Bank Records and Net Worth Increases 1 Page2

---

[ Back ] [ Next ]

   

[79-1 USTC ¶9195] United States of America , Plaintiff-Appellee v. Leland M. Carriger, Defendant-Appellant

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 78-5272, 592 F2d 312, 2/5/79, Reversing unreported District Court decision

[Code Sec. 7201]

Criminal penalty: Attempt to evade or defeat tax: Reconstruction of income: Net worth method: Evidence: Promissory notes.--The conviction was reversed and the cause remanded for a new trial in a criminal action against a defendant for evading taxes. Evidence of the existence of promissory notes produced to refute the government's reconstruction of income by the net worth method was improperly denied admission by the lower court. Such evidence was both material and relevant. Commercial paper is self-authenticating and it was only necessary that the documents be sufficiently identified as promissory notes to make out a prima facie case of admissibility. It was error to deny admission of this evidence for the determination by the jury of the authenticity or persuasiveness of such evidence, particularly when such evidence was used to refute a net worth prosecution.

James K. Rob inson, United States Attorney, F. William Soisson, Assistant United States Attorney, Detroit, Mich. 48226, for plaintiff-appellee. Joseph S. Friedberg, 605 Fourth Avenue South , Minneapolis , Minn. 55415 , for defendant-appellant.

Before LIVELY and MERRITT, Circuit Judges; and TAYLOR, ^* District Judge.

LIVELY, Circuit Judge:

The defendant was convicted by a jury of evading income taxes for the year 1971. 26 U. S. C. §7201 (1976). The jury acquitted him of the same charge for 1972. The government sought to prove by the net worth method ¹ that Carriger substantially understated his taxable income on the returns which he filed for each of the taxable years for which he was indicted. Prosecution witnesses testified that the defendant owned approximately $13,000 more federal income tax for 1971 than he paid.

The net worth method of proof requires the government to establish a taxpayer's "opening net worth" with reasonable certainty. Holland v. United States, supra, 348 U. S. at 132. This consists of the taxpayer's assets, at cost, less his liabilities on the last day of the year preceding the one for which taxable income is being reconstructed. The next step involves an analysis of expenditures of the taxpayer during the taxable year and a determination of his net worth at the end of that year. If the net worth at the end of the year plus non-tax-deductible expenditures during the year exceeds the amount of taxable income reported, there is an inference that additional taxable income was received. The government must investigate all leads furnished by a taxpayer to explain expenditures or increases in net worth in order to negate the existence of non-taxable sources. See, generally, Holland v. United States , supra; United States v. Giacalone [78-1 USTC ¶9350], 574 F. 2d 778 (6th Cir.), cert. denied, -- U. S. --, 99 S. Ct. 114 (1978).

On appeal Carriger contends that the district court erred in denying his motion for an acquittal on the ground that opening (December 31, 1970) net worth was not established with reasonable certainty. Since all calculations in a net worth case use the opening net worth as their starting point, it is obvious that this figure must be accurate. The Supreme Court in Holland stated the requirement as follows:

We agree with petitioners that an essential condition in cases of this type is the establishment, with reasonable certainty, of an opening net worth, to serve as a starting point from which to calculate future increases in the taxpayer's assets. The importance of accuracy in this figure is immediately apparent, as the correctness of the result depends entirely upon the inclusion in this sum of all assets on hand at the outset.

348 U. S. at 132.

Our careful review of the evidence convinces us that the district court did not err in denying the motion for acquittal. Starting with a financial statement which the defendant prepared in 1966 the government witnesses analyzed Carriger's income and expenditures through 1970 and concluded that he could not have accumulated large amounts of cash or other assets which were unknown to them. Among items considered were evidence that Carrigar had cashed some savings bonds and made no new investments and that he continued to pay interest on relatively small debts through 1971. The summary witness for the government, an experienced agent of the Internal Revenue Service who was an accountant, assumed that the defendant had "walking around money" of $500 on December 31, 1970 and on the same date in 1971. The evidence relied upon to establish opening net worth in this case is similar in kind to that relied upon in Giacalone, supra. The analysis of expenditures is similar in the two cases also. The opening net worth was established with sufficient certainty to present an issue for determination by the jury.

The second ground urged for reversal is that the district court erred in excluding evidence by which the defendant sought to attack the accuracy of the prosecution's opening net worth calculation and analysis of 1971 income. In his opening statement counsel for Carriger stated that the defense would show that the defendant's brother paid large amounts of money to the defendant in 1971 and that two promissory notes dated in 1970 were evidence that his brother owed the defendant $24,000.

The defendant's daughter testified that she saw her father count out a large sum of money and hand it to her uncle in 1969 or 1970. An apparently disinterested witness testified that in the spring or summer of 1971 he saw the defendant's brother push a pile of money toward the defendant. Describing the transaction the witness said, ". . . he hollered out ten thousand, and 'Here's the rest' and pushed it to Leland [the defendant], you know." Prior to presenting the above testimony the defendant had sought to introduce as exhibits two promissory notes. Both notes were signed by Vernon Carriger, identified as defendant's brother, and Valada Mason. Both notes were payable to Leland Carriger in annual installments of $1,000. One note, for $10,000, was dated March 2, 1970; the other for $14,000, was dated September 10, 1970. The government objected to the introduction of the notes and the objection was sustained.

The promissory notes were first offered during the testimony of an attorney who had represented the defendant's brother and had seen the notes in his office, probably in 1971. Though the witness stated that he was familiar with Vernon Carriger's signature, he was not permitted to testify that the signature on the two notes appeared to be that of Vernon Carriger. The notes were next offered as exhibits during the testimony of another attorney who stated that he represented Vernon Carriger for seven or eight years and had also represented the defendant in tax matters. The witness testified that he was able to recognize the signatures of Vernon Carriger and the other signer of the note, Valada Mason. The witness was not permitted to testify that the signatures on the notes were those of Vernon Carriger and Valada Mason because the district court concluded that there was "no foundation at all" for such testimony. Following this reling the witness testified that he had seen both signers of the two notes sign their names hundreds of times. He was then permitted to identify the signatures on the notes as those of Vernon Carriger and Valada Mason.

When the two notes were again offered in evidence the objection of government counsel was sustained and they were excluded. The district court held that the tendered exhibits had been adequately identified as purporting to be two promissory notes payable to the defendant and signed by his brother and Valada Mason. However, in concluding that the notes were relevant, but not material, the trial judge stated:

There has been no witness here that has testified as to the purpose, or the execution of these, what the consideration was, why the notes were transferred, how it is material to this lawsuit, how it accounts for any asset or anything else.

The court then indicated that the notes could be made material by the testimony of any of the three parties to them or by a lawyer who prepared the notes and could identify the transaction of which they were a part.

The district court correctly determined that the promissory notes were relevant evidence. Rule 401, Fed. R. Ev., contains this general definition:

"Relevant evidence" means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.

Since the government's opening net worth contained no indebtedness from Vernon Carriger to the defendant, the notes at least had a tendency to make more probable the fact as claimed by the defendant that the opening net worth was inaccurate for failure to include assets owned by him on December 31, 1970. They also tended to make more probable the claim that some of the defendant's 1971 expenditures came from a non-taxable source--the repayment of a preexisting debt. Since Rule 402, Fed R. Ev., makes all relevant evidence admissible unless otherwise provided, ² we must determine whether any exception applies.

In excluding the notes the district court held that they were not material. The Note of Advisory Committee on Proposed Rules appended to Rule 401 criticizes the word "material" as "loosely used and ambiguous." 28 U. S. C. A., Federal Rules of Evidence (1975) at 85. The word "material" does not appear in the federal rules and appears to be subsumed into the language of Rule 401, "any fact that is of consequence to the determination of the action." Since the promissory notes related to the central issues in the case they should not have been excluded on grounds of materiality.

In overruling Carriger's motion for a new trial the district court held that "the promissory notes were properly excluded since no foundation was laid for their admission into evidence; . . .." In its brief the government equates this language with a holding that the notes were excluded for lack of authentication. Rule 901, Fed. R. Ev., provides in part as follows:

Rule 901.

REQUIREMENT OF AUTHENTICATION OR IDENTIFICATION

(a) General provision. The requirement of authentication or identification as a condition precedent to admissibility is satisfied by evidence sufficient to support a finding that the matter in question is what its proponent claims.

(b) Illustrations. By way of illustration only, and not by way of limitation, the following are examples of authentication or identification conforming with the requirements of this rule:

(1) Testimony of witness with knowledge. Testimony that a matter is what it is claimed to be.

(2) Nonexpert opinion on handwriting. Nonexpert opinion as to genuineness of handwriting, based upon familiarity not acquired for purposes of the litigation.

The note of the Advisory Committee appended to Rule 901 states, "Authentication and identification represent a special aspect of relevancy." 28 U. S. C. A., Federal Rules of Evidence, at 714. This comment ties Rule 901 to Rule 104(b), Fed. R. Ev., which deals with the admission of evidence where relevancy depends upon fulfillment of a condition of fact. ³ See In re James E. Long Construction Co., 557 F. 2d 1039 (4th Cir. 1977). Under this rule the district court was required to make a preliminary determination of whether there was sufficient evidence "to support a finding that the matter in question is what its proponent claims." Rule 901(a), supra. The requirement of the illustration in Rule 901(a)(2), supra, was clearly satisfied by the testimony of the witness who was familiar with the handwriting and signatures of both signers of the notes.

The government argues that exclusion of the notes from evidence was proper because defendant failed to present testimony of a witness with knowledge "that a matter is what it is claimed to be." Rule 901(a)(1), supra. This argument echoes the statement of the district court that testimony concerning the underlying transaction was required to make the notes admissible. Actually the notes were sufficiently identified as promissory notes by their production and no further authentication was required by reason of an applicable provision for self-authentication in Rule 902(9), Fed. R. Ev.:

Rule 902.

SELF-AUTHENTICATION

Extrinsic evidence of authenticity as a condition precedent to admissibility is not required with respect to the following:

* * *

(9) Commercial paper and related documents. Commercial paper, signatures thereon, and documents relating thereto to the extent provided by general commercial law.

The Advisory Committee Note and the Report of the House Committee on the Judiciary indicate that "general commercial law" refers to the Uniform Commercial Code. 28 U. S. C. A., Federal Rules of Evidence (1976) at 734-35; See 11 J. Moore, Fed. Prac. §920.01[b] at IX -- 31 2d ed. 1976). Under Uniform Commercial Code §3-307 mere production of a note is prima facie evidence of its validity and of the holder's right to recover on it.

In United States v. Goichman [77-1 USTC ¶9115], 547 F. 2d 778, 784 (3d Cir. 1976), the court stated:

Once a prima facie case [of authenticity] is made, the evidence goes to the jury and it is the jury who will ultimately determine the authenticity of the evidence, not the court. The only requirement is that there has been substantial evidence from which they could infer that the document was authentic.

We conclude that the district court erred in requiring further authentication of the promissory notes. Actually, no testimony was required to establish the genuineness of the signatures on the notes. In effect UCC §3-307 creates a presumption that commercial paper offered in evidence is authentic and Rule 902 dispenses with a requirement of extrinsic evidence for admissibility. By requiring proof of the underlying transaction as a condition for admission the district court denied the defendant the benefit of the rule. Of course, admission of the notes would not have established their genuineness or the existence of an indebtedness conclusively. As the Advisory Committee note states, "in no instance is the opposite party foreclosed from disputing authenticity." 28 U. S. C. A., Federal Rules of Evidence (1975), following Rule 902 at 733. In effect the district court required the defendant to prove that the notes were genuine and that a debt existed, whereas only a prima facie showing was required to make them admissible.

As has been pointed out, the notes, together with the testimony of cash transactions between the Carriger brothers, tended to make more probable the defense claims of error in the opening net worth statement and inferences concerning 1971 taxable income. In fact, this was the only evidence presented by the defendant with respect to 1971. The careful consideration required before making a decision to exclude relevant evidence offered by a defendant in any criminal case is even more necessary in a net worth prosecution. After discussing the "pitfalls inherent in the net worth method" the Supreme Court concluded in Holland v. United States , supra, that great care and restraint is required where this method is employed. Justice Clark wrote for the Court:

The complexity of the problem is such that it cannot be met merely by the application of general rules. Trial courts should approach these cases in the full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute. . . . Appellate courts should review these cases, bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation (citation omitted). 348 U. S. at 129.

The judgment of the district court is reversed, and the cause is remanded for a new trial.

^* The Honorable Rob ert L. Taylor, Judge , United States District Court for the Eastern District of Tennessee, sitting by designation.

¹ The net worth method was described in detail by the Supreme Court, and its use in tax evasion prosecutions approved in Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121 (1954).

²

Rule 402.

RELEVANT EVIDENCE GENERALLY ADMISSIBLE; IRRELEVANT EVIDENCE INADMISSIBLE

All relevant evidence is admissible, except as otherwise provided by the Constitution of the United States, by Act of Congress, by these rules, or by other rules prescribed by the Supreme Court pursuant to statutory authority. Evidence which is not relevant is not admissible.

³

Rule 104.

PRELIMINARY QUESTIONS

(a) Questions of admissibility generally. Preliminary questions concerning the qualification of a person to be a witness, the existence of a privilege, or the admissibility of evidence shall be determined by the court, subject to the provisions of subdivision (b). In making its determination it is not bound by the rules of evidence except those with respect to privileges.

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

 

 

 

[79-1 USTC ¶9151] United States of America , Plaintiff-Appellee v. James H. Normile, Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 78-5372, 587 F2d 784, 1/12/79, Aff'g unreported DC decision

[Code Sec. 7201]

Crimes: Tax evasion: Bank deposit method: Opening cash balance: Miscellaneous defenses.--A seller of auto parts was properly convicted of tax evasion on the basis of a bank deposits-cash expenditures analysis. The government did not need to corroborate his statement as to the amount of cash he had on hand at the beginning of the relevant period and it was not obligated to track down accounts that were in the name of his wife. Substantial evidence existed to show a likely source of unreported income. Certain opinion testimony was properly excluded. Other defenses were likewise unavailing.

