Hull, held that where the return was filed after the due date, the Statute of Limitations did not begin to run until the date of filing. (That is the date when the alleged crime was committed.) The Court said that when the return is filed prior to the due date, the statute begins to run on the due date. United States v. Habig [68-1 USTC ¶9243], 390 U. S. 222, 36 L. W. 4187, decided March 5, 1968, (mandate issued April 1, 1968). The decision in Habig is now binding upon us and therefore appellant's argument that this action was instituted too late has no merit.

II. Appellant further contends that the trial judge committed reversible error in refusing to give to the jury the following specially requested instruction:

"If you find that the defendant had discussed this matter with competent tax counsel and that the tax return herein was prepared pursuant to that advice, then you must find that the defendant did not willfully file a false return or make a false statement, and you should bring in a verdict of not guilty." (Tr. 859)

We agree that there is substantial merit in this contention for the following reasons:

In Perez v. United States, 297 F. 2d 12 (5 Cir. 1961), we held:

"It is elementary law that the defendant in a criminal case is entitled to have presented instructions relating to a theory of defense for which there is any foundation in the evidence. * * * A charge is erroneous which ignores a claimed defense with such a foundation. * * * The charge to which he is entitled, upon proper request, in such circumstances is one which precisely and specifically, rather than merely generally or abstractly, points to his theory of defense, * * * and one which does not unduly emphasize the theory of the prosecution, thereby deemphasizing proportionally the defendant's theory." (Citations omitted) (297 F. 2d at 12, 15, 16)

Our recent ruling in Strauss v. United States [67-1 USTC ¶9405], 376 F. 2d 416 (5 Cir. 1967), also involved an appeal from a conviction of willful tax evasion. Coincidentally, that case also was tried before the same District Court in Florida . In reversing the conviction and sentence for failure of the Trial Court properly to instruct the jury, we noted:

"* * * If the trial judge evaluates or screens the evidence supporting a proposed defense, and upon such evaluation declines to charge on that defense, he dilutes the defendant's jury trial by removing the issue from the jury's consideration. In effect, the trial judge directs a verdict on that issue against the defendant. This is impermissible. Bryan v. United States, 5 Cir. 1967, [67-1 USTC ¶15,742] 373 F. 2d 403." (376 F. 2d 416, 419)

Review of the record here leaves little or no doubt as to why appellant requested the quoted instruction. One of the essential elements to be proved by the Government here was that he, appellant, willfully evaded the federal income tax laws. To have been successful, the Government must have proved, beyond a reasonable doubt, that appellant willfully filed a false income tax return with intent to defraud the Government. Thus, if the jury believed that appellant honestly relied on the advice of his tax counsel, Goldworn, it might have found that the element of willfulness was lacking and have acquitted. Moreover, there is no doubt that there was adequate basis in the record for this requested instruction.

Careful review of this quite lengthy record reveals why this instruction was refused by the District Judge:

"Mr. Booth: Which one are you refusing?

The Court: Well, that 'advice'; that's no excuse at all for a lawyer, particularly. It's no excuse at all. (Emphasis added.)

[We must note here, as a matter of judicial knowledge, that most lawyers have only scant knowledge of the tax laws.]

Mr. Osman: I give this to the Court and ask him if he is going to have a charge on that?

The Court: If this were the law, then I could get advice from anybody.

Mr. Soltz: Well, it says, 'competent'.

The Court: Well, that's silly. You can always find a crook that will give you any advice that you don't owe any tax."

(Tr. 725, 726)

Moreover, we note from the Charge Conference, this:

"Mr. Booth: Your Honor, it certainly goes on the question of what the intent was from what he was advised and what he believed.

The Court: Well, I'm not saying intent--

Mr. Booth: Whether it's the law or not.

The Court: That's a matter of argument. I agree with you that he may have foolish enough to believe that so-called professor we had here--

Mr. Booth: He teaches at the graduate school.

The Court: I don't care what school he teaches in, he is not a good tax man. (Emphasis added)

Mr. Booth: Well, on the question of intent, that really doesn't make much difference.

The Court: No, he may have given that advice. I don't say he didn't; and if he did, I don't say that this man is guilty in this case if he believed him.

Mr. Booth: That's what the testimony shows.

The Court: That's up to the jury. I'm not going to decide that." (Tr. 729, 730)

This clearly establishes that this instruction was refused because the trial judge thought "he [Goldworn] [was] not a good tax man." In the very same colloquy with defense counsel, the trial judge also noted that whether appellant relied upon advice given by Goldworn was up to the jury. As was stated in Strauss v. United States , supra:

" * * * We agree that the substance (though not necessarily the wording) of these charges should have been given. Defendant's dissatisfaction here is not pettifoggery over nuances of words. His objections go to the refusal to submit substantive defenses." (376 F. 2d 416, 418-419)

While the record reveals (Tr. 795-798) that the trial judge gave a general instruction to the jury on the element of intent, the authorities cited and quoted from conclusively hold that appellant was entitled to a more specific charge in light of his contention that he relied on advice of his tax counsel. This failure to give such a specific charge, even though it should have been reworded, so as to indicate that, to rely on this defense, appellant should have been found to have given all the facts to his advisor, was reversible error.

