Bank Records and Net Worth Increases
1 Page4
[77-1
USTC ¶9165]
United States of America
, Plaintiff-Appellee, v. Edward Cook, Defendant-Appellant
(CA-5),
U. S.
Court of Appeals. 5th Circuit, No. 76-3299, Summary Calendar *, 546 F2d 82,
1/27/77, Affirming District Court, 75&-1 USTC ¶9134
[Code Secs. 7201 and 7203--result unchanged under the '76 Tax Reform
Act]
Tax evasion: Appeal of conviction: Motion for new trial: Newly
discovered evidence.--The Court of Appeals dismissed taxpayer's
motion for a new trial since the taxpayer failed to demonstrate that the
newly discovered evidence was not merely cumulative but material and
such that a new trial would be likely to change the result by producing
an acquittal. Therefore, the taxpayer's conviction for tax evasion was
upheld.
Julius
Lucius Echeles, Carolyn Jaffe,
35 E. Wacker Dr.
,
Chicago
,
Ill.
60601
, for appellant. John L. Briggs, United States Attorney, Jacksonville,
Fla., Bernard S. Bailor, Scott P. Crampton, Assistant Attorney General,
Gilbert E. Andrews,
Rob
ert E. Lindsay, Murray S. Horwitz, Department of Justice, Washington, D.
C. 20530, for appellee.
Before
COLEMAN, GOLDBERG and GEE, Circuit Judges.
PER
CURIAM:
The
appellant, Edward Cook, was convicted by a jury of income tax evasion
for the years 1966 through 1970, in violation of 26 U. S. C. §7201. 1 Cook's
motion for a new trial or for judgment of acquittal was denied after a
hearing in November 1973, and he was sentenced on January 7, 1974. His
conviction was affirmed on appeal. United States v. Cook, 505 F.
2d 659, cert. denied, 421
U. S.
1000, 95
S. Ct.
2397, 44 L. Ed. 2d 667 (1975). On March 5, 1975, appellant moved for
reconsideration of the denial of his motion for a new trial. The court
below denied the motion for new trial after a full evidentiary hearing,
and Cook has filed this appeal. He argues that the discovery of new
evidence mandates that a new trial be held. We affirm.
Appellant
filed no tax return for the relevant years. The government sought to
show at trial that Cook's substantial expenditures from 1966 through
1970, when viewed against the fact that prior to this period Cook was
unemployed and earned no income, showed that appellant had unreported
income during the period. Cook's defense was that prior to 1966 he had
accumulated assets worth over $150,000, which constituted the source of
his expenditures during the 1966-1970 period.
A
defense witness, Howard Brodsky, testified that in 1964 he received
power of attorney from Cook to remove the contents of the latter's
safety deposit box in a local bank. Brodsky testified that he removed
several diamonds and about $30,000 in cash from the box. Two bank
employees testified at an April 1973 hearing on Cook's motion for new
trial that a search of the bank's records prior to trial had failed to
reveal a power of attorney or entry slip with Brodsky's name on it.
Brodsky was subsequently indicted for perjury. Brodsky requested that
another search be made. In September 1974, investigators discovered a
power of attorney and an entry slip indicating that Brodsky had entered
the box on February 12, 1964. The perjury indictment against Brodsky was
dismissed. Cook moved for a new trial on the basis of this evidence.
The
district court denied the motion, holding that the newly discovered
evidence was merely cumulative and its introduction at trial could not
likely have changed the result. This is correct. the critical element of
Cook's defense was not that Brodsky entered the safe deposit box, but
that he removed diamonds and $30,000 therefrom.
That
Brodsky entered the safe deposit box was not controverted at trial. That
Brodsky removed diamonds and $30,000 was an unsupported assertion the
jury could and did disbelieve. The newly discovered evidence, even
assuming its authenticity, 2 does not
establish the truth of Brodsky's latter assertion but merely
corroborates his former statement.
In
order to compel the granting of a new trial because of newly discovered
evidence, the movant must show that the evidence is not merely
cumulative but material and such that a new trial would be likely to
change the result by producing an acquittal. United States v. Spivey,
508 F. 2d 1061, 1063 (5th Cir. 1975); United States v. Jacquillon,
469 F. 2d 380, 388 (5th Cir. 1972), cert. denied, 410
U. S.
938, 93
S. Ct.
1400, 35 L. Ed. 2d 604 (1973); United States v. 41, Cases, More or
Less, 420 F. 2d 1126 (5th Cir. 1970). The evidence Cook adduces is
cumulative and thus fails to meet this threshold requirement. See
United States
v. Riley, 544 F. 2d 237 (5th Cir. 1976). We therefore need not
consider whether Cook has satisfied a second requirement by showing that
he demonstrated due diligence in seeking to discover the evidence before
trial. United States v. Spivey, supra, 508 F. 2d at 1063; United
States v. Jacquillon, supra, 469 F. 2d at 388.
The
judgment of the district court is
AFFIRMED.
*
Rule 18, 5 Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty
Co. of New York et al., 5 Cir. 1970, 431 F. 2d 409, Part I.
1
26
U. S.
C. §7201 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
The record reveals that a laboratory analysis performed on the power of
attorney and entry slip suggested that the date of entry and safety
deposit box number had been overwritten by a pen with a different ink
than that used to affix the original numbers and date.
[75-1
USTC ¶9134]
U. S. A.
, Plaintiff-Appellee v. Edward Cook, Defendant-Appellant
(CA-5),
U. S. Court of Appeals, 5th Circuit, No. 74-1164, 505 F2d 659, 12/20/74,
Affirming unreported District Court decision
[Code Sec. 7201]
Tax evasion: Willful evasion: Sufficiency of evidence.--The trial
court's record contained substantial, although conflicting, evidence
from which the jury could conclude beyond a reasonable doubt that the
testimony of an IRS agent, as to the taxpayer's net worth at the opening
of the tax period in question, was accurate. Similarly, a reasonably
mined jury could validly draw inferences from the government's
circumstantial evidence of credit purchases accompanied by large and
extensive cash dealings, far in excess of the taxpayer's apparent net
worth at the opening of the tax period in question, and inconsistent
statements by the taxpayer as to the source of his finances that, beyond
a reasonable doubt, the taxpayer was living on taxable income received
in the period in question upon which he willfully evaded taxation. from
the government's circumstantial sufficient to establish affirmative
evasion, the taxpayer's plea for reversal of his conviction, on the
grounds that the government's evidence was insufficient to overcome his
"cash hoard" defense and that the evidence failed to establish
willful evasion, must fail.
[Code Secs. 7201 and 7203]
Tax evasion: Appeal of conviction: Allegations of reversible error.--Assignments
of error raised for the first time on appeal connot be reviewed unless
the plain error threshold is met. Consequently, the taxpayer's claim
that it was plain error for the trial court to permit the prosecutor to
argue that the taxpayer was "lying," and that he was
"hiding" from both the I. R. S. and the jury, must fail. While
it was improper for the prosecutor to present the argument in the manner
that he did, to characterize the government's "hiding" comment
as an allusion to the taxpayer's refusal to testify requires an
inference which is too tenuous to support plain error reversal;
moreover, whatever prejudicial effect the "lying" comment may
have produced was substantially diminished both by the prosecutor's
disclaimer and by the efforts of taxpayer's counsel to turn the improper
argument against the government. Finally, it was not error for the trial
court to advise the jury with a lesser-included offense instruction that
the misdemeanor provisions of Code Sec. 7203, which involve a willful
omission of failing to file a return, are included in the broader felony
offense provisions of Code Sec. 7201, involving the willful commission
of an attempt to evade or defeat the tax.
John
L. Briggs, U. S. Attorney, Claude H. Tison, Asst. U. S. Attorney, Tampa,
Fla., Scott P. Crampton, Asst. Attorney General, Meyer Rothwacks, John
P. Burke, Murray S. Horwitz, Dept. of Justice, Washington, D. C. 20530,
for plaintiff-appellee. Julius Lucius Echeles,
Chicago
,
Ill.
, for defendant-appellant.
Before
COLEMAN, CLARK and RONEY, Circuit Judges.
[Opinion
of the Court]
CLARK,
Circuit Judge:
Edward
Cook appeals from his jury conviction on five counts of willfully
evading income taxes from 1966 through 1970 in violation of 26 U. S. C.
§7201. Through the diligent efforts of new counsel in this court, he
advances six grounds for reversal, the last four of which, since not
properly presented below, must constitute plain error to be reviewable
here. 1 First, he
contends that the government's evidence was insufficient to overcome his
"cash hoard" defense. Second, he argues that the evidence
failed to establish willful evasion. His third, fourth and fifth grounds
assign, individually and cumulatively, three instances of prosecutorial
conduct: unsupported attempts to impeach key defense witnesses during
cross examination, closing argument use of a court-excluded statement by
defendant, and closing argument statements that the defendant "was
lying" and failed to testify. His final plain error contention
relates to a lesser-included-offense instruction. We affirm.
Following
the expenditures method, the government sought to show that Cook, who
was unemployed, had an income of approximately 13,000 dollars from
nontaxable sources for the five years; had not filed returns for any of
the years; yet, had spent approximately 150,000 dollars. See United
States v. Penosi [72-1 USTC ¶9103], 452 F. 2d 217, 220 (5th Cir.
1971). Neither Cook's defense below nor the present appeal focuses on
these matters. Rather his defense was that prior to January 1, 1966, he
had accumulated cash and other assets of a value in excess of 150,000
dollars, which were the source of the funds spent. See e.g., United
States v. Newman [72-2 USTC ¶9719], 468 F. 2d 791, 794 (5th Cir.
1972).
[Sufficiency
of Evidence]
To
address the sufficiency question, we must record the evidence presented
at trial in some detail. The Government's proof established that Cook
had not filed income tax returns for any of the years in question and
that treasury agents had made an exhaustive search which failed to
discover any assets held by defendant prior to January 1, 1966, other
than two cars valued at 5,850 dollars. This conclusion was supported by
evidence that Cook had been infrequently employed prior to 1966 and
that, during the prosecution years, he had "financed" several
purchases. It was stipulated that the defendant was totally unemployed
and earned no income whatsoever from 1944-1948, 1951-1960 and 1964-1965,
and that he received no gifts or bequests nor inheritance from his
mother at her death in 1967. His former wife, Geraldine, whom he married
in February, 1961; separated from in 1962; reunited with in 1965 and
divorced in May 1966, testified, inter alia, that defendant did
not have a job in 1961 when they were married and that she did not know
if or when he got his first job after that. She had to work as a
secretary for a short time during the marriage. She had no knowledge
that defendant had a safety deposit box, or any jewelry, or a coin
collection. In addition, she testified that not only had they borrowed
money from the family when they were short of cash, but they had also
financed the purchase of a 1965 Oldsmobile. F. B. I. Special Agent
Guilfoile testified that he had known Cook's current wife, Joan, even
before 1966, but had never known her to be gainfully employed. By Cook's
own statement, his employment record prior to 1951 had been sporadic and
insubstantial. In fact, his only sustained employment was from 1962-1964
when he received a salary of 250 dollars per week as an employee of a
jewelry company. Also tending to negate the existence of pre-1966 assets
was the evidence that Cook had to obtain credit for several purchases
during the prosecution years. In 1967 he purchase a 59,500 dollar house
and assumed both a first and second mortgage. He also financed part of
the purchase price of a 12,566 dollar Donzi Boat and a new Oldsmobile
automobile.
Other
evidence established abundant facts about Cook's financial activities
and resources and numerous inconsistencies in his personal
representations about them. In August, 1969, for example, defendant told
F. M. Beirne, a local police officer, that he was still under
investigation by the Internal Revenue Service because of not filing an
income tax return. Beirne further quoted Cook as saying his standard
explanation for this was that his wife was wealthy and that since he had
never held a job or earned 600 dollars annually, he was not required to
file an income tax return. 2 The
statement is in direct conflict with Cook's credit card and loan
applications during the prosecution years in which he consistently
represented himself to have an income of 18,000 or 20,000 dollars per
year. The source of his income was variously shown as deriving from
self-employed, semi-retired, or retired activity in stocks, bonds and
investments, or the cosmetic business. Evidence of other business
activity by the defendant during the prosecution years included Cook's
ordering of locksmith's tools under the trade name Cook's Key and Hobby
Shop and his representation in 1967 that he was in the perfume business
or had something to do with a donut establishment.
Cook
made substantial outlays of cash in the covered period. Included were
the purchase of five cars, for which he paid out cash ranging in an
amount from 2065 to 3700 dollars; a 6200 dollar initial payment on the
Donzi Boat, and an 18,000 dollar cash payment for a lot. In at least two
of the prosecution years, Cook's total cash payments (28,601.65 and
22,261.21 dollars) were more than double the payments for purchases he
made by check.
Defendant's
proof included no documentation of his pre-1966 ownership of assets. He
did, however, produce three witnesses to support his claim that
substantial asset ownership accounted for his spendings in the tax
period. They were Howard Brodsky, a bondsman; Ronald Hanson, a business
friend; and Richard Chapman, a self-employed dealer in jewels. Brodsky's
contact with Cook was as a bail bondsman on an unrelated criminal
charge. In his testimony to the jury the relationship was merely
described as one requiring Cook to place collateral with Brodsky.
Brodsky testified that in 1963 and 1964 Cook had safety deposit boxes
containing a gold coin collection, diamonds (including a canary diamond
appraised for more than 75,000 dollars), cash, and other assets which in
total value exceeded 150,000 dollars. He further stated that he took
possession of these items and in 1966 and 1967 redelivered their
contents to Cook. Hanson testified he had known Cook in
Chicago
, that in December of 1965 he had borrowed 35,000 dollars in cash from
Cook to establish a wig business, and that in about February or March of
1966, when the projected venture did not materialize, he returned these
funds.
Cook
also presented testimony from Richard Chapman to the effect that Chapman
shared offices and a telephone with one Herman Gordon, who was a
wholesale diamond merchant. Chapman testified that in the summer of 1968
he witnessed a transaction in which Gordon paid Cook 85,000 dollars in
cash for a large canary diamond. Inferentially, this diamond was similar
to a diamond Brodsky testified he observed to be in Cook's safety
deposit box in 1963.
[Proof
Required]
It
is essential to affirmance to find that the jury was furnished adequate
proof of the defendant's net worth at the opening of the tax period in
question. United States v. Penosi, supra; Marcus v. United States
[70-1 USTC ¶9213], 422 F. 2d 752, 755 (5th Cir. 1970). In this case,
the inferences to be drawn from the evidence of little or no income
prior to 1966 and credit purchases after January 1, 1966 together with
the special agent's testimony that Cook's net worth on January 1, 1966,
the beginning of the prosecution years, was less than 6,000 dollars were
opposed by the testimony of Brodsky, Hanson and Chapman. The fact that a
conflict existed, however, is immaterial, because viewed in the light
most favorable to the government, Glasser v. United States, 315
U. S. 60, 62 S. Ct. 457, 86 L. Ed. 680 (1942), the record contained
substantial evidence from which the jury could conclude beyond a
reasonable doubt that the agent's testimony was accurate.
Similarly
a reasonably minded jury could validly draw inferences from the
government's circumstantial evidence of credit purchases accompanied by
large and extensive dealings in cash, and inconsistent statements as to
the sources of his finances that, beyond a reasonable doubt, Cook was
living on taxable income received in the subject period upon which he
willfully evaded taxation rather than on a cash hoard accumulated
previously.
United States
v. Nazien, 504 F. 2d 394 (5th Cir. 1974);
United States
v. Warner, 441 F. 2d 821, 830 (5th Cir. 1971);
United States
v. McGlamory, 441 F. 2d 130, 135 (5th Cir. 1971). These
permissible inferences would be sufficient to establish affirmative
evasion. Spies v. United States [43-1 USTC ¶9243], 317
U. S.
492, 499, 63 S. Ct. 364, 87 L. Ed. 418 (1943). See also United States
v. Newman [72-2 USTC ¶9719], 468 F. 2d 791, 794 (5th Cir. 1972).
[Prosecutorial
Conduct]
Cook's
remaining assignments of error are raised for the first time in this
court. They were not even brought before the trial court in his post
trial motions. To permit review, the plain error threshold must be
crossed. See, e.g.,
United States
v. Smith, 502 F. 2d 512, 519 (5th Cir. 1974). Acknowledging this to
be the standard, Cook urges it was plain error for the prosecution to
imply, in its cross examination of defense witnesses Howard Brodsky and
Richard Chapman, that it possessed impeaching information without
thereafter offering supporting evidence when the questions were answered
adversely. 3 Cf.