John H. Hannah, Jr., United States Attorney, T. J. Baynham, Jr., William E. Gordon, Jr., Assistant United States Attorneys, Tyler , Tex. 75701 , for plaintiff-appellee. C. M. Meadows, Jr., J. Gregory Jackson, 3900 First National Bank Bldg., Dallas, Tex. 75202, for defendant-appellant.

Before GEWIN, GEE and RUBIN, Circuit Judges.

RUBIN, Circuit Judge:

Convicted of income tax evasion for 1972 ¹ on the basis of a bank deposits-cash expenditures analysis, James H. Normile, who sold auto parts under the trade name Barney's Auto Supply in Denton, Texas, contends that a proper foundation for use of this indirect method of proof was not laid because the government failed to establish the opening cash balance and that various other prejudicial errors occurred during his trial. Because we perceive no such errors, we affirm.

We have recently reviewed the prerequisites for circumstantial proof of tax evasion in United States v. Boulet [78-2 USTC ¶9628], 5 Cir. 1978, 577 F. 2d 1165, and it would be supererogatory to repeat what we said there. Among other duties, the government is required to conduct a full and adequate investigation in order to establish with reasonable certainty the amount of cash the taxpayer had in his possession at the start of the taxable period and the opening balance in his bank accounts. The defendant's first objection is that the government failed to conduct such an inquiry here in that it did not discover two bank accounts that in fact existed.

[Background]

At the start of the investigation, Normile was approached by IRS Special Agent David Black who interviewed him extensively about his financial affairs. During this interview, Normile stated that he seldom kept more than about $100 on hand in cash, did not have a safety deposit box, and had checking or savings accounts at specified banks only. He also denied receiving any income from non-taxable sources during 1972. The government examined every account Normile disclosed; this included checking accounts at Denton County National Bank, and savings accounts and certificates of deposit at North Texas Savings and Loan, Denton ; Farmers and Merchants Bank of Krum; Denton County National Bank; and First State Bank of Denton . When, during the trial, for the first time the government learned of the existence of two other accounts--one in the name of University Service Station at the First National Bank of Denton, of which the taxpayer was in fact the owner, and the other in his wife's name--it immediately investigated the account controlled by the taxpayer. This account's balance at the start of 1972 was only $442, an amount that could not make and appreciable difference in the government's calculations. No evidence as to the cash balance in Mrs. Normile's account was introduced because the taxpayer's counsel both expressly disclaimed any intention of arguing the existence of such an account and vehemently objected on Fifth Amendment grounds to any court order compelling production of her records. ²

[Adequacy of Investigation]

The investigation, however, was adequate without respect to the concession by counsel. The Internal Revenue Service agent questioned Normile and thoroughly investigated every bank account he mentioned. The government was not obliged to bay down rabbit tracks and check every bank in the area in the hope of locating other monetary scents. The taxpayer suggests that, if the investigator had examined every one of the deposit slips in the taxpayer's accounts, he would have found a "lead" to Mrs. Normile's account; but the investigator was not obliged to search out every conceivable link to other evidence and to exhaust every possibility of proof. A full and adequate investigation is required, not a universal probe. See, e.g., United States v. Beasley [79-1 USTC ¶9107], 5 Cir. 1978, 585 F. 2d 796 (1978); United States v. Hiett, 5 Cir. 1978, 581 F. 2d 1199; United States v. Esser [75-2 USTC ¶9654], 7 Cir. 1975, 520 F. 2d 213.

The defense also alleges that the government's failure to corroborate Normile's statement that he had only $100 on hand at the beginning of 1972 mandates reversal. With respect to cash on hand in currency the government had no way of determining this save by interrogating the taxpayer. He freely and voluntarily told agent Black that he kept no more than $100 in cash because he did not feel safe having larger amounts around. ³ It was not necessary for the government to seek to corroborate the taxpayer's statement; indeed the inherent secrecy of the cash hoard makes it impossible for any but the keeper to know even of its existence, let alone the amount.

The requirement of corroboration of admissions in tax evasion cases was discussed in Smith v. United States [54-2 USTC ¶9715], 1954, 348 U. S. 147, 75 S. Ct. 194, 99 L. Ed. 192. In that case, the Court said

"The Government may provide the necessary corroboration by introducing substantial evidence, apart from petitioner's admissions, tending to show that petitioner willfully understated his taxable income. This may be accomplished by substantiating the opening net worth directly, . . . [or] by independent evidence concerning petitioner's conduct during the prosecution period, which tends to establish the crime of tax evasion without resort to the net worth computations." 348 U. S. at 157-58, 75 S. Ct. at 199-200.

In Smith the Court concluded that substantial expenditures made by the taxpayer and his wife corroborated the net worth admission by tending to show an understatement of income during the years in question.

Here, the government introduced no evidence to corroborate directly the figure given Black by Normile. There was, indeed, no evidence available that would confirm it. The government was not obliged to prove a proposition inherently impossible to establish. However, there was no evidence showing that this figure was in any way unreliable. All testimony regarding large cash purchases by Normile related to years other than 1972. The $100 figure was repeated to agent Black at a second interview. Moreover, the independent evidence of substantial deposits in his bank accounts, while insufficient in itself to convict him for tax evasion, does tend to corroborate his admission by showing understatement of income.

The argument that there was insufficient evidence to show a likely source of income is tendentious if not frivolous; a comparison of the Barney's sales receipts with the summaries prepared by Normile for his accountant provided evidence that Normile sold more in auto parts that he reported as gross income. It was also undisputed that both Normile and his accountant had subtracted the sales tax from the reported sales, resulting in a double deduction. The question whether the relatively large amount of income that Normile was charged with concealing could have been derived from Barney's operations was one for the jury, which obviously gave it credence. The taxpayer's own disclaimer of other sources of income made to agent Black supported the jury's conclusion.

The judge excluded the opinion testimony of Normile's ex-partner as to the income producing capability of Barney's on the basis the ex-partner was not an expert. This appears to have been well within the judge's discretion. Rule 702, Fed. R. Evid. If, however, the decision was erroneous, it was harmless beyond reasonable doubt because the very same observations were offered by another witness, also called by the defense, who was an expert in auto supplies sales in the area and knew Barney's well.

In his fastidious, if not bacteriophobic, search for error, counsel also contends that Normile was prejudiced because the 1972 summary of Normile's business bank account offered in evidence by the Government was not supported by the original microfilm records of deposited checks, records used by the agent who prepared the summary in determining that there were no inter-account transfers that might explain some of the deposits. Rule 1006, Fed. R. Evid. Because of the number of bank accounts involved, the generality of the remarks of counsel when offering or objecting to evidence, and the treatment of this issue in the briefs, it is difficult to be entirely certain what happened at the trial and therefore the precise nature of the objection now. Apparently, however, all checks written on those of Normile's personal accounts known to the investigator before the trial began, as well as the deposit slips for the business account in question, were present in the courtroom. These reflected no transfers from a personal account into the business account. The only checks not present were those written on the belatedly-revealed account in the name of University Service Station at the First National Bank of Denton, and these records were presumably available to the defense. Counsel for defendant was offered a continuance to procure any documents not immediately present in the courtroom that he wished to use to impeach the accuracy of the summary, and refused such a continuance. It has not been demonstrated that any inter-account transfers were made, or that any substantial right of Normile was affected by the admission of the summary, Rule 103, Fed. R. Evid. The availability of the original checks and deposit slips satisfied that requirement of Rule 1006, Fed. R. Evid.

The prosecutor's remarks during rebuttal argument about the opportunity given the taxpayer to furnish information during the investigation did not constitute a comment on Normile's failure to testify. Moreover, the defense had implied on cross-examination, prior to the exchange on redirect, that Normile had not been given the opportunity to provide any leads. The prosecutor was not obliged silently to suffer an attack that was in essence untruthful. The prosecuting attorney was attempting to demonstrate that the government followed all leads supplied by Normile in establishing the opening balance of his accounts, the amount of his cash on hand, and the cource of the deposits. It was entirely proper for him to do so in order to refute the groundless defense argument.

For these reasons, the conviction is AFFIRMED.

¹ The defendant was convicted of violating 26 U. S. C. §7201 and was sentenced to three years' imprisonment, to become eligible for parole upon serving a period of nine weeks pursuant to 18 U. S. C. §4205(b)(1). The defendant was acquitted on similar charges for the years 1973 and 1974.

² We note that the taxpayer offered no evidence that the amount in Mrs. Normile's account was substantial. Although this goes to the sufficency of the evidence, it is remarkable that the taxpayer seeks reversal on the basis of the government's failure to follow a trail that might have led nowhere.

³ The argument that Normile made the statement under duress because the agent "showed his gun" has no merit. Black himself testified that he never drew his gun, and was not even sure he was wearing it, although that was standard practice. Moreover, Black testified without contradiction that Normile conveyed the same information about cash on hand during a subsequent interview.

 

 

 

[78-1 USTC ¶9170]United States of America, Plaintiff-Appellee v. Joseph J. Gay, Defendant-Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 77-1369, 567 F2d 1206, 1/6/78, Aff'g unreported District Court opinion

[Code Sec. 7201--result unchanged by '76 Tax Reform Act]

Crimes: Evasion: Reconstruction of income: Expenditures method.--An individual's conviction of evasion of income tax was affirmed where the evidence supported the Commissioner's determination of the taxpayer's opening net worth and the amount of reconstructed income. The evidence indicated that the taxpayer did not have a cash hoard.

Richard J. Arcara, United States Attorney, Richard E. Mellenger, Assistant United States Attorney, Buffalo, N. Y. 14202, for plaintiff-appellee. R. William Stephens, Raichle, Banning, Weiss & Halpern, 10 Lafayetts Sq., Buffalo, N. Y. 14203, for defendant-appellant.

Before FEINBERG, MANSFIELD and TIMBERS, Circuit Judges.

PER CURIAM:

After a jury trial before Judge John T. Curtin in the Western District of New York appellant was on April 13, 1976, found guilty of five counts of an indictment charging him with attempted willful evasion of income tax due during the years 1967 through 1971 in violation of Title 26 U. S. C. §7201. On July 21, 1977, following a delay attributable to extensive post-trial motions pursued by new counsel for appellant, which were denied, the defendant was sentenced to three years probation on count one and fines on all five counts.

At trial the government used the "expenditures" method to prove the alleged attempted tax evasion of approximately $71,436 for the years in question. See Taglianetti v. United States, [68-2 USTC ¶9479], 398 F. 2d 558 (1st Cir. 1968). Under the expenditures method the government establishes as unreported income the amount of the taxpayer's expenditures during the taxable year that are not attributable to resources on hand at the beginning of the year, non-taxable sources received during the year, or amounts reported by the taxpayer as income during the year. The reliability of the method depends on a reasonably accurate identification of the taxpayer's net worth position in terms of assets held at the beginning and end of the taxable year. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121 (1954); United States v. Penosi [72-1 USTC ¶9103], 452 F. 2d 217 (5th Cir. 1971), cert. denied, 405 U. S. 1065 (1972). Otherwise the expenditures might be attributable to conversion of the taxpayer's prior accumulated capital rather than to income received during that period. See United States v. Fisher [75-2 USTC ¶9766], 518 F. 2d 836 (2d Cir. 1975); United States v. Bianco [76-1 USTC ¶9351], 534 F. 2d 501 (2d Cir. 1976).

In the present case the government offered extensive and detailed proof of appellant's opening net worth as of December 31, 1966 (including securities, mortgage receivables, United States Savings Bonds and cash on hand), his closing net worth, non-taxable sources of income and his expenditures. Appellant's principal defense was that the opening net worth established by the government was incorrect because it did not include a "cash hoard" of more than $100,000, which he revealed for the first time in trial testimony as having been accumulated by him prior to 1967, kept in a tin box in the basement of his home, and used both prior to and after 1967 to make various cash mortgage loans to relatives, friends and acquaintances who from time to time paid back some or all of the loans to appellant. Appellant argued that this cash hoard accounted for his later expenditures attributed by the government to income and that since this was not taken into account by the government it negated an inference from the government's evidence that expenditures during the 1967-1971 period were derived from unreported income.

In response to appellant's claim of a cash hoard, the government pointed to appellant's own statement to its agents, made during the course of their pre-prosecution investigation, to the effect that appellant would never have more than $2,000 in cash around the house and that his wife had saved not more than $11,000. On the basis of these statements the government credited $13,000 in cash to appellant's opening net worth. Moreover, the government credited appellant's net worth with mortgage receivables that were a matter of record.

Appellant's principal contention here is that, in view of the evidence introduced by him for the first time at trial with respect to the cash hoard, mortgages and pay-backs, the indictment must be dismissed because of the government's failure to negate this proof by investigating, obtaining and analyzing evidence with respect to his cash hoard and mortgage dealings for the years prior to those which were the subject of the indictment. This contention must be rejected. The government was not under any such burden. See United States v. Penosi, supra, 452 F. 2d at 219-20. It was entitled to accept appellant's statement to the effect that at most he kept $2,000 on hand and did not have any larger cash hoard. To impose on the government the burden of anticipating that appellant would change his version and of negating a possible contrary story with respect to matters peculiarly within appellant's personal knowledge is to ask the impossible. The evidence presented a clear issue of fact and the jury was entitled to infer, as it apparently did, that appellant's "cash hoard" testimony was a belated and blatant concoction which was not entitled to any credit.

We find it unnecessary to discuss the other point raised by appellant, which are equally meritless.

The judgment of conviction is affirmed.

 

 

[78-1 USTC ¶9410]United States of America, Appellee v. Edgar F. X. Shields, Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 77-1816, 571 F2d 1115, 3/9/78, Aff'g unreported District Court decision

[Code Sec. 7201--result unchanged by 1976 Tax Reform Act]

Crimes: Tax evasion: Impeachment: Destruction of interview notes: Use of grand jury: Evidence.--The defendant was properly convicted, by the bank deposits method, of three counts of tax evasion. He was not impeached on account of his silence prior to trial as to the sources of his funds. He was not prejudiced by the government's destruction of notes of its interviews with prospective witnesses. He failed to make a timely objection to allegedly improper grand jury proceedings. And he did not show that the government had failed to pursue all leads as to possible nontaxable sources of funds.