III. Finally, we consider appellant's last major contention that on many, many occasions the trial judge overstepped the bounds of judicial propriety by repeatedly injecting himself into the trial, in questioning of witnesses and wrongly expressing his personal opinions. The thrust of this contention is that he (the judge) intervened to such an extent (on an average of at least once in each three pages of the Transcript) that appellant was denied the right to a fair trial guaranteed to him by the Constitution. In considering this contention, we advert to the following basic principles.

It is well settled that a federal district judge is not relegated to complete silence and inaction during the course of a criminal jury trial. ⁴ He must, however, be most careful that his interventions are proper, timely, made in a fair effort to clear unanswered issues, and are not prejudicial to defendant. Many federal decisions recognize the power of the judge, within reasonable limits, to comment on the evidence and to express fair opinions. ⁵ This privilege, however, has been limited to the point where the trial judge is under a strict duty to direct the jury clearly that they are the sole judges of the facts and are not bound by the judge's questions or comments. Matters of fact unmistakably must be left to the jury.

It is well known, as a matter of judicial notice, that juries are highly sensitive to every utterance by the trial judge, the trial arbiter, and that some comments may be so highly prejudicial that even a strong admonition by the judge to the jury, that they are not bound by the judge's views, will not cure the error. ⁶

To be sure, admonition of counsel in hotly contested cases, such as this one, sometimes becomes requisite, even essential. Cf. United States v. Sacher, 186 F. 2d 416 (2d Cir. 1950). It is preferable, of course, that such corrections be made outside of hearing of the jury, but, for such conduct to constitute ground for reversal, it must appear that in some way the judge's conduct operated to deprive the defendant of his right to an impartial trial, such as to deprive him of effective assistance of counsel, or adversely influencing and prejudicing the jury. ⁷ If a trial court continually intervenes so as to unnerve defense counsel and throw him off balance, in a supposedly fair trial, and causes him not to devote his best talents to the defense of his client, then this is ground for reversal, no matter what counsel's experience and equipoise may be. Even if there is a basis for some criticism of overpartisanship, of defense counsel, this does not justify unwonted and unnecessary continuous interruption. ⁸ A trial judge must strive for total neutrality and complete circumspection, in the eyes and minds of the jury.

Upon careful scrutinization of the record here, it is abundantly clear that the many and manifest interventions by the trial judge deprived appellant of a fair trial. While it would be impracticable, if not impossible, for us to set forth all instances of undue interruptions, and a total taking over of the trial by the District Judge, the following examples clearly illustrate that he manifestly overstepped the bounds of judicial trial propriety in commenting upon the evidence and lengthily and partisanly interrogated witnesses in the presence of the jury.

During cross examination of Government's witness, Sawyer, the following colloquy took place:

"By Mr. Booth [Defense counsel]: Have you ever threatened to put Mr. Bursten in jail?

Mr. Murphy [Government counsel]: I will object, your Honor. Now, Mr. Booth knows better than that.

Mr. Booth: That is perfectly proper, your Honor.

The Court: If he [Mr. Booth] doesn't prove it, I hope the jury will hold it against him, because he shouldn't make that statement unless he has some proof." (Emphasis added) (Tr. 209)

The following dialogue occurred upon cross examination of the same witness:

"Mr. Booth: In the south corridor that goes right past this Courtroom?

Mr. Sawyer: I am a little mixed up. I may have been in the other corridor. I was in this building. I don't know which corridor.

Mr. Murphy: Your Honor, this is wide of the scope of the direct examination.

The Court: Yes, Mr. Booth, now get back to your own case, if you have a case. [Emphasis added] Proceed.

Mr. Booth: Your Honor, I am trying to lay a foundation for a statement he has made.

The Court: I know. You're trying to lay a--well, we won't say what it is. But never mind. Your are not going to do it that way, so forget about it. [Emphasis added]

Mr. Booth: Now, when you were in this building, in this--

The Court: Now, none of that, none of his being here in the building.

Mr. Booth: Your Honor, I am only laying a predicate for impeachment.

The Court: Mr. Booth, sit down and let the other attorney take over if you don't know how to cross examine this man. [Emphasis added]

Now, proceed in the proper way. I am sure that you have had enough training to know.

Mr. Booth: Do you recall the date that you were here?

Mr. Booth: Your Honor, you have got me in a position here that--I'd like to address the Court.

The Court: I know you'd like to, and you're not going to, Mr. Booth. Your tactics are not correct. [Emphasis added]

Mr. Booth: In the absence of the jury, may I talk to your Honor?

The Court: No. You can at noon. Just keep going on. At noon I will hear your objections, whatever they are. [Emphasis added]

You want to ask this man if he did, on a specific date, in the presence of certain people, at a specific place, make a statement which is contrary to something that is already made, you may do so, but nothing more.

Mr. Booth: I am trying to.

The Court: Nothing more.

Mr. Booth: Believe me, that's what I'm trying to do.

The Court: I know. You are doing it in a very awkward way. Let's do it the right way. [Emphasis added]

Mr. Booth: I am trying to establish the day.

The Court: Now, ask him a question. Sit down. Please sit down. Take over, counsel. [Emphasis added]

Mr. Soltz: Your Honor, I can't figure out how to ask the question Mr. Booth is trying to get.

The Court: You sit down if you can't ask the questions. There is no use waiting--" [Emphasis added]

(Tr. 215-218)

These proceedings, which took place in the presence of the jury, are bound definitely to have prejudiced the jury and to have had a deleterious effect upon appellant's right to a fair trial. These admonitions, which indeed were definitely prejudicial, made by the trial judge clearly constituted plain, manifest error. Such definitely were not adequately corrected by the Court's charge to the jury (Tr. 787), that it should disregard all arguments between Court and counsel. Other instances of erroneous intervention and grossly improper conduct by the trial judge in this case are set forth in the Appendix to this opinion.