United States v. Constant, 501 F. 2d 1284 (5th Cir. 1974). Since
failure to introduce rebuttal on these points is more likely to have
aided than harmed defendant, and since his counsel capitalized on the
lack of such rebuttal in closing arguments, we refuse to try the issue
for the first time in this court under the plain error rule.
Cook's
criticisms of the closing arguments urge that the prosecutor
impermissibly utilized a statement which had been made by Cook to an IRS
agent, but which had been ruled inadmissible by the court. Assuming this
was error at all, the problem for treating it as plain error is that the
very same statement had been admitted in evidence through Officer
Beirne. 4 If objection
had been timely made and the court's ruling had been made retroactively
applicable to the IRS agent's testimony, the problem could have been
clarified without prejudice. This is precisely the kind of matter that
cannot qualify as plain error.
Cook
further contends that the court committed plain error when it allowed
the prosecutor to argue:
"Today
I want to tell you, this case is not difficult to decide. It is an
extremely large amount of evidence coming in here which shows that the
defendant, No. 1 spent the money, made many admissions as to taxable
income. Only to the Internal Revenue Service and to you does he need
hide because he has a technical income, because he had a cash hoard.
It is evidence on the record that such a cash hoard did not exist. He
was lying and purposely and willfully evading the income tax."
(Emphasis is added)
The
questions to and answers by the witness Chapman were:
Q.
Are you telling me as an expert in the diamond business that all diamond
merchants deal exclusively in cash?
A.
I didn't say . . . exclusively . . . I say primarily.
*
* *
Q.
But you are not prepared to state whether this is the custom throughout
the diamond trade?
A.
I would say that it is . . . on a wholesale level between diamond
brokers.
The
government asserts that the "hide" allusion in this statement
was intended to point out the contrast between Cook's admissions on
loans and credit applications of income around 20,000 dollars a year and
his later assertion that he didn't earn 600 dollars a year. They also
urge that the comment was meant to question the existence of defendant's
asserted cash hoard. The use of the phrase "he was lying",
while confessedly ill advised and inappropriate, is said to have been
based on a permissible belief inferred from the evidence. See, e.g.,
United States
v. Greenberg, 268 F. 2d 120, 123-124 (2nd Cir. 1959).
In
the abstract, the argument is clearly objectionable.
.
. . [P]rosecutors should exercise utmost restraing and caution in
fashioning arguments which may tend to support the suggestion of a
comment on the failure of a defendant to testify. Additionally,
expressions of personal opinion as to the credibility of witnesses for
the prosecution should be avoided. "It is as much his [the
prosecutor] duty to refrain from improper methods calculated to produce
a wrongful conviction as it is to use every legitimate means to bring
about a just one".
United
States v. Rhoden, 453 F. 2d 598, 600 (5th Cir. 1972) quoting
Berger v.
United States
, 295
U. S.
78, 88, 55 S. Ct. 629, 79 L. Ed. 1314, 1321 (1935).
However,
to establish the "hide" comment as an allusion to the
defendant's refusal to testify requires an inference which is altogether
too tenuous to support plain error reversal. We note that the opening
words of this sentence couple the revenue service with the trial court
jury in speaking of those from whom Cook need "hide." Since
the revenue service performs an extra judicial function of
investigation, its mention tends to disassociate the tenor of the
remarks from the hiding of courtroom testimony. It is entirely plausible
to construe the thought intended to be conveyed as a challenge to the
jury to use Cook's own prior representations that he had income as a
basis for rejecting the defense assertion that his large spendings came
from a prior accumulation and that he had no income over 600 dollars for
any of the years. This is what the trial was mainly about. The failure
of defense counsel to object helps to confirm that the argument was
sufficiently ambiguous to deny it classification as an error which
plainly deprived defendant of any substantial right.
Whatever
prejudicial effect might have obtained from the "lying"
comment, was diminished both by an express disclaimer by the prosecution
and by defense counsel's use of the prosecutor's argumentary
indiscretions in an attempt to turn the "lying" remark against
the prosecution. 5 At the
beginning of this closing argument, the prosecutor stated:
I
want my discussion to be based on the evidence you have heard in this
court-room. As I said at the outset, what lawyers say is not evidence,
no matter how important we think it is, it is not evidence and it is not
properly considered by you in arriving at the verdict. It is to aid you.
If your recollection of the evidence differs from what I said, follow
your recollection. You are the people who are to evaluate the evidence.
While
the comment was altogether improper and an objection would surely have
brought corrective action, we must weigh the degree to which the
prosecutor's argument may have affected a substantial right belonging to
the defendant. We conclude that the prejudicial effect was slight, while
the evidence of guilt was substantial. See
United States
v. Rodriques, 503 F. 2d 1370 (5th Cir. 1974);
United States
v. Rhoden, 453 F. 2d 598 (5th Cir. 1972). "Without putting
our imprimature on every remark made by the prosecutor, we perceive no
plain error which should be noticed in the absence of objection. . .
."
United States
v. Jenkins, 442 F. 2d 429, 435 (5th Cir. 1971);
United States
v. Scaglione, 446 F. 2d 182, 188 (5th Cir. 1971).
[July
Instruction]
Finally,
appellant argues that misdemeanors under Section 7203 (failure to file)
are not lesser included crimes under Section 7201 (willful evasion) and,
thus, that the giving of a lesser-included-crime instruction was
erroneous. The failure to bring the error complained of here to the
attention of the trial court would bar its assignment as error under
Fed. R. Crim. P. 30, unless it fell under Rule 52(b). But the
instruction here involved was not error at all. The misdemeanor
provisions of Section 7203 ininvolve a willful omission of
failing to file a return. The felony provisions of Section 7201 includes
the broader offense of willful commission of an attempt to evade
or defeat the tax. Sansone v. United States [65-1 USTC ¶9307],
380
U. S.
343, 351, 85 S. Ct. 1004, 1010, 13 L. Ed. 2d 882 (1965); Spies v.
United States [43-1 USTC ¶9243], 317
U. S.
492, 63 S. Ct. 364, 87 L. Ed. 418 (1943).
See
,
United States
v. Bishop [73-1 USTC ¶9459], 412
U. S.
346, 93
S. Ct.
2008, 36 L. Ed. 2d 941 (1973). Cf.
United States
v. Bowness, 504 F. 2d 391 (5th Cir. 1974).
We
have carefully considered appellant's auxiliary arguments and find them
equally without merit.
Affirmed.
1
Fed. R. Crim. P. 52(b) provides: "Plain errors or defects affecting
substantial rights may be noticed although they were not brought to the
attention of the court." See C. Wright, Federal Practice and
Procedure §856.
2
An agent of the Internal Revenue Service testified that Cook made
essentially the same statement to him. Subsequent to the admission of
this evidence, the Court ruled that the failure to give Cook
admin
istratively required warnings, Int. Rev. Manual §9384.2, rendered this
testimony excludable. The record reveals that at this point counsel for
Cook made the deliberate strategic choice to leave this testimony in the
record rather than having it highlighted by a specific direction from
the Judge that the jury should disregard it.
3
The witness Brodsky answered these questions in the negative:
"Q.
Isn't it a fact, sir, you told them (F. B. I. Agents) those coins were
submitted to you by Martin Katz and were owned by Martin Katz?
*
* *
Q.
Isn't it a fact you also later told them you returned the gold coins not
to Clarence, but John Cook?
Q.
Isn't it a fact you told the F. B. I. agent it was returned to Clarence
Cook?
*
* *
Q.
Didn't you tell the F. B. I. that the 27 carat diamond was owned by
Martin Katz?
4
See note 2, supra, and accompanying text.
5
Defense counsel argued that it constituted "unfair tactics" to
"try to create prejudice in the minds of the jury by inflection,
innuendos, insinuation" and that the prosecution was attempting to
"inflame people" by "twist[ing] the truth". Then he
came to the point:
Now,
I resent it. I personally resent it calling my client a liar.
Now
he is an American citizen and he is entitled to every kind of a
courtesy; every kind of a right and privilege that you or I should be
entitled to in this Court of Law. Why is he a liar? Because he tried to
prove in a particular time, in 1963, he had a valuable diamond and he
had a gold coin collection. And you call him a liar? Well, let us see.
Now, who is lying here?
I
don't call anybody a liar, but I say who is making the mistake? Who is
making the false innuendo?
[56-2
USTC ¶9956]
United States of America
, Plaintiff-Respondent v. Raymond A. O'Connor, Defendant-Appellant
(CA-2),
U. S. Court of Appeals, 2nd Circuit, Docket No. 23763, 237 F2d 466,
10/1/56, Reversing and new trial ordered of an unreported District Court
decision
[1939 Code Sec. 145(b)--substantially unchanged in 1954 Code Sec. 7201]
Crimes: Willful failure to pay tax: Instructions to jury.--The
conviction of taxpayer, a certified public accountant, on an indictment
charging him with willfully attempting to evade and defeat his income
taxes by filing returns understating the amount of his taxable income,
was not sustained. With reference to alleged errors raised by taxpayer,
the court held as follows: (1) the trial court's charge to the jury was
insufficient where it failed to include a summary of the net worth
method, the assumptions on which it rests, and the inferences available
both for and against the accused; (2) the summary net worth charts used
by the government and introduced in evidence were reasonably accurate;
(3) the trial court did not err in excluding certain documentary
evidence offered by taxpayer where the documents were alleged copies or
summaries of originals which had been lost or destroyed by taxpayer or
others; and (4) taxpayer improperly contended that the indictment should
have been dismissed because it was based entirely on hearsay evidence.
The case was remanded for a new trial.
[1939 Code Sec. 3631--similar in 1954 Code Sec. 7605(b)]
Examination of books and witnesses: Time and place: Failure to object
to examination as waiver.--The court held taxpayer waived any
objection by consenting to a re-examination of his books, even assuming
the evidence obtained was inadmissible in a tax prosecution because of
the Commissioner's failure to provide taxpayer with the written notice
mentioned in 1939 Code Sec. 3631.
John
O. Henderson, United States Attorney,
Buffalo
, N. Y. (Alexander C. Cordes, Assistant United States Attorney, of
counsel), for plaintiff-respondent. John F. X. Finn (Joseph Lorenz, John
E. McAniff, William R. White, of counsel),
New York City
, for defendant-appellant.
Before
FRANK, LUMBARD and WATERMAN, Circuit Judges.
WATERMAN,
Circuit Judge:
Defendant,
Raymond A. O'Connor, appeals from a judgment entered upon the verdict of
a jury, finding him guilty on all four counts of an indictment charging
him with wilfully attempting to evade and defeat his income taxes for
the years 1946, 1947, 1948, and 1949, by filing for each of those years
an income tax return understating the amount of his taxable income.
Judge Knight imposed a sentence of five years upon each of the four
counts (to be served concurrently), and a fine of $10,000 for each of
the counts for 1946 and 1947. Defendant was released on bail pending
this appeal.
[Errors
Raised by Taxpayer]
The
alleged errors raised by defendant are as follows: (1) the failure of
the Government to prove the essential elements of its case; (2) the
inaccuracy of the Government's net worth statements and computations;
(3) the inadmissibility of certain evidence; (4) the correctness and
sufficiency of the charge; and (5) a group of miscellaneous and
unclassified errors.
Because
of the complexity of this particular case and the confusing manner in
which it was conducted, defendant's most telling point is that the trial
court's charge to the jury was unclear, confusing, and incomplete. The
role of the court's charge in tax evasion cases increases in
significance in direct proportion to the mounting complexity of the
issues presented.
Because
of the size and range of defendant's fiscal activities, the Government's
case of necessity required extensive factual data. At the time of the
trial, the defendant was fifty-five years of age, married, and the
father of four children, among whom he had distributed many of his
assets. He was a certified public accountant, duly admitted to the
practice of his profession by the Regents of the University of the State
of
New York
. In addition, the defendant had varied business interests. He conducted
the largest accounting practice in
Niagara County
,
New York
. He also managed two farms and a canning plant; he was treasurer of a
cold storage business; he dealt with at least thirteen parcels of real
estate; and he managed a large investment portfolio.
The
trial covered a period of fifty days. The Government introduced 435
complicated and frequently confusing exhibits. In addition, the
defendant introduced 145 exhibits. The staggering task of properly
analyzing these exhibits was left to the jury without adequate
instruction.
The
Government conceded that a complicated case was presented, as indicated
by its chief witness who testified: "There are thousands of
entries, thousands of adjustments, thousands of items that we have had
to handle." To pull together all the items of evidence the
Government relied primarily upon the testimony of three revenue agents,
all of whom confessed to only a modest background in accounting and an
unfamiliarity with net worth tax cases. The presentation of evidence
revealed little awareness of the complexities of proof required for a
net worth prosecution. The witnesses were not properly prepared to
present a logical flow of testimony.
The
record was devoid of any computation offered by the Government to prove
the specific amount of tax due from the defendant in his individual
capacity. Government Exhibit 423 was in fact a combined statement of the
alleged net worth of the defendant and his wife, and it included assets
of each of their four children, assets belonging to a co-partnership of
which the defendant was a member, and at least one asset of a
corporation not owned by the defendant.
One
of the basic elements of the Government's case rested upon the claim
that the funds and assets of the defendant's wife, Bertha O'Connor, and
the defendant's four children were in reality assets belonging to the
defendant. This contention was not made clear in the court's charge to
the jury. When the United States Attorney originally offered evidence as
to bank accounts of the defendant's wife, he did not state the
Government's theory that these were in reality assets of the defendant.
Instead he said. "I am offering this in evidence to show the
general plan or having these assets moved around, and if I do not
connect it up, of course, it will be stricken eventually."
Similarly, when bank accounts of the defendant's children were offered,
the court made no explanation of the rules either as to admissibility or
relevancy. The failure to illuminate the jury as to the theory upon
which evidence was admitted persisted throughout the trial, and on
occasion the court contributed to the confusion. At one point the
Government offered in evidence checks of the Chisholm Ryder Co., Inc.,
payable to the defendant's partnership, R. A. O'Connor & Co. Upon
defense counsel's objection that this was improper under the net worth
theory without some claim that the partnership return was erroneous, the
court overruled the objection, stating: "I don't see any difficulty
about it. Part of the income of the company. It may be assets and
liabilities on the net income theory." (Italics added.) This
comment did not clarify the issues and could only have confused the
jury.
Considerable
testimony was introduced as to loans by the defendant, some as far back
as 1929 and extending up to 1941, and others paid off in January, 1942.
There is no statement by the court as to why these were admissible or
how they bore on the issues. Evidence was also permitted concerning
loans of others which were endorsed by the defendant, again without any
explanation.
The
defendant testified in his own behalf and listed what he claimed were
104 errors in the Government's computations. His testimony covers
several days of the record and lists item after item of either income or
expense which he contends was not properly set up in the Government's
exhibits. The defendant detailed many items and gave his explanation as
to how they should be treated. Nowhere in the succeeding pages of the
record is the jury given any explanation as to the significance of the
defendant's contentions and what effect these items would have on the
Government's computations.
When
the defendant sought to examine one of the government witnesses, Julian
O'Connor, the defendant's brother, to explain what the net worth theory
encompassed, the trial judge refused to permit the examination, stating:
"The Court will instruct the jury very fully on what the net worth
theory is." This, however, the court neglected to do.
In
addition to the confusion of defendant's income with that of others not
on trial, there were issues as to which items were to be included in
defendant's assets as of the opening dates of the tax periods in
question.
Since
the ascertainment of the defendant's opening net worth is crucial to an
effective net worth prosecution, it was incumbent upon counsel and court
to instruct the jury as to what evidence was being offered to establish
that net worth, its purported size and whether exact or closely
approximated, and its significance in the inferential process by which
defendant was sought to be convicted. But the trial judge never so
instructed the jury nor did he supply the missing clarification at the
time of the admission of the evidence. On at least one occasion, for
example, the judge overruled an objection with the statement,
"Whatever ground you base it on, I overrule it."
[Opening
Net Worth]
The
trial court failed to analyze for the jury the important significance of
the items that the defendant claimed were omitted from his opening net
worth. For example, the defendant claimed that he had $59,054.59 in
undeposited cash and checks on December 31, 1945. He further testified
that in 1941 he had paid $60,500 for the stock of the Burt Cold Storage
Company. The Government gave him no credit for either of these items in
its opening statement. Obviously, if the Government had omitted almost
$120,000 from its opening statement, the computation for each of the
four succeeding years would have to be drastically revised. Similarly,
when the defendant received $60,000 during the prosecution years from
the Burt Cold Storage Company, the Government charged it all up to
current income as a capital gain. The defendant argued that this was
merely a repayment of his original investment. Whether or not it was
income had a very substantial effect on determining whether there was
any tax evasion in the year the $60,000 was received. This is the type
of explanation that the jury needed, because, as the United States
Attorney admitted several times during the trial, a very complicated
financial picture was involved.
