Bank Records and Net Worth Increases
1 Page5
There
was not a probated will or other record of any inheritance, and the
testimony of the inheritance came from Goldstein's relatives. The jury
was under no duty to accord face value to this self-serving,
undocumented testimony.
Further,
even if Goldstein had a cash hoard from this inheritance, Goldstein's
financial statements with the
Peoria
banks indicate that most of this claimed inheritance was expended before
1976. According to Goldstein's May 1975 financial statement, he had a
cash hoard of only $9,200. This was not enough to account for
Goldstein's increase in net worth in 1976. Finally, Goldstein argues
that the Government did not fulfill its obligation to investigate and
negate reasonable explantations of nontaxable sources of income. See
Holland
, 348
U. S.
at 135-36; United States v. Mackey [65-1 USTC ¶9328], 345 F. 2d
499, 506 (7th Cir.), cert. denied, 382
U. S.
824 (1965). The steps the Government took, including interviewing
Goldstein's relatives, fulfilled its obligation. The Government does not
have to negate every possible nontaxable source of income. Scott,
660 F. 2d at 1161. Information on nontaxable income should be supplied
by the taxpayer. The only suggestion here was the claimed but
undocumented inheritance.
[Jury
Instructions]
II.
Goldstein's second argument is that the jury instructions were
erroneous, particularly in their failure to make clear that the
Government had to establish an opening net worth for each year.
Specifically, he argues that the district court erred in (1) not giving
a proposed instruction which emphasized the Government's duty to
establish cash on hand at the beginning of each year, (2) delivering
instructions which used the plural "years," thereby suggesting
that opening net worth need be established only for the series of years,
not each year, (3) delivering an instruction that compared net worth in
1974 with the net worth in years 1974, 1975, and 1976, also suggesting
that an opening net worth for each year was unnecessary, and (4) saying
that illegal income is taxable, thereby prejudicing Goldstein.
When
reviewing jury instructions, we must consider them in their entirety and
not in "artificial isolation." United States v. Baskes,
[80-2 USTC ¶9761], 649 F. 2d 471, 479 (7th Cir. 1980), cert. denied,
450
U. S.
1000 (1981). Assuming for the sake of argument that Goldstein is correct
in saying that some of the instructions could be called misleading, the
instructions were clear when viewed in context. For instance, the court
said in Instruction No. 12, "[T]he evidence in the case must
establish beyond a reasonable doubt that the defendant's assets at the
beginning of the year, plus his reported income for the taxable year do
not add up to an amount sufficient to account for the increases in his
net worth, plus his non-deductible expenditures during that year."
Trial Transcript at 812. When the entire instructions are reviewed, they
are not misleading.
The
court also acted properly in delivering the instruction on the
taxability of illegal income. There was testimony that Goldstein engaged
in illegal gambling during the years in question. Furthermore, the court
minimized any possible prejudice by instructing the jury that Goldstein
was not on trial for anything not alleged in the indictment. Trial
Transcript at 819. Therefore, we find no prejudicial error in the
instructions.
[Supplemental
Instruction]
III.
Goldstein's final argument is that he was prejediced by a supplemental
instruction. The instruction came in response to an inquiry from the
jury: "Does the Government have to prove where the questionable
source of income came from, or what does the Government have to
prove?" The court answered:
"A
short answer to the first part of the question is "No"; but
the second part of the question is important also, and I think it
requires that I read to you the essential elements which the Government
does have to prove and also under instructions on the net worth method
which by its nature does not specify source.
Trial
Transcript at 834. The court then proceeded to reread some of the
instructions.
A.
There are two aspects to Goldstein's complaint about the supplemental
instruction. The first is that the repeated instructions included some
of those he objected to originally. However, they also included
Instruction No. 12, which, as stated above, clarifies any ambiguity as
to the Government's burden.
B.
Goldstein also argues that the court's answer was incomplete when it
responded "No" to the question of whether the Government had
to prove the source of the income. Goldstein suggests that the court
should have said, "No, if and only if the Government has proved
beyond a reasonable doubt that all nontaxable sources of income have
been negated." We do not consider the court's response improper or
prejudicial.
First,
the court's "short answer" was semantically correct. The
Government could win its case without even introducing evidence of a
likely source of income, much less proving it beyond a reasonable doubt.