For the foregoing reasons, the judgment of the District Court, therefore, is reversed and the cause remanded for a new trial.

Reversed and Remanded.

¹ 26 U. S. C. §7201. 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 penslties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than five years, or both, together with the costs of the prosecution.

² While on the witness stand, appellant testified that the $14,000 claimed as a loss on his 1957 income tax return, was actually an "expense." (Tr. 641)

³ We seriously doubt whether there is any validity to these other arguments by appellant.

⁴ Moody v. United States , 377 F. 2d 175, 178, 179 (5 Cir. 1967), and citations therein; Baker v. United States, 357 F. 2d 11, 14 (5 Cir. 1966).

⁵ Moody v. United States , supra; Baker v. United States, supra, and citations therein.

⁶ Moody v. United States , supra.

⁷ Johnson v. United States , 366 F. 2d 680, 683 (8 Cir. 1966), citing Zeboundi v. United States, 226 F. 2d 826 (5 Cir. 1955).

⁸ Young v. United States , 346 F. 2d 793, 795 (D. C. Cir. 1965).

Appendix

Hereinafter quoted are excerpts from this transcript which illustrate only a few of the improper interventions and prejudicial remarks by the trial judge. All of these occurred before the jury.

"Mr. Murphy [Government counsel]: Your Honor, what relevance does this have?

The Court: Not a bit in the world. Now, Mr. Booth [Defense counsel] is trying to testify.

Now, Mr. Booth, you will have to take the stand if you want to continue on that.

Keep in mind we are only concerned, Mr. Booth, with did this man pay his taxes. His quarrels with his uncle [Mr. Sawyer], if there were any such quarrels, is so remote as to not be important at all. [Emphasis added]

Mr. Booth: Your Honor, the only purpose--

The Court: His uncle hasn't testified to anything--never mind your purpose. Never mind your testimony. You will have to take the stand and take the witness off the stand.

(Tr. 220-221)

* * *

The Court: We are just going around in circles, now.

Mr. Booth: I hope to tie it all in later, your Honor.

The Court: I do not think you can and I do not want you to do it, until you show me some reasons for doing it. [Emphasis added]

Mr. Booth: Well, I believe it will all be tied in with other testimony.

The Court: I don't think so, Mr. Booth. If you tie it up, you can call this witness back. But let me hear you tie it up first. I'm not going to let you ramble all over the picture concerning this family's relationship. How can you tie something else up when the deed is done? It is either in the income tax claim or it isn't in there. [Emphasis added]

(Tr. 433-434)

* * *

The Court: There is no claim here that this man [the defendant] owns that stock or, if he did own it, that is another day and another place.

Mr. Booth: There is a claim that he thought he owned it.

The Court: Well, he is a lawyer, now. Now, he ought to know whether he owns it or not, Mr. Booth. [Emphasis added]

(Tr. 440-441)

[We must note that a lawyer-defendant in an income tax evasion case is held to no higher duty of knowledge of the tax laws than any other defendant.]

* * *

Mr. Murphy: Your Honor, I can't see the relevancy of this to the issue of this law suit.

The Court: I can't either. Mr. Booth claims there is. We will hold him to it, unless he shows us something. [Emphasis added]

(Tr. 446)

[A criminal defendant is under no duty to prove his innocence.]

* * *

Mr. Soltz [Defense counsel]: To your knowledge, was Leonard Bursten a partner in 1560 Construction Company?

Charles Bursten: Yes.

The Court: Sustained.

Now, you want me to take action? Leading, suggestive, calling for a conclusion in all the faults. I'm afraid maybe you don't know the law of evidence. Perhaps you better turn this over to other counsel. This is your witness. [Emphasis added]

(Tr. 473)

* * *

Mr. Booth: What was the discussion as to his stock after 1951?

Mr. Rakita: It was always my impression and it was always--

The Court: Never mind your impression. We are not interested. [Emphasis added]

Mr. Rakita: It was always my discussion that this stock was collateral for monies that had been advanced to him by Mr. Sawyer.

The Court: There was no question about that, but what about it?

The Witness: It was always my discussion--

The Court: Never mind your discussion. What was said? Who talked to you and what--

The Witness: In my conversation with Mr. Sawyer--

Mr. Murphy: I will object to what his conversations with Mr.--

The Court: Never mind your conversations. That wouldn't be competent either.

(Tr. 489-490)

* * *

Mr. Soltz: Mr. Zier says that they couldn't tell what the income was because he never told him what the income was.

Mr. Osman [Government counsel]: That was not the testimony.

The Court: Not the testimony of anybody. Sit down, Counsel. I am afraid that you are way out of place.

Mr. Booth, I think you better take over. If you have something to ask this man, go ahead and do it. [Emphasis added]

(Tr. 576)

* * *

The Court: These loans came from the corporation.

Defendant: My understanding was, if I might--

The Court: I say actually they came from the corporation.

The Witness: I understood, your Honor, they were being charged to him personally. The corporation was just his conduit.

The Court: You understood you got the loan from the corporation. They do not get in the 80% bracket.

Defendant: I didn't get any loans from the corporation.