In
the unusually complex circumstances of this case, the clarity, accuracy,
and detail of the trial judge's charge to the jury became essential for
the fair and orderly conduct of the trial. To be sure, the Government
introduced a great deal of non-accounting evidence from which the jury
could reasonably infer a wilful evasion of taxes by the defendant. There
was testimony to the effect that the defendant had unsuccessfully
attempted to induce one accountant to testify to his version of his net
worth, but the accountant had refused to so testify because he had no
faith in that version. Other evidence was adduced tending to show that
defendant had destroyed or concealed his financial records, thereby
necessitating a five-month investigation by the Government's agents in
order to amass the required data. Defendant's own story as to the cash
hoard in his attic tested the limits of credibility. Finally, a bank
official testified that defendant had tried to induce him to change bank
records which would indicate defendant's income.
But
regardless of the weight of evidence tending to show the guilt of the
accused, 1 in order to
justify a conviction of tax evasion obtained through resort to the net
worth method, it is imperative that the jury comprehend the complex
theory involved and that it appreciate the relevance of the evidence
introduced in the application of that theory. The trial circumstances
here considered dramatically underscore that need and emphasize the
weight that must be attached, in this case, to the court's charge to the
jury. Indeed, in cases such as this, it is highly desirable that some
explanation of the issues involved and the relevance of the evidence
introduced be given during a lengthy trial, as well as in the charge at
the conclusion of the evidence.
[Charges
to Jury]
The
Supreme Court has held that the net worth method of prosecution for tax
evasion is a permissible one, but that because of the dangers inherent
in the method it must be applied with the greatest caution. "Trial
courts should approach these cases in the full realization that the
taxpayer may be ensnared in a system which, through difficult for the
prosecution to utilize, is equally hard for the defendant to refute. Charges
should be especially clear, including, in addition to the formal
instructions, a summary of the nature of the net worth method, the
assumptions on which it rests, and the inferances available both for and
against the accused. Appellate courts 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." Holland v. United States,
1954, 348
U. S.
121, 129 [54-2 USTC ¶9714]. (Italics added.) We interpret this
statement as at the very least requiring that the charge to the jury, in
a case of such complexity as this, set forth the relationship of the
various schedules and computations introduced into evidence to the
applicable claims advanced for them by the Government and the defense,
and the pertinence of these claims in supporting the logical inferences
each party relies upon. See
United States
v. Altruda, 2 Cir. 1955, 224 Fed. (2d) 935, 943 [55-2 USTC ¶9592].
In
this case two preliminary questions must be disposed of before turning
to the merits of the charge: (1) whether the standards announced by the
Supreme Court in Holland and its companion cases, Friedberg v.
United States, 1954, 348 U. S. 142 [54-2 USTC ¶9713]; United
States v. Calderon, 1954, 348 U. S. 160 [54-2 USTC ¶9712]; and Smith
v. United States, 1954, 348 U. S. 147, [54-2 USTC ¶9715], are
applicable to this case, which was tried prior to those decisions; and
(2) whether defendant is entitled to raise the merits of the charge on
appeal despite his alleged failure to make specific and timely
objections to the court's charge.
In
United States
v. Bardin, 7 Cir. 1955, 224 Fed. (2d) 255 [55-1 USTC ¶9488],
the Court of Appeals compared the charge in that case with the charge
affirmed by the Supreme Court in Holland, and concluded that,
since neither charge met the standard enunciated by the Supreme Court in
the Holland case, that standard must have been intended for
prospective--and not retroactive--application. A vigorous dissent
questioned the majority's view that the
Holland
standard was intended merely as a guide for future trials. We think that
we are required to apply the latest rules of law formulated by the
Supreme Court to all cases coming before us in which those rules are
relevant, irrespective of the relative dates of trial. Indeed, we have
already done so in one case tried before the
Holland
decision, United States v. Costello, 2 Cir. 1955, 221 Fed. (2d)
668 [55-1 USTC ¶9342], aff'd 350
U. S.
359 [56-1 USTC ¶9321]. And we can only interpret the Supreme Court's
action in granting certiorari in nine net worth cases, vacating the
judgments, and remanding the cases to the respective Courts of Appeals
for reconsideration in the light of the Supreme Court's net worth
decisions, as a definite command that the new formulations be applied to
all pending net worth cases. Mitchell v. United States, and other
cases, 1954, 348
U. S.
905 [55-1 USTC ¶9139].
[Contention
of Government]
The
Government argues that we should not consider the charge on its merits
because defendant did not request specific instructions and did not
object to the instructions given. However, defendant did make a general
objection to the trial court's charge "as to the net worth method
of computation," and specifically requested the court to charge
that the establishment of an accurate starting net worth was vital to
the Government's case. This request was denied. Rule 30 of the Federal
Rules of Criminal Procedure provides that "No party may assign as
error any portion of the charge or omission therefrom unless he objects
thereto before the jury retires to consider its verdict, stating
distinctly the matter to which he objects and the grounds of his
objection." Thus the general rule is that a defendant cannot raise
an objection on appeal for the first time if he has failed to object
specifically to a charge or failed to request a charge omitted by the
trial court. 2 But in
criminal cases federal appellate courts have sometimes noticed errors to
which no proper objection has been taken "if the errors are
obvious, or if they otherwise seriously affect the fairness, integrity
or public reputation of judicial proceedings." 3 The Federal
Rules of Criminal Procedure have not abolished this inherent power. 4 We think
that in this case we should consider the charge on the merits, both
because the alleged error seriously affected the substantial rights of
defendant and because, under the circumstances, defendant's general
objections and requests were sufficient to preserve the point.
It
is our belief that the charge failed to include "a summary of the
nature of the net worth method, the assumption on which it rests, and
the inferences available both for and against the accused," and
that in the setting of this case such a failure constituted reversible
error. There is serious doubt that the jury ever understood the issues
of the case or the bearing that the complex evidence might have on those
issues. The trial court's only instructions on the net worth method are
contained in the four paragraphs, not delivered consecutively, that are
quoted in the margin. 5 Taken singly
or viewed as a whole, they were inadequate to explain to the jury the
net worth method and its limitations. They contained neither an
understandable summary of the net worth method as a whole 6 nor an
explanation of how proof of wilful tax evasion is properly inferred from
proof that the cost of assets acquired during the indictment period and
the actual amount of expenditures during that period exceeded reported
income. Were the error of less importance, we would affirm the
conviction, but this charge was so grossly inadequate that we have no
alternative. Kotteakos v.
United States
, 1946, 328
U. S.
750, 763-766. Such must be our decision where, as here, the evidence
adduced and the issues involved were extremely complex and where no
indication is given that the jury received the necessary guidance from
counsel or the court at any other point in the trial. Consequently, the
judgment below must be reversed, and the case remanded for a new trial.
Because
we are remanding the case for a new trial, we think it advisable to
dispose now of questions raised on this appeal that may arise during the
course of a new trial.
1.
The Charge to the Jury. We have already indicated to some extent
what we think should have been contained in the charge in this case. But
we think it appropriate to discuss our views at greater length. First of
all, the jury--either in the charge or during the trial--should have
been given an explanation of the net worth method as a whole. The mere
repetition of the accounting formula involved (an increase in net worth
plus non-deductible expenditures, minus non-taxable receipts, equals
taxable income) is helpful, but in addition the jury should have been
given a comprehension of the underlying mechanism: the inferential proof
of wilful tax evasion by proof that the cost of assets acquired during
the indictment period and the actual amount of expenditures during that
period exceeded reported income. 7 Once this is
done, the accounting statements and computations will at least make some
sense to an intelligent jury. The trial court should caution the jury,
however, as to the use it may make of the statements, figures, and
tables, and, in addition, explain the two major inferences which the
jury must draw in order to convict.
The
first inference, i. e., that the defendant's expenditures and
increase in net worth during the indictment years are attributable to
some current, rather than past, source of income, can arise only
if the jury believes that the Government has established the opening and
closing net worths with "reasonable certainty." Holland v.
United States, supra, 132. Invariably, as in the case here, the
defendant will contend that the Government has omitted substantial items
from the opening net worth, and hence that the inference cannot
justifiably be drawn that his expenditures and increase in net worth
during the indictment years come from a current income source.
The nature of this defense and its factual elements should be explained
to the jury, either in the charge or at some other appropriate point in
the trial. 8 The second
major inference involved in the net worth method, i. e., that the
current source of income is an unreported source of taxable income,
cannot arise unless the Government has established to the jury's
satisfaction the non-existence or improbability of the receipt by the
defendant during the indictment years of non-taxable funds, such as
loans, gifts, inheritances, etc. In this connection, the trial court
should discuss the proof of a "likely source," and explain the
claims advanced by the defendant of various non-taxable resources and
the attempted negation of these claims by the Government. 9 Only if the
jury finds that the defendant did not have non-taxable resources during
the indictment years can it draw the inference that the defendant's
expenditures and increase in net worth in excess of reported income
constitute taxable income. Finally, the trial court must
appropriately charge the jury on the issue of wilfulness, and, in
addition, give the usual formal instructions on burden of proof,
reasonable doubt, and the like. We think that instructions of this type,
in a case such as this, should involve summarization of the more
important disputed questions of fact.
2.
Alleged Accounting Errors. Defendant contends that the Government
made numerous accounting errors which resulted in tremendous
understatement of opening net worth and overstatement of increase in net
worth. Examination of these alleged "errors" reveals that the
Government omitted them from its computation either because it could
find no trace of their existence or because it concluded that they had a
different effect than that claimed by defendant. Most of them were
vigorously disputed questions of fact which were properly left to the
jury. Insofar as genuine accounting errors, mistakes of transcription,
and mathematical mistakes are present in the charts utilized by the
parties, the trial judge will be in a much better position to pass on
them as they arise during a retrial than we are at this time.
3.
Admissibility of Evidence. Defendant advances numerous claims of
error with respect to the admission and exclusion of evidence. We think
only two of them are sufficiently meritorious to deserve consideration
at this time.
Defendant
contends that the summary net worth chart used by the Government was a
"monstrosity of errors" and should not have been introduced in
evidence. We have recently considered at some length the conditions
under which such summaries may be used.
United States
v. Altruda, 2 Cir. 1955, 224 Fed. (2d) 935 [55-2 USTC ¶9592].
In that case we held that a schedule which omitted certain items was
incomplete, inaccurate, and misleading, and hence should not have been
admitted over objection. While it is not the court's function to decide
which of the various possible inferences should be drawn, it is the
court's function to determine whether evidence is competent to justify
certain inferences. See
United States
v. Velenti, 2 Cir. 1943, 134 Fed. (2d) 362, 364, cert. denied
319
U. S.
761. Thus the trial court must scrutinize charts, summaries, schedules,
etc. before they can be admitted into evidence, to see whether they
fairly represent and summarize the evidence on which they are based. If
they are fair representations, they are admissible. Costello v.
United States, 1956, 350
U. S.
359 [55-1 USTC ¶9342], aff'g 2 Cir. 1955, 221 Fed. (2d) 668 [56-1 USTC
¶9321];
United States
v. Altruda, supra; Kampmeyer v.
United States
, 8 Cir. 1955, 227 Fed. (2d) 313 [55-2 USTC ¶9779]; Scanlon v.
United States, 1 Cir. 1955, 223 Fed. (2d) 382 [55-1 USTC ¶9508]. We
think that the charts involved here were reasonably accurate.
Defendant
contends that the trial court erred in excluding certain documentary
evidence offered by defendant. The reason for excluding this evidence
was that the documents were alleged copies or summaries of originals
which had been lost or destroyed by defendant or others. The trial court
ruled that secondary proof should not be admitted unless defendant
showed that the original records had existed and that they had not been
destroyed by defendant with fraudulent design. Sellmayer Packing Co.
v. Commissioner, 4 Cir. 1944, 146 Fed. (2d) 707, 709-710 [45-1 USTC
¶9133], and cases there cited; Reynolds v. Denver & Rio Grande
Western R. Co., 10 Cir. 1949, 174 Fed. (2d) 673; Uniform Rules of
Evidence, Rule 70(1). Cf. Scanlon v.
United States
, 1 Cir. 1955, 223 Fed. (2d) 382, 387-388 [55-1 USTC ¶9508]. We
cannot say that the trial court's suspicions were unwarranted and that
its action constituted an abuse of discretion. There was considerable
evidence that defendant had not kept records and that he had
intentionally destroyed what records existed. Moreover, there was
evidence that he had attempted to bribe a bank official in order to
obtain the removal of certain bank records. The burden was on defendant
to lay a proper foundation for the admission of this secondary evidence.
Sellmayer Packing Co. v. Commissioner, supra.
4.
Denial of Discovery and Bill of Particulars. Defendant argues
that the trial court erred in denying his motions prior to trial for a
bill of particulars and for discovery. Federal Rules of Criminal
Procedure 7(f), 16, and 17(c). Rule 7(f) provides that "The court
for cause may direct the filing of a bill of particulars." Rule 16
provides for discovery and inspection of "designated books, papers,
documents or tangible objects * * * upon a showing that the items sought
may be material to the preparation of his defense and that the request
is reasonable." Rule 17(c) authorizes the issuance of a subpoena duces
tecum for the production of documentary evidence. Although these
rules have different functions and applications, they serve a related
purpose: to enable the accused to meet the charges presented against
him. They should be liberally interpreted to carry out this purpose. See
Bowman Dairy Co. v.
United States
, 1951, 341
U. S.
214; Fryer v.
United States
, D. C. Cir. 1953, 207 Fed. (2d) 134, cert. den. 346
U. S.
885. To the defendant seeking to prepare a defense to a net worth
criminal prosecution it is no answer to say that he should have kept
better records, or that his memory should have been better. 10 Of course,
the defendant must not be allowed to rummage around freely in the
Government's files or working papers, or avoid the burdensome chore of
preparing for trial; but where he genuinely lacks knowledge, he should
not be denied information relevant to his defense by a restrictive
interpretation of the Federal Rules of Criminal Procedure. 11
But
in this case we need not decide whether the action of the trial court in
denying defendant's motions constituted an abuse of discretion, since we
are ordering a new trial for other reasons. Defendant is now fully
apprised of the Government's case, and the problem should not arise on
retrial.
5.
Indictment Founded on Hearsay. Defendant contends that the
indictment should have been dismissed because it was based entirely on
hearsay evidence. Defendant does not appear to have raised this point
below; but in any event we have recently decided the precise question
against defendant's contention and have been upheld by the Supreme
Court. Costello v. United States, 1956, 350
U. S.
359 [55-1 USTC ¶9342], aff'g 2 Cir. 1955, 221 Fed. (2d) 668, 676-679
[56-1 USTC ¶9321].
6.
Reexamination of Defendant's 1946 Books in Violation of 26 U. S. C.
§3631. Prior to trial defendant moved to suppress all documents,
records, and papers obtained during several reexaminations of
defendant's 1946 books, on the ground that they were illegally obtained
in violation of 26 U. S. C. (I. R. C. 1939) §3631, now 26 U. S. C. (I.
R. C. 1954) §7605(b). 12 Defendant
did not claim that he had objected to these reexaminations, but merely
that the Commissioner had not notified him in writing that his 1946
books were to be reexamined. Even assuming, arguendo, that this
evidence is inadmissible because of the Commissioner's failure to
provide taxpayer with the written notice mentioned in §3631, defendant
waived any objection by consenting to the reexamination.
United States
v. United Distillers Products Corp., 2 Cir. 1946, 156 Fed. (2d)
872 [46-2 USTC ¶9327]; Sutor v. Commissioner, 1951, 17 T. C. 64
[CCH Dec. 18,442]; Thelma Blevins, 14 T. C. M. 840 [CCH Dec.
21,157(M)].
Judgment
reversed and new trial ordered.
1
"From presuming too often all errors to be 'prejudicial,' the
judicial pendulum need not swing to presuming all errors to be
'harmless' if only the appellate court is left without doubt that one
who claims its corrective process is, after all, guilty. In view of the
place of importance that trial by jury has in our Bill of Rights, it is
not to be supposed that Congress intended to substitute the belief of
appellate judges in the guilt of an accused, however justifiably
engendered by the dead record, for ascertainment of guilt by a jury
under appropriate judicial guidance, however cumbersome that process may
be." Bollenbach v.
United States
, 1946, 326
U. S.
607, 615. See also Kotteakos v. United States, 1946, 327
U. S.
750, 763-766.