The Supreme Court held in a post-Holland case that proof of a
likely source is not necessary in every case. United States v.
Massei, [58-1 USTC ¶9326], 355
U. S.
595, 595 (1958). Proving a likely source of the income is merely one of
the ways that the Government can prove that the increased net worth
resulted from taxable sources. It does not seem apparent to us how a
"No" answer to the jury's question would ordinarily imply that
the Government also had no duty to negate nontaxable sources, where
reasonable information or leads were supplied to the Government.
Nevertheless,
in the instant case a simple "No" answer only answered the
first part of the question, and the second part of the jury's question
indicated that it was confused as to the Government's burden in general.
Therefore, the district court properly repeated some of the
instructions, including those on the Government's burden. The court
explicitly stated: "The burden is always upon the prosecution to
establish beyond a reasonable doubt that any amounts reflected in the
defendant's increased net worth, plus non-deductible expenditures, were
from taxable, rather than nontaxable sources." Trial Transcript at
838. The court also stated:
[I]f
the evidence in the case also establishes beyond a reasonable doubt that
the defendant had one or more possible sources of taxable income, and
that the receipts did not come from non-taxable income, then the jury
may draw the further inference and find that such receipts constituted
taxable income to the defendant.
Id.
at 837. When we read these statements and the entire response to the
jury's question, id. at 834-41, we cannot believe the jury would
have understood that the Government neither had to prove a likely source
of the income nor had to negate reasonable nontaxable sources. Therefore
we find no prejudicial error in the supplemental instructions.
Goldstein
also raises other issues as to the admissibility of certain evidence. We
have considered these issues and find them without merit, particularly
in light of our disposition of the other issues in this case.
The
judgment of the district court is affirmed.
*
Hon. Floyd R. Gibson, Senior U. S. Circuit Judge, United States Court of
Appeals for the Eighth Circuit, sitting by designation.
1
Government Exhibit 121 is as follows:
William
& Charmaine Goldstein Net Worth Statement 1973 through 1976
1973 1974 1975 1976
ASSETS:
C ash on hand .................. 100. 237. 100. 297.
Bank balances .................. 5913. 11132. (4784). 8400.
Stocks and Bonds ............... 11795. 18791. 17086. 40394.
Loans Receivable ............... 11000.
Tax Shelter Investment ......... 7000. 17000.
Personal Residence ............. 72294. 95484.
Autos .......................... 9841. 8345. 15214. 15214.
Yard Machinery ................. 391.
Furniture and Fixtures ......... 3579. 4323. 8161. 20643.
Jewelry ........................ 404. 498.
Total Assets ................... 31228. 42828. 126475. 198321.
Liabilities:
Notes Payable .................. 9449. 6859. 2534. 1064.
Accounts Payable ............... None None 9556. 17951.
Total Liabilities .............. 9449. 6859. 12090. 19015.
Net Worth December 31 .......... 21779. 35969. 114385. 179306.
Net Worth Beginning of Year .... (5688.) 21779. 35969. 114385.
Increase for Year .............. 27467. 14190. 78416. 64921.
[80-2
USTC ¶9730]
United States of America
, Plaintiff-Appellee v. Raymond E. Smith, Defendant-Appellant
(CA-6),
U. S. Court of Appeals, 6th Circuit, No. 79-5111, 11/13/79, Affirming an
unreported District Court decision
[Code Sec. 7201]
Crimes: Income tax evasion: Reconstruction of income: Net worth
method: Investigation of other leads.--The government properly used
the net worth method to establish the taxpayer's taxable income and thus
to convict him of income tax evasion. The inability of the government to
establish a "cash on hand" figure did not invalidate the
method because even if there was cash on hand it was for the jury to
decide whether the cash was sufficient to account for the net worth
increase. Therefore the government established the taxpayer's opening
net worth with the required reasonable certainty. In addition the
government checked all "leads" that were furnished by the
taxpayer that were reasonably susceptible of being checked.
Before
EDWARDS, Chief Circuit Judge, CELEBREZZE and LIVELY, Circuit Judges.
Order
Raymond
E. Smith appeals from his jury conviction for willfully evading payment
of income taxes in violation of 26
U. S.
C. §7201. In the appeal Smith contends that the district court erred in
denying his motion for acquittal because the government did not
investigate relevant and exculpatory pre-trial leads, resulting in a
failure of the government's proof to establish Smith's opening net worth
with reasonable certainty when using the net worth method of proof.