Carroll D. Gray, Assistant United States Attorney, Spokane, Wash. 99210, for appellee. Michael J. Hemovich, Hemovich, Smith & Nappi, 422 W. Riverside Ave., Spokane, Wash., for appellant.

Before MERRILL and ELY, Circuit Judges, and ORRICK, ^* District Judge.

ELY, Circuit Judge:

At a jury trial appellant Shields was convicted of three counts of willful evasion of income taxes for the years 1971 through 1973. To prove its case, the Government introduced analyses of appellant's bank deposits and withdrawals. The evidence reflected large deposits that could not be attributable to appellant's reported income. In an effort to explain these deposits, appellant raised the "cash hoard" defense. Appellant's accountant and business associate, one Brickert, testified that appellant had a cash hoard of approximately $33,000, part of which appellant stashed in his car, part at his home, and part at his nightclub. Supposedly, appellant's cash hoard diminished during the prosecution years of 1971-1973 as appellant made periodic bank deposits from that reserve. Brickert also testified that appellant received two loan repayments totalling $9000 during the years in question, which would constitute another nontaxable source of funds. We affirm.

[Suggestion of Silence]

I. Prior to trial, on June 19, 1975, the Internal Revenue Service (IRS) held a conference, attended by appellant, Brickert, and appellant's attorney, Randall, to discuss appellant's tax liability. An IRS representative, Bouker, confronted appellant with his alleged tax deficiency and stated that the purpose of the conference was to permit "anyone to say anything" on behalf of the appellant. Bouker specifically asked if appellant had nontaxable sources of funds that would explain his unaccounted for bank deposits. At the conference Brickert mentioned only the two loan repayments.

At trial the prosecutor impeached Brickert by eliciting that Brickert had said nothing about a cash hoard at the IRS conference. He argued that Brickert's silence was inconsistent with his testimony that he had personally observed appellant's cash hoard. To augment this line of attack, Bouker later testified that Brickert had not referred to the cash hoard at the conference. The prosecutor then asked Bouker whether Randall, appellant's attorney, had revealed by non-taxable sources of funds at the conference. Appellant objected, the District Court sustained the objection, and the jury never heard an answer. Finally, in the closing argument the prosecutor broadly referred to the failure to raise the cash hoard defense at the conference:

The defense which is raised here, and the one that where the evidence is produced for the first time in court, never occurred outside of the court before, before we started on the Tuesday a week ago, the government was never offered these explanations which--

[Shields' counsel]: If Your Honor please, at this time, I would like to move for a mistrial on the basis of . . . that statement . . ..

[Prosecutor]: I'm getting right into the matter of Brickert, what Brickert said, and Brickert's testimony on the stand.

* * *

[Prosecutor]: I am not commenting on the defendant's failure to say anything.

THE COURT: Well, I think it was too general of a statement.

* * *

THE COURT: Well, I'm going to admonish the jury, but I'm not going to grant the motion for a mistrial. . . . Members of the jury, I want to call your attention to one of the instructions I just gave you, that the defendant on trial has no obligation to say anything, and anything he does say, or any silence is not to be used against him, . . ..

The silence of an accused at the time of arrest may not be used to impeach a defense subsequently offered at trial. Doyle v. Ohio, 426 U. S. 610, 96 S. Ct. 2240, 49 L. Ed. 2d 91 (1976); United States v. Hale, 422 U. S. 171, 95 S. Ct. 2133, 45 L. Ed. 2d 99 (1975); Fowle v. United States, 410 F. 2d 48 (9th Cir. 1969). The prohibition of such impeachment stems from the privilege against self-incrimination and from the representation implicit in the Miranda ¹ warnings that a defendant will not be penalized for his decision to remain silent.

Despite the urgings of appellant, we find the above rule inapplicable. Appellant claims that the cross-examination of Brickert, Bouker's testimony concerning Brickert's silence at the IRS conference, and the prosecutor's closing argument reflected upon appellant, implying to the jury that appellant also had failed to mention his cash hoard at the IRS conference. ² Appellant concedes, as he must, that he was not cross-examined concerning his silence and that no direct evidence was introduced concerning his silence. For this reason the rule against impeaching an accused by his prior silence does not apply, and we elect not to extend the rule to situations such as the present one in which the silence of nondefendant witnesses might conceivably suggest that the explanation of a defendant is a recent fabrication.

Rather, Fed. R. Evid. 403 contains the correct standard for determining wheher evidence, though relevant and not directly concerning the silence of an accused, is nonetheless inadmissible because it circumstantially tends to suggest his silence. Rule 403 grants discretion to the District Court to exclude evidence "if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury . . .." Twice the District Court instructed the jury that appellant had the right to remain silent and that his silence could not be used against him. Clearly this minimized the possibility that the jury improperly considered whether appellant was silent at the IRS conference. Thus, the District Court did not err in refusing to exercise its discretion under rule 403 to exclude the evidence of Brickert's silence. ³

Appellant also maintains that Brickert's impeachment, apart from its reflection on appellant, was improper because Brickert's silence was "ambiguous." The argument that Brickert's silence in and of itself lacked probative value was not presented to the District Court, and consequently we decline to consider it now. See Gollaher v. United States, 419 F. 2d 520, 523 (9th Cir.), cert. denied, 396 U. S. 960, 90 S. Ct. 434, 24 L. Ed. 2d 424 (1969).

[Destruction of Notes]

II. Pursuant to the routine practice of government agencies, officials destroyed the rough notes of interviews with four prospective witnesses. It is not clear whether IRS agent Bouker made any notes at the conference with appellant, Randall, and Brickert. All the interviews in question occurred during 1974 and 1975, and the notes were not verbatim transcripts of witnesses' statements. The government officials prepared typed memoranda of the interviews, which were disclosed to appellant.

Appellant insists that the destruction of the notes violated the Jencks Act, 18 U. S. C. §3500 (1970), and the rule of Brady v. Maryland, 373 U. S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963). In United States v. Harris, 543 F. 2d 1247 (9th Cir. 1976), we held that rough interview notes constitute potentially discoverable material and therefore must be preserved. Our court, however, has continually refused to apply the Harris rule retroactively in the absence of a specific demonstration that the destruction of notes resulted in prejudice. United States v. Wood, 550 F. 2d 435, 440 (9th Cir. 1976); United States v. Parker, 549 F. 2d 1217, 1224 (9th Cir.), cert. denied, 430 U. S. 971, 97 S. Ct. 1659, 52 L. Ed. 2d 365 (1977); United States v. Rob inson, 546 F. 2d 309, 312 (9th Cir. 1976), cert. denied, 430 U. S. 918, 97 S. Ct. 1333, 51 L. Ed. 2d 597 (1977). Appellant does not contend that the interview memoranda are incomplete or inaccurate and does not otherwise specify any prejudice to his defense resulting from the destruction of the rough notes. Accordingly, we conclude the appellant's contention in this respect must be rejected.

[Use of Grand Jury]

III. Another issue presented here is whether the Government improperly used an Idaho grand jury to obtain the testimony of one of appellant's witnesses, a man named Popp. ⁴ A memorandum from IRS agent Bouker, dated September 8, 1975, stated:

During the course of the investigation it became necessary to use the grand jury proceedings to elicit testimony from reluctant witnesses. No prior judicial approval required under Rule 6(e) was obtained; however, the testimony was not relevant as regards the revenue agent's computation of gross of taxable income.

Appellant makes four related arguments concerning misuse of the grand jury. First, he claims that Bouker's memorandum concedes a violation of Fed. R. Crim. P. 6(e). ⁵ Second, he asserts that the IRS wrongfully used the Idaho grand jury to collect evidence and did not submit evidence to that grand jury for the purpose of obtaining its indictment. Third, he asserts that at the time of Popp's testimony before the Idaho grand jury, the IRS had not yet recommended criminal sanctions against appellant, and, therefore, the IRS was using the grand jury for the purpose of establishing appellant's civil tax liability. ⁶ Last, appellant maintains that the Government's impeachment of Popp with the transcript of the proceedings before the Idaho grand jury was improper. Generally, impeachment is a proper use of grand jury testimony, e.g., Gollaher v. United States, 419 F. 2d 520, 523 (9th Cir.), cert. denied, 396 U. S. 960, 90 S. Ct. 434, 24 L. Ed. 2d 424 (1969), so appellant's contention must rest upon his previous arguments that the Idaho grand jury proceedings were illegal.

Appellant did not object at trial or even in posttrial proceedings to the Idaho or the Washington grand jury proceedings. Nor did appellant object to Popp's impeachment. We are unable to accept appellant's proffered excuse that he could not have known of the alleged grand jury misuse until too late in the trial to seek recourse. Before trial began the Government had disclosed the Idaho grand jury transcript to appellant. Bouker's memorandum was released to appellant's counsel sometime during the course of the trial. Although the record does not reveal the exact date, it is clear that appellant had the memorandum in his possession on the day before the last trial day. Thus, his failure to permit the district judge to evaluate the grand jury proceedings is unjustified, and we shall not review the alleged improprieties. No plain error is evident, as the record contains nothing that can substantiate or disprove appellant's allegations. Fed. R. Crim. P. 52(b).

[Sufficiency of Evidence]

IV. The Government employed an analysis of appellant's bank deposits and withdrawals to establish appellant's understatement of taxable income. Appellant contends that the Government did not attempt to prove appellant's "cash on hand" on January 1, 1970, the beginning date of the tax years in question. The relevance of cash on hand is that if it were deposited into accounts during the tax years, it would explain those deposits and reduce the understatement of income. Specifically, appellant claims that the Government did not follow leads that might have demonstrated currency withdrawals made in late 1969.

Special Agent White conducted the investigation of appellant's income tax liability, and there is sufficient evidence that he diligently pursued all leads that could have disclosed nontaxable sources of funds, including cash on hand. White testified that he prepared a "complete analysis of all the bank accounts, savings and checking." He also stated that he covered leads and properly credited appellant for all nontaxable sources and that he examined financial statements given by appellant to financial institutions. There is no indication that White failed to evaluate 1969 withdrawals. After his investigation, White decided to use a cash on hand figure of zero, having found no evidence of cash on hand. An expert witness heard all the testimony at trial and examined all the exhibits, concluding that "there was insufficient evidence upon which to form a conclusion that there was cash on hand."

Looking at the evidence in a light most favorable to the Government, as we must, Glasser v. United States, 315 U. S. 60, 80, 62 S. Ct. 457, 86 L. Ed. 680 (1942) the Government clearly presented sufficient evidence for the jury to infer that White had adequately pursued all leads and had correctly shown as the proper amount of cash on hand the zero figure.

AFFIRMED.

^* Honorable William H. Orrick, United States District Judge for the Northern District of California, sitting by designation.

¹ Miranda v. Arizona, 384 U. S. 436, 467-73, 86 S. Ct. 1602, 16 L. Ed. 2d 694 (1966).

² We reject the Government's argument that this issue was not preserved for appeal. It is true that appellant did not object to the cross-examination of Bricket on the basis that his silence reflected upon appellant; he only objected on the ground that the questions were argumentative. Appellant, however, objected and moved for a mistrial during Bouker's testimony concerning Brickert's silence and during the prosecutor's reference during closing argument to the newness of the cash hoard defense. In light of the latter objections, appellant fully preserved his right to challenge on appeal all the alleged indirect references to appellant's silence. See United States v. Semensohn, 421 F. 2d 1206, 1210 (2d Cir. 1970) (objection made on an incorrect ground preserved appeal because trial judge's attention was later focused on the proper reason for objection).

³ For the purposes of this decision, we have assumed, as did the District Court, the impropriety of a direct reference to appellant's silence at the IRS conference. This issue is not directly presented, and we express no view as to its merits. Doyle, Hale, and Fowle all involved the impeaching use of the postarrest silence of an accused. The IRS conferences, however, occurred during the preindictment stage. The evidentiary use of such silence would not present a Miranda problem and might not be so inherently lacking of probative value so as to justify a per se rule.

⁴ It was the grand jury for the Eastern District of Washington that issued the indictment upon which appellant was convicted.

⁵ Fed. R. Crim. P. 6(e) provides:

Secrecy of Proceedings and Disclosure. Disclosure of matters occurring before the grand jury other than its deliberations and the vote of any juror may be made to the attorneys for the government for use in the performance of their duties. Otherwise a juror, attorney, interpreter, stenographer, operator of a recording device, or any typist who transcribes recorded testimony may disclose matters occurring before the grand jury only when so directed by the court preliminary to or in connection with a judicial proceeding or when permitted by the court at the request of the defendant upon a showing that grounds may exist for a motion to dismiss the indictment because of matters occurring before the grand jury.

⁶ See In re Grand Jury, Nos. 76-1893, 76-1995 (9th Cir. May 2, 1977) (proscribing civil use by IRS of grand jury information without adversary hearing resulting in finding that disclosure is reasonably necessary, withdrawn as moot (9th Cir. June 28, 1977).

 

 

[77-1 USTC ¶9290]United States of America, Plaintiff-Appellee v. Rob ert E. Helina, Defendant-Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 74-3453, 549 F2d 713, 3/4/77, Affirming an unreported District Court decision

[Code Secs. 7201 and 7206--result unchanged by '76 Tax Reform Act]

Crimes: Tax evasion: Fraud and false statements: Assertion of error at trial.--A taxpayer's conviction for tax evasion and for willfully subscribing to false income tax returns was affirmed. The trial court did not commit reversible error in permitting the prosecutor to comment on the taxpayer's invocation of his Fifth Amendment right to refuse to turn over his books and records to government agents who were conducting a criminal investigation of his tax returns. One dissent.

[Code Sec. 446--result unchanged by '76 Tax Reform Act]

Tax accounting: Reconstruction of income: Bank deposits method: Source of deposits.--A taxpayer's conviction for income tax evasion established through the bank deposits method of reconstruction of income was affirmed even though the taxpayer's counsel objected to the admissibility of the bank deposit analysis evidence at trial. The court stated that the taxpayer's reliance on Morse, 74-1 USTC ¶9228, 491 F. 2d 149, was misplaced since all of the prerequisites set out in Morse for the admission of a bank deposit analysis had been met by the government.