2
United States
v. Tramaglino, 2 Cir. 1952, 197 Fed. (2d) 928, cert. denied 344
U. S.
864; United States v. Sherman, 2 Cir. 1948, 171 Fed. (2d) 619;
United States
v. McCarthy, 2 Cir. 1948, 170 Fed. (2d) 267.
3
United States
v. Atkinson, 1936, 297
U. S.
157; Johnson v. United States, 1943, 318
U. S.
189, 200 [43-1 USTC ¶9288]; Screws v. United States, 1945, 325
U. S.
91, 107.
4
See Rule 52(b); Obery v.
United States
, D. C. Cir. 1954, 217 Fed. (2d) 860; Fischer v.
United States
, 10 Cir. 1954, 215 Fed. (2d) 441, 444 [54-1 USTC ¶9370]; United
States v. Marachowsky, 7 Cir. 1953, 201 Fed. (2d) 5, 18; Tatum v.
United States
, D. C. Cir. 1951, 190 Fed. (2d) 612, 614;
United States
v. Monroe, 2 Cir. 1947, 164 Fed. (2d) 471, 474;
United States
v. Rappy, 2 Cir. 1946, 157 Fed. (2d) 964, 967; Herzog v.
United States, 9 Cir. 1956, 235 F. 2d 664, 666-667 [56-2 USTC ¶9654].
And even in civil cases, Rule 51 of the Federal Rules of Civil
Procedure, which is similar in content to Rule 30 of the Criminal
Procedure Rules, is uniformly interpreted to permit appellate review of
fundamental errors which cause substantial prejudice or affect
substantial rights. Hormel v. Helvering, 1941, 312 U. S. 552,
556-557 [41-1 USTC ¶9322]; Sibbach v. Wilson & Co., 1941,
312 U. S. 1, 16; Moore v. Waring, 2 Cir. 1952, 200 Fed. (2d) 491;
Finn v. Wood, 2 Cir. 1950, 178 Fed. (2d) 583; Dowell, Inc. v.
Jowers, 5 Cir. 1948, 166 Fed. (2d) 214; Shockuwan Shimabukuro v.
Higeyoshi Nagayama, D. C. Cir. 1944, 140 Fed. (2d) 13. For obvious
reasons the Federal Rules of Criminal Procedure should be given, if
anything, a more liberal interpretation in this regard.
5
"There are different methods by which liability for the payment of
an additional tax may be determined. The method adopted by the
Government in this case, and authorized under certain conditions by law,
is what is called the net worth method. The use of this method is
authorized when the bookkeeping methods of an individual do not clearly
reflect his income. * * *
*
* *
"* * * The net worth is determined as of a certain date. The
determination is made to a later date. The difference in amounts between
the two dates would be the net income gain for the period. This method
has been utilized here as to each of the four years in question; from
the last of 1945 to the last of '46 and the last of '46 to the last of
'47 from the last of '47 to the last of '48 and the last of '48 to the
last of '49. * * *
* * *
"* * * Government's Exhibit 423 in evidence purports to show the
total net assets of defendant and Mrs. O'Connor as of [stating dates and
amounts in 1945, 1946, 1947, 1948, and 1949]. You will see the figures
as shown in the column on Exhibit 423. I may have misstated one of the
amounts as to one of these dates, but you will see that on the exhibit.
The increase of the gross each year is shown. To this net increase is
added personal disbursements, and the total of the gifts claimed to be
taxable. From the total there is a deduction of the income tax deduction
of long-term capital gain, allowable annual deduction of personal
disbursements and the net income as shown in defendant's return for
1946, but the addition of the amount as claimed in the returns. The net
income subject to tax is shown on Exhibit 423 as [stating the figures
for 1946, 1947, 1948, and 1949]. * * *"
* * *
"* * * As to this net income tax method as employed by the
Government, you will see from the exhibit introduced into evidence by
the defendant that the amount of gross for the year 1945 is much larger
than the gross as claimed by the Government. Now the effect of that is
under this method of operation that the larger the amount of net worth
is at the end of one year the less it would be the following year. You
can see how that would be so. * * *"
6
Justice Clark succinctly summarized the net worth method in Holland
v. United States, 1954, 348
U. S.
121, at 125 [54-2 USTC ¶9714]. Judge Learned Hand has provided us with
a similarly lucid description in United States v. Costello, 1955,
221 Fed. (2d) 668, at 670 [55-1 USTC ¶9342]. The use of the term
"net worth" to describe the method used in these cases is a
possible source of misunderstanding since it connotes "value."
Actually, this method of prosecution for tax evasion is not concerned
with value, but only with actual costs and expenditures. "[T]he
statement of 'net worth' which is used by the Government is not
altogether a net worth statement in an accounting sense, but rather a
statement of visible assets (at cost) and liabilities." Mills, Net
Worth Approach in Determining Income, 41 Va. L. Rev. 927, 940 (1955);
also see Hill, Defense of a Criminal Net Worth Tax Case in Light of
Recent Supreme Court Decisions, 41 Corn. L. Q. 106, 108 (1955).
7
The inference relied on in a net worth prosecution, simply stated, is
that the unexplained difference between a defendant's net worth at the
beginning of the tax year and at the end, plus his non-deductible
expenditures, less the total of his reported net income and non-taxable
resources, is unreported taxable net income. The Government's proof that
the inference is warranted, and the defendant's attack upon it, is
usually divided into two phases: (1) whether the Government has
accurately established the total of non-deductible expenditures and
increase in net worth during the indictment years; and (2) whether the
Government has negated possible non-taxable receipts during the
indictment years suggested by the defendant.
8
A criminal defendant is entitled to have instructions presented relating
to any theory of defense for which there is any foundation in the
evidence, no matter how weak or incredible that evidence may be.
United States
v. Indian Trailer Corp., 7 Cir. 1955, 226 Fed. (2d) 595, 598; Tatum
v.
United States
, D. C. Cir. 1951, 190 Fed. (2d) 612, 617.
9
See Holland v. United States, 1954, 348
U. S.
121, 135-139 [54-1 USTC ¶9714]; United States v. Costello, 2
Cir. 1955, 221 Fed. (2d) 668, 671-672 [55-1 USTC ¶9342], aff'd 350
U. S.
359 [56-1 USTC ¶9321]. We need not here explore the extent to which the
Government is required to explore the leads suggested by the
circumstances or supplied by the defendant in order to establish a prima
facie case. See
United States
v. Fenwick, 7 Cir. 1949, 177 Fed. (2d) 488 [49-2 USTC ¶9448]; Bryan
v. United States, 5 Cir. 1949, 175 Fed. (2d) 223 [49-1 USTC ¶9322],
aff'd on other grounds 338
U. S.
552 [50-1 USTC ¶9140]; Dupree v. United States, 5 Cir. 1955, 218
Fed. (2d) 781 [55-1 USTC ¶9169]. Other cases hold that proof of a
"likely source" of unreported taxable income is sufficient
when combined with persuasive proof of the defendant's financial
circumstances which indicates that the existence of the asserted
non-taxable resources is unlikely. Campodonico v.
United States
, 9 Cir. 1955, 222 Fed. (2d) 310 [55-1 USTC ¶9416]; Watts v.
United States, 10 Cir. 1955, 220 Fed. (2d) 483 [55-1 USTC ¶9301]; United
States v.
Caserta
, 3 Cir. 1952, 199 Fed. (2d) 905, 907 [52-2 USTC ¶9540]; Kasper
v. United States, 9 Cir. 1955, 225 Fed. (2d) 275 [55-2 USTC ¶9576];
Bell v. United States, 4 Cir. 1950, 185 Fed. (2d) 302 [50-2 USTC
¶9499]; Brodella v. United States, 6 Cir. 1950, 184 Fed. (2d)
823 [50-2 USTC ¶9477].
10
Cf.
United States
v.
Caserta
, 3 Cir. 1952, 199 Fed. (2d) 905, 910 [52-2 USTC ¶9540]; United
States v. Chapman, 7 Cir. 1948, 168 Fed. (2d) 997, 998-999 [48-1
USTC ¶9312]. Bills of particulars have been quite freely granted in net
worth and other tax evasion cases. Lufty v.
United States
, 9 Cir. 1956, 230 Fed. (2d) 643; Singer v.
United States
, 3 Cir. 1932, 58 Fed. (2d) 74 [1932 CCH ¶9188]; United States
v. Peelle, E. D. N. Y., 1954, 122 Fed. Supp. 923 [54-2 USTC ¶9527];
United States v. Profaci, E. D. N. Y., 1954, 124 Fed. Supp. 141
[54-2 USTC ¶9607]; United States v. Witbeck, N. D. N. Y., 1954,
122 Fed. Supp. 717 [54-2 USTC ¶9656]; United States v. Giglio,
S. D. N. Y., 1954, 16 F. R. D. 268 [54-2 USTC ¶9633]; United States
v. King, N. D. N. Y., 1954, 16 F. R. D. 124 [54-2 USTC ¶9655]; United
States v. Boyer, N. D. W. Va., 1952, 13 F. R. D. 91. See Balter,
What the Four New Supreme Court Net-Worth Decisions Mean to Tax
Practitioners, 2 J. Taxation 139, 345 (1955); Hill, The Defense of a
Criminal Net Worth Tax Case in the Light of Recent Supreme Court
Decisions, 41 Corn. L. Q. 106, 123-124 (1955).
11
United States v. Klein, S. D. N. Y., 1954, 124 Fed. Supp. 476,
479 [54-2 USTC ¶9604]; United States v. Iozia, S. D. N. Y.,
1952, 13 F. R. D. 335 [52-1 USTC ¶9246].
12
26 U. S. C. (I. R. C. 1939) §3631:
"No
taxpayer shall be subjected to unnecessary examinations or
investigations, and only one inspection of a taxpayer's books of account
shall be made for each taxable year unless the taxpayer requests
otherwise or unless the Commissioner, after investigation, notifies the
taxpayer in writing that an additional inspection is necessary."
[76-2
USTC ¶9708]
United States of America
, Plaintiff-Appellee v. Charles Richard Haller, Defendant-Appellant
(CA-9),
U. S. Court of Appeals, 9th Circuit, No. 74-2706, 543 F2d 62, 8/12/76,
Affirming unreported District Court decision
[Code Sec. 7203--result unchanged under '76 Tax Reform Act]
Appeal: Failure to file return: Conviction affirmed.--The
taxpayer's conviction for failing to file income tax returns for three
years was affirmed. The District Court did not err in permitting the
Government to introduce evidence of the increase of the taxpayer's net
worth to rebut the taxpayer's defense that he was unable to pay. The
closing argument of the Assistant District Attorney, although excessive,
was not in plain error prejudicial. Although the Court's instructions
were grammatically incorrect, the instructions, when read as a whole,
did not fail to inform the jury adequately and they also covered the
taxpayer's requested instruction.
Charles
H. Turner, Assistant United States Attorney,
Portland
,
Ore.
, for appellee. Norman Sepenuk, 309 LL B, Commonwealth Bldg.,
Portland
,
Ore.
, for appellant.
Before
BROWNING and TRASK, Circuit Judges, and FIRTH, * District
Judge.
Opinion
PER
CURIAM:
Appellant
Haller appeals his conviction of willfully failing to file income tax
returns for the years 1967, 1968, and 1969, in violation of 26 U. S. C.
§7203. We affirm.
1.
Appellant contends that, since he was charged only with failure to file
and not with failure to pay, the district court erred in permitting the
government to introduce evidence of an increase in appellant's net worth
for the years 1966 through 1972.
Appellant
concedes that he knew the tax was due. His defense was that his failure
to file was not willful because he was unable to pay the tax and thought
he could not file a return without tendering the tax. In view of this
defense, evidence of appellant's net worth was admissible to rebut
appellant's contention that he was unable to pay. United States v.
Rosenfield [72-2 USTC ¶9734], 469 F. 2d 598, 600 (3rd Cir. 1972).
The fact that the increase in appellant's net worth may have been due to
appreciation, gifts, and other nontaxable or unrealized income did not
make the net worth statements any less probative on this issue. United
States v. Walker [73-1 USTC ¶9426], 479 F. 2d 407, 408-09 (9th Cir.
1973), is therefore distinguishable.
Walker
's defense was not that he could not pay, but rather that he thought no
tax was due.
Walker
's ability to pay was not relevant to this defense; and proof of an
increase in
Walker
's net worth would have been relevant only if it were shown that the
increase reflected taxable income.
Net
worth statements relating to the years immediately after 1969 were also
admissible. The fact that appellant did not file the returns, when he
later acquired the funds to do so, casts doubt on his defense that he
failed to file because he thought he was not allowed to do so unless he
could pay the tax. The relevance of net worth statements relating to the
period preceding the critical years is more remote; but in the context
of the whole evidence they were insignificant.
Appellant
waived the objection that the September 1969 statement included his
wife's net worth as well as his own by failing to raise it at trial.
Evidence
of substantial expenditures by appellant in the period following the
years for which he failed to file was admissible on the same theory as
the net worth statements relating to these years.
2.
Appellant asserts that certain remarks of the Assistant United States
Attorney in closing argument were improper and prejudicial. Appellant
did not object at trial, nor did he request corrective instructions.
Though perhaps excessive, the arguments were not plain error,
particularly when viewed in context.
United States
v. Perez, 491 F. 2d 167, 173-74 (9th Cir. 1974).
3.
We agree that the instruction on good reputation (taken from the 1970
version of E. Devitt & C. Blackmar, Federal Jury Practice and
Instructions §11.30) was grammatically incorrect and confusing. We also
agree "that evidence of good character may be sufficient alone to
create a reasonable doubt of guilt . . ., but we cannot agree that the
court's instructions, read as a whole, failed to inform the jury of this
principle adequately and fairly." Weedin v. Wheeler, 380 F.
2d 657, 660 (9th Cir. 1967). The instructions informed the jury that it
was to consider evidence of good reputation "along with all the
other evidence in the case," and that "[i]n determining
whether or not sufficient intent exists, you may consider all of the
facts and circumstances surrounding the case and the evidence in the
case."
4.
Read as a whole, the instructions also covered the essence of
appellant's requested instruction on the effect of his financial
circumstances at the time the returns were due.
Affirmed.
*
Honorable
Rob
ert Firth, United States District Judge, Central District of California,
sitting by designation.
[94-2
USTC ¶50,347]
United States of America
, Plaintiff-Appellee v. Ronald Bencs, Defendant-Appellant
(CA-6),
U.S Court of Appeals, 6th Circuit, 93-3408, 6/30/94, 28 F3d 555,
Affirming, reversing and remanding an unreported District Court decision
[Code Sec.
7201 ]
Crimes: Evasion of tax: Failure to report income: Net worth method.--An
individual's conviction of tax evasion was sustained where it was
determined that he had unreported income from illegal drug sales under
the net worth method of reconstructing income. There was no evidence
that beginning net worth was erroneously computed. Reversed and remanded
on other issues.
Linda
M. Betzer, Stephen G. Sozio, Assistant United States Attorneys, 600
Superior Ave., Cleveland, Ohio 44114-2600, for plaintiff-appellee.
Harvey H. Starkoff, Richard A.F. Mendelsohn,
27600 Chagrin Blvd.
,
Cleveland
,
Ohio
44122
, for defendant-appellant.
Before:
KEITH and SUHRHEINRICH, Circuit Judges
;
and JOINER, Senior District Judge. *
JOINER,
Senior District Judge. Ronald Bencs was charged with conspiring to
defraud the
United States
, evading income tax, money laundering, and structuring financial
transactions to avoid cash reporting requirements applicable to
transactions in excess of $10,000. The government claimed generally that
Bencs was involved in a large marijuana selling business, and attempted
to shelter his drug profits from taxes and hide them from detection. The
jury convicted on all counts, and Bencs appeals all but his conspiracy
conviction, raising numerous claims of error. We conclude that the
structuring charges (counts 16 and 17) were submitted to the jury under
erroneous instructions, and reverse those convictions and remand for a
new trial. In all other respects we affirm.
I.
A.
In
1988, the IRS criminal investigation unit investigated Bencs'
accountant,
Rob
ert Gross, for allegedly helping a drug dealer launder drug proceeds and
evade income tax on those proceeds. Agents searched Gross' office in
April 1988, and, among other documents, seized the financial records of
Ronald Bencs and his company, Diversified Financial Enterprises.
In
reviewing those records, IRS agents Cappara and Kacarab noted that
Bencs' net worth was approximately $1.2 million, but that his reported
income did not justify this accumulation of wealth. The agents
researched public records, bank records and tax returns, and interviewed
a number of people, including Bencs, to account for the discrepancy.