Under
the net worth method of proof, the government seeks to compute taxable
income by determining a taxpayer's net worth at the end of each year
plus his nondeductible expenditures during the year. The difference
between this figure and the net worth figure at the beginning of the
year is treated as the taxable income received during the year.
The
net worth method of proof in income tax evasion cases was approved by
the Supreme Court in Holland v. United States [54-2 USTC ¶9714],
348 U. S. 121 (1954). The Court stated that "an essential condition
in cases of this type is the establishment, with reasonable certainty,
of an opening net worth, to serve as a starting point from which to
calculate future increases in the taxpayer's assets." To this end
the Court imposed upon the government an obligation to investigate all
"leads" furnished by the taxpayer relative to nontaxable
sources which are "reasonably susceptible of being checked."
In analyzing the "leads" alleged by appellant the district
court concluded that all leads that could reasonably be investigated
were, in fact, pursued by an I. R. S. Agent. The other "leads"
were either unknown to the government before trial, involved
insignificant amount of money, or could not reasonably be investigated.
Relying
on United States v. Giacalone [78-1 USTC ¶9350], 574 F. 2d 328
(6th Cir.), cert. denied, 99 S. Ct. 114 (1978), the district
court also concluded that the inability of the government to establish a
figure for "cash on hand" did not invalidate the net worth
statement. In that case this court approved a net worth statement that
did not contain a figure for "cash on hand," stating that even
if the evidence showed that there was cash on hand, it was for the jury
to determine whether there was enough to account for the net worth
increase.
With
respect to the issues raised by appellant, we conclude that the
government established appellant's opening net worth with the
"reasonable certainty" required by law, and adequately
investigated the leads which were reasonably susceptible of being
checked.
Accordingly,
it is ORDERED that the judgment of the district court be, and hereby is,
affirmed.
[78-2
USTC ¶9717]
United States of America
, Plaintiff-Appellee v. Charles A. Schafer, Defendant-Appellant
(CA-5),
U. S. Court of Appeals, 5th Circuit, No. 77-5736, 580 F2d 774, 9/20/78,
Affirming unreported District Court decision
[Code Sec. 7201]
Criminal penalties: Attempt to evade or defeat taxes: Net worth
method of proof: Willfulness.--The taxpayer's conviction for the
willful attempt to evade or defeat taxes was affirmed on appeal. Using
the net worth method, the government proved that there was a substantial
tax due and owing on the taxpayer's income, but he had reported and paid
only a small portion of that amount. Also, there was more than
substantial evidence from which willfulness could be inferred. Finally,
the government did discharge its burden of examining all leads furnished
by the taxpayer that were inconsistent with the taxpayer's guilt and
reasonably susceptible of being checked.
William
T. Moore, Jr., United States Attorney, M. Carr
Ferguson
, Assistant Attorney General,
Rob
ert E. Lindsy, Richard B. Buhrman, Gilbert Andrews, Department of
Justice,
Washington
, D. C. 20530, for plaintiff-appellee. William L. Runyon, Jr.,
P. O. Box
99
,
18 Broad St.
,
Charleston
, S. C. 29402, for defendant-appellant.
Before
COLEMAN, GEE and HILL, Circuit Judges.
COLEMAN,
Circuit Judge:
Charles
A. Schafer appeals from his conviction by a jury on three counts of
willful evasion of federal income taxes. 1 The
government established its case through the "net worth"
approach, a method of circumstantial proof which basically consists of
five steps: (1) calculation of net worth at the end of a taxable year,
(2) subtraction of net worth at the beginning of the same taxable year,
(3) addition of non-deductible expenditures for personal, including
living, expenditures, (4) subtraction of receipts from income sources
that are non-taxable, and (5) comparison of the resultant figure with
the amount of taxable income reported by the taxpayer to determine the
amount, if any, of under-reporting. Because the evidence established
with reasonable certainty the beginning net worth and the increase in
net worth for each year in question (with proper allowance for
corrections in expenditures and sources of income), and because there
was sufficient evidence from which a jury could infer the requisite
element of willfulness, we affirm the judgment of conviction. 2 We also find
that the government discharged its burden under Holland v. United
States [54-2 USTC ¶9714], 348 U. S. 121, 75 S. Ct. 127, 99 L. Ed.