Marvin Gray, Assistant United States Attorney, Seattle, Wash., for appellee. John W. Flynn, Stern, Gayton, Neubauer & Brucker, Seattle, Wash., for appellant.

Before ELY and WRIGHT, Circuit Judges, and LUCAS, ^* District Judge.

Opinion

I. Facts

LUCAS, District Judge:

Defendant was indicted on three counts of income tax evasion, in violation of 26 U. S. C. §7201, and four counts of wilfully subscribing a false income tax return, in violation of 26 U. S. C. §7206(1). Defendant was convicted by a jury on all seven counts. He now appeals from the judgment of conviction and urges as error:

(1) That the prosecution was permitted to comment upon the fact that he chose to exercise his fifth amendment right in declining to turn over his books and records to Government agents who were conducting the criminal investigation of his tax returns.

(2) That the trial court admitted into evidence the Government's bank deposit analysis.

In January, 1971, the defendant, Helina, was contacted by Revenue Agent Marx, who had been assigned the audit of Helina's 1969 tax return. At the end of March, 1971, the audit of Helina's tax returns shifted to a criminal investigation and Marx referred Helina's case to the Intelligence Division of the Internal Revenue Service. On August 25, 1971, Special Agent O'Boyle of the Intelligence Division of the Internal Revenue Service met with Helina and Marx. According to O'Boyle, he immediately advised Helina that a criminal tax investigation was in progress and that Helina had the right not to talk to or furnish the agents with any books and records. Throughout the investigation, Helina refused to produce his business records.

Prior to trial, defense counsel made a motion in limine to exclude any evidence that Helina had exercised his fifth amendment rights and had refused to provide the Internal Revenue Service with his books and records. The trial court precluded direct examination by the Government on this issue but, in case the subject was raised by the defendant during the trial, refused to prevent cross-examination and rebuttal on the issue.

At the trial, the Government was forced to use the net worth method of proof ¹ and a bank deposit analysis. ² Evidence of the bank deposit analysis, in the form of testimony by Special Agent Huntsman and Mrs. Clark, Helina's assistant, was admitted over the objection of defense counsel.

The thrust of Helina's defense at trial was that although the Government's net worth analysis showed an increase in net worth during the years in question, he was not guilty of any of the crimes charged as the increases were due to his negligent bookkeeping and were not a result of his intent to evade his income taxes.

II. Comment on Helina's Exercise of His Fifth Amendment Privilege

Primarily, although recent United States Supreme Court cases ³ and cases from other circuits ⁴ perhaps intimate a different result, we initially conclude that Helina was within his rights, granted pursuant to fifth amendment protections against self-incrimination, to refuse to produce his books and records during the Internal Revenue Service criminal investigation. Additionally, the Government does not challenge Helina's invocation of his fifth amendment rights.

The fifth amendment commands that "No person . . . shall be compelled . . . to be a witness against himself." It has been the law for ninety years that compelled production of documents falls within the ambit of the privilege against self-incrimination. Boyd v. United States, 116 U. S. 616, 6 S. Ct. 524, 29 L. Ed. 746 (1886). In Boyd, the Supreme Court held that production of an invoice on goods belonging to defendants could not be compelled under the fourth and fifth amendments and stated: "[W]e have been unable to perceive that the seizure of a man's private books and papers to be used in evidence against him is substantially different from compelling him to be a witness against himself." Boyd v. United States, supra, 116 U. S. 633, 6 S. Ct. 534. This sound legal principle has been applied by this circuit to cases involving the production of tax records. United States v. Cohen [68-1 USTC ¶9140], 388 F. 2d 464 (9th Cir. 1967). ⁵

Having established that Helina was entitled to exercise his fifth amendment rights in the manner in which he did, the next question is whether the prosecutor improperly commented on Helina's invocation of those rights. To answer this, it must be determined what language will constitute "comment."

On five occasions during the course of trial, it was evident that investigators did not have access to all of Helina's records. The first exchange, which took place on direct examination, ⁶ made no reference to why the records were not available. This was in no way a comment upon the defendant's failure to produce. See United States v. Grammer, 513 F. 2d 673, 676 (9th Cir. 1975). Any connection between this testimony and defendant's fifth amendment privilege was so remote as to escape the notice of Helina's counsel and the judge.

The conclusion that this was not a comment is strengthened by noting that the judge had already granted Helina's in limine motion as to direct examination by the prosecutor. The failure of the judge to make a ruling at this juncture, and of defense counsel to call it to the judge's attention, indicates that no prejudicial comment had been made.

Later in the trial, during the prosecutor's cross-examination of Helina, the following exchange took place:

"Q: Now, these particular checks [in exhibit], how long had you had these checks?

A: Since--I imagine since they came back on the bank statements.

Q: How long has that been?

A: This is 1967 through 1970.

Q: So you had them that period of time?

A. Yes.

Q: Did you ever lose them?

A: Not that I know of.

Q: Do you recall Mr. O'Boyle asking you particularly about these checks?

A: I recall Mr. O'Boyle calling me on the telephone and asking me if I cashed a check for $5,000.00 . . . and what it was for . . .

Q: In addition to that check and other checks, did you have some of these records available also when Mr. O'Boyle was asking you about those that you brought in here today?

A: I think Mr. O'Boyle asked me--[Objection by defense counsel. The basis for this objection is unclear; however, it does not appear to be upon fifth amendment grounds.]

The Court: This is cross-examination on this subject on this particular check.

[Prosecutor]: I was going to go into the record of Mr. Helina's records, also, your Honor.

The Court: Objection denied.

Q: Isn't it a fact during the periods that Mr. O'Boyle talked to you and also Mr. O'Leary, they asked you on a number of occasions about your business records, didn't they?

A: That's not true.

Q: They never asked you?

A: The only man that ever asked me to see anything in my office was Mr. Marx, and I showed him everything he asked for, with the exception of Mr. O'Boyle, which was two years after this investigation began and he asked me for all of my cancelled checks from 1963 through 1970. That is the time that I sought legal counsel and I was told not to give them to the Internal Revenue Service, and at no other time did they ask me for the records.

. . .

Q. Well during this period of time in 1971 and '72, you did have your business records available to you, did you not?" (Tr. 540-42) (Emphasis added.)

Crafty questioning may constitute "comment" despite its obliquity. In Johnson v. Patterson, 475 F. 2d 1066 (10th Cir.), cert. denied, 414 U. S. 878, 94 S. Ct. 64, 38 L. Ed. 2d 124 (1973), the court found that the question, "Now, Mr. Johnson, you didn't tell the police this, did you?", constituted comment, reasoning that the jury could as easily draw prejudicial inferences even where the comment was not direct. Id. at 1067-68.

In United States v. Rose, 500 F. 2d 12 (2d Cir. 1974), vacated 422 U. S. 1031, 95 S. Ct. 2648, 45 L. Ed. 2d 688, aff'd, 525 F. 2d 1026 (2 Cir. 1975), cert. denied, 424 U. S. 956, 96 S. Ct. 1432, 47 L. Ed. 2d 362 (1976), however, defendant was asked several times on cross-examination whether he told his story to the police upon arrest. 500 F. 2d 14, n. 1. This was not held to be improper comment.

Here, the prosecution questioning could have been answered by "Yes" or "No" responses for the most part. Instead, defendant volunteered the information that legal counsel advised him to use the fifth amendment and withhold his records.

Assuming arguendo, without deciding, that this was improper prosecutorial comment, it must be noted that defense counsel failed to object to this exchange. ⁷ His in limine motion having been denied with respect to cross-examination and rebuttal testimony, defese counsel once more bore the burden of making a proper objection at the appropriate time.

Although it is error for the prosecution to comment on an accused's pretrial silence for purposes of impeaching his trial testimony in a situation where the earlier silence is not clearly inconsistent with the subsequent testimony (Doyle v. Ohio, 426 U. S. 610, 96 S. Ct. 2240, 49 L. Ed. 2d 91 (1976); Fowle v. United States, 410 F. 2d 48 (8th Cir. 1969)), for the reasons that follow, we affirm the judgment of the district court.

Ojbections not made at trial cannot be raised on appeal to the court of appeals absent the presence of plain error. See, e.g., United States v. Rose, supra, 500 F. 2d at 17; United States v. Machado, 457 F. 2d 1372, 1375 (9th Cir.), cert. denied, 409 U. S. 860, 93 S. Ct. 96, 34 L. Ed. 2d 106 (1972); Fed. R. Crim. P. 52; Fed. R. Evid. 103(d).

With regard to this second exchange, it is our conclusion that it did not amount to plain error. This holding is supported by the fact that defense counsel, during his recross-examination of Agent Huntsman, opened the door and invited discussion of Helina's failure to turn over his records. This portion of the record reads as follows:

"Q: You indicated that you had made no allowance in 1970 for any check cashing whatsoever in the tavern because you didn't have Mr. Helina's checks, is that what you said?

A: Yes.

Q: Well, would it really perhaps be helpful if you had the customers' cancelled checks . . . ?

A: No.

Q: That wouldn't have been helpful?

A: Would you please ask the question again?

Q: Well, certainly wouldn't it have been helpful if, for example, in one month you had all the checks of all customers that deposited into the tavern, that would have been helpful?

A: It would have been more helpful to have the taxpayer's checks." (Tr. 387)

By this colloquy, defense counsel, at best, sought to discredit the Government's case by suggesting to the jury that the Government had failed to document its case and, at worst, was intimating to the jury that Helina had fully cooperated with the Government agents. Having thus raised the subject of the Government's documentation of its case, Helina opened the door to a full and not just a selective development of that subject. See United States v. Fairchild, 505 F. 2d 1378 (5th Cir. 1975). He cannot be heard now to complain of discussion of a subject he introduced into the proceedings.

The third and fourth relevant exchanges occurred during rebuttal testimony by Agents O'Boyle and O'Leary. ⁸ The prosecution called these rebuttal witnesses to contradict Helina's cross-examination testimony that the agents had not on more than one occasion asked him about his tax records.

In Martin v. United States, 400 F. 2d 149, 153 (9th Cir.), cert. denied, 393 U. S. 987, 89 S. Ct. 466, 21 L. Ed. 2d 449 (1968), this court held that rebuttal evidence was permissible to contradict defendant's testimony that he had told federal agents his exculpatory story at the time of his arrest. This case falls within the Martin rule.

Finally, the prosecution, during closing argument, commented on Helina's failure to produce documents prior to putting on his defense at trial. Defense counsel specifically objected to this comment. (Tr. 655)

We see no error but, if it be such, it was certaintly harmless. See Chapman v. California, 386 U. S. 18, 87 S. Ct. 824, 17 L. Ed. 2d 705 (1967); Harrington v. California, 395 U. S. 250, 89 S. Ct. 1726, 23 L. Ed. 2d 284 (1969). As the Court stated in Harrington, a departure from constitutional procedures does not result in automatic reversal. Here, the impact of the prosecutor's statement was lessened by the exchanges that had occurred earlier in the trial regarding Helina's seeking and following the advice of an attorney on whether to turn over certain tax records to the agents.

We therefore affirm the district court as to this issue.

III. Admission of the IRS Bank Deposit Analysis

As previously indicated, the Government used the net worth method of proof and a bank deposit analysis to prove the offenses with which Helina was charged. ⁹ Defense counsel objected to the admissibility of the bank deposit analysis evidence on the grounds that the Government failed to eliminate all non-income deposits from gross receipts. Appellant argues that the Government's bank deposit analysis was an "arbitrary and speculative process."

In support of his position, appellant cites the seminal case of United States v. Morse [74-1 USTC ¶9228], 491 F. 2d 149 (1st Cir. 1974). In Morse, the First Circuit reversed the defendant's conviction of wilful tax evasion, held that absent some primary evidence to support the agent's bank deposit analysis his testimony was merely inadmissible hearsay, and established the following three prerequisites to the admissibility of a bank deposit analysis:

"In order to legitimately avail itself of this approach, the government must initially introduce evidence to show (1) that, during the tax years in question, the taxpayer was engaged in an income producing business or calling; (2) that he made regular deposits of funds into bank accounts; and (3) that an adequate and full investigation of those accounts was conducted in order to distinguish between income and non-income deposits." United States v. Morse [74-1 USTC ¶9228], 491 F. 2d 149, 152 (1st Cir. 1974).

Appellant's reliance upon the third prong of the Morse test above is misplaced, however, under the facts of the present case. There is ample evidence on the record to demonstrate that the Government conducted an extensive investigation of Helina's bank accounts in order to distinguish between income and non-income deposits. First, the testimony of Mrs. Clark was presented as primary evidence of the Internal Revenue Service's basis for estimating the percentage of Lithotype receipts paid into the Lithotype bank account. Second, there was testimony that an effort was made to identify specific deposits that might have been made from the tavern check cashing into the Lithotype account by checking the identification numbers on the checks. Finally, on two occasions, the trial judge asked defense counsel what more the Internal Revenue Service agent could have done, and his only response was that the agent knew about the check cashing and should have investigated further. The trial court specifically found that the agent had done all he could to investigate and eliminate the non-income sources of the defendant's bank accounts. The finding is not clearly erroneous but is amply supported by the record. We must, therefore, affirm as to this issue.

The judgment is affirmed.

^* Honorable Malcolm M. Lucas, United States District Judge, Central District of California, sitting by designation.

¹ This method of proof requires the Government to show the net worth of the taxpayer as of the beginning and the end of the taxable year and the non-deductible expenditures made by him that year. If the increase in his net worth, plus his non-deductible expenditures, exceed his reported income for the year and such excess is not attributable to gifts, devises, loans or other non-taxable receipts, the conclusion may be drawn that the taxpayer realized income which he failed to report. Papadakis v. United States [54-1 USTC ¶9137], 208 F. 2d 945 (9th Cir. 1953); McFee v. United States [53-2 USTC ¶9549], 206 F. 2d 872 (9th Cir. 1953).