Bencs told the agents that Diversified's business was, in fact,
diversified, and that the company had sources of income from striping
parking lots; selling jewelry, art work and Christmas trees; and
renovating houses. Bencs also claimed nontaxable sources of income in
the form of loans from various individuals and banks. Bencs denied
receiving income from illegal activities.
Contrary
to Bencs' denial, the investigation indicated that Bencs was involved in
a large marijuana distribution operation. Raymond Russell testified that
he started selling marijuana to Bencs in 1972, and sold 300 to 500
pounds per month to him in 1973 and 1974. Russell testified that he sold
9000 pounds of marijuana for Bencs between 1980 and approximately 1985.
Bencs occasionally bought cocaine from Russell during this period in
amounts of one-half to one kilogram at a time. Russell's activity for
the years 1985-89 abated somewhat. He testified that during this
four-year period, he sold marijuana to Bencs on two occasions, one
involving 40 pounds and one involving 60 pounds. Russell also borrowed
$16,000 from Bencs to buy cocaine and repaid Bencs in 1986 or 1987 with
500 pounds of marijuana.
Michael
McCarthy testified that from 1974 to 1976 he transported Russell's
marijuana from
Arizona
, delivering it to Bencs in
Cleveland
. McCarthy testified that his dealings with Bencs resumed in 1983 and
continued to 1985, when he again transported marijuana to Bencs,
delivering 200-300 pounds on each trip. He and Bencs each made a profit
of $100 per pound. Finally, George Abraham testified that between 1974
and 1983 he sold marijuana to Bencs in 200-300 pound amounts. These
transactions took place at varying intervals, as seldom as once very six
months and as frequently as two times per week.
Bencs
formed Diversified in 1978, naming himself president. Bencs was the sole
shareholder, and Gross maintained the financial records. Kacarab
analyzed the deposits to and checks written against Diversified's
account for the years 1983-88, demonstrating at trial that a total of
$376,460.28 in cash was deposited, and only $41,680 in checks. Most of
these checks were from individuals, or were government checks endorsed
by the individuals to Diversified. A total of $318,374 was disbursed
from the account in payroll checks to Bencs. Kacarab testified that a
payroll check was usually negotiated shortly after a cash deposit was
made. Diversified's bank records and tax returns did not reflect
expenses customarily incurred by businesses engaged in sales and
contracting work, such as cost of goods sold, rent, utilities, and
labor. Diversified's tax returns reflected losses for all years but one,
when it reported a $241 gain.
Cappara
and Kacarab undertook a net worth analysis of Bencs and his company,
necessitated because Bencs transacted business almost exclusively in
cash and had records inadequate to determine his tax liability. The
agents calculated Bencs' net worth at the end of 1983, and then for each
of the years that followed through 1988. Included in the net worth
computation were known income; personal, nondeductible expenditures for
which documentation existed; bank account balances; real property;
vehicles; securities; and other assets, such as loan receivables and an
interest in a partnership. After subtracting liabilities, the agents
then calculated Bencs' net worth for each tax year in question. The
agents concluded that Bencs' net worth for the years 1984-88 exceeded
his reported income in amounts ranging between $68,000 and $99,000, and
that he had underpaid income tax for those years in amounts ranging
between $21,000 and $40,000. Bencs presented an expert witness at trial
who concurred in Kacarab's methodology and used most of his
calculations. The expert's totals differed principally because he
included Bencs' alleged ownership of coins, Krugerrands and jewelry in
calculating Bencs' net worth as of the end of 1983, valuing them at
$200,000.
B.
Bencs
and Gross were charged with conspiring during the years 1978-89 to
defraud the United States through obstructing the collection of tax on
income earned from the illegal sale of controlled substances, 18 U.S.C. §371 (count 1). Bencs was
charged with five counts of income tax evasion for the years 1984-88, 26
U.S.C. §7201 (counts 2-6). Gross
was charged with four counts of filing false tax returns for the years
1985-88, 26 U.S.C. §7206(2)
(counts 7-10). Bencs and Gross were charged with five
instances of laundering drug proceeds as payroll in 1987 and 1988, 18
U.S.C. §1956(a)(1)(B)(i) (counts 11-15). Finally, Bencs was charged
with two instances of structuring financial transactions to avoid the
cash transaction reporting requirements, 31 U.S.C. §5322 (counts
16-17). Gross pled guilty to two counts of the indictment, and did not
testify at trial. Bencs went to trial and was convicted on all counts.
He was sentenced to 65 months imprisonment. No appeal is taken from the
sentence.
II.
A. Denial of Motion to Suppress
Bencs
moved to suppress the statements that he made to agents Cappara and
Kacarab during the interview at his home, on grounds that he was not
advised of his Miranda 1 rights prior
to the interview. The court conducted an evidentiary hearing and
concluded that the motion was without merit. We review findings of fact
in connection with a motion to suppress for clear error, and review the
district court's conclusions of law de novo. United States v. Duncan,
918 F.2d 647, 650 (6th Cir. 1990), cert. denied, 500 U.S. 933
(1991).
The
agents testified that they displayed their credentials to Bencs when
they arrived at his home, informed him that they were conducting a
criminal investigation, and advised him of his constitutional rights.
Douglas Noe was in the house during this interview, but the agents
testified that he was not present when they advised Bencs of his rights.
Nonetheless, Noe testified that he heard the agents identify themselves
and ask Bencs if he would answer some questions. Noe confirmed that
Bencs was complying of his own free will and that the agents did not
display weapons or restrict Bencs' movement. However, both Bencs and Noe
denied that the agents informed Bencs of his rights. This alleged
omission formed the basis for Bencs' motion to suppress. On appeal,
Bencs does not argue that Miranda warnings were constitutionally
required because he was "in custody"; rather, he suggests that
the interview was a noncustodial one in which warnings were required,
allegedly because the failure to give the warnings violated IRS
procedure.
The
suppression of evidence does not depend on whether agents violate
internal operating procedures, but on whether those procedures are
required by either the Constitution or federal law. United States v.
Caceres [79-1 USTC ¶9294 ],
440 U.S. 741, 749-55 (1979). Miranda prohibits the use of
unwarned statements made by a defendant "stemming from custodial
interrogation[.]" Miranda v.
Arizona
, 384
U.S.
436, 444 (1966). Accord Stansbury v. California, 114 S.Ct. 1526
(1994); Beckwith v. United States [76-1
USTC ¶9352 ], 425 U.S. 341, 346 (1976) (holding that
statements made during noncustodial interview with IRS agent need not be
suppressed and confirming that determinative issue is whether suspect is
in custody, not whether he is focus of investigation). 2 The
interview of Bencs was not a custodial interview, and Miranda
warnings were not required. United States v. Sivils, 960 F.2d
587, 597-98 (6th Cir.), cert. denied, 113 S.Ct. 130 (1992). The
district court properly denied Bencs' motion to suppress.
B.
Denial of Motion to Bifurcate and Motion for Mistrial
Bencs
claims that the court erred in denying his motion to bifurcate the tax
evasion charges from the money laundering charges, stating that his
defense on the evasion charges was prejudiced by evidence admissible
only on the laundering charges, i.e., that he had income derived from
illegal activity. He claims that the prejudice is apparent from the
government's reference to his drug dealing in its opening statement.
Bencs' motion for a mistrial based on these comments was denied, and he
claims that this too was error.
Offenses
may be joined under Fed. R. Crim. P. 8(a) if they are "of the same
or similar character or are based on the same act or transaction or on
two or more acts or transactions connected together or constituting
parts of a common scheme or plan." Rule 14 provides that if joinder
of offenses results in prejudice, "the court may order an election
or separate trials of counts . . . or provide whatever other relief
justice requires." Rule 14 leaves the determination of risk of
prejudice and any remedy that may be necessary to the sound discretion
of the district court. Zafiro v.
United States
, 113 S.Ct. 933 (1993).
Joinder
of the money laundering and tax evasion counts was proper. Evidence of
Bencs' marijuana income was admissible on the evasion charges regardless
of whether Bencs was simultaneously tried on the money laundering
charges. The charge of tax evasion requires proof of the willful attempt
to evade or defeat a federal tax. 26 U.S.C. §7201 . The government may
prove tax evasion through the net worth method, pursuant to which the
government demonstrates with reasonable certainty the defendant's net
worth at the commencement of the relevant period, and then at the end.
If the ending amount is greater than the beginning, and the government
proves beyond a reasonable doubt that the defendant had one or more
sources of taxable income, the jury can find that the receipts
constituted taxable income to the defendant. Holland v. United States
[54-2 USTC ¶9714 ],
348 U.S. 121, 138 (1954). Drug proceeds constitute taxable income. Thus,
in United States v. Wirsing, 719 F.2d 859 (6th Cir. 1983), the
court concluded that tax evasion charges were properly joined with a
marijuana distribution charge, where the defendant's unreported income
was allegedly derived from his illegal activity in distributing drugs. 3 Accord
United States
v.
Clark
, 928 F.2d 639, 644 (4th Cir. 1991).
The
evidence which Bencs claims was prejudicial was admissible against him
on both the evasion charges and laundering charges, and the government
was entitled to make reference to this evidence in its opening
statement. Consequently, Bencs has not demonstrated that the district
court erred in denying his motion to bifurcate or his motion for a
mistrial.
C.
Brady Material
Bencs
contends that he was denied a fair trial by virtue of the government's
delayed production of material allegedly discoverable under Brady v.
Maryland, 373 U.S. 83, 87 (1963). Specifically, he challenges the
government's failure to respond to a pretrial discovery request
by producing memoranda of interviews with witnesses Abraham and
McCarthy. The Abraham memoranda were produced two days prior to trial;
the McCarthy memorandum was produced during trial, but prior to
McCarthy's testimony. The memoranda contained statements by both
witnesses to the effect that Bencs was not involved in drug dealing,
inconsistent with the witnesses' trial testimony. 4
Additionally, the Abraham memoranda reflected that Abraham informed the
agents that Bencs sold jewelry and collected coins, a statement that
Bencs contends was relevant to his attack on the government's net worth
analysis, as discussed in more detail below. Finally, Bencs complains
that the memorandum of interview of witness Russell, and his grand jury
testimony, were not produced until shortly before trial.
"
'[T]here is no general constitutional right to discovery in a criminal
case, and Brady did not create one[.]' " United States v.
Mullins, No. 92-2228,--F.3d--,--(6th Cir. 1994) (quoting Weatherford
v. Bursey, 429
U.S.
545, 559 (1977)). However, Brady imposes on the government an
obligation to turn over material that is both favorable to the defendant
and material to guilt or punishment. Materiality pertains to the issue
of guilt or innocence, and not to the defendant's ability to prepare for
trial. United States v. Agurs, 427
U.S.
97, 112 n.20 (1976). 5 Reversal for
a Brady violation is required only where there is a reasonable
probability that, had the evidence been disclosed, the result of the
trial would have been different. Mullins,--F.3d at--. Thus, Brady
generally does not apply to delayed disclosure of exculpatory
information, but only to a complete failure to disclose. United
States v. Word, 806 F.2d 658, 665 (6th Cir. 1986), cert. denied,
480 U.S. 922 (1987). "Delay only violates Brady when the
delay itself causes prejudice." United States v. Patrick,
965 F.2d 1390, 1400 (6th Cir. 1992), vacated and remanded on other
grounds, 113 S.Ct. 1378 (1993).
When
Brady material sought by a defendant is covered by the Jencks
Act, 18 U.S.C. §3500, 6 the terms of
that Act govern the timing of the government's disclosure. United
States v. Presser, 844 F.2d 1275 (6th Cir. 1988) (Jencks Act
overrides Brady with respect to timing of disclosure; evidence
properly disclosed after testimony at trial pursuant to Jencks Act
cannot be subject to earlier disclosure under Brady). Presser
discounted the likelihood that a defendant could be prejudiced by the
production of witness statements during trial, as permitted by the
Jencks Act, noting that even the Brady doctrine requires only the
production of material in time for its effective use at trial.
Any
prejudice the defendant may suffer as a result of disclosure of the
impeachment evidence during trial can be eliminated by the trial
court ordering a recess in the proceedings in order to allow the
defendant time to examine the material and decide how to use it.
Id.
at 1283-84 (emphasis added).
However
Bencs' claim is analyzed, whether as seeking true Brady material
or witness statements subject to the Jencks Act, it is evident that he
has no cognizable claim of error or prejudice. The evidence requested by
Bencs was produced, and only the timing of the disclosure is at
issue. Bencs claims that his trial preparation was hindered by virtue of
the production of the evidence during trial, and, without explanation or
exemplification, that his cross-examination of the witnesses was not as
effective as it otherwise would have been. The first claim is not
cognizable under Agurs, and the second lacks any substance
whatsoever. Bencs' Brady claim of error has no merit.
D.
Sufficiency of the Evidence
Bencs
contends that the evidence of money laundering and tax evasion was
insufficient to support the jury's verdicts. We must determine
"whether, after viewing the evidence in the light most favorable to
the prosecution, any rational trier of fact could have found the
essential elements of the crime beyond a reasonable doubt." Jackson
v. Virginia, 443
U.S.
307, 319 (1979) (emphasis in original).
1.
Money Laundering
Counts
11 through 15 charged five instances in 1987 and 1988 of money
laundering in violation of 18 U.S.C. §1956(a)(1)(B)(i). 7 The amounts
involved totalled $12,830 in 1987 and $17,100 in 1988. The charges set
forth the elements of a §1956(a)(1)(B)(i) offense in alleging that
Gross issued checks drawn against Diversified's account to Bencs and
that Bencs negotiated the checks; that the transactions involved the
proceeds of drugs sales, as Bencs knew; and, finally, that Bencs acted
knowing that the transaction was designed to conceal or disguise the
nature and source of the proceeds.
United States
v. Moss, 9 F.3d 543, 551 (6th Cir. 1993).
Bencs
claims that the record reflects "significant sources of
income" during 1987 and 1988, and does not reflect that he was
engaged in drug dealing during this time. Based on this view of the
record, Bencs contends that the evidence of laundering was insufficient
as a matter of law. We disagree.
The
government proved that Bencs was involved in a substantial drug selling
operation that had lasted over 15 years. The government further proved
that Bencs created Diversified midway into his operation, funding it
almost entirely with cash deposits (over $376,000 since 1983), and
extracting from it periodic "payroll" payments (totalling over
$318,000 since 1983). The record reflects that deposits in excess of
$68,000 were made to Diversified's account in 1987, and $35,000 in 1988.
There was no evidence substantiating Bencs' claim that Diversified was
engaged in legitimate income-generating activity in these amounts.
Bencs' expert acknowledged that the proceeds of stock dividends and
sales and the sales of real property were not treated as corporate
income, and income from rental property was reported by Bencs as
personal income. 8
Bencs'
argument is based on the assumption that the government must trace the
funds involved in a financial transaction to specific drug sales in
order to successfully prove a money laundering charge. Bencs was charged
with laundering the proceeds of his own drug selling business. Section
1956(a)(1)(B)(i) requires only that the defendant conduct a financial
transaction "involving" the proceeds of specified unlawful
activity.
We
do not read Congress's use of the word "involve" as imposing
the requirement that the government trace the origin of all funds
deposited into a bank account to determine exactly which funds were used
for what transaction. Moreover, we cannot believe that Congress intended
that participants in unlawful activities could prevent their own
convictions under the money laundering statute simply by commingling
funds derived from both "specified unlawful activities" and
other activities.
United States
v.
Jackson
, 935 F.2d 832, 840 (7th Cir. 1991). Like the Seventh Circuit, we
refuse to read the statute in a manner that would reward the more
creative money-launderer by allowing him to escape liability altogether
by commingling assets or otherwise disguising the source of his funds.
On
the record presented, a rational juror could have found each element of
the offense beyond a reasonable doubt. We therefore affirm Bencs'
laundering convictions.
2.
Tax Evasion
Section 7201 provides that
"[a]ny person who willfully attempts in any manner to evade or
defeat any tax imposed by this title or the payment thereof shall . . .
be guilty of a felony[.]" 26 U.S.C. §7201
. The government may prove tax evasion through the net worth
method, pursuant to which a taxpayer's net worth is calculated at the
beginning of the relevant period and then at the end. The difference
between these two amounts may be attributed to taxable income if the
government proves that the taxpayer had one or more sources of taxable
income. Holland v. United States [54-2 USTC ¶9714 ],
348 U.S. 121 (1954).
In
approving the net worth method in
Holland
, the Court cautioned that the method is "so fraught with danger
for the innocent that the courts must closely scrutinize its use."
Id.
at 125. Thus, "an essential condition . . . 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."
Id.
at 132. A defense often asserted in net worth cases is that the
government's opening net worth is not accurate because of substantial
cash or assets on hand at the starting point. This "favorite
defense," as characterized by the Supreme Court, is one which the
government has great difficulty refuting.