150 (1954), to follow up all leads furnished by the taxpayer that are
inconsistent with the taxpayer's guilt and reasonably susceptible of
being checked.
I.
Background
To
his friends and neighbors in
Augusta
,
Georgia
, Charles A. Schafer must have been the very embodiment of the
entrepreneur who builds a small company into a sprawling corporate
empire and acquires substantial wealth in the process. From a small
partnership, National Audiotronics (National), which apparently
specialized in supplying long-playing stereo tapes to funeral homes,
Schafer expanded his operations in the early part of this decade until
either he or members of his immediate family owned or substantially
controlled the following business enterprises: Bluebird Auto Music Corp.
(Bluebird); Custom Recording Company (Custom); Stereo City, Inc.;
National Audiotronics; Stereo Village, Inc.; International Recording
Studios, Inc. (International); Cutlass Records, Inc. (Cutlass); Charles
A. Schafer Industries; Redball Electronics Corp. (Redball); WABB Corp.;
Stamps and Collectors Items, Inc.; Charles A. Schafer Collections; Land
Ho, Inc.; and perhaps others. Although his primary line of business
activity continued to be stereo tapes, he branched out into other
fields, such as ice cream parlors.
By
the time of the tax years in issue (1970, 1971, and 1972), Schafter
began to lead a lifestyle of conspicuous consumption. 3 He
accumulated large, expensive collections of coins and stamps. He
purchased diamond rings from Tiffany & Co., fur coats and other
apparel for women from Bergdorf Goodman in
New York
, and art work from the
Ormond Beach
,
Florida
,
Art
Galleries
. He and his wife purchased two large adjacent lots in
Augusta
, built a fence along the rear property line, paid substantial sums to
an architectural firm to design a 7,000 sq. ft. house and, in 1972,
began construction work on that house. He also invested heavily in
stocks and bonds. Charles A. Schafer had become a man of means. 4
There
was only one problem with this success story--Schafer allegedly evaded
the the payment of his lawful share of the federal income tax burden for
the years in question. On his returns, he reported net taxable income of
$4,525.00; $9,235.32; and $11,823.94 for those three years. He paid a
total of $4,294.24. At trial, the government's expert witness, who based
his testimony solely upon the evidence adduced in court, calculated the
defendant's net taxable income at $51,935.17; 58,897.28; and 92,567.36
for the same three respective years. The expert witness further
testified that the tax on that net income would total $64,505.69, a
figure over fifteen times the amount which the defendant actually
declared and paid.
In
this criminal prosecution for the willful evasion of income taxes, the
government was required to prove three elements of the crime beyond a
reasonable doubt: (1) an additional tax due and owing, (2) an attempt to
evade or defeat such taxes, and (3) willfulness. Sansone v. United
States [65-1 USTC ¶9307], 380
U. S.
343, 351, 85 S. Ct. 1004, 13 L. Ed. 2d 882 (1964); Holland v. United
States [54-2 USTC ¶9714], 348
U. S.
121, 130-139, 75 S. Ct. 127, 99 L. Ed. 150 (1954); United States v.
Calles [73-2 USTC ¶9544], 5 Cir. 1973, 482 F. 2d 1155, 1158. In any
tax evasion case where the government attempts to prove the violation
through the net worth method, 5 the jury is
necessarily asked to determine guilt or innocence largely through
circumstantial evidence. Specifically, the jury is asked to infer guilt
from the existence of a substantial increase in net worth, which, when
coupled with the negation of all reasonably possible sources of
non-taxable income, can only be attributed to unreported taxable income.
See
Holland
v.
United States
, supra, 348
U. S.
at 125, 75 S. Ct. 127; United States v. Tunnell [73-2 USTC ¶9560],
5 Cir. 1973, 481 F. 2d 149, cert. denied, 415
U. S.
948, 94
S. Ct.
1469, 39 L. Ed. 2d 563 (1974); Merritt v. United States, 5 Cir.
1964, 327 F. 2d 820. See also United States v. Horton [76-1 USTC
¶9219], 5 Cir. 1976, 526 F. 2d 884, 886, cert. denied, 429
U. S.
820, 97 S. Ct. 67, 50 L. Ed. 2d 81 (1976). Because of the dangers
inherent in this type of prosecution, where many figures represent only
approximations and where the defendant has a constitutional right to
remain silent and put the government to its proof, the government must
prove that it has conducted a full and adequate investigation of the
defendant's finances and that it has followed up all leads furnished by
the taxpayer that are "reasonably susceptible of being
checked." Holland, supra, 348
U. S.
at 138, 75 S. Ct. 127.