The Court: The corporation did what you were talking about, according to the record here. There are notes made to that--[Emphasis added]

* * *

The Court: Go ahead.

Mr. Booth: The loans apparently--

The Court: Well, he had no business saying 80% bracket. A corporation never gets in the 80% bracket. It might get in the 18% bracket. [Emphasis added]

(Tr. 589-590)

* * *

The Court: Let me say a corporation is not entitled to give rent-free apartments to anybody except on the basis of debt.

Mr. Booth: I am not arguing what the law is.

The Court: You asked him how come.

Mr. Booth: I agree. All I want is the facts.

The Court: Did you return income tax on that apartment for all those years?

Defendant: Did I pay income tax on those years? I don't recall.

The Court: Look at your reports. I am sure you did not. I don't believe you did. [Emphasis added]

Mr. Booth: I don't believe that is material.

The Court: It would be. If it was a rent-free apartment I think you would have to agree that he must report the value of the rent. [Emphasis added]

Mr. Booth: That may be true, but I don't think it has anything to do with this case.

The Court: I do not think any of this has anything to do with this case as far as that is concerned, but that is neither here nor there. Trying to get you to get to the case. Go ahead.

(Tr. 603-604)

* * *

The Court: Sustained. What difference does it make?

Mr. Booth: I think it makes a difference.

The Court: Well, I know. I do not think so and please do not. I don't think you think so, Mr. Booth, if you want a frank statement from this Court. [Emphasis added]

(Tr. 621)

* * *

The Court: When you settled with your wife?

Defendant: When I settled with my wife.

The Court: You know the law--

Defendant: I was advised--

The Court:--It is what you put in originally, not what you put in, your wife's.

Defendant: To determine my base and that's why I made my return accordingly.

The Court: You took the advice of somebody that turned out to be wrong. [Emphasis added]

Defendant: I don't know if it is wrong. That's why we are here today.

The Court: You didn't know it was wrong?

Defendant: No, my counsel tells me it's not wrong.

The Court: All right.

Mr. Murphy: No further questions.

The Court: Well, let me say to you that the law is that you only have a gain or loss is the difference between what you put in and what you take out. [Emphasis added]

(Tr. 658-659)

* * *

The Court: You knew advances by way of loans is not a business expense. You certainly must have known that.

Defendant: Well, your Honor--

The Court: Oh, well, never mind. Don't answer. [Emphasis added]

(Tr. 662)

* * *

Mr. Booth: What his reputation is, if you know.

Mr. Ratner [Defendant's character witness]: I haven't heard any bad words.

The Court: I haven't heard any bad things about Joe Doakes in New York City , but that doesn't make any difference. [Emphasis added]

Mr. Ratner: Mr. Bursten.

(Tr. 667)

* * *

Mr. Soltz: Your Honor, I'm sorry, when I qualified him [Mr. Goldworn] I forgot to submit him as an expert.

The Court: I will accept him as an expert, but--

Mr. Goldworn: Thank you.

The Court: But I don't take expert opinions as to my job.

Mr. Soltz: Well, that I understand.

The Court: When they get appointed by the President then they become a different kind of expert, see. [Emphasis added]

(Tr. 685)

* * *

The Court: Read this section now and see if you still persist in that opinion.

Mr. Goldworn: Read it out loud?

The Court: No. Just read it to yourself.

Mr. Booth: I object as it being an immaterial question, also, your Honor.

The Court: Well, he's an expert, and experts can be examined in great detail.

Let's see how good an expert he is, really."

[Emphasis added]

(Tr. 687)

[Concurring Opinion]

SIMPSON, Circuit Judge, concurring specially:

I concur in the result, on the basis of the matters discussed in Part III of the opinion, even though a number of the prejudicial remarks of the trial court were elicited by the conduct of defense counsel.

I disagree with Part II of the opinion. The requested instruction was deficient in at least two respects: (1) it speaks in terms of the defendant discussing the matter with tax counsel, rather than in terms of a full disclosure to such counsel, and (2) the necessary element of reliance upon counsel's advice is omitted. Under these circumstances, I am not persuaded that it was error to refuse the charge or to fail to edit it and give it in amended form.

 

 

[54-2 USTC ¶9707] United States of America , Plaintiff-Appellee v. George E. Phillips, Defendant-Appellant

(CA-7), In the United States Court of Appeals for the Seventh Circuit, No. 11087. October Term and Session, 1954, 217 F2d 435, December 2, 1954

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.

[1939 Code Sec. 145--similar to 1954 Secs. 7201-7203]

Evasion of tax: Instructions to jury: Advice of counsel: Previous arrests.--In a jury trial for tax evasion, where there was testimony to the effect that failure to report income from segregated funds was based on defendant's reliance on advice of counsel, it was improper for the trial court to refuse to give the jury an instruction as to the consequences of such reliance, although the defendant had not formally pleaded the defense of reliance upon the advice of counsel. Other indicated error consisted of the Government's questioning witnesses as to their knowledge of defendant's previous arrests while the record was devoid of any showing that the defendant had in fact been arrested.

Rob ert Tieken, Edward J. Calihan, J., United States Attorneys, Chicago , Ill. , for plaintiff-appellee. Thomas Dodd Healy, 208 South La Salle Street, Chicago, Ill., Harold Stickler, W. Donald McSweeney, for defendant-appellant.

Before MAJOR, SWAIM and SCHNACKENBERG, Circuit Judges.