² The bank deposit analysis has been described as follows:

. . . the government totals all bank deposits, and, after the non-income deposits are excluded, United States v. Lacob, supra, 416 F. 2d [756] at 759 (7 Cir.), and the amounts on deposit prior to the tax years in question have been deducted, see Price v. United States [64-2 USTC ¶9708], 335 F. 2d 671, 677 (5th Cir. 1964), the circumstantial inference properly permitted to arise is that all remaining deposits constitute taxable income. United States v. Doyle [56-1 USTC ¶9553], 234 F. 2d 788, 793 (7th Cir.), cert. denied, 352 U. S. 893, 77 S. Ct. 132, 1 L. Ed. 2d 87 (1956). The government then includes any additional income which the taxpayer received during the tax year but did not deposit in any bank account, and the resulting total would be the taxpayer's reconstructed gross income. From this amount, the appropriate tax deductions, exclusions, exemptions and credits to which the taxpayer is entitled are taken, leaving a net income upon which is computed the amount of tax due. This is then compared with the actual tax paid in the years in question. See Percifield v. United States [57-1 USTC ¶9406], 241 F. 2d 225, 229-230 n. 7 (9th Cir. 1957); Morrison v. United States, supra, 270 F. 2d [1] at 2-3 (4 Cir.).

United States v. Morse [74-1 USTC ¶9228], 491 F. 2d 149, 152 (1st Cir. 1974).

³ Two recent Supreme Court cases have narrowly interpreted the fifth amendment's application to the production of a defendant's business records. In the recent case of Fisher v. United States [76-1 USTC ¶9353], 425 U. S. 391, 96 S. Ct. 1569, 48 L. Ed. 2d 39 (1976), the Court held that an attorney's production, pursuant to a lawful summons, of his client's tax records in his hands does not violate the fifth amendment privilege of the taxpayer

because enforcement against a taxpayer's lawyer would not 'compel' the taxpayer to do anything--and certainly would not compel him to be a 'witness' against himself.

Id. at 1573.

In the more recent case of Andresen v. Maryland, -- U. S. --, 96 S. Ct. 2737, 49 L. Ed. 2d 627 (1976), the Court held that the search of an individual's office for business records, their seizure, and subsequent introduction into evidence does not offend the fifth amendment's prescription that

[n]o person . . . shall be compelled in any criminal case to be a witness against himself.

Both cases, however, recognized a distinction which is clearly applicable in the present case:

A party is privileged from producing the evidence but not from its production.

Johnson v. United States, 228 U. S. 457, 458, 33 S. Ct. 572, 57 L. Ed. 919 (1913).

⁴ See Smith v. United States [56-2 USTC ¶9830], 236 F. 2d 260 (8th Cir.), cert. denied, 352 U. S. 909, 77 S. Ct. 148, 1 L. Ed. 2d 118 (1956); Beard v. United States [55-1 USTC ¶9400], 222 F. 2d 84 (4th Cir.), cert. denied, 350 U. S. 846, 76 S. Ct. 48, 100 L. Ed. 753 (1955); United States v. Mousley [62-1 USTC ¶9380], 201 F. Supp. 510 (D. C. Pa. 1962), aff'd, 311 F. 2d 795 (3rd Cir. 1963); Garner v. United States [75-1 USTC ¶9388], 501 F. 2d 228, 236 (9th Cir. 1972), aff'd [76-1 USTC ¶9301], 424 U. S. 648, 96 S. Ct. 1178, 47 L. Ed. 2d 370 (1976).

⁵ See also Garner v. United States [75-1 USTC ¶9388], 501 F. 2d 228, 236 (9th Cir. 1972), aff'd [76-1 USTC ¶9301], 424 U. S. 648, 96 S. Ct. 1178, 47 L. Ed. 2d 370 (1976); United States v. Judson [63-2 USTC ¶9658], 322 F. 2d 460, 464 (9th Cir. 1963).

⁶ The testimony was:

Q: Okay, Mr. Huntsman, if I can direct your attention now back to the approximate spring of 1972, did you at that time receive an assignment to conduct an investigation with respect to Mr. Helina's case?

A: Yes, I did.

Q: And as part of your investigation in this case, did you have access to the taxpayer's books and records?

A: No, I did not.

(Tr. 328)

Not only was no contemporaneous objection made by defense counsel but, in his appellate brief, defense counsel did not object to this testimony.

⁷ The record does indicate that Helina's counsel made a vague objection, which was not based on fifth amendment grounds, during the critical cross-examination of Helina. The exchange went as follows:

Q: In addition to that check and other checks, did you have some of these records available also when Mr. O'Boyle was asking you about those that you brought in here today?

A: I think Mr. O'Boyle asked me--

[Defense counsel]: The question was with respect to Mr. O'Boyle talking about these checks, I don't recall Mr. O'Boyle testifying about anything else other than he did ask him about the particular accounts, and what other records we are talking about, I don't recall Special Agent O'Boyle testifying--

The Court: This is cross-examination on this subject on this particular check.

[Prosecutor]: I was going to go into the records of Mr. Helina's records also, Your Honor.

The Court: Objection denied.

(Tr. 546)

This objection is, however, insufficient to preserve the issue for appeal.

⁸ There were no contemporaneous objections on fifth amendment grounds to this rebuttal testimony. However, after argument and after the jury had retired, defense counsel objected and called attention to his prior in limine motion as follows:

I have a comment with respect to the objection to cross-examination of rebuttal. [and rebuttal?] Even before the jury was selected, in chambers we made known our concerns in this area and made a motion in limine. We didn't want to be driving the point home in front of the jury an objection to questions with respect to this evidence if it was going to be admitted anyway, and at that point in time it was in our mind clear that the court had decided that this was proper.

. . . [T]his does not indicate any concession. (Tr. 684)

⁹ See notes 1 & 2 and accompanying text, supra.

[Dissenting Opinion]

ELY, Circuit Judge (dissenting):

I respectfully dissent.

Our court has unequivocally held that it is constitutionally impermissible for the prosecution to use against an accused his pretrial silence, maintained in the exercise of his privilege against incrimination, unless the accused waives that privilege by offering "any testimony as to the contents of any conversation" at the relevant time in question. Fowle v. United States, 410 F. 2d 48, 55 (9th Cir. 1969). The present case is controlled by Fowle. Accordingly, Helina's conviction should be reversed if the District Court erroneously allowed the prosecution to question witnesses regarding their "lack of access" to Helina's records.

With all due respect, I submit that the first exchange, found in footnote six of the majority's opinion, did, without question, involve a prejudicial comment upon Helina's privileged refusal to supply his personal records. United States v. Grammer, 513 F. 2d 673, 676 (9th Cir. 1975), cited by the majority as support for its proposition that the first colloquy did not involve a comment on the exercise of Helina's fifth amendment privilege, is inapposite. In Grammer, the prosecutor remarked during closing argument that the defendant's failure to call an expert witness left the testimony of a Government's witness uncontradicted. The court held that this remark "in no way commented upon the defendant's failure to testify." Id. (emphasis in original). Thus, Grammer differs obviously and materially from the case now under review. Here, it is clear that the interchange with Agent Huntsman was intended for the jury to appreciate that the defendant had not authorized access to his personal records.

The majority attempts to bolster its conclusion that this interchange did not involve an impermissible "comment" by emphasizing defense counsel's failure to record a specific objection. The majority's perspective ignores the context of the colloquy and, in effect, converts Helina's constitutional privilege of silence to a meaningless technicality. While it is true that Helina's counsel did not object every time the prosecution improperly raised the issue of Helina's refusal to supply his records, the significant point is the very fact that the defense attorney had made a motion in limine, prior to the impaneling of the jury, requesting the exclusion of all evidence concerning Helina's invocation of his fifth amendment right. Following the jurors' selection, defense counsel reiterated his motion in open court (out of the presence of the jury), thereby evidencing an undeniable intent that the motion would serve as a continuing objection throughout the trial. ¹ (Tr. 58).

Thereafter, at a hearing in the midst of the prosecution's case-in-chief, defense counsel objected to the prosecutor's request that he be permitted to elicit testimony from government witnesses in respect to their "lack of access" to Helina's records. Helina's attorney remarked:

"My reaction is exactly the same as it was yesterday when Your Honor made the ruling [that the prosecution could not introduce evidence of Helina's silence in its case-in-chief]. I think essentially this is just a back door attempt to do the same thing." (Tr. 116).

When the trial judge later stated that he did not "see any constitutional problem" (Tr. 119), defense counsel further responded:

". . . [I]t's just cumulative and getting into an area that is very dangerous . . . and for him [the special IRS agent] to go back and rehash essentially what Mr. Marx already testified to as to why the net worth method is used is again just essentially a subtle back door method of getting the facts in that for some reason or another, the special agent didn't have the books and records." (Tr. 119-20).

The court then ruled that the prosecution's witnesses would be allowed to testify concerning their inability to review Helina's records.

It was following this hearing that the colloquy between the prosecutor and Agent Huntsman occurred. I simply cannot agree that the significance of this interchange is dissipated because defense counsel failed to make a contemporaneous objection. Only shortly before Agent Huntsman testified, Helina's counsel had expressed to the judge his specific objection to the admission of such evidence. The judge nevertheless decided to admit it. In light of the defense attorney's motion in limine and his objection to the particular line of questioning that the prosecutor ultimately pursued with Agent Huntsman, it is, in my view, manifestly unreasonable and unfair to hold that this colloquy did not give rise to a prejudicial comment of the most flagrant character.

Because we are here concerned with one of the most basic and substantial rights enjoyed by all citizens of his country, we should, I think, have a duty to look a little beyond procedural irregularities. Our court has never thought itself to be inextricably constrained by the failure of counsel always to raise an objection at a precise time. When we find plain error affecting substantial rights, we may, should, and often do consider the issue even though no objection whatsoever has been made, either during a trial or even on the appeal. Beadnell v. United States, 303 F. 2d 87 (9th Cir. 1962). As I see it, the trial court's ruling in this case, allowing the prosecutor to raise the question of the agent's access to Helina's records, is pivotal. Under our decision in Fowle, supra, this ruling was egregious error, error of constitutional dimension. Surely, it cannot be held that the error was "harmless beyond a reasonable doubt," Chapman v. California, 386 U. S. 18, 24, 87 S. Ct. 824, 17 L. Ed. 2d 705 (1967).

I would reverse.

¹ In Helina's motion for a new trial, his defense counsel again emphasized the view, which I think correct, that the motion in limine served as a continuing objection, making it unnecessary for him to object time after time, repeatedly reasserting Helina's privilege against self-incrimination. See footnote 9 supra.

 

 

[76-1 USTC ¶9379]United States of America, Appellee v. William Edward Bethea, Appellant

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 75-1472, 537 F2d 1187, 4/29/76, Reversing unreported District Court decision

[Code Secs. 446 and 7201]

Crimes: Evasion or avoidance of tax: Reconstruction of income: Net-worth method: Burden of proof: Source of income: Cash hoard.--The Court of Appeals reversed the taxpayer's conviction in the lower court for willful evasion of income tax. The government, in reconstructing the taxpayer's income by the net-worth method, failed to negate all nontaxable sources of income that could have accounted for the taxpayer's sudden accretion of wealth. Although the lower court had discounted as unbelievable the taxpayer's claim that he had inherited a large amount of money which he had hoarded in a safety deposit box, the Court of Appeals found some merit to the taxpayer's claim and, thus, held that the government had not satisfied its burden of proof since it had not established the taxpayer's guilt beyond a reasonable doubt.

Roger T. Williams, Assistant United States Attorney, William B. Cummings, United States Attorney, Norfolk, Va., for appellee. Thomas R. Frantz, Frederick T. Stant, Jr., Suite 1230, Va. Nat'l Bank Bldg., Norfolk, Va., for appellant.

Before HAYNSWORTH, Chief Circuit Judge, and CRAVEN and FIELD, Circuit Judges.

CRAVEN, Circuit Judge:

This is a "net worth" income tax evasion ¹ case. More than 20 years ago Mr. Justice Clark, speaking for a unanimous Court, lectured the nation's prosecutors on the dangers of the net-worth method of proof in tax evasion prosecutions. ² What he then said, in Holland v. United States [54-2 USTC ¶9714], 348 U. S. 124 (1954), has not been eroded by time. He began by recognizing that the net-worth method involves "something more than the ordinary use of circumstantial evidence in the usual criminal case." Id. at 124. He emphasized that the method is "so fraught with danger for the innocent that the courts must closely scrutinize its use." Id. at 125. Although concluding that the dangers inherent in the net-worth method were not so great as to outlaw it, he cautioned that they do "require the exercise of great care and restraint," and admonished trial courts to "approach these cases in the full realization that the taxpayer may be ensnarged in the system which, though difficult for the prosecution . . . is equally hard for the defendant . . .." Id. at 129. Holland also carried a message to the courts of appeals: that we "should review the cases, bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation." Id. Having done that, we are convinced that the government failed to establish guilt beyond a reasonable doubt, and reverse.

I. Bethea filed no income tax return for the years 1971 and 1972 and paid no income tax in either year. In order to convict Bethea under 26 U. S. C. §7201, the government had to prove that during those years he incurred tax liability ³ and that he took some affirmative act with the intent of thereby evading that tax liability. ⁴ It undertook to do so by invoking the "net worth" method of proof.

On the net-worth theory, the government must first establish the total net value of the defendant's assets at the beginning of the tax year in question. That figure is subtracted from the net value of his assets at the close of the tax year, and to it is added all his non-deductible expenditures during the year. The final figure is the defendant's "taxable income" if the government's proof either (1) negates all non-taxable sources of income or (2) demonstrates a likely taxable source which generated the income. United States v. Massei [58-1 USTC ¶9326], 355 U. S. 595 (1958); Holland, supra. We conclude that under neither theory did the government introduce sufficient evidence from which the trier of fact could find guilt beyond a reasonable doubt. See United States v. Fisher, 484 F. 2d 868, 869 (4th Cir. 1973), cert. denied, 415 U. S. 924 (1974); United States v. Sherman, 421 F. 2d 198, 199 (4th Cir.), cert. denied, 398 U. S. 914 (1970).