In
this case, the government's investigation consumed some four years and
uncounted manhours. The taxpayer's individual records, including bank
accounts, were minutely examined, as were the records of all of
Schafer's associated business enterprises, with the sole apparent
exception of Cutlass' records, a fact which will later be discussed in
detail. The trial lasted four days, and the 24 witnesses produced 628
pages of transcript. The government introduced some 553 documents in
evidence, for the most part without objection. The defense rested on the
government's case. On appeal, Schafer advances a number of contentions,
which, for purposes of discussion, we divide into two categories: (1)
the sufficiency of the evidence, and (2) the asserted failure of the
government to follow up leads.
II.
Sufficiency of the Evidence
A. The Existence of a Tax Deficiency
Schafer
first attacks the government's computation of his tax liability. He
argues that the calculation of opening net worth was inadequate, that
much of the evidence was unduly speculative, and that the prosecution's
expert witness should not have been allowed to testify. It has been
somewhat difficult for us to analyze the nature of his complaints,
however, because of the shotgun approach taken in the brief and the lack
of focus on specific items. Because of these difficulties, we now
attempt to construct an item-by-item description of the computation of
Schafer's tax liability for the first prosecution year, 1970.
The
case was exceedingly complex, but much of the complexity must be
directly attributed to the tangled, interlocking financial affairs of
the taxpayer and his numerous associated business entities. On numerous
occasions, Schafer paid for personal expenses and purchases with checks
drawn on the accounts of those entities.
Mr.
Schafter also bases part of his defense on large losses allegedly
sustained by Cutlass, whose affairs have been about as difficult to
untie as the proverbial Gordian Knot. In order to assist the jury in
organizing and understanding the mass of testimony and documents before
them, the government relied upon its expert witness, Mr. Ralph Williams,
an IRS agent, who has testified in over seventy such trials. Williams
prepared one large chart which summarized the evidence presented at the
trial and computed the tax owed under the net worth approach, as well as
a smaller chart which summarized Schafer's stamp transactions. He stated
that all of his figures were based upon either direct testimony or
documents admitted in evidence. Schafer has failed to point out a single
figure which was improperly computed (although he does mount other
challenges to Williams' testimony), and our independent examination of
the record convinces us that a solid evidentiary foundation had
successfully and properly been laid for his testimony. It is well
settled that such expert testimony is permissible in a tax evasion case,
provided, of course, that the expert testifies on the basis of facts in
evidence. United States v. Johnson [43-1 USTC ¶9470], 319
U. S.
503, 519-20, 63
S. Ct.
1233, 87 L. Ed. 1546 (1943). The trial judge properly charged the jury
as to the weight to be given to the expert's testimony, and he therefore
committed no error in allowing Williams to testify. Indeed, without
Williams' testimony, the jury might well have been hopelessly confused,
for it would have been well-nigh impossible for them to determine
whether Schafer in fact had substantially underpaid his taxes.
To
compute Schafer's net worth at the beginning of 1970, Williams added up
Schafer's assets and then subtracted his liabilities. Contrary to what
Schafer argued at trial and now presses on appeal, it was not necessary
for the government to establish the basis for every asset the taxpayer
owned. It was sufficient for the government to identify with reasonable
specificity Schafer's basis in every asset, including cash, in which a
purchase or sales transaction occurred in the tax years in question. For
example, the government did not list furniture owned by Schafer in its
net worth computation, but it seems reasonable to suspect that he owned
furniture at the beginning and at the end of this three-year period. If,
however, Schafer neither bought nor sold furniture during this period,
it is totally immaterial whether furniture is included in the
computation. If he owned $20,000 of furniture at the beginning of 1970
and $20,000 of furniture at the end of that year, the two figures would
balance in the net worth computation. If, on the other hand, he owned
$100,000 of furniture at the beginning, sold $80,000 without realizing a
profit and invested the proceeds in stocks, the omission of furniture
from the beginning net worth computation would make it appear that the
taxpayer had experienced an $80,000 increase in net worth, namely
through an increased investment in stocks. If such transactions have
occurred, the taxpayer has a burden to furnish "leads" on
them, so that the government can investigate and perhaps clear the
taxpayer prior to trial. See Holland v. United States, 348
U. S.
at 135-136, 75 S. Ct. 127; part III, infra.