MAJOR, Circuit Judge:

A six-count indictment was returned against defendant, George E. Phillips, on March 2, 1951. Each count charged that defendant "did wilfully and knowingly attempt to defeat and evade" taxes, in violation of Section 145(b) of the Internal Revenue Code (26 U. S. C. A. Sec. 145(b)). Count 1 charged a violation for the year 1944; count 2, for the year 1945; count 3, for the year 1946; count 4, for the year 1947; count 5 charged that defendant as president of a corporation, Phillips Company, Inc., wholly owned by defendant except for qualifying shares, caused the evasion of taxes due by the corporation for the year 1944, and count 6, that the defendant caused evasion of taxes of the same corporation for the period of January and February, 1945. On April 10, 1951, defendant entered a plea of not guilty and there followed a series of legal maneuvers between counsel for the respective parties. The trial commenced October 22, 1953, to a jury which returned a general verdict finding defendant guilty as charged. Upon such verdict the court, on November 16, 1953, entered judgment providing for defendant's imprisonment for a period of five years and imposing a fine in the sum of $10,000. From this judgment defendant appeals to this court.

Many issues are raised and argued here as grounds for reversal but, in our view, the only questions which need be given serious consideration are those which relate to the giving and refusal of certain instructions, and the admission and exclusion of evidence.

The conclusion which we have reached after a lengthy study and investigation of the record makes it unnecessary to relate more than a brief outline of the factual situation. Particularly is this so in view of the fact that there is no denial by the defendant, in fact it is tacitly conceded, that there were large deficiencies in gross income as reported for the taxable years in question. More than that, it is hardly open to question that the proof was sufficient to justify a submission of the case to the jury. A statement by this court in United States v. Raub, 177 Fed. (2d) 312 [49-2 USTC ¶9422], in which we reversed a judgment of conviction on the same charge as is made here, is appropriate. We stated (page 314):

"We conclude that if the only question here were as to the sufficiency of the evidence we would have no difficulty in affirming the judgment of conviction. However, a much more serious and difficult question is presented with respect to the instructions under which the case was submitted to the jury."

And so here we are presented with the problem as to whether the defendant had a fair and impartial trial, that is, a trial free from prejudicial error, and this we must decide irrespective of what we might otherwise think of the case.

During the years in question and prior thereto, defendant was engaged in the manufacture of jams, preserves and syrups, some of the time in his individual capacity and at other times by a corporation of which he was the owner and manager. Sales were made to restaurants in Chicago and its suburbs by truck driver-salesmen and to wholesale and retail customers throughout the midwest. Among his employees were William Freitag, his bookkeeper, and Blanche O'Donnell, an assistant bookkeeper, both of whom were called as government witnesses. The defendant also employed at intervals outside accountants and tax experts who made or assisted in making his returns for the years in question, including John Bertrand and Nels Tessem, also called as government witnesses.

The government relied upon two theories in proving its case, (1) that the defendant received a large amount of money from the sale of his products which was not included in his gross income as reported in his returns, and (2) the so-called net worth theory. The employees of defendant as government witnesses testified that acting under his instructions, a certain portion of income was not shown on the books from which the tax returns were prepared but that it was recorded in a special accounts receivable ledger, with the amount so recorded deposited in a special account in the bank, either in the name of defendant individually or in that of his corporation. The monies thus received and handled are referred to throughout the record as segregated business receipts. These so-called segregated receipts which were not reported resulted in the deficiency in gross income as reported. This segregated income was invested by defendant in real estate, the rental income from which was shown in his returns.

It was and is defendant's contention that this course was pursued in good faith on the advice of his attorney, George S. Porikos. Defendant did not testify and offered no evidence other than that of character witnesses. Thus, defendant relies upon evidence elicited from government witnesses, either on direct or cross-examination. Defendant does not claim, of course, that the asserted fact that he acted on the advice of counsel is a bar to the charge, but it is strenuously urged that it was a circumstance to be taken into consideration by the jury on the issue of defendant's good faith or, more accurately, that it was a circumstance which the jury was entitled to consider on the charge that he "did wilfully and knowingly attempt to defeat and evade" taxes. Notwithstanding, the court refused to instruct on the advice of counsel issue, which is here urged as prejudicial error.

In view of the concessions contained in the government's brief, we think there is no occasion to relate in detail the evidence under discussion. Typical is the testimony of defendant's bookkeeper, Freitag, called as a government witness, who stated that the segregated business receipts were recorded in a special accounts receivable ledger kept by O'Donnell and that they were not reflected in the general ledger from which the tax returns were prepared. On direct examination, questions were asked and answered as follows:

"Q. Did you have a conversation with Mr. Phillips, Mr. Freitag, just about the time this practice of separating orders into these two categories began?

A. Yes, I did.

Q. Now, would you please state what Mr. Phillips told you about this practice?

A. He said he was acting on the authority of his attorney and following his advice.

Q. What else did he say?

A. He said he was acting in his--that he had the authority, I mean he was acting on the attorney's statement that he could put that money in a special account and use it for the purpose of buying buildings.

Q. What else did he say about it?

A. He said that all of the money that was recorded in the special ledger, would be picked up and deposited, and it would be reflected in his personal income tax.