II. Bethea does not challenge the government's final net-worth figure in either tax year. Instead, he contends that the prosecution failed to negate all non-taxable sources of the net worth increase. Under the facts of this case, that claim is equivalent to the contention, which Bethea also makes, that the government failed to establish "with reasonable certainty" his opening net worth. ⁵

Bethea testified at trial that the increases in his worth established by the government were derived from an inheritance of between $53,000 and $54,000 which was left him by his brother, Vernon Bethea, who was knifed to death in July 1970 in New York City. Vernon Bethea had been a narcotics dealer ⁶ who made frequent trips to Norfolk, Virginia. According to the defendant, his brother often left with him sealed envelopes containing money to be put in his safe deposit box and told him the contents of those envelopes were his if Vernon were to die. Bethea swore that he never opened them until approximately a month after his brother's death. ⁷ He said he found between $53,000 and $54,000, but because of his uncertainty as to the legal status of the money, he did not begin to spend it in appreciable amounts until October 1971. He soon learned, however, and by May 9, 1973, when the box was inventoried by internal revenue agents, it contained only $1,062; the rest, according to Bethea, having been spent.

The government responds that Bethea's statements are simply the typical unverified and unverifiable "cash hoard" defense raised frequently in net worth tax evasion cases. ⁸ Furthermore, it strongly emphasizes that when asked by revenue agents early in the investigative process concerning any "inheritances," Bethea mentioned only $2,000-$3,000 which he recovered from a box in his brother's New York City apartment. ⁹

The court found "the defendant's assertions to be inherently incredible, and not worthy of belief." We think Judge MacKenzie meant that Bethea's story was inherently stranger than fiction, and in that sense "unbelievable." We find no clear rejection of Bethea as one unworthy of belief, i.e., a judgment resting upon observation of demeanor, manner, voice tones, etc., and a judgment peculiarly within the province of the trial judge. ¹⁰

The objective facts make Bethea's story not so incredible. The government concedes, indeed insists, that Bethea at the end of 1970 was a poor man. For the tax years 1967 through 1970, his adjusted gross income averaged approximately $2,850, ¹¹ according to government figures. He lived in what was described as a cold-water flat, with a rent of from $10 to $11 per week. He made purchases on credit with extended payment periods.

After his brother's death Bethea's life style changed dramatically. In October 1971, he moved into a new apartment with rent of $180 per month--some four times more expensive than his old apartment. He purchased a new Buick, paying more than $4,000 in cash, and he placed approximately $2,000 in a savings account. All told during that year, his net worth increased $7,419.21. And in 1972 it increased by $15,741.06, which amounted to better than a 100 percent increase.

It is an undisputed fact that at a time when Bethea was living in poverty conditions, he rented a safety deposit box at a bank. What would a poor man want one for and what would he keep in it? Why would he visit that box 18 times between June 1969, when he acquired it, and July 13, 1970, the date of his brother's death? The government's evidence of his poverty lifestyle during that period strongly supports Bethea's testimony that he visited the box to put envelopes containing his brother's money in it, and not to take money out of it. That Bethea's brother Vernon had a lot of money is corroborated in the record by the testimony of Thomas W. Moss, attorney at law, who saw Vernon Bethea exhibit a large envelope containing $100 bills. He testified that Vernon Bethea said the envelope contained $7,500 and that he could get that much more with little or no effort.

The typical "cash hoard" defense which the government disparages rests upon the totally uncorroborated testimony of a defendant that years ago he buried money in his backyard. Bethea's story is atypical. He says his brother made a lot of money in the narcotic traffic in New York. Vernon's criminal record confirms that he was in the business. Lawyer Moss' testimony confirms that Vernon at times carried very large sums on his person. And finally the bank's records show the rental of a safety deposit box by a defendant living at a poverty level. The government, in short, offers no evidence to refute the probability of a cash hoard, and instead, relies solely upon a natural disinclination to believe that large sums of money are ever cashed away.

It is not necessary that we believe Bethea's story to reverse his conviction. He is not required, even under the networth theory, to prove his innocence; the government must establish his guilt beyond a reasonable doubt.

But it is urged upon us that even if we should view the evidence as a failure on the part of the government to satisfactorily negate all non-taxable sources of increase in net worth, the conviction may nevertheless be sustained on the ground that the evidence shows a likely source of taxable income. We agree that the net worth evidence rules provide the prosecutor with a two-edged sword and that he may cut either way. If he cannot negate all non-taxable sources, he can prove the substantial equivalent by demonstrating a "likely source" of taxable income. Holland, supra, as interpreted in Massei, supra.

On this point the district court found:

The evidence clearly showed beyond all reasonable doubt that the defendant, in the years in question, had a source of income as a carpenter. He, himself, estimated his income from that source on credit applications signed by him during the years in question as $250 per week.

For reasons that subsequently appear, we view this finding as clearly erroneous.

Except for the statement on a credit application that his income was $250 per week, which was highly self-serving at the time made and not then either under oath or subject to cross-examination, all the evidence showed that Bethea normally made only $200-$300 per month when working for his uncle, Wilson Hill, and acquired small amounts of additional income (approximately $20 per job) working independently. During the tax years 1971 and 1972 his income from carpentry was, according to uncontroverted testimony, even smaller because of the significant amounts of time he spent in 1971 repairing his grandmother's house and in 1972 building houses for himself and his mother.

Most importantly, there is nothing in the record to indicate that Bethea's carpentry income went up at all during the years 1971 and 1972 when his net worth sharply increased. The government's own accounting showed that Bethea averaged only $2,856.31 during the four tax years 1967 through 1970 from his employment. Finally, we think it fair to comment that the government seemed at one point during the trial to urge that ethea's source of income was illicit rather than derived from his carpentry business. Bethea's cross-examination by Roger Williams, Assistant United States Attorney, disclosed the government's theory:

[Williams] As a matter of fact, Mr. Bethea, weren't you and your brother in partnership?

[Bethea] What do you mean, partnership?

[Williams] In the narcotics business?

[Bethea] No sir, I don't deal in narcotics.

[Williams] Mr. Bethea, didn't you take over your brother's narcotics business?

[Bethea] No, sir.

[Williams] Wasn't this where you got all the money to put in the house?

[Bethea] No, sir.

Transcript at 226.

There are two problems with this suggested source of income. First, not one shred of evidence was introduced at trial to show that Bethea had any dealings in narcotics or was in partnership with his brother. Second, the timing of any narcotics activity was not shown or even suggested. Such timing would be critical to the government's proof under the present indictment. If Bethea was in partnership with his brother, presumably the profits would have been realized before his brother's death in the summer of 1970 and would therefore have been a source of net worth at the beginning of the period of the indictment and would have gone to exculpate him. On the other hand, if Bethea "took over" his brother's business, then the revenues may have been realized during 1971 and 1972, but there is absolutely no proof either as to Bethea's participation in criminal enterprise or the timing of any participation. We cannot sustain this conviction upon mere speculation that Bethea might have made a lot of money unlawfully. The short answer is there is no evidence of substantial earned income--either lawful or unlawful that can account for the increases in net worth.

III. The government emphasizes that when Bethea was interviewed by Special Agent Jerry Rowe on May 8, 1973, and was asked whether he had received any gifts or inheritances during the period 1968 through 1972 he said that he received only $2,000-$3,000 from a box in his brother's apartment. It is urged that the trier of fact was entitled to credit Bethea's declaration and thus reject his cash hoard testimony. As for the declaration to Agent Rowe, the district judge was in no better position to judge credibility than are we: he did not hear or see him speak.

Bethen explained his failure to disclose the larger inheritance to be a result of his ignorance if the tax consequences of inherited wealth and his fear that "they would try to take it away from [him] . . .." Transcript at 202.

It is not an irrational appehension. Aside from moral sensibility, we think some bankers, perhaps even a few lawyers, might feel uncomfortable in possession of a very large sum of tainted money. Bethea attended school for only a five-year period, and we cannot impute to him knowledge of the common law of trover. Not everyone knows that the innocent possessor of illicitly gained money has a sufficient property interest to retain it against all the world except the true owner. Armory v. Delamire, 93 Eng. Rep. 664 (K. B. 1722).

That Bethea's testimony may be interpreted as an admission that he initially lied to the agent because he feared income tax liability is insufficient to establish guilt under 26 U. S. C. §7201. Willful intent is irrelevant unless a tax deficency is established. Lawn v. United States [58-1 USTC ¶9189], 355 U. S. 339, 361 (1958). See also Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 351 (1965).

Because of failure to offer evidence sufficient to establish Bethea's guilt beyond a reasonable doubt, the conviction will be

REVERSED.

¹ The defendant was convicted on two counts of having violated 26 U. S. C. §7201 which provides:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.

² Mr. Justice Clark was especially well qualified. He spoke to the United States Attorneys as their former boss. Five years previously he had relinquished his job as Attorney General or the United States.

³ Lawn v. United States [58-1 USTC ¶9189], 355 U. S. 339, 361 (1958). See also Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 351 (1965).

⁴ Spies v. United States [43-1 USTC ¶9243], 317 U. S. 492, 499 (1943).

⁵ Holland, supra at 132.

⁶ That Vernon Bethea's extensive police record [some five pages long] contained eight counts of sale of heroin strongly supports that inference.

⁷ Bethea testified that he never opened the envelopes "[b]ecause I didn't want no [sic] misunderstanding with him. He would know if i had opened them." Transcript at 185.

⁸ See, e.g., Smith v. United States [56-2 USTC ¶9830], 236 F. 2d 260 (8th Cir.), cert. denied, 352 U. S. 909 (1956) (money hidden in an old mail bag or buried in an iron pot); Mighell v. United States [56-2 USTC ¶9630], 233 F. 2d 731 (10th Cir.), cert. denied, 352 U. S. 832 (1956) (a buried cash hoard).

⁹ At trial, Bethea testified that this $3,000 which he personally went to New York to recover, was in addition to the money in the safe deposit box.

¹⁰ A finding of fact in a criminal case may certainly be set aside by a federal court of appeals if found to be clearly erroneous (See United States v. Glover, 514 F. 2d 390, 391 (9th Cir. 1975), cert. denied, -- U. S. --) and might even be set aside upon a lesser showing given the higher burden of proof on the government in criminal prosecutions. (Cf. Jones v. Pitt County Bd. of Education, No. 74-2257 (4th Cir. Nov. 19, 1975) (Craven, J. dissenting)).

¹¹ Bethea's adjusted gross income according to government figures for the four years is as follows: 1967-$2,068.19; 1968-$1,551.17; 1969-$6,500.64; and 1970-$1,305.26. Transcript at 154.

Above we have presented his income as an average for those four years because we believe it more accurately reflects the evidence as to Bethea's accretion of wealth. We find that the figure of $6,500.64 for 1969, while eminently fair as to the critical issue of net worth increase during 1971 and 1972, artificially lumps income in that year. A key element of that figure is $3,000 cash on hand which Bethea testified was in addition to the $3,000 obtained from his brother's apartment and which he told the revenue agents he accumulated between 1969 and 1972. By placing that amount in the earliest tax year, 1969, the government reduced Bethea's income during the indictment period but increased it in 1969 From Bethea's testimony, which is the only source of this figure (see Transcript at 118 & 135), we have no way to determine when the money was accumulated. Similarly, the 1969 income includes a $1,023.90 non-deductible loss which Bethea realized when he traded for a newer automobile and received less than the original purchase price as a tradein. We do not believe that this increase is properly viewed as occurring in only 1969 when the issue at hand is the real availability of income to Bethea in that year. Again, the government's treatment of this issue did not prejudice Bethea as to the critical period of 1971-72, but it does have the effect of making the 1969 income appear artificially large.

 

 

[76-1 USTC ¶9219]United States of America, Plaintiff-Appellee v. Bernard A. Horton, Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 75-1530, 526 F2d 884, 2/5/76

[Code Secs. 446, 7203, and 7206(1)]

Criminal penalties: Fraud: Income not reported: Reconstruction of income: Bank records: Specific items: Net worth increase.--Evidence of criminal tax fraud found in defendant's total bank deposits was admissible as corroborative evidence with respect to the "omission of specific items" method of proof used by the government, and was not limited to proof under the net worth increase method. Bank deposit evidence implied that the specific-item testimony had correctly indicated the defendant's receipt of considerable unreported income. The District Court erred in refusing to instruct the jury to limit evaluation of the bank deposit evidence to corroborative credibility; but the error was harmless.

Gerald J. Gallinghouse, United States Attorney, Mary Williams Cazalas, Assistant United States Attorney, New Orleans, La., for plaintiff-appellee. George W. Reese, 1802 Broadway, New Orleans, La., for defendant-appellant.

Before THORNBERRY, SIMPSON and MORGAN, Circuit Judges.

THORNBERRY, Circuit Judge:

Appellant Bernard Horton was convicted by a jury of willfully and knowingly subscribing false income tax returns for the years 1968, 1969, and 1970. See 26 U. S. C. §7206(1). Appellant's conviction followed from his understating on his returns for the years in question his gross receipts from the practice of law. The present appeal challenges that conviction on three grounds. We reject appellant's contentions and affirm his conviction.