The
most frequent challenge to the government's computations in a net worth
case is to the opening cash balance. See, e.g., Hayes v.
United States
[69-1 USTC ¶9204], 5 Cir. 1969, 407 F. 2d 189, cert. dismissed,
395
U. S.
972, 89
S. Ct.
2133, 23 L. Ed. 2d 777 (1969). This is understandable, since it is often
difficult to disprove the existence of a large "cash hoard",
but nevertheless the government must establish this figure with
reasonable specificity. Here, the taxpayer himself told the IRS agents
in April, 1973, that he never had more than three or four-thousand
dollars on hand (representing undeposited business receipts), that in
1968 he rarely had more than twenty dollars in cash, and that in April,
1973, he had about eight hundred dollars in cash. The agents therefore
credited him with $800.00 in cash at the beginning of 1970 and at the
end of each year in question, and they gave his wife credit for $200.00
in cash at each point, for a total of $1,000.00. The jury could
certainly have concluded that Schafer's propensity to incorporate and
place many of his personal assets in the corporate solution negated the
existence of a large cash hoard and corroborated the agent's figure of
$1,000.00. Furthermore, Schafer has never asserted that such a hoard did
in fact exist.
As
for other assets, the parties stipulated that the balances in the
checking accounts totaled $142.67 and that there were no funds in
savings accounts. No balance for coins was listed, because there was no
indication from the taxpayer that he possessed significant coin
holdings, the sale of which might explain the increases in his other
assets. Schafer did, however, make several purchases of coins in 1970
and 1972, and the IRS agents properly added those purchases to his
holdings. The only evidence concerning Schafer's stamp collection at the
beginning of 1970 were invoices from
Rob
ert A. Siegel and Southeastern Stamp Company indicating total purchases
of $4,945.82. The agents used this figure for the opening balance.
Although Schafer strenuously objects to this figure, he has furnished no
"lead" that the government could track down nor has he
introduced any rebuttal evidence. Absent some indication of other
purposes, the jury could readily find that the value of Schafer's stamps
was established with reasonable certainty. 6 The only
investment in stocks and bonds which the agents were able to discover
totaled $824.67. He had no loans receivable at the start of 1970, and
his two
Pontiac
automobiles cost a total of $9,477.39. One car was later traded in, and
both remaining cars were then transferred to Schafer's related entities.
As for real estate, an affidavit established that the Schafers had
purchased their house and lot for a total of $31,050.00. There was no
evidence introduced concerning possible additions to this property
before 1970, and the figure of $31,050.00 was carried forward for each
taxable year. This house, therefore, did not affect the net worth
computation.
The
final and perhaps most elusive asset listed was investments in related
entities and was valued by the IRS at $38,221.64. Williams first took
the tax returns filed by National and determined that Schafer's 50%
investment in that partnership amounted to $10,221.64. Since the bulk of
National's assets were transferred in 1970 to Custom and National filed
no further tax returns, the agents concluded that National no longer
operated as a partnership and that Schafer had no investment in it. The
agents also identified five separate infusions of Schafer's money into
Bluebird prior to 1970, and they concluded that his investment in that
corporation totalled $28,000. They could identify no other investments
in business entities prior to 1970, so the total figure for investments
was $38,221.64. Schafer's assets therefore totalled $85,662.19 in the
net worth computation.
The
calculation of Schafer's liabilities was more straight-forward. Based
upon the evidence admitted, acounts payable totalled $541.85; loans
payable, $24,090.05; mortgage payable, $26,383.51; and judgments
payable, $19,013.87. Since total liabilities were $69,029.28, Schafer's
beginning net worth was determined to be $16,632.91. We find no
disparity in this computation sufficient to warrant reversal.
Williams
then proceeded to calculate Schafer's net worth at the end of each
successive tax year, but we shall go into detail only for the year 1970.