Q. Did he mention the name of the lawyer?

A. Yes, he did.

Q. What was the name?

A. Mr. Porikos."

That government's counsel recognized this testimony as important is evidenced by the fact that at that point a request was made that the jury and the witness be excused. Thereupon, government's counsel represented that the testimony came as a surprise, that the witness was hostile and requested that the court call the witness as its own, with permission to the government to cross-examine. The record does not disclose any ruling by the court on this request but it is inferable that it was denied because the government proceeded with the examination of the witness as it own. On cross-examination the witness testified that the defendant said to him in substance that at about the time the special account and special ledger were segregated, he (defendant) was acting on the advice of an attorney named Porikos who had advised him that he could segregate some of his business sales, invest them in real estate and account for the proceeds of the real estate when sold.

Testimony to the same effect was given by other government witnesses and was admitted on the theory that it was a part of the res gestae. The testimony of the witness Tessem, also a government witness, falls in a different category insofar as concerns the reasons for its admission. Tessem was a tax expert who had formerly been employed for many years as an agent by the Treasury Department and who was employed by defendant in connection with his tax affairs and to prepare his tax return for 1947. The witness was informed by defendant regarding the segregation of business receipts in 1947 and earlier years, and was asked on cross-examination what the defendant had told him regarding the practice which had been followed. The court sustained the government's objection to this question. Upon an offer of proof by defendant's counsel as to what the witness would testify, the government withdrew its objection and the court permitted the question to be answered. He testified that the defendant told him in substance that since the year 1944, he had been separating or segregating a part of his income and had been investing the proceeds in real estate, reporting the income from the same on his personal returns, and that he had deferred reporting further income until he sold the buildings. Defendant followed this practice, so he told the witness, on the advice of attorney Porikos. The witness informed the defendant that these segregated accounts must be included in his tax return, which was done with defendant's consent for the year 1947.

Defendant's assistant bookkeeper, O'Donnell, at the request of the government was called as a court witness. For some reason not explained, the court sustained an objection by the government when it was sought to show on cross-examination that she had been told by defendant that he was acting under the advice of his lawyer. This was the same character of testimony which had been elicited from the witness Freitag by the government itself and from the witness Tessm on cross-examination, after the government's objection had been withdrawn. We need not dwell further upon this character of evidence emanating from government's witnesses because the government in its brief states, "The record is replete with references by Government witnesses concerning statements made to them by the defendant that he was following the advice of an attorney." In response to defendant's contention that much evidence of this character was suppressed, the government in its brief states, "The record to the contrary shows affirmatively that the Court; the defendant, and the jury were aware of the alleged advice." And again, the government in its brief states, "It is well to remember that the only evidence of defendant's reliance on advice adduced at the trial below was by Government witnesses. * * * The testimony of each uniformly was that the defendant told each of them he was acting on advice of counsel."

[Refusal to Give Instruction]

Defendant offered an instruction (referred to as No. 13), reading as follows:

"There is evidence in this trial that some business receipts were segregated from receipts used for ordinary business purposes, and that such receipts were invested in real estate, and that the net rental income from the said real estate was reported on the individual income tax returns of Mr. Phillips for the years in question, and that the segregated receipts were not reported on any tax returns in the taxable year when received because Mr. Phillips relied upon the legal advice of Attorney George Porikos in deferring the reporting of segregated receipts until after he had sold the real estate.

"You are advised that the defendant, Mr. Phillips, was entitled to act in good faith upon he advice of his attorney to such effect, whether or not such advice was correct as a matter of law.

"You are further advised that unless you find from the evidence beyond a reasonable doubt that the defendant was not acting upon such legal advice and in good faith, then you must find the defendant not guilty as to each and every count of the indictment."

The sole reason given by the court for its refusal was, "I will refuse No. 13, and my reason for doing it is in the court's opinion there is nothing in the record to support the instruction. If the defendant wanted to avail himself of that defense, he should have called Mr. Porikos and had him testify to that effect, as his own witness." Thus it is inherent in this statement, given as the reason for denying the instruction, that the defendant was not entitled to an instruction based upon favorable testimony given by government's witnesses, but that as a prerequisite to his right to such an instruction, there must be testimony coming from his side of the case. We think this was clearly an erroneous idea, the effect of which was to shift the burden of proof.

The government's attempt to justify the refusal of the court to instruct on the advice of counsel theory is not convincing; in fact, in our view, it has little if any merit. The government, presumably in an attempt to show that no harm was done, quotes as follows from the argument of defendant's counsel to the jury:

`On the other hand, if you believe Mr. Tessem, if you believe the statement of Mr. Freitag, and the others who testified that he was acting under the advice of Mr. Porikos, then he did not have the intent to wilfully evade. And it is not a crime to avoid. Whatever action you take on your tax returns under the advice of a lawyer or accountant, even though it be wrong, it is not a crime, not at all.'"

An argument to a jury, however, on a legal issue, unsupported by an instruction to which the defendant was entitled, constitutes an aggravation rather than a mitigation of the harmful effect of the court's refusal to instruct. The government relies upon the well established rule that the instructions must be considered as a whole and, when so viewed, the jury was amply instructed on the issue of good faith. This argument does nothing more than beg the question under discussion. Particularly is this so when the court instructed the jury, "Nor would mere negligence or carelessness, unaccompanied by bad faith, render the defendant guilty under the six counts." The jury was thus instructed, notwithstanding there was no contention and no proof that the defendant failed to report total gross income through either negligence or carelessness, but the court refused to instruct as to the effect which the jury might ascribe to the government's proof that his failure to so report was occasioned by the advice which he had received from his lawyer.