In response to appellant's request pursuant to F. R. Cr. P. 7(f) for a bill of particulars, the Government stated that it intended to establish appellant's guilt by the "specific item" method of proof. Appellant now challenges the Government's later introduction--in Schedule VI and through the testimony of expert summary witness Rotolo--of evidence as to his total bank deposits in 1968, 1969, and 1970. He argues that introduction of this evidence created a fatal variance between the Government's asserted method of proof set out in the bill of particulars and the proof at trial and, more specifically, that evidence of total bank deposits is admissible only where the Government proceeds under the "net worth" theory. To be contrasted with the specific item method of proof, the net worth method hinges on a proven increase in the taxpayer's net worth during the period in question in an amount greater than that reported to IRS with the consequent implication of unreported income. See, e.g., United States v. Meriweather [71-1 USTC ¶9390], 440 F. 2d 753 (5th Cir. 1971), cert. denied, 417 U. S. 948, 94 S. Ct. 3074, 41 L. Ed. 668 (1974). The net worth method generates a circumstantial case laden with possibilities for error and is, in turn, circumscribed in its use by a number of limiting rules. See Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 75 S. Ct. 127, 99 L. Ed. 150 (1954); Merritt v. United States [64-1 USTC ¶9226], 327 F. 2d 820 (5th Cir. 1964). For example, the Government must establish opening net worth with reasonable certainty and must investigate and show false leads furnished by the taxpayer. E.g., Holland v. United States, 348 U. S. at 135-36, 75 S. Ct. at 135; Agoranos v. United States [69-1 USTC ¶9316], 409 F. 2d 833, 835 (5th Cir. 1969); Merritt v. United States, supra at 822-23.

The specific item method is, however, direct in its operation. The usual strategy with the latter method is for the Government to produce evidence of the receipt of specific items of reportable income by the defendant that do not appear on his income tax return or appear in diminished amount. United States v. Goldstein, 56 F. R. D. 52, 55 n. 8 (D. Del. 1972); see Azcona v. United States [58-2 USTC ¶9666], 257 F. 2d 462 (5th Cir. 1958); Lloyd v. United States [55-2 USTC ¶9665], 226 F. 2d 9 (5th Cir. 1955). Appellant Horton's prosecution presents a good example of the specific item method of proof in income tax cases. Horton was a lawyer in New Orleans with an extensive criminal defense practice. Agents of IRS, working from records supplied by appellant and from records in the local court clerk's office that showed those cases in which appellant was attorney of record, derived the names of a large number of clients represented by Horton during 1968, 1969, and 1970. The agents then determined through a lengthy process of interviews the amounts paid to appellant as legal fees by those clients in the above years. Unfortunately for appellant, the amounts his clients were willing to testify to exceeded the amounts of gross receipts stated on his income tax returns. Relying on the testimony of appellant's clients, the Government successfully built its case and obtained a conviction.

We reject appellant's argument that use of evidence of total bank deposits created a fatal variance. In this appeal, as was the case at trial, the Government argues that evidence of total bank deposits was properly admissible in corroboration of the testimony of appellant's former clients as to amounts paid him in 1968, 1969, and 1970. Many of the former clients called by the Government possessed no documents or receipts to substantiate their claims of payment to appellant. The Government contends, correctly, that the evidence of total bank deposits corroborated this unsupported testimony as to the fact of payment. The corroborative feature of the bank deposits evidence proceeds apace with the implication that appellant handled and expended large sums of money, as would be expected if the specific item testimony were true. See United States v. McGuire [65-1 USTC ¶9299], 347 F. 2d 99 (6th Cir. 1965), cert. denied, 382 U. S. 826, 86 S. Ct. 59, 15 L. Ed. 2d 71 (1966); McKenna v. United States [56-1 USTC ¶9492], 232 F. 2d 431, 436-37 (8th Cir. 1956); United States v. Nunan [56-2 USTC ¶9876], 236 F. 2d 576, 588 (2d Cir. 1956), cert. denied, 353 U. S. 912, 77 S. Ct. 661, 1 L. Ed. 2d 665 (1957). For this reason, appellant's fatal variance argument is inapposite. The evidence of total bank deposits during the years in question was properly admissible as corroborative evidence in this specific item prosecution and there was no variance.

Assuming for the purposes of argument only, however, that a variance did exist between the method of proof designated in the bill of particulars and the Government's introduction of the total bank deposits evidence, appellant has still failed to demonstrate that the variance was fatal to the Government's case. The purpose of the bill of particulars is to apprise the defendant of the charges against him with sufficient precision to enable him to prepare his defense, e.g., United States v. Bearden, 423 F. 2d 805 (5th Cir. 1970), cert. denied, 400 U. S. 836, 91 S. Ct. 73, 27 L. Ed. 2d 68 (1971), and this purpose is particularly well-served in complicated income tax prosecutions like the instant one. The usual manner in which questions as to bills of particulars reach this Court is on review of a district court's denial of a defendant's request for the bill. In such cases, the standard of review is one of discretion; viz., did the district court abuse its discretion? See e.g., Buie v. United States, 420 F. 2d 1207 (5th Cir. 1969), cert. denied, 398 U. S. 932, 90 S. Ct. 1830, 26 L. Ed. 2d 97 (1970); Joseph v. United States, 343 F. 2d 755 (5th Cir. 1965), cert. denied, 382 U. S. 828, 86 S. Ct. 65, 15 L. Ed. 2d 73 (1966). In the instant situation, where a fatal variance is argued, appellant must demonstrate that he was taken by surprise by reason of the variance and that such surprise prejudiced the preparation of his defense. See United States v. Glaze, 313 F. 2d 757 (2d Cir. 1963); cf. Buie v. United States, supra. Appellant Horton has not made and cannot make the requisite demonstration. As early as the first day of trial, the Government stated and defendant acknowledged in their respective opening remarks that bank statements and other documents connected with four basic bank accounts used by appellant and his wife would be introduced and analyzed. First Supplemental Record on Appeal, Vol. I at 7, 15. Appellant cannot argue that the evidence of total bank deposits unreasonably impeded the adequate preparation of his defense by reason of surprise.

Appellant also challenges the refusal of the district court to give the jury an instruction limiting its consideration of the total bank deposits evidence to corroboration of the specific item testimony. The district court relied on Azcona v. United States, supra, to support its denial of the requested instruction. This was error. The Azcona opinion dealt with a district court's denial of an additional bill of particulars in a specific item prosecution; it did not address the problem of a limiting instruction on corroborative evidence. We hold that the district court erred in refusing the requested instruction. However, we also find the error to be harmless under the facts of the instant case. The evidence against appellant was overwhelming, and the bank deposits evidence was but an insignificant portion of the Government's total case. Moreover, the colloquy that occurred between the Government, the defense attorney, and the bench in the presence of the jury when defense counsel objected to the introduction of this evidence served as the functional equivalent of a limiting instruction.

GOVERNMENT: Your Honor, we tender this schedule into evidence as corroborative evidence, not to be added to Exhibits 1 through 5 previously admitted, but as separate corroborative evidence to show the availability of cash as testified to by witnesses who have testified previously.

DEFENSE: I object to the introduction of all of this evidence as far as Schedule VI is concerned, Your Honor.

THE COURT: Objection overruled; let it be admitted.

GOVERNMENT:

Q. Would you give us the total amounts shown on your schedules for the period we are concerned with, Mr. Rotolo?

A. In 1968 the total deposits amounted to $31,511.80; in 1969, $52,499.25; in 1970, $43,835.99.

Q. Now, did you prepare another schedule in connection with all the preceding schedules?

A. Yes, sir. That's G-VII, I believe.

Q. Would you identify that for us please?

THE COURT: Let me ask you first: These amounts the witness has mentioned as being total deposits, is it the government's contention that they represent the gross receipts on the books?

GOVERNMENT: No, Your Honor. Those figures are only in corroboration of the witnesses who have testified.

THE COURT: In 1970, for example, the understatement alleged here was $9,199.

THE WITNESS: That's inclusive of all the sources we used, Your Honor.

THE COURT: What?

GOVERNMENT: In other words, Your Honor, we have introduced evidence of four types of sources to indicate that $9,000 amount.

One of the important sources of that was the testimony of witnesses, who did not have receipts any longer that they paid, and we have intended to show, by this corroborative evidence, that there were bank deposits in this year of amounts which will justify belief in those witnesses that what they paid was received and deposited.

DEFENSE: And I have objected on the grounds that I previously stated, Your Honor.

THE COURT: I just don't want the jury to get the impression that this is an addition to the $9,000 already mentioned.

GOVERNMENT: Oh, no, sir.

THE COURT: All right; go ahead.

DEFENSE: Your Honor, also because of my previous objection to Government Exhibit VI, on the bank deposits, I also want to interpose an objection to Exhibit VII, where these figures are carried over in an attempt to summarize the figures, which I don't think is proper.

THE COURT: Objection overruled. Go ahead.

Second Supplemental Record on Appeal, Vol. I at 1062-64. Accordingly, the district court's refusal to give the limiting instruction was harmless error. See Kotteakos v. United States, 328 U. S. 750, 66 S. Ct. 1239, 90 L. Ed. 1557 (1946); United States v. Harbolt, 491 F. 2d 78 (5th Cir. 1974).

As a second point of error, appellant attacks the Government's use of prior statements by appellant's clients, given to IRS agents at the time of their investigation, to refresh the memories of those witnesses at the time of trial. Appellant's contention is answered by this Court's opinion in Esperti v. United States, 406 F. 2d 148, 150-51 (5th Cir.), cert. denied, Farinella v. United States, 394 U. S. 1000, 89 S. Ct. 1591, 22 L. Ed. 2d 777 (1969).

It is hornbook law that any writing may be used to refresh the recollection of a witness. See Wigmore, Evidence §758. This is true even where the document itself would be inadmissible as evidence. Williams v. United States, 7 Cir. 1966, 365 F. 2d 21. Caution must be exercised to insure that the document is actually being used for purposes of refreshing and not for purposes of putting words into the mouth of the witness. Such, however, is within the discretion of the trial judge.

See Redfearn v. United States, 375 F. 2d 767 (5th Cir. 1967).

It must be borne in mind that the reliability and credibility of witnesses is a matter for the trier of fact--here, the jury. See Thompson v. United States, 342 F. 2d 137 (5th Cir.), cert. denied, 381 U. S. 926, 85 S. Ct. 1560, 14 L. Ed. 2d 685 (1965). Moreover, where the issue, as here, is one of present recollection revived, the doctrine of contemporaneity has little application. See Putnam v. United States, 162 U. S. 687, 16 S. Ct. 923, 40 L. Ed. 1118 (1895). We perceive no abuse of discretion in the district court's allowing the Government to refresh the witnesses' memories with their prior statements to IRS agents.

As a final point of error, appellant challenges that portion of the Plan for Random Selection of Grand and Petit Jurors for the Eastern District of Louisiana which excuses operators of "one-man" businesses from jury duty upon request. We reject appellant's argument. In the first instance, the exclusion of sole proprietors is not automatic. On the contrary, it is necessary for such persons to request that they be excused from jury duty. This element of choice makes the present case analogous to that before the Court in Camp v. United States, 413 F. 2d 419 (5th Cir. 1969), where the use of voter registration lists to compile a roster of potential jurors was approved. As the Court stated in Camp, persons choosing not to register to vote do not constitute a cognizable class capable of systematic exclusion from juries. 413 F. 2d at 421. Likewise, sole proprietors requesting to be excused from juries in the Eastern District of Louisiana do not constitute a cognizable class systematically excluded from petit juries. See Labat v. Bennet, 365 F. 2d 698 (5th Cir. 1966); cf. Taylor v. Louisiana, 419 U. S. 522, 95 S. Ct. 692, 42 L. Ed. 2d 690 (1975); Curry v. Estelle, 524 F. 2d 981 (5th Cir. 1975). The categorical exclusion of certain occupational groups from jury duty is permissible on the "bona fide ground that it [is] for the good of the community that their regular work should not be interrupted." Government of the Canal Zone v. Scott, 502 F. 2d 566, 569 (5th Cir. 1974), quoting Mr. Justice Holmes in Rawlins v. Georgia, 201 U. S. 638, 640, 26 S. Ct. 560, 561, 50 L. Ed. 899 (1906). The exclusion of sole proprietors upon request meets that standard.

The judgment of conviction in the instant case is in all respects affirmed.

 

 

[80-1 USTC ¶9372]United States of America, Plaintiff-Appellee v. George J. Skalicky, Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 79-5429, 615 F2d 1117, 4/24/80, Affirming unreported District Court decision

[Code Sec. 7201]

Criminal penalties: Tax evasion: Net worth method.--The taxpayer's conviction for willfully evading income tax in 1975 and 1976 was upheld. The IRS properly used the net worth method to establish the taxpayer's true income for the years at issue. The taxpayer's consistent pattern of substantial understatement of income, together with evidence of falsehoods and inadequate records, permitted the jury to draw an inference of willfullness. The trial court's granting of the taxpayer's motion for acquittal on the first of three counts did not affect the validity of the IRS' determination of the taxpayer's true income under the remaining two counts.

John H. Hannah, Jr., United States Attorney, Janet Hellmich, T. J. Baynham, Assistant United States Attorneys, Tyler, Tex. 75710, for plaintiff-Appellee.

Dale Long, 818 Citizens Bank Building, Tyler, Tex. 75702, for defendant-appellant.

Before AINSWORTH and HENDERSON, Circuit Judges, and HUNTER,* District Judge:

HUNTER, JR., District Judge:

George J. Skalicky appeals from his conviction by a jury on two counts of willful evasion of federal income taxes. ¹ The government established its case through the "net worth" approach. The procedure for this method was approved in Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 125, 75 S. Ct. 127, 130, 99 L. Ed. 150 (1954):

"In a typical net worth prosecution, the Government, having concluded that the taxpayer's records are inadequate as a basis for determining income tax liability, attempts to establish an 'opening net worth' or total net value of the taxpayer's assets at the beginning of a given year. It then proves increases in the taxpayer's net worth for each succeeding year during the period under examination and calculates the difference between the adjusted net values of the taxpayer's assets at the beginning and end of each of the years involved. The taxpayer's nondeductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the Government claims the excess represents unreported taxable income."

See also United States v. Schafer, 580 F. 2d 774 (5th Cir. 1978); United States v. Calles [73-2 USTC ¶9544], 482 F. 2d 1155 (5th Cir. 1973); United States v. Tunnell [73-2 USTC ¶9560], 481 F. 2d 149 (5th Cir. 1973).

On appeal, Skalicky contends that the district court's action in granting a Judgment of Acquittal on the first count completely discredited the validity of the government's net worth computations; that the record contains no evidence of willfulness; and that the trial court erred in admitting into evidence certain government charts and summaries. These contentions have been earnestly and ably presented by appellant's counsel, but we are quite sure that they are totally without merit. We affirm the judgment of conviction.