Id.
at 127. Nonetheless, the government's failure to investigate leads
furnished by the taxpayer can result in serious injustice. "When
the Government fails to show an investigation into the validity of such
leads, the trial judge may consider them as true and the Government's
case insufficient to go to the jury."
Id.
at 136.
Net
worth increases must be attributable to taxable income. However, where
the government proves a source of taxable income, it need not negate all
the possible nontaxable sources of the alleged net worth increases, such
as gifts, loans, and inheritances. Proof of a source of taxable income
carries with it the negation of untaxable income.
Id.
at 137-38.
Bencs
attacks the legitimacy of the government's net worth analysis by
claiming that the government's starting figure for the end of 1983 was
too low, because it did not take into account an alleged coin,
Krugerrand and jewelry collection. Bencs also claims that the agents did
not pursue leads furnished by him and did not fully investigate his
financial status as of the end of 1983. The agents testified, however,
that they researched Bencs' financial statements and tax returns. None
substantiated Bencs' ownership or acquisition in 1983 of a coin
collection, and none reflected a sale of such items after that date.
Although a number of Bencs' witnesses claimed to have seen his coin
collection, none verified that the collection existed as of the
beginning of the net worth period. The agents also interviewed Bencs'
alleged jewelry source, and learned that Bencs had purchased a total of
25 pieces over a ten-year period, at a cost of only $5000 per year.
The
jury properly was left to decide whether Bencs owned those assets at the
end of 1983. Based on this record, a rational trier of fact could
conclude that Bencs' opening net worth was that which the government
proved, and not Bencs' inflated figure. United States v. Carpenter,
No. 88-2190, 1989 U.S. App. LEXIS 17588 at *9 (6th Cir. Nov. 21, 1989)
(per curiam) ("Evidently, the jury simply did not believe the
appellant's story that his wife had amassed a $200,000 fortune over the
preceding years and keeping the money in a box in the closet."). United
States v. Wilson [81-2
USTC ¶9567 ], 647 F.2d 534, 536 n.1 (5th Cir. 1981) (holding
that jury could decide question of credibility regarding defendant's
cash hoard).
Bencs
also contends that the evidence in support of his tax evasion
convictions is insufficient because the testimony at trial did not
reflect the same volume of drug sales for 1987 and 1988 as had existed
in prior years. The government's financial proof reflected that Bencs
had underreported his income by $69,000 and $68,000 for the years 1987
and 1988. The government also proved that Bencs had a source of taxable
income during this period--drug dealing. Bencs himself claims to have
had other sources of taxable income. It was not necessary, as Bencs
concedes, for the government to prove that all of the unreported income
was illegally derived. Having proved a likely source of taxable income,
the government was not required to negate all possible sources of
untaxable income.
Holland
[54-2 USTC ¶9714 ],
348
U.S.
at 137-38. Even now, Bencs does not contend that nontaxable
income explains the entire amount of unreported income. 9
The
evidence, when viewed in the light most favorable to the government, was
sufficient to support the jury's guilty verdicts on all of the tax
evasion charges, including those for 1987 and 1988. We therefore affirm
his convictions on those charges.
E.
Jury Instructions
1.
Leads Instruction
Bencs
contends that the court erred in refusing his requested instructions
that the government is "duty bound to follow up leads presented to
them," and that the government's "failure to do so may be seen
as a complete defense to a prosecution based upon net worth
analysis." (Defendant's requested instructions 33A and 62B.)
"[W]hen a theory of defense finds some support in the evidence and
in the law, a defendant is entitled to some mention of that theory in
the instructions." United States v. Garner, 529 F.2d 962,
970 (6th Cir.), cert. denied, 426
U.S.
922, 429 U.S. 850 (1976). However, a "party is not entitled to an
instruction on his theory of the case if that party does not produce
sufficient evidence of such theory." United States v. Carpenter,
No. 88-2190, 1989 U.S. App. LEXIS 17588 at *9-*10 (6th Cir. Nov. 21,
1989) (per curiam) (defendant not entitled to instruction that
government failed to pursue leads resulting in incorrect net worth).
The
court's "leads" instruction adequately informed the jury that
they were entitled to take into account the government's response to
reasonable leads furnished by the defendant. On this record, Bencs was
entitled to no more. While we do not foreclose the possibility that
instructions approximating those requested by Bencs might be warranted
in the proper case, we find no error in the court's refusal of Bencs'
request on the record presented.
2.
Structuring Instruction
Bencs
was charged with structuring financial transactions to avoid the
reporting requirements applicable to cash transactions in excess of
$10,000, in violation of 31 U.S.C. §5322. In Ratzlaf v. United
States [94-1
USTC ¶50,015 ], 114 S.Ct. 655 (1994), decided after this
case was tried, the Supreme Court held that the government must prove
that a defendant charged with a structuring offense acted with knowledge
that the structuring he undertook was unlawful, not simply that the
defendant's purpose was to circumvent a bank's reporting obligation.
Bencs requested a jury instruction containing both elements, but the
court instructed the jury that the government "need not prove,
however, that the Defendant knew that structuring a transaction as
alleged was against the law." The record does not reflect that
Bencs objected to this instruction. Nonetheless, in light of Ratzlaf,
we conclude that the district court's jury instruction constitutes plain
error.
United States
v. Olano, 113 S.Ct. 1770 (1993). We therefore reverse Bencs'
convictions on counts 16 and 17, and remand for a new trial as to those
counts. 10
F.
Other Claims of Error
We
have carefully reviewed Bencs' claims that the district court erred in
allowing the government to ask leading questions, refusing to admit his
father's tax returns, permitting cross-examination of a defense witness,
and permitting the government to exceed the scope of cross-examination
in its rebuttal examination of an IRS agent. We find no abuse of
discretion in any of these evidentiary rulings. Further, we have
reviewed Bencs' claim that he was denied discovery by virtue of the
government's failure to produce a copy of the audit of his 1979 tax
return, conducted eight years before the criminal investigation was
undertaken. Based upon the testimony of the IRS custodian of records,
destruction of those documents commenced in January 1987. There is no
evidence that the government failed to produce documents in existence,
or wrongfully procured the destruction of evidence. Bencs' claim of
error has no merit.
For
the reasons stated, we REVERSE Bencs' convictions on counts 16
and 17, charging violations of 31 U.S.C. §5322, and REMAND for a
new trial on these charges. In all other respects, we AFFIRM
Bencs' convictions.
*
The Honorable Charles W. Joiner, United States District Court for the
Eastern District of Michigan, sitting by designation.
1 Miranda v. Arizona,
384 U.S. 436 (1966).
2
Beckwith acknowledged that suppression of statements derived from
noncustodial interrogation might be warranted if the interrogators
behaved in a coercive manner, overbearing the suspect's will. [76-1 USTC ¶9352 ]
425
U.S.
at 347-48. Facts suggesting coercion simply are not present in this
case.
3
The court nonetheless concluded that severance of the drug charge should
have been granted because defense counsel had insufficient time to
prepare for trial on the evasion charges. Wirsing, 719 F.2d at
864-66.
4
Abraham first told the agents that Bencs was not involved in drug
transactions, but returned the next day to correct that statement,
informing the agents at that time that Bencs bought hundreds of pounds
of marijuana from him through 1984. Both statements were provided to
Bencs prior to trial.
5
The Supreme Court rejected the claim that the duty to disclose hinges on
the usefulness of the material to pretrial preparation. Such a standard
would "necessarily encompass incriminating evidence as well as
exculpatory evidence, since knowledge of the prosecutor's entire case
would always be useful in planning the defense." Agurs, 427
U.S.
at 112 n.20.
6
"In any criminal prosecution brought by the United States, no
statement or report in the possession of the United States which was
made by a Government witness or prospective Government witness (other
than the defendant) shall be the subject of subpena [sic], discovery, or
inspection until said witness has testified on direct examination in the
trial of the case." 18 U.S.C. §3500.
7
Section 1956(a)(1)(B)(i) provides:
(a)(1)
Whoever, knowing that the property involved in a financial transaction
represents the proceeds of some form of unlawful activity, conducts or
attempts to conduct such a financial transaction which in fact involves
the proceeds of specified unlawful activity--
.
. .
(B)
knowing that the transaction is designed in whole or in part--
(i)
to conceal or disguise the nature, the location, the source, the
ownership, or the control of the proceeds of specified unlawful
activity; or
.
. .
shall
be sentenced to a fine of not more than $500,000 or twice the value of
the property . . . imprisonment for not more than twenty years, or both.
8
All of these facts distinguish this case from United States v.
McDougald, 990 F.2d 259 (6th Cir. 1993) (holding government did not
prove that defendant knowingly laundered a third person's drug
proceeds, where government introduced no evidence of the third person's
sources of income and where evidence of defendant's knowledge of source
of money was as consistent with innocence as with guilt; and implying in
that kind of case that government must trace the allegedly laundered
money to specific unlawful activity). In McDougald, the defendant
was charged with laundering another person's drug proceeds, and the
government failed to demonstrate that the defendant knew the source of
the allegedly laundered money. In this case, Bencs is charged with
laundering the proceeds of his own drug activity.
9
One of Bencs' witnesses testified that he loaned Bencs $50,000 in
October 1987 to enable Bencs to meet a margin call following the stock
market decline, testimony that the jury was free to credit or disregard.
Even if the jury were to credit this testimony, however, a conviction
for that tax year would not be precluded. The government is not required
to prove the exact amount of unreported income and resulting tax
deficiency, but only that the amount of tax evaded was substantial. United
States v. Sorrentino [84-1 USTC ¶9196 ],
726 F.2d 876, 880 n.1 (1st Cir. 1984); Brodella v. United States
[50-2 USTC ¶9477 ],
184 F.2d 823, 826 (6th Cir. 1950).
10
Reversal of Bencs' conviction on these counts renders moot his argument
that he was prejudiced by the delayed disclosure that agents Cappara and
Kacarab were to testify that Bencs admitted to them that he was aware of
the cash transaction reporting requirements.
[89-2
USTC ¶9478]
United States of America
, Plaintiff-Appellee v. Charles A. Blandina, Defendant-Appellant
(CA-7),
U.S. Court of Appeals, 7th Circuit, 87-3120, 7/12/89, Affirming an
unreported District Court decision
[Code Sec.
7201 ]
Criminal penalties: Tax evasion: Trial.--A store owner who was
found guilty of income tax evasion was not prejudiced by being denied a
continuance to prepare a rebuttal to the damaging testimony of a
witness. The taxpayer had sufficient time to prepare for the testimony
and future alternative dates for trial were rejected by defense counsel.
Testimony regarding large, illegal drug purchases by the taxpayer was
relevant to show a likely source of income. The direct examination of an
IRS agent did not produce hearsay evidence regarding his conversations
with coin dealers but merely showed the diligence of the investigation.
Finally, the evidence supported the net worth figures calculated by the
IRS, and the government was not required to further investigate business
records that the taxpayer refused to turn over which may have reflected
a likely source of income.
Before
CUMMINGS, COFFEY and MANION, Circuit Judges.
COFFEY,
Circuit Judge:
Defendant-appellant
Charles A. Blandina appeals his conviction on two counts of income tax
evasion for the years 1983 and 1984 in violation of 26 U.S.C. §7201 . We affirm.
I.
FACTS
Defendant
Blandina was the owner of the State Liquors package store in
Indianapolis
,
Indiana
. He purchased the package store in the fall of 1983 for a price of
$108,203.40, $94,203.40 of which he paid in cash. 1 An Internal
Revenue Service ("IRS") task force investigating large cash
transactions at that time became aware of Blandina's sizeable cash
downpayment, and, after reviewing Blandina's 1983 tax return in which he
reported taxable income of only $66,190.00, decided that a criminal
investigation into Blandina's financial affairs was warranted, assigning
Agent Charles Vonderschmitt to conduct the investigation.
During
the course of the criminal investigation, Agent Vonderschmitt analyzed
Blandina's expenses and purchases of assets, such as real estate and
automobiles, examined bank records, and reviewed probate records to
determine, among other things, the amount he inherited from his father,
who died in 1979. Vonderschmitt interviewed Blandina in April 1985,
informing him that he had been assigned to investigate the discrepancy
between his stated taxable income and the large amount of cash he used
to purchase the package store. Blandina told Vonderschmitt that he had a
cash hoard from two sources of non-taxable income which were not
reflected on his tax returns. First, Blandina stated that in 1979 his
father gave him a large amount of cash resulting from the investment of
a $19,000 settlement for injuries Blandina sustained in a 1958 car
accident. Blandina stated that he hid the cash in a basement bathroom in
his stepmother's house. Blandina also stated that prior to the death of
his father, he received his father's coin collection. Vonderschmitt
investigated both of these "leads" into possible sources of
cash and determined that neither could be verified.
Blandina
was indicted in the Southern District of Indiana on February 18, 1987,
on two counts of income tax evasion for the years 1983 and 1984. The
indictment charged Blandina with understating his 1983 income by
$103,291.20 and his 1984 income by $162,164.83, resulting in a total tax
deficiency of $103,923.41. The trial was originally scheduled for April
27, 1987, but was continued to June 15, 1987, on motion of the
defendant. Prior to the rescheduled court date, the parties engaged in
extensive discovery culminating on June 5 when the defendant delivered
to the government the remnants of his alleged coin collection given to
him by his late father, an appraisal of the remaining coins in the
collection, as well as the statement of a defense witness who was
scheduled to testify about accompanying Blandina when he sold portions
of the collection to various coin dealers in Bloomington, Indiana, and
Chicago, Illinois.
Based
on its obligation to investigate all leads reasonably susceptible of
being checked which might establish Blandina's non-taxable sources of
income, 2 the
government, on June 8, filed a motion to continue the trial for another
90 days. Over Blandina's objection, the trial court granted the
government's motion on June 10 and set the trial for September 8, 1987.
On June 11, 1987, the defendant filed a motion asking the court to
reconsider its continuation of the case, requesting a hearing on the
matter, and petitioning the court for an order to compel the government
to provide the defense with various statements of prosecution witnesses
under the Jencks Act, 18 U.S.C. §3500.
The
court conducted a hearing and after considering the defendant's
objections to the continuance based on the Speedy Trial Act, 18 U.S.C.
§3161 et seq., reaffirmed its previous decision to continue the
trial until September 8. The court specifically found that the defendant
would not be prejudiced by the continuance and that the interests of
justice and judicial economy would be served by granting the government
sufficient time to comply with its obligation to investigate Blandina's
alleged sources of nontaxable income. The court also found that the
defendant was not entitled to the Jencks material requested until one
week prior to trial. The defendant renewed his opposition to the
continuance in a motion to dismiss filed on September 4, which the court
denied based on its findings at the hearing on the motion to reconsider.
On
September 7, the day prior to the scheduled trial date, the government
informed defense counsel that it planned to call Richard Aaron as a
government witness for the purpose of eliciting testimony concerning
marijuana transactions between Aaron and Blandina in 1984. Jury
selection began on September 8, but due to a problem in the selection
procedure, the jury was discharged and the trial was rescheduled for
September 15. On September 10, the defendant orally requested a 90-day
continuance in light of the damaging testimony the government planned to
elicit from Aaron. The court held a hearing on this motion and offered
the defendant two alternate trial dates: October 5, 1987, or November 9,
1987, both of which defense counsel rejected due to scheduling
conflicts. The court then denied the motion and trial commenced on
September 15.
At
trial, the government used the net worth method of proving that Blandina
willfully understated his taxable income for the years 1983 and 1984.
"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 for that year,
the government claims the excess represents unreported taxable
income."
Holland
v. United States [54-2 USTC ¶9714 ],
348 U.S. 121, 125 (1954). The government's summary expert, IRS Agent
Rob
ert Bennett, concluded that Blandina's net worth on December 31, 1982,
was $50,074.00, none of which was attributable to cash on hand. The
government then presented numerous witnesses and exhibits regarding
Blandina's expenditures during 1983 and 1984. The government also
presented the testimony of Richard Aaron, who stated that he had
delivered 30 to 40 pounds of marijuana to Blandina on two occasions in
1984. Aaron stated that Blandina paid for the first delivery in cash at
a price of $300 to $400 a pound, but returned the second quantity of
marijuana without paying for it because it was unacceptable, being of
inferior quality. Based on this evidence, the government concluded that
Blandina had taxable income of $159,434.25 in 1983, and $105,439.46 in
1984. Because Blandina reported income of $66,190.00 in 1983, and a loss
of $8,978.00 in 1984, the government alleged that Blandina owed
$74,965.35 in unpaid taxes.