The government in its numerous approaches to the issue under discussion always reverts to its primary thesis, that the defendant was not entitled to an instruction on the advice of counsel theory in the absence of proof offered by the defendant. In its brief it states, "In the absence of a defense made under the doctrine of good faith reliance on the advice of others by a defendant, no instruction would appear to be necessary," and "The lawyer or lawyers who so allegedly advised the defendant were not called on his behalf." This argument contravenes a fundamental proposition of law, that is, that there was no burden on the defendant to show good faith. The burden was upon the government to prove beyond a reasonable doubt that the defendant "did wilfully and knowingly attempt to defeat and evade" taxes as alleged, and that burden never shifted to the defendant. United States v. Fenwick, 177 Fed. (2d) 488, 492 [49-2 USTC ¶9448].

Finally, the government attempts to justify the alleged error thus, "Suffice it to say that under the instructions as given, the jury was not precluded from considering the evidence that the defendant purportedly acted on the advice of counsel." The statement is without merit. Nobody claims that the jury was so precluded. The point is that the jury was not instructed by the court that it had a right to consider such evidence on the issue of good faith.

We think the government's contention, apparently embraced by the trial court, that a defendant is not entitled to an instruction embodying a theory merely because it is predicated upon proof adduced by the government, is not the law. A case closely in point is Tatum v. United States, 190 Fed. (2d) 612, wherein evidence relative to defendant's sanity was offered by the government. A judgment of conviction was reversed because that issue, under proper instructions, was not submitted to the jury, even though the trial court was not requested to do so. The court stated (page 615):

"But as soon as 'some evidence of mental disorder is introduced, the prevailing rule in most jurisdictions is that sanity, like any other fact, must be proved as part of the prosecution's case beyond a reasonable doubt.'"

The court on the same page quoted from Davis v. United States (160 U. S. 469, 487):

`Strictly speaking, the burden of proof * * * is on the prosecution from the beginning to the end of the trial and applies to every element necessary to constitute the crime. * * * the vital question from the time a plea of not guilty is entered until the return of the verdict, is whether upon all the evidence, by whatever side adduced, guilt is established beyond reasonable doubt.'"

Defendant cites three cases in support of his contention that it was reversible error not to instruct on defendant's theory of the evidence as to a good faith. Haigler v. United States , 172 Fed. (2d) 986 [49-1 USTC ¶9171]; United States v. Raub, 177 Fed. (2d) 312 [49-2 USTC ¶9422], and Wardlaw v. United States, 203 Fed. (2d) 884 [53-1 USTC ¶9335].

In the Haigler case, the court reversed a conviction for income tax evasion on the ground that the defendant did not have a fair trial. The court stated (page 988):

"On cross-examination, counsel for the appellant sought to elicit from the internal revenue agents, Haigler's explanation to them for not having returned the income in question. The government objected to this inquiry on the grounds that Haigler was seeking to prove his 'side of the story by government witnesses.'"

And again on the same page:

"The court, however, sustained objections to any testimony concerning his understanding of the law applicable to his income tax liability, on the grounds that his intent would be judged by his acts, and not by what he understood to be their consequences."

In commenting on the rulings thus made, the court on the same page stated:

"Unconvincing as it may be, this testimony was plainly admissible as bearing upon the essential element of intent to commit the offense charged, and we think it was error to exclude it."

In the Raub case (by this court), the defendant contended that he had acted upon the advice of lawyers and certain tax officials. The opinion sets forth (page 315) an instruction, which was given to the jury, the following portion of which was not challenged by the government:

`You should consider that evidence [relating to defendant's consultation with counsel] in connection with all the other evidence in determining whether or not he wilfully and intentionally entered into this scheme for the purpose of evading his taxes.'"

In the Wardlaw case, also reversed because of an improper charge to the jury, the defendant was a lawyer who interposed the defense that "he acted under a bona fide misconception of the income tax law." The court, apropos to this defense, stated (page 885):

"It is now settled that 'willfully', as used in this offense, means more than intentionally or voluntarily, and includes an evil motive or bad purpose, so that evidence of an actual bona fide misconception of the law, such as would negative knowledge of the existence of the obligation, would, if believed by the jury, justify a verdict for the defendant. [Citing many cases.]"

Again the government, in response to these cases, falls back upon its stock argument. It states:

"It is thus apparent that in each of the cited cases, the defendant, by his own testimony and testimony of others, placed in issue his reliance on claimed advice."

It then cites United States v. Phelps, 160 Fed. (2d) 858, 874, and Meyer v. United States , 258 Fed. 212, 216, for the proposition that a court will not instruct on "a defense not made by the defendant."

These cases furnish no support for the contention. They hold nothing more than that the court will not instruct upon a theory unsupported by evidence. Certainly they do not indicate, even by inference, that the evidence must come from the defendant's side of the case.

We can think of no more important circumstance as bearing upon the crucial issue in a criminal prosecution for tax evasion than that the defendant acted in good faith upon the advice of an attorney. And where there is proof that he did so, irrespective of whether it comes from the witnesses of the government or those of the defendant, he is entitled to have the issue of his asserted good faith reliance submitted to the jury, under instruction, to be considered with all the other circumstances in proof in arriving at a decision as to whether the defendant "did wilfully and knowingly attempt to defeat and evade" taxes. It is not the province of this court, and neither was it that of the trial court, to appraise the reasonableness or unreasonableness of the evidence relative to the advice of counsel theory. As was stated in Tatum v. United States, 190 Fed. (2d) 612, 617:

"That is unnecessary, for 'in criminal cases the defendant is entitled to have presented instructions relating to a theory of defense for which there is any foundation in the evidence, even though the evidence may be weak, insufficient, inconsistent, or of doubtful credibility.'"