The jury returned a verdict of guilty on all counts. ² Following the trial, defendant filed a Motion for Judgment of Acquittal as to all three counts on the grounds that "* * * the Government has failed to introduce substantial evidence of an essential element in the case, this being that the Appellant owed Federal Income Tax * * *" for the years 1974, 1975 and 1976 "* * * which he failed to pay." The District Judge granted the motion as to Count I and denied as to Counts II and III. ³

Defendant argues that the entry of the judgment of acquittal completely discredited the government's net worth statement and the validity of its computation of the opening and closing net worth for each of the calendar years. This argument is based on several mistaken assumptions. There is absolutely nothing in the trial court's action to justify the conclusion that appellant attributes to it. Contrariwise, the denial of the motion as to Counts II and III attests to an endeavor to carefully weigh the evidence as to each count. Our inquiry is limited to a determination of whether the evidence is sufficient to support the jury's conclusion that the defendant was guilty beyond a reasonable doubt on Counts II and III. What the judge did with the remaining count is immaterial. ⁴ United States v. Dubea, 612 F. 2d 950 (5th Cir. 1980); United States v. Varkonyi, 611 F. 2d 84 (5th Cir. 1980); United States v. Michel, 588 F. 2d 986 (5th Cir. 1979). A careful review of the record reveals with reasonable certainty the begining net worth and the increases in net worth for each year in question. Those figures were clearly proven by the introduction of Chart A during the testimony of Revenue Agent Smith, which gave the computation of the defendant's net worth for 12-31-73 as $18,769.67, for 12-31-74 as $41,761.33, for 12-31-75 as $71,738.18 and for 12-31-76 as $97,412.52. No useful purpose would be served by further recital of the testimony to demonstrate the accuracy of these calculations; it suffices to state that the evidence was more than sufficient for the jury to find beyond a reasonable doubt that substantial tax deficiencies existed for each of the three years.

Appellant can not really dispute the deficiencies in his tax returns, but argues vigorously that the government has failed to prove a willful attempt to evade payment of those taxes. He contends that willfulness cannot be inferred from the mere understatement of income but must be shown by independent proof. Whatever validity this argument might have as a single element, the record here reflects a number of facts which warrant an inference of willfulness.

Few areas of criminal law pose more difficulty than the definitions of the words "willfully attempts" in the statute. In United States v. Bishop [73-1 USTC ¶9459], 1973, 412 U. S. 346, 93 S. Ct. 2008, 36 L. Ed. 2d 941, the Supreme Court held that the term "willfully" requires more than a showing of careless disregard for the truth. In United States v. Pomponio [76-2 USTC ¶9695], 1976, 429 U. S. 10, 97 S. Ct. 22, 50 L. Ed. 2d 12, the Court noted that proof of evil motive or bad intent was not necessary, and that willfulness in the context of the felony tax evasion statutes simply means a voluntary intentional violation of a known legal duty.

Defendant was the owner of George's Coffee Bar and a bingo parlor known as the Silver Dollar Ballroom. The use of cash was common in the two businesses, and defendant used large amounts of cash for the purchase of automobiles and gifts. The government has established that during the years of 1974, 1975 and 1976 he followed a persistent pattern of underreporting large amounts of income. His tax returns were prepared at H & R Block by Larry Wilson. Whatever information Wilson had was obtained from summary sheets furnished him by Skalicky, and what he furnished turned out to be totally erroneous. When Revenue Agent McPherson notified Skalicky that there appeared to be a substantial understatement of income on his (defendant's) tax returns, Skalicky replied, "everyone lies at times."

Here, the consistent pattern of understating large amounts of income, coupled with evidence of falsehood, surreptitious cash transactions and inadequate records kept by taxpayer, permits an inference of willfulness sufficient to create a jury question. Spies v. United States [43-1 USTC ¶9243], 1943, 317 U. S. 492, 63 S. Ct. 364, 87 L. Ed. 418. The requisite affirmative act can be found in the filing of false returns for each year in the indictment. United States v. Tunnell [73-2 USTC ¶9560], 481 F. 2d 149 (5th Cir. 1973).

Summaries

We reject appellant's claim that the district court's treatment of the summaries and charts unduly prejediced his trial. In permitting the jury to utilize them the court proceeded well within the discretion accorded it under Federal Rules of Evidence, rule 1006, 28 U. S. C. A. By instructing the jury that the summaries were not evidence, however, the trial judge took one further step to insure that the jury would not rely on the conclusory matter as independent proof of the appellant's guilt. ⁵

Conclusion

Because the evidence establishes with reasonable certainty the beginning net worth and the increase in net worth for each year in question, and because there was sufficient evidence from which the jury could infer the requisite element of willfulness, and because we discern no prejudicial error of any nature, we affirm the judgments of conviction on Counts II and III of the indictment.

AFFIRMED.

^* District Judge for the Western District of Louisiana, sitting by designation.

¹ 26 U. S. C. §7201, the applicable statute, provides:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.

² Count I involved income tax allegedly due and owing for 1974. The 1975 tax return was the subject of Count II, and the 1976 return was the subject of Count III.

³ No reasons were assigned. The formal order entered read:

"Came on this day to be considered Defendant's Motion for Judgment of Acquittal in the above styled and numbered cause of action and the Court is of the opinion that the motion as to

"COUNT I is Granted,

COUNT II is Denied,

COUNT III is Denied,

"SIGNED this 11th day of July, 1979.

/s/ Rob ert M. Parker

JUDGE PRESIDING"

⁴ The government had a right to appeal under 18 U. S. C. §3731 from the Judgment of Acquittal on Count I. United States v. Varkonyi, 611 F. 2d 84 (5th Cir. 1980); United States v. Burns, 597 F. 2d 939, 940 (5th Cir. 1979). By brief the United States requests that we uphold the jury convictions for all three years and "bring the defendant forward for sentencing on Count I (1974)." However, no formal appeal was entered by the United States.

⁵ That the court below did not apply the rule so as to receive the summaries in evidence is understandable, in light of the conflicting case law, but prior uncertainties regarding the status of summaries are now resolved by rule 1006. See United States v. Smyth, 556 F. 2d 1179 at 1184 (5th Cir. 1977).

 

 

 

[75-2 USTC ¶9729]United States of America, Plaintiff-Appellee v. Virgil V. Keller and Alice I. Keller, Defendants-Appellants

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 74-3087, 523 F2d 1009, 9/17/75, Aff'g and rev'g unreported District Court decision

[Code Sec. 7201]

Crimes: Tax evasion: Net worth prosecution: Defenses.--A husband and wife were improperly convicted of tax evasion for 1967. The prosecution was based on a net worth reconstruction of income and the government did not investigate the spouses' claim that they had made improvements to their two residences which, if verified, would have eradicated their 1967 tax liability. Moreover, it was error not to permit the wife to retake the stand to testify as to certain evidence she had just discovered. However, these errors did not carry through to later years and the spouses' 1968 and 1969 tax evasion convictions, also based on net worth reconstructions, were affirmed.

Carroll D. Gray, Assistant United States Attorney, Spokane, Wash., for plaintiff-appellee. Douglas A. Wilson, Wilson, Flower & Sullivan, Suite 2, Yakima Legal Center, 303 E. D St., Yakima, Wash., for defendants-appellants.

Before WRIGHT and CHOY, Circuit Judges, and PLUMMER, ^* District Judge.

Opinion

CHOY, Circuit Judge:

Appellants Alice and Virgil Keller were convicted by a jury on three counts of wilfully and knowingly attempting to evade income taxes, for the years 1967, 1968, and 1969, in violation of 26 U. S. C. §7201. We reverse as to the 1967 count and affirm as to the 1968 and 1969 counts.

The Kellers owned and operated two drive-in restaurants and a catering business in Yakima, Washington. They also dealt in a few real estate transactions. Although their businesses were profitable and their financial affairs were expanding, they paid no taxes during any of those three years. Eventually coming under the scrutiny of the Internal Revenue Service (I. R. S.), they were subjected to investigation by the "net worth" method because they supplied incomplete financial records.

Under the net worth method, the taxpayer's total assets and liabilities as of December 31 each year are determined to yield the taxpayer's net worth. When done at successive yearly intervals, annual net worth increases or decreases are shown. Using the annual net worth figures, with due allowance for amounts spent on living expenses and deductible items, I. R. S. agents recompute the taxpayer's tax liability. If the resulting figure for any year is substantially larger than the taxable income reported by the taxpayer on his tax return, the Government may charge tax evasion, making an inference of wilfulness.

I. R. S. agents Costan and Turk constructed the following net worth computations for the Kellers.

                                                               12-31-66         12-31-67         12-31-68         12-31-69

Total assets .......................................          $94,368         $219,981         $263,320         $380,571

Total liabilities ..................................           66,685          164,523          177,273          255,592

Net worth ..........................................           27,683           55,458           86,046          124,978

                                                                              (27,683)         (55,458)         (86,046)

Increase in net worth ..............................                          $ 27,775         $ 30,587         $ 38,932

(Amount included for living expenses not shown)

Deducting depreciation, exclusions, exemptions, and

deductions

yielded taxable income in the amounts of:

                                                                              $ 14,955         $ 22,014         $ 29,686

The Kellers had reported

respectively for taxable income:

                                                                                 $ 632            $ 414              $ 0

Values Allowed For Two Residences

Appellants allege error concerning the values allowed them for two residences that they held on December 31, 166 and traded-in in 1967 for their second restaurant. The I. R. S. allowed bases of $16,000 and $42,000 for the two properties, which had been the original purchase prices paid by the Kellers some years before. The Kellers maintained that the values were $20,000 higher due to improvements and furniture they had put into both houses. If these improvements and furnishings existed as the Kellers claim, the December 31, 1966 assets would be increased to the point that the tax liability for 1967 would disappear.

The record shows that the I. R. S. agents credited the Kellers with no basis for any furnishings or improvements and that the agents had not made a reasonable investigation into these matters. The Kellers gave leads whereby the agents could have investigated the existence of the furniture and the improvements. Photostats of the Kellers' checks for these years were available from the local bank. Payments by an insurance company and a fire loss statement on the 1965 tax return indicate that there existed at least $15,800 in furnishings. A realtor itemized a long list of furniture in 1967. The buyer of the two residences credited the Kellers with the approximate increased values which the Kellers claim, but which the I. R. S. denies. When the I. R. S. sets a taxpayer's return aside and constructs a new return for him, it assumes the burden of proving, beyond a reasonable doubt, that the items contained therein are true. Lenske v. United States [66-2 USTC ¶9686], 383 F. 2d 20, 25 (9th Cir. 1967). In proving the new return, the I. R. S. must investigate leads reasonably susceptible of being checked. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 135 (1954). Because the Government failed to pursue leads which were reasonably susceptible of being checked, the opening net worth for 1967 was not reasonably certain and the evidence as to the 1967 count was insufficient to go to the jury. That count should have been dismissed.

Recall of Witness

Mrs. Keller testified concerning the furniture in the house and its approximate value. At the close of trial, defense counsel sought to recall Mrs. Keller to clarify several furniture expenditures and introduce receipts and other supporting documentary evidence which she had just discovered. The court did not allow her to be recalled, and only part of the documentary evidence was admitted. We find that the court abused its discretion in refusing to allow Mrs. Keller to retake the stand.

The defendant in a net worth prosecution is ensnared in a system which is difficult to refute. Holland v. United States, 348 U. S. at 129. The trial court should not be unduly restrictive when the defendant tries to meet the mass of technical evidence adduced by the Government. We acknowledge the wide latitude allowed the trial court in permitting the recall of a defendant and in excluding cumulative evidence. But when the court restricts the admission of newly-found documentary evidence and prevents the itemization, receipt by receipt, of expenditures completely denied by the Government, it cannot be said that the jury's verdict would have been the same and that the defendants were not denied an essential part of their defense. This error, however, only affected the 1967 count.

Carry-over of 1967 Errors

It must be recognized that a separate net worth analysis, and a separate indictment, is made for each year. The compilations of net assets on December 31 of each year are also distinct from one another, and are interrelated only to the extent that an asset carries through, or credits and losses can be carried over. It follows, then, that an accounting error in one net worth compilation does not affect analysis for the succeeding year unless the error concerns an asset that is present in both years or credit or loss carryovers.

The errors noted as to the 1967 count do not carry through into the later years. The uncertainty in the December 31, 1966 net worth and the excluded testimony related only to the issue of what furniture and improvements were present in the Kellers' two houses. During 1967 these houses were traded in for the Kellers' second restaurant, which had an undisputed value of $110,000. For the Kellers the houses were no longer present on December 31, 1967, and whatever worth they had was replaced by the restaurant. It is the restaurant that was carried on the new assets list and was used for the 1968 and 1969 net worth computations. It is plain that the 1968 and 1969 indictments are unaffected by the errors relating to the houses.

Other Alleged Errors

The 1968 and 1969 net worth computations being otherwise valid, we turn to the few remaining errors alleged by the Kellers as affecting these later years: failure by the I. R. S. to consider carryovers of income taxes withheld in 1967, investment credit carryovers and capital loss carryovers; and failure to deduct from the 1969 net worth the sum of checks outstanding as of the close of 1969. Without resolving these errors we note that, even favorably disposed to appellants, they amount to no more than one-tenth of the understatement shown by the Government for the years 1968 and 1969. The Government is not required to prove its case to a mathematical certainty. This would be particularly unfair because taxevaders' surreptitious dealings create a barrier to such exactitude. United States v. Calderon [54-2 USTC ¶9712], 348 U. S. 160, 167 (1954). Olender v. United States [56-2 USTC ¶10,077], 237 F. 2d 859, 867 (9th Cir. 1956). An understatement of taxable income of over $20,000 having been proven for each of 1968 and 1969, the evidence was clearly sufficient to sustain the verdict as to the 1968 and 1969 counts.

The conviction on the 1967 count is reversed. The convictions on the 1968 and 1969 counts are affirmed.

^* The Honorable Raymond E. Plummer, United States District Judge, District of Alaska, sitting by designation.