Blandina
did not dispute the government's summary of his expenditures during 1983
and 1984; rather, he attacked the accuracy of the opening net worth
figure, arguing that Agent Bennett failed to give him credit for a
"cash hoard" in existence prior to the years in question.
Blandina claimed that this "cash hoard" consisted of proceeds
from the accident settlement which his father initially invested and
later turned over to him, as well as the proceeds from the sale of his
father's coin collection. Although members of Blandina's family
testified as to the existence of the accident settlement, no one could
testify as to the amount or what became of the proceeds. With regard to
the coin collection, defense witness Beth Greene, Blandina's former
girlfriend, testified that just prior to the death of the defendant's
father, he received several boxes of coins and that she accompanied him
when he sold some of the coins for cash.
The
government attempted to rebut Greene's testimony with the testimony of
IRS Agent Vonderschmitt. Vonderschmitt stated that after he received the
remnants of the alleged coin collection during pre-trial discovery, he
and other members of his staff interviewed 61 coin dealers from
Indianapolis, Indiana, Bloomington, Indiana, and Chicago, Illinois, and
that none of the coin dealers had purchased coins from Blandina and one,
Rolland Kontak, had actually sold coins to him. Kontak, a coin dealer
from
Indianapolis
, testified that sometime after 1984, he sold Blandina a roll of twenty
silver dollars which were included in the group of coins which the
defendant had represented to the government as the remnants of his
father's coin collection. The government also called Paul Edmonds,
another coin dealer from
Indianapolis
, as a witness.
Edmonds
testified that although he had never dealt with the defendant, he
recognized various coins in the purported collection as coins he had in
his own collection until sometime after 1981--two years after Blandina's
father passed away.
The
jury convicted Blandina on both counts, returning a verdict of guilty on
September 25, 1987. On December 15, 1987, the court sentenced Blandina
to two years' imprisonment on Count One (1983) and three years'
probation on Count Two (1984). On appeal, the defendant argues that his
conviction should be reversed because: (1) the district court erred in
denying Blandina's motion to dismiss based on violations of his rights
under the Speedy Trial Act; (2) the district court abused its discretion
in denying his motion for continuance; (3) the district court abused its
discretion in admitting (a) the testimony of Richard Aaron regarding
marijuana transactions between Aaron and Blandina, and (b) the testimony
of IRS Agent Vonderschmitt concerning his conversations with various
coin dealers during his investigation of Blandina's coin collection; and
(4) the government failed to present sufficient evidence to establish
tax evasion under the net worth method of proof.
II.
SPEEDY TRIAL ACT
Blandina
initially contends that the district court erred in refusing to dismiss
his case pursuant to the Speedy Trial Act, 18 U.S.C. §3161, et seq.
"The
Speedy Trial Act generally requires that trials in criminal cases
commence within 70 days of the filing date of the information or
indictment, or from the date of initial appearance, whichever last
occurs. 18 U.S.C. §3161(c)(1). However, the Act provides that several
periods of time may be excluded from this 70-day period. 18 U.S.C. §3161(h).
Among the permitted exclusions is delay 'resulting from a continuance
granted . . . on the basis of . . . findings that the ends of justice
served by [the continuance] outweigh the best interest of the public and
the defendant in a speedy trial.' 18 U.S.C. §3161(h)(8)(A)."
United States
v. Vega, 860 F.2d 779, 786 (7th Cir. 1988). The main thrust of
the defendant's argument under the Speedy Trial Act is that the district
court improperly granted the government's motion for a 90-day
continuance to further investigate Blandina's sources of non-taxable
income and excluded the delay from the 70-day period allowable under the
Act. At the outset we note that Blandina's burden on this issue is
indeed a heavy one. As we stated in Vega: " 'The decision to
grant a continuance under the Speedy Trial Act, and [the] accompanying
decision to exclude the delay under [§3161](h)(8)(A) is addressed to
the discretion of the trial court. To obtain a reversal of the court's
decision a defendant must show actual prejudice.' " 860 F.2d at 787
(quoting United States v. Tedesco, 726 F.2d 1216, 1221 (7th Cir.
1984)).
Initially,
we hasten to point out that the defendant has failed to make the
required showing of actual prejudice due to the delay resulting from the
continuance. Further, our review of the record reveals that at the time
the government filed its motion for continuance, the trial was scheduled
to commence on June 15, 1987. The evidence upon which the government
premised its motion--namely, remnants of Blandina's coin collection, an
appraisal thereof and the statement of a defense witness who planned to
testify about the collection--was not presented to the government until
June 5, 1987, and then only in response to a court order mandating the
defendant's production of this material. Thus, the government would have
had only 10 days to complete the investigation of this evidence, which
was directly relevant to the defendant's contention that he had
accumulated a "cash hoard" from, among other things, the sale
of his late father's coin collection--a potential source of non-taxable
income the government was required to investigate under Holland v.
United States [54-2 USTC ¶9714 ],
348 U.S. 121 (1954). Based on these factors, the district court
concluded:
"The
information concerning possible non-taxable income having been
peculiarly within the knowledge of the Defendant until being delivered
to counsel for the Government on June 5, 1987, and an investigation of
same being necessary for a full and truthful factfinding during trial,
the court finds that the Motion is made consistent with judicial economy
and is premised on Defendant's right to a speedy and just trial. It
appears, therefore, that a continuance is mandated to ensure a speedy
and just trial."
Order
of June 10, 1987, at 2. In light of the defendant's delay in providng
the government with this information and the government's investigatory
obligations under Holland, which notably resulted in a two-state
investigation of coin dealers and other witnesses, we are convinced that
the district court did not abuse its discretion in granting the
continuance and excluding the resulting delay from the Speedy Trial
Act's 70-day time period. Accordingly, we hold that the defendant's
rights under the Speedy Trial Act were not violated and thus, the
district court's refusal to dismiss the case based thereunder was
proper.
III. DENIAL OF MOTION FOR CONTINUANCE
Blandina's
second allegation of error is that the district court improperly denied
his motion for a continuance, which he filed on September 10, 1987,
after being notified on September 7 that the government intended to
elicit testimony from Richard Aaron regarding marijuana transactions
occurring between Aaron and Blandina in 1984. As noted above, this court
will overturn a trial court's disposition of a motion to continue only
for an abuse of discretion and a showing of actual prejudice. See Vega,
supra. See also United States v. Rodgers, 755 F.2d 533,
539-40 (7th Cir.), cert. denied, 473 U.S. 907 (1985).
Nonetheless, Blandina argues that in view of the limited time he had to
prepare a rebuttal to Aaron's damaging testimony, coupled with the trial
court's grant of the government's motion to continue based on a need to
investigate the evidence pertaining to his "cash hoard"
defense, the trial court did in fact abuse its discretion in this
instance. We disagree.
This
court has previously stated that the factors listed in United States
v. Uptain, 531 F.2d 1281 (5th Cir. 1976), are "highly
relevant" when a trial court considers a motion for a continuance
based on an allegation of insufficient time to prepare a defense. See
United States
v. Zambrana, 841 F.2d 1320, 1327 (7th Cir. 1988). The Uptain
court stated:
"We
have deemed the following factors highly relevant in assessing claims of
inadequate preparation time: the quantum of time available for
preparation, the likelihood of prejudice from denial, the accused's role
in shortening the effective preparation time, the degree of complexity
of the case, and the availability of discovery from the
presecution."
531
F.2d at 1286 (footnotes omitted).
Upon
reviewing the trial court's denial of Blandina's motion to continue in
light of these factors, we are of the opinion that the denial was
proper. First, the defendant had eight days before the trial commenced
on September 15, 1987, to prepare a rebuttal to Aaron's testimony. It is
also important to note that Aaron did not actually testify until
September 21, 1987; thus, Blandina had an additional 6 days of
preparation time (14 days total) before the jury heard Aaron's
testimony. Second, although Aaron's testimony was no doubt damaging to
Blandina, any prejudice resulting solely from the denial of the
continuance motion is, at best, speculative. Further, our review of the
record reveals that defense counsel had an opportunity to, and did,
extensively cross-examine Aaron regarding his association with the
defendant, his recollection of the marijuana transactions, his other
drug dealings, and his plea agreement with the government. Finally, the
court conducted a hearing on Blandina's motion and offered him two
alternate trial dates: October 5, 1987, and November 9, 1987, both of
which defense counsel rejected. Although it appears from the record that
defense counsel had plausible reasons for rejecting both dates, the fact
remains that it was the defense who rejected the trial court's attempt
to accommodate their request.
Finally,
we reject Blandina's contention that the trial court improperly denied
his motion for an adjournment based on the fact that the court
previously granted a similar motion filed by the government. Blandina's
argument overlooks the fact that the district court granted the
government's motion based on its obligation under
Holland
, supra, to investigate Blandina's evidence pertaining to
possible sources of non-taxable income. This contention also overlooks
the fact that the trial court had previously granted Blandina's motion
or continuance to conduct further discovery filed on April 13, 1987. In
light of these facts, particularly the defendant's rejection of the two
alternate trial dates offered by the court as well as his previous
adjournment, we hold that the district judge was well within his broad
discretion in denying Blandina's motion to again continue the trial.
IV.
EVIDENTIARY ERRORS
Blandina
next contends that the trial court committed reversible error in
admitting the testimony of Richard Aaron regarding marijuana
transactions between Aaron and Blandina and the testimony of IRS Agent
Vonderschmitt concerning his discussions with various coin dealers about
Blandina and his alleged coin collection. Specifically, Blandina alleges
that Aaron's testimony was evidence of acts other than those charged in
the indictment which were inadmissible because its prejudicial effect
greatly outweighed its probative value. With regard to Agent
Vonderschmitt's testimony, Blandina argues that it was hearsay not
admissible under any of the exceptions to the hearsay rule. Blandina
carries a heavy burden in challenging a trial court's evidentiary
rulings. As we stated in United States v. Kaden, 819 F.2d 813,
818 (7th Cir. 1987): "[A] reviewing court gives special deference
to the evidentiary rulings of the trial court. We shall only overrule
such rulings on a showing that the trial court has abused its
discretion."
A.
Blandina
initially challenges the district court's admission of Richard Aaron's
testimony. Aaron stated that in 1984 he sold between 30 and 40 pounds of
marijuana to Blandina on credit. Approximately one week later, Blandina
paid Aaron a price of $300 and $400 a pound for the marijuana. Aaron
also stated that he delivered another 30 to 40 pounds of marijuana to
Blandina, but Blandina returned it to him approximately one month later
because it was of inferior quality for resale. Blandina argues that this
testimony is evidence of "other acts" not charged in the
indictment. The admission of "other acts" evidence is governed
by Fed.R.Evid. 404(b), which provides:
"Evidence
of other crimes, wrongs, or acts is not admissible to prove the
character of a person in order to show action in conformity therewith.
It may, however, be admissible for other purposes, such as proof of
motive, opportunity, intent, preparation, plan, knowlege, identity, or
absence of mistake or accident."
Further
in order to be admissible under Rule 404(b), evidence of "other
acts" must satisfy the following four-part test:
"(1)
The evidence is directed toward establishing a matter in issue other
than the defendant's propensity to commit the crime charged, (2) The
evidence shows that the other act is similar enough and close enough in
time to be relevant to the matter in issue, (3) The evidence is
sufficient to support a jury finding that the defendant committed the
similar act, and (4) The probative value of the evidence is not
substantially outweighed by the danger of unfair prejudice."
United States
v. Zapata, 871 F.2d 616, 620 (7th Cir. 1989).
However,
we agree with the government's contention that Rule 404(b) and its
corresponding four-part test are not applicable to Aaron's testimony.
Aaron's marijuana transactions with Blandina are directly related to the
question of Blandina's likely sources of taxable income--one of the core
issues at trial, not an act collateral to those charged in the
indictment. Thus, the proper inquiry is whether the evidence is relevant
to the tax evasion charges, and, if relevant, whether Fed. R. Evid. 403
bars the admission of Aaron's testimony because its probative value is
"substantially outweighed by the danger of unfair prejudice."
In
a net worth tax evasion prosecution the government is required to prove
a likely source of income or negate all non-taxable sources of income.
Holland
, supra. A defendant's possession of a controlled substance in a
quantity sufficient for resale is relevant and admissible to show a
likely source of income. United States v. Chu [86-1
USTC ¶9113 ], 779 F.2d 356, 366 (7th Cir. 1985). Thus, under
Chu
Aaron's testimony concerning Blandina's purchase of 30 to 40 pounds of
marijuana--a quantity sufficient for resale--is clearly relevant in this
case.
Relevant
evidence is not inadmissible under Rule 403 unless its probative value
is substantially outweighed by the danger of unfair prejudice. The fact
that evidence is prejudicial or damaging to the defendant does not of
itself classify the evidence as inadmissible.
United States
v.
Medina
, 755 F.2d 1269, 1274 (7th Cir. 1985). Indeed, "[r]elevant
evidence is inherently prejudicial; but it is only unfair prejudice,
substantially outweighing probative value, which permits exclusion of
relevant matter under Rule 403." United States v. McRae, 593
F.2d 700, 707 (5th Cir.), cert. denied, 444 U.S. 862 (1979).
The
trial transcript reflects that the trial judge conducted a hearing
outside the presence of the jury in which Aaron testified about his
marijuana transactions with Blandina. Only after the judge had
determined that Aaron was a credible witness did he permit Aaron to
testify in the presence of the jury. Further, immediately after the jury
heard Aaron's testimony, the trial judge carefully instructed the jury
as follows:
"You
just heard a witness, Richard Aaron, testify that he sold marijuana to
the defendant, Charles Blandina. This testimony concerns things that
happened outside what is charged in the indictment. As you are aware,
the indictment has to do with two charges of evading taxes in 1983 and
1984. I would like to remind you at this point that this evidence should
be considered only so far as it goes to show law violations pertaining
the indictment which we have here under consideration. No consideration
should be given by the jury as to whether the defendant is guilty of
violating any other criminal law. Such would be improper and unduly
prejudicial to the defendant."
We
are convinced that the trial judge's preliminary finding regarding
Aaron's credibility combined with his cautionary instruction immediately
following Aaron's testimony abated any possible unfair prejudicial
effect Aaron's testimony might have had on the jury's decision-making
process. Absent evidence to the contrary, "[w]e make the crucial
and valid assumption the jurors carefully follow instructions given them
by the court."
United States
v. Stern, 858 F.2d 1241, 1250 (7th Cir. 1988). Accordingly, we
hold that the district court did not abuse its discretion in admitting
Aaron's testimony.
B.
Blandina
also contends that the district court improperly admitted the testimony
of Agent Vonderschmitt relating the results of his interviews with
various coin dealers regarding Blandina's alleged coin collection
because the testimony was hearsay. Under Fed. R. Evid. 801, hearsay is
defined as "a statement, other than one made by the declarant while
testifying at the trial or hearing, offered in evidence to prove the
truth of the matter asserted."
During
his testimony Agent Vonderschmitt stated that after Blandina delivered
the alleged remnants of the coin collection to the government, he and
other IRS agents commenced an investigation of the collection. Regarding
their investigation, Agent Vonderschmitt testified as follows:
"Q.
What . . . did you do in response to that coin collection being turned
over to you?
A.
I and several agents from our office interviewed--contacted and
interviewed 61 coin dealers from
Indianapolis
,
Bloomington
and dealers from
Chicago
.
Q.
Did you attend any coin shows to accomplish that?
A.
Yes, we attended coin shows in
Indianapolis
on two successive weekends.
Q.
And what were you doing at those coin shows and [sic] coin dealers?
A.
We were showing them photographs of the coins, and also showed them a
photograph of Mr. Blandina's face.
Q.
Did you find anyone who had sold coins--or pardon me, bought coins from
Charles Blandina?
A.
No."
The
defendant argues that this testimony was offered to establish that
Blandina never sold coins to any coin dealers in
Indianapolis
,
Bloomington
or
Chicago
, thus contradicting Beth Greene's testimony that she accompanied
Blandina when he sold some of the coins at a gun shop in
Bloomington
and at various coin shops in
Chicago
. As such, the defendant contends, this testimony is hearsay, and was
improperly admitted by the district court. We disagree. The trial
transcript reveals that Agent Vonderschmitt made the statements to which
the defendant objects in the context of his testimony regarding his
attempt to verify the leads on Blandina's coin collection--an
investigation he was obligated to make under
Holland
, supra. The results of Vonderschmitt's investigation of the coin
collection were within his personal knowledge, which is independent of
the truth of the coin dealers' statements concerning their lack of
familiarity with Blandina or his coins. As one commentator aptly stated:
"It
is hard to prove a negative. If someone . . . conducts a fruitless
investigation, he may, of course, testify that he did not find whoever
or whatever he was looking for. But the significance of this testimony
depends on the thoroughness of the investigation. To whom did the
witness make inquiry? What responses did he get?