Inasmuch as the judgment must be reversed, we need not discuss in detail the criticism directed at the court's charge to the jury. The argument in the main is that by the instructions the burden was shifted from the prosecution to the defendant. We think there is some merit in the criticism. For instance, it is stated in the instructions, "Even though you should believe from the evidence that the returns filed by the defendant were incorrect, if you further believe that he acted in good faith in making such returns, then the defendant is not guilty of the offenses charged in the indictment." This statement standing alone undoubtedly would indicate to the jury that the burden was upon the defendant to establish good faith as a basis for acquittal. As previously shown, however, no such burden was upon the defendant. On the contrary, the burden was upon the government to prove defendant's bad faith, or, in other words, to prove wilfulness and knowledge on his part, beyond a reasonable doubt. When the charge is considered as a whole, however, as it must be, we think much of defendant's criticism evaporates. At any rate, we need not under the circumstances give any further consideration to this phase of the situation.

[Previous Arrests]

We perhaps should not conclude without mention of another matter which under the circumstances would be difficult to excuse as non-prejudicial error. The defendant called eight character witnesses who testified as to his good reputation among his friends and associates for honesty, integrity and fair dealing. On cross-examination of one of such witnesses, a Mr. Gallagher, the following questions were asked by the government:

"Did you hear that in the year 1934, well, specifically, that in January of 1934, in September of 1934, and in October of 1934, Mr. Phillips was arrested for issuing checks to defraud. Did you ever hear of that?

* * *

"Did you hear that in July of 1934 and in September of 1934, Mr. Phillips had been arrested for obtaining money under false pretenses? * * * These are two additional. Did you ever hear of that?"

Defendant objected to these questions on the basis that they were highly prejudicial, which objection was overruled by the court. To each question the witness answered, "No," that is, that he had never heard of the charges implied by the questions. At the time these questions were thus propounded and answered, no instruction was given to the jury as to their relevancy or as to the purpose for which they could be considered. The record is entirely devoid of any showing as to whether the defendant had in fact been arrested, as implied by the questions. Neither does the record disclose except by vague inference that the court was at any time advised that the government was prepared to prove such arrests. The most that is shown is that after the conclusion of the trial, in a colloquy between the court and counsel on defendant's motion for a new trial, the court in response to an inquiry by government's counsel stated that he recalled that there was submitted to him during the trial the Michelson case (Michelson v. United States, 335 U. S. 469).

More than that, the final charge to the jury made no reference to the cross-examination of this character witness or the purpose for which it was permitted. It is true that the government tendered an instruction (No. 11-A) purporting to state the reason for and purpose of the cross-examination. The instruction as proposed was objected to by the defendant on the basis that it assumed a number of matters which were not in proof, including the assumption that the defendant had actually been arrested, as implied by the questions. The court refused to give the instruction and in doing so stated, "There is not any proof in the case that could be produced that defendant was arrested." It is now argued by the government that the court's refusal to give the instruction under the circumstances forecloses the defendant from claim of error on appeal. With this we do not agree. In the first place, it is doubtful if any instruction could have been given at that late time which would have dissipated the harmful effect of the cross-examination. In the second place, when the instruction was refused by the court because of its form, the duty devolved upon the government to tender a proper instruction. Upon its failure to do so, we think it was the duty of the court of its own volition to instruct the jury as to the purpose for which the cross-examination was permitted, as well as the extent to which it could be considered by the jury.

Both sides rely upon the Michelson case in support of their positions on the cross-examination under discussion. It is true the court in that case approved a similar cross-examination under the facts and circumstances before it. There, however, the trial court at the time of the occurrence twice instructed the jury as to the limited purpose for which the examination could be utilized and again so instructed the jury in its final charge (see footnote to Michelson, supra, pages 472, 473). The Supreme Court, referring to the precautionary means employed by the trial court, stated (page 480):

"Wide discretion is accompanied by heavy responsibility on trial courts to protect the practice from any misuse. The trial judge was scrupulous to so guard it in the case before us. He took pains to ascertain, out of presence of the jury, that the target of the question was an actual event, which would probably result in some comment among acquaintances if not injury to defendant's reputation. He satisfied himself that counsel was not merely taking a random shot at a reputation imprudently exposed or asking a groundless question to waft an unwarranted innuendo into the jury box."

In the instant case no such precautionary measures were taken. In fact, there were no precautionary measures of any kind. For aught that is disclosed by the record, the jury was at liberty to consider the damaging implication inherent in the government's cross-examination for any and all purposes.

We need not extend this opinion by discussion of other issues raised on this appeal. We have shown enough, so we think, to require a reversal of the judgment. In so concluding, we are not unmindful of the effort and time which have been expended in the prosecution of the case. Regardless of all other questions and considerations, however, it is the heavy responsibility of a reviewing court to ascertain if a defendant has had a fair and impartial trial, that is, a trial free from prejudicial errors. In the instant case, it is our considered judgment that the defendant did not have such a trial.

The judgment appealed from is, therefore, reversed, and the cause remanded for a new trial.