In that year, Schafer's assets climbed to $114,559.65, with the increase
primarily attributable to increases in loans receivable, stamps, and
coins. His liabilities declined to a total of $52,314.77, with the
decline due mainly to large drops in loans payable and judgments
payable. We are satisfied that the calculation of Schafer's end-of-1970
net worth as $62,244.88 met all legal requirements. To this increase in
net worth, Williams added personal expenditures of $12,718.38. This
figure was based on testimony that Schafer had: (1) purchased jewelry
from Tiffany in the amount of $6,307.50; (2) paid $1,172.00 on an
inherited apartment; (3) paid an old debt of $2,937.20 to Frank
Carpenter; (4) paid another debt of $50.00 to Fred M. Simms; (5) paid
yet another debt of $1,002.68 to a third individual; and (6) paid
$499.00 in tax. Plainly, Schafer has nothing to complain of with respect
to these additions, for the IRS did not even attempt to introduce
evidence of other non-deductible general expenses, such as food, utility
bills, etc.
The
agents also deducted a total of $6395.18 to reflect allowable deductions
and certain non-taxable sources of income. In 1970, Tiffany refunded
$955.00 to Schafer. He received a judgment debt of $2303.38. He got the
maximum allowable credits for dividend exclusion, personal exemption,
and sales tax. All told, Williams calculated Schafer's taxable income
for 1970 at $51,935.17, which was more than 11 times the $4,525.00
Schafer reported. Schafer would have owed $10,791.30 on his 1970 income;
he actually paid only $651.00. The jury was certainly warranted in
finding that a substantial tax was due and owing on that income.
Similarly,
the evidence was more than sufficient for the jury to find beyond a
reasonable doubt that tax deficiencies existed for 1971 and 1972. We are
also convinced that the net worth computations were reasonably certain
and feel that no purpose would be served by further recital of the
testimony to demonstrate the accuracy of the expert's calculations. 7
B.
Willfulness. In a prosecution under 26
U. S.
C. §7201, the element of willfulness or intent is usually the most
difficult to prove. In the misdemeanor and felony tax evasion statutes
(26
U. S.
C. §§ 7201 to 7207, inclusive), the word "willfully"
generally connotes a voluntary, intentional violation of a known legal
duty. United States v. Pomponio [76-2 USTC ¶9695], 429
U. S.
10, 97 S. Ct. 22, 50 L. Ed. 2d 12 (1976) (per curiam); United States
v. Bishop [73-1 USTC ¶9459], 412
U. S.
346, 93
S. Ct.
2008, 36 L. Ed. 2d 941 (1973). Proof of evil motive or bad intent is not
required. Pomponio, supra. This showing of willfulness will most
often be made by circumstantial evidence, 8 see e.g.,
Spies v. United States [43-1 USTC ¶9243], 317 U. S. 492, 63 S. Ct.
364, 87 L. Ed. 418; United States v. Brown [77-1 USTC ¶9278], 5
Cir. 1977, 548 F. 2d 1194; United States v. Burrell [75-1 USTC ¶9152],
5 Cir. 1974, 505 F. 2d 904; United States v. Jernigan [69-1 USTC
¶9397], 5 Cir. 1969, 411 F. 2d 471, cert. denied, 396 U. S. 927,
90 S. Ct. 262, 24 L. Ed. 2d 225 (1969), since direct proof of
willfulness, as that term is defined in Pomponio and in Bishop,
may not be readily available.
In
this appeal after conviction by a jury, we must sustain the verdict if
there is substantial evidence, taking the view most favorable to the
government to support it. Glasser v.
United States
, 315
U. S.
60, 62 S. Ct. 457, 86 L. Ed. 680 (1942); United States v. Warner,
5 Cir. 1971, 441 F. 2d 821, cert. denied, 404
U. S.
829, 92 S. Ct. 65, 30 L. Ed. 2d 58 (1971). Our examination of the record
convinces us that the record contains more than substantial evidence
from which the jury could infer willfulness. The trial judge
specifically refused the government's request to charge the jury by
giving examples of conduct which would indicate the requisite intent,
where there was no evidence to support such examples. He did, however,
charge the jury as follows, based upon his perception of what the
evidence tended to prove:
You
may consider if there was any concealment of assets, any covering up of
sources of income, any handling of one's affairs to avoid the making of
the usual records, and any conduct the likelihood of which would mislead
or conceal. Now, I give you these instructions simply to illustrate the
type of conduct from which you may infer intent to evade taxes, and if
the tax evasion motive plays any part in such conduct, the offense may
be made out even though the conduct I have mentioned might also serve
some other purpose.