The
responses that the witness received would be hearsay if offered to prove
their truth. But the theory here is that the responses are offered, not
for their truth, but only to prove how diligent the investigation was,
so that the trier of fact can determine how much weight to place on the
negative results."
D.
Binder, Hearsay Handbook 466 (2d. ed. 1983). It is clear that the
coin dealers' negative responses to Vonderschmitt's question concerning
whether they had ever dealt with Blandina were offered not to prove the
truth of the responses; rather, they were offered only as evidence of
Agent Vonderschmitt's diligence in investigating Blandina's allegations
and the negative results of his investigation. Because Vonderschmitt's
testimony was not offered to prove the truth of the coin dealers'
statements, but rather only to establish that he had conducted a most
thorough investigation and the results thereof, the testimony is not
subject to a hearsay objection under Fed. R. Evid. 801. Thus, we hold
that the trial court did not abuse its discretion in admitting in
evidence Vonderschmitt's testimony concerning the results of his
investigation.
V.
SUFFICIENCY OF THE EVIDENCE
Blandina's
final argument on appeal is that the government's evidence at trial was
insufficient to support a conviction for tax evasion under the net worth
method of proof. The standard for reviewing challenges to the
sufficiency of the evidence is well established. We must determine
"whether, after reviewing the evidence in the light most favorable
to the government, any rational trier of fact could have found
the essential elements of the crime beyond a reasonable doubt." Jackson
v. Virginia, 443
U.S.
307, 319 (1979) (emphasis in original); United States v. Chu [86-1 USTC ¶9113 ],
779 F.2d 356, 361 (7th Cir. 1985).
As
noted above, the government employed the net worth method of proof
during its investigation of the defendant. In
Chu
this court set forth three elements the government must establish under
the net worth method. First, the government must establish with
reasonable certainty " 'an opening net worth to serve as a starting
point from which to calculate future increases in the taxpayer's
assets.' " 779 F.2d at 361 (quoting
Holland
, 348
U.S.
at 132). Second, the government must demonstrate that it investigated
all " 'relevant leads furnished by the taxpayer--leads reasonably
susceptible of being checked, which, if true, would establish the
taxpayer's innocence.' " 779 F.2d at 365 (quoting
Holland
, 348
U.S.
at 135-36). Finally, the government must establish " '[e]ither a
"likely source" of the illegally unreported income represented
by the calculated increase in net worth plus non-deductible expenditures
in the year in question . . . or all possible sources of non-taxable
income must be negated.' " 779 F.2d at 366 (quoting United
States v. Grasso [80-2 USTC ¶9593 ],
629 F.2d 805, 808 (2d Cir. 1980)). Blandina challenges the government's
opening net worth figure because he was given no credit for cash on
hand. Further, the defendant contends that the government failed to
prove a likely source of income because it did not attempt to audit the
records from Blandina's liquor store and construction business.
Although
cash on hand in an opening net worth figure is "only one of several
and varied financial assets and is of no greater significance, aside
from its liquidity, than other assets," United States v.
Goldstein [82-2 USTC ¶9507 ],
685 F.2d 179, 181 (7th Cir. 1982), it is of increased importance in this
case because the defendant's primary defense at trial was that he had
accumulated a substantial amount of cash--the alleged "cash
hoard"--prior to the years under investigation. "While the
source and existence of cash-on-hand need not be proved with
mathematical exactitude, the amount must be established with reasonable
certainty."United States v. Terrell [85-1 USTC ¶9249 ],
754 F.2d 1139, 1146 (5th Cir.), cert. denied, 472
U.S.
1029 (1985).
At
trial, the government presented and the trial court allowed IRS Agent
Rob
ert Bennett to tesify as an expert witness regarding the government's
calculations of Blandina's income, expenditures and cash on hand.
Bennett testified that in his opinion the defendant had virtually no
cash on hand for the years 1980 through 1984. He based his conclusion on
the following facts: Carol Smith, a witness for the government,
testified that she lived with the defendant from 1979 through 1984 and
that there were not large sums of money available; Blandina's former
landlord testified that the defendant was continually late in making his
rental payments and was eventually evicted from his apartment in
September 1981; and Blandina took out two small loans during this time
period. Agent Bennett stated that these attributes were inconsistent
with those of someone with a large amount of cash on hand. Bennett also
performed a cash flow analysis of the defendant for the years 1980, 1981
and 1982--and three years immediately preceding the tax years under
investigation--demonstrating that all of Blandina's available income for
those years would have been consumed for the assets the government
proved Blandina acquired and the living expenses he incurred, thus
leaving no extra cash available to accumulate during these years.
Further, IRS Agent Vonderschmitt testified that when he interviewed
Blandina in April of 1985, Blandina told him that he did not let his
money sit around, he made it work for him by investing it--a statement
directly contradicting Blandina's assertions at trial that he maintained
a "cash hoard" prior to 1983.
Blandina's
only challenges to Bennett's conclusion that he had no cash on hand
prior to 1983 are his allegations that he received the proceeds from the
accident settlement which his father invested and later turned over to
him and that he had excess cash from the sale of his father's coin
collection. Blandina presented neither bank records nor deposit
statements concerning the accident settlement, nor did he present any
receipts from the sale of coins. Moreover, Agent Vonderschmitt testified
that he investigated Blandina's alleged sources of cash and determined
that neither could be verified. Specifically, Vonderschmitt asked Shelby
Federal Savings and Loan in Indianapolis--the institution where
Blandina's father allegedly invested the accident settlement
proceeds--to determine whether any member of the Blandina family had an
interest-bearing account in 1977 or 1978--the two years prior to when
Blandina stated he received the sum of money resulting from the invested
settlement proceeds. The bank located only two accounts, and neither of
them were large enough to represent the proceeds from the alleged
$19,000 settlement--the amount of the settlement according to Blandina.
Vonderschmitt thereafter interviewed Blandina's mother, stepmother, and
brother, none of whom could corroborate Blandina's representation as to
the $19,000 settlement figure.
With
regard to the coin collection, Vonderschmitt's initial investigation
revealed that Blandina failed to file a gift tax return after the
alleged receipt of the coin collection. Finally, probate records
revealed that the coin collection was not listed as an asset of the
estate of Blandina's father. Vonderschmitt's subsequent investigation
after the remnants of the coin collection were obtained from the
defendant included interviews with 61 coin dealers from
Indianapolis
,
Bloomington
and
Chicago
, none of whom could recall purchasing coins from the defendant. More
importantly, Vonderschmitt discovered one coin dealer during his
investigation, Rolland Kontak, who testified under oath that he
recognized coins represented by Blandina to be part of his father's
collection as coins he sold to the defendant sometime after 1984.
Vonderschmitt found a second coin dealer, Paul Edmonds, who testified
that although he never engaged in coin transactions with Blandina, he
recognized coins among the purported remnants of Blandina's collection
as coins he kept in his own collection until sometime after 1981--two
years after Blandina allegedly obtained the collection from his
father.
The
government's meticulous analysis of Blandina's income and expenditures,
coupled with the overwhelming proof rebutting Blandina's claimed sources
of cash on hand, when viewed in the light most favorable to the
government, convince us that a rational trier of fact could reasonably
conclude that Blandina had no cash on hand from 1980 to 1984. Because
Blandina challenges the government's opening net worth figure only in
the sense that it erroneously concluded that he had no cash on hand, our
analysis need go no further. Thus, we hold that the opening net worth
figure was established with the required degree of certainty beyond a
reasonable doubt.
Blandina
next argues that the government failed to establish a likely source of
income because it failed to audit the records of his liquor store as
required under the Supreme Court's opinion in
Holland
, supra. We need not be long detained with this contention. This
court has previously stated that "[t]he court in
Holland
limited the scope of the government's required investigation to
'relevant leads furnished by the taxpayer--leads reasonably
susceptible of being checked.' "
Chu
, 779 F.2d at 365 (emphasis added and citation omitted). The
defendant concedes that when Agent Vonderschmitt asked him for his
business records, he refused to supply them based on his fifth amendment
right against self-incrimination. Thus, the business records were not a
lead furnished by the taxpayer, a prerequisite under
Chu
to requiring a governmental investigation. Blandina contends that the
government should have subpoenaed the business records despite his
refusal to turn them over to the government. Our research reveals no
such requirement. In addition, such a requirement would directly
contradict the Supreme Court's clear and unambiguous language in
Holland
. The defendant has no one to blame but himself for the
government's failure to examine his business records. As we stated in United
States v. Marrinson, another tax evasion case also prosecuted under
the net worth method: "The defendant, of course, has a right to
remain silent, but in these circumstances he assumes some risk by doing
so." [87-2 USTC ¶9610 ],
832 F.2d 1465, 1473 (7th Cir. 1987). The jury obviously determined that
the government agents exhausted all reasonably verifiable leads
furnished them by Blandina. In light of Blandina's refusal to cooperate
with the investigating agents, we refuse to set aside that
determination. Thus, we hold that the government fulfilled its
obligation to investigate all relevant leads concerning a likely source
of income furnished by the defendant that were reasonably susceptible of
being checked.
VI.
CONCLUSION
The
defendant's arguments in favor of reversing his conviction are without
merit. The district court properly granted the government's motion for
continuance and excluded the delay from the 70-day time period under the
Speedy Trial Act based on the government's obligations under
Holland
to investigate Blandina's evidence regarding his coin collection. Next,
the court did not abuse its discretion in denying the defendant's motion
to continue based on the proposed testimony of Richard Aaron. Defense
counsel rejected both of the alternate trial dates which the court
offered and, in any case, the defense had two weeks to prepare for
Aaron's testimony. Nor did the court err in admitting both Aaron's
testimony and the testimony of Agent Vonderschmitt into evidence.
Aaron's testimony regarding his marijuana transactions with the
defendant was directly relevant to one of the core issues at
trial--namely, whether Blandina's drug dealings were a likely source of
unreported taxable income during the years in question. Further
Vonderschmitt's testimony regarding his interviews with the coin dealers
was not inadmissible hearsay as the defendant contends; rather, the
trial court properly admitted it to show the diligence and results of
the investigation of Blandina's coin collection. Finally, Blandina's
challenges to the sufficiency of the evidence are unconvincing. The
evidence supported the government's conclusion that no part of
Blandina's opening net worth was attributable to cash on hand. Moreover,
the government was not required to investigate Blandina's business
records because Blandina explicitly refused to provide them during the
government's investigation. Accordingly, the judgment of the district
court is
Affirmed
1
Blandina tendered the remaining $14,000 of the purchase price in the
form of a cashier's check.
2
See
Holland
v.
United States
[54-2
USTC ¶9714 ], 348 U.S. 121 (1954), discussed in Sections II
and V, infra.
[82-2
USTC ¶9507]
United States of America
, Plaintiff-Appellee v. William Goldstein, Defendant-Appellant
(CA-7),
U. S. Court of Appeals, 7th Circuit, No. 81-2556, 685 F2d 179, 7/29/82,
Affirming unreported District Court decision
[Code Secs. 446 and 7201]
Crimes: Tax evasion: Evidence: Net worth method of reconstructing
income: Opening net worth: Jury instructions.--The evidence
presented by the IRS was sufficient to establish the taxpayer's opening
net worth with reasonable certainty for purposes of reconstructing his
income using the net worth increase method of reconstructing income. The
jury could reasonably find, based on that reconstruction, that the
taxpayer had attempted criminal tax evasion in the year for which he was
convicted. Jury instructions given by the court properly stated the
evidentiary standard to be met by the IRS, and a supplemental
instruction regarding proof about sources of unreported income was not
prejudicial.
Terry
G. Harn, Assistant United States Attorney,
Peoria
,
Illinois
61602
, for plaintiff-appellee. Stanley P. Gimbel, Gimbel, Gimbel &
Reilly, 900 MGIC Plaza, 270 East Kilbourn,
Milwaukee
,
Wisconsin
53202
, for defendant-appellant.
Before
CUMMINGS, Chief Judge, GIBSON, Senior Circuit Judge, * and CUDAHY,
Circuit Judge.
GIBSON,
Senior Circuit Judge:
William
Goldstein appeals his conviction on one count of a three-count
indictment charging him with tax evasion in violation of 26 U. S. C. §7201
(1976). He was acquitted on charges ot tax evasion for the tax years
1974 and 1975, but was convicted for the tax year 1976. The district
court imposed a $10,000 fine and a five-year sentence, and ordered that
the sentence be suspended after sixty days' confinement in jail, with a
three-year probation.
Goldsein
raises three points on appeal. The first is that the Government's use of
the "net worth method" to show unreported taxable income was
insufficient to support a conviction for 1976 because the Government did
not establish an opening net worth for 1976 with reasonable certainty.
The second point is that the jury instructions were improper,
particularly in allowing the jury to return a conviction without the
Government's establishing with reasonable certainty an opening net worth
for 1976. The third is that a supplemental instruction regarding the
Government's need to prove the source of Goldstein's income was
prejudicial.
[Net
Worth Reconstruction]
I.
The Government used the net worth method to show Goldstein's income for
the years in question. This method was described by the Supreme Court in
Holland v. United States [54-2 USTC ¶9714], 348 U.S. 121, 125
(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.
Goldstein
concedes that the Government's proof established that between 1972 and
1976 he increased his net worth by an amount greater than that reflected
in his taxable income according to his tax returns. Appellant's Reply
Brief at 2. But Goldstein argues that the Government had to establish an
opening net worth for the beginning of each tax year in question, and
that it failed to do so because it did not establish with reasonable
certainty one element of net worth, cash on hand. Goldstein also argues
that the Government did not adequately exclude the possibility of
nontaxable sources of income, such as an inheritance he said he and his
wife received in April 1973.
[1976
Opening Net Worth]
A.
In the instant case we need not decide whether the Government adequately
established an opening net worth for each tax year because Goldstein was
convicted of tax evasion in only one of those years. The question is
whether the evidence adduced with the net worth method supported
Goldstein's conviction for tax evasion in 1976. The Government had to
establish an opening net worth for 1976 because Goldstein was charged
with and convicted of tax evasion specifically in 1976. The Government
presented evidence that Goldstein's net worth was--$5,688 on January 1,
1973, and $179,306 on December 31, 1976, an increase of $184,994. The
Government also estimated net worth for the beginning of each tax year,
including 1976. The Government estimated that Goldstein's net worth went
from $114,385 to $179,306 in 1976, an increase of $64,921. The
Government's opening net worth estimate for 1976 included $100 for cash
on hand. Goldstein suggests that the opening net worth estimate is not
reasonably certain because it underestimated Goldstein's cash on hand.
We conclude that the evidence was sufficient to establish the 1976
opening net worth with reasonable certainty and that Goldstein's
suggestion of a cash hoard did not have to be believed by the jury.
The
Government adequately showed an increase in Goldstein's net worth in
1976. The evidence of Goldstein's increase in net worth from January 1,
1973, to the end of 1976 was relevant to proving an increase in net
worth in 1976. The Government can show a 1976 opening net worth bt
establishing a net worth in an earlier year and then calculating the
effect of income and disbursements. United States v. Scott [81-2
USTC ¶9663], 660 F. 2d 1145, 1149 (7th Cir. 1981), cert. denied,
--
U. S.
--, 71 L. Ed. 2d 445 (1982); United States v. Marshall [77-2 USTC
¶9581], 557 F. 2d 527, 530 (5th Cir. 1977). Therefore, after the
Government established the beginning net worth, it did not have to
establish cash on hand at the beginning of each year with evidence
independent of the other years. Cash on hand in a net worth calculation
is only one of several and varied financial assets and is of no greater
significance, aside from its liquidity, than other assets. The
Government's calculations of income and disbursements based on a
starting point were adequate to prove the opening net worth for 1976. 1
Furthermore,
Goldstein's own admissions, in the form of financial statements,
indicate that he did not have a cash hoard in the years in question. For
instance, in January 1972 he told the Internal Revenue Service he had a
net worth of--$46,000. In May 1975, he told a
Peoria
,
Illinois
, bank that he had cash on hand of $9,200. In October 1976 he told
another Peoria bank that he had cash on hand of only $4,500. There was
more than enough evidence to support an increase in net worth in 1976
substantially greater than Goldstein's reported income.
[Nontaxable
Income Sources]
B.
Goldstein also argues that a net worth increase did not show tax evasion
because the Government did not exclude nontaxable sources of income.
Specificially, he suggests that the net worth increase was attributable
to a $130,000 cash inheritance that he and his wife received from his
mother-in-law in April 1973.