There
was evidence of a consistent pattern of under-reporting large amounts of
income here. In the three prosecution years, Schafer reported a total
taxable income of only $25,584.26, whereas the government's figure
demonstrated that he should have reported at least $203,399.81. The
discrepancy was not due to a single, isolated transaction, but rather to
a consistent pattern spread over three years. In addition, Schafer
certainly handled his affairs in such a manner as to avoid the usual
making of records. He reported no income from National after he
transferred its assets to Custom, although National continued to sell
funeral tapes and he continued to utilize its checking account to pay
for his purchases. His records of his investments in, and loans to, his
other corporations were equally abysmal. The IRS agents were required to
construct the financial statements of many of those entities from the
ground up, since there were few tax returns filed and grossly inadequate
records kept. When the IRS agents attempted to gain access to Cutlass'
records for the purpose of investigating the "lead" furnished
by the taxpayer, they were met with obstinate refusals. At least 16
summonses were issued, but the responses were inadequate and the records
piecemeal. In fact, one of Schafer's agents told the IRS agents they
would not produce the records "because this was what they were
going to base their defense on". The jury certainly could have
found that such conduct was designed to conceal or mislead.
And
there was more. One agent testified that they had uncovered Schafer's
own computations of his net worth. In August, 1969, Schafer computed his
net worth at $64,000. By March, 1972, Schafer figured that he was worth
$1,635,500, although he did state to the agents that this latter figure
was "inflated" when they confronted him with the calculations
written on his letterhead and signed in his hand. Although these
statements were not introduced in evidence, the testimony stood
unrefuted, and the jury could have credited it as evidence of Schafer's
willfulness. Furthermore, Schafer made at least one false statement to
an IRS agent. When asked whether he had any gifts or inheritances, or
any nontaxable source of funds, Schafer indicated that he had received a
$4,000 inheritance from an aunt. The agents later discovered that his
son, not Schafer, has received such an inheritance.
We
need not detail more of the evidence from which the jury could have
inferred the requisite intent, but there is no doubt that this record,
which is replete with incidents similar to those detailed above,
contains not only substantial evidence, but perhaps overwhelming
evidence, of the defendant's willfulness.
With
willfulness thus established, defendant's filing of false and fraudulent
income tax returns constituted an affirmative act of evasion. Sansone
v.
United States
, 380
U. S.
343, 352, 85
S. Ct.
1004, 13 L. Ed. 2d 882 (1965). The jury could also have found the
requisite affirmative act from any one of a number of other incidents in
the record, some of which are detailed above.
III.
The Asserted Failure of the Government of Follow Up Leads
Appellant
characterizes his contention that the government failed to follow up all
leads which he supplied as "one of the most crucial questions in
this case". However, we cannot appraise this point as being quite
so "crucial".
Schafer's
contention here seems to be based entirely on large losses allegedly
sustained by Cutlass in 1972. Cutlass, which was apparently issued a
charter by the State of
Tennessee
in early 1972, was 98% owned by Schafer. Cutlass filed no federal income
tax return for 1972 and the only solid testimony (if it can be so
denominated) in the record as to the extent of Cutlass' losses was that
of Mr. Howard Joe, an accountant for Custom. Joe was apparently sent to
Nashville
,
Tenn.
, to try to organize Cutlass' records and he testified on
cross-examination that a Mr. Ken Shears had told him that the losses
were in the neighborhood of $457,000 or $475,000. There was no objection
to this testimony, but on redirect Joe admitted that the losses might
have occurred after 1972. The IRS agents knew about this alleged loss
and attempted to track the lead down. They were met with a stonewall.
The custodians refused to divulge the records voluntarily, and repeated
summonses met with little cooperation. Finally, a scant month before
trial, Cutlass delivered a mass of disorganized records stored in three
filing cabinets to the IRS agents, who did not have sufficient time to
analyze the records before trial. In these circumstances, we think the
agents did all that could reasonably be expected of them. Cf. Hayes
v. United States [69-1 USTC ¶9204], 5 Cir. 1969, 407 F. 2d 189,
193, cert. dismissed, 395
U. S.
972, 89
S. Ct.
2133, 23 L. Ed. 2d 777 (1969). Furthermore, as was repeatedly explained
at trial, corporate losses are not normally deductible against income
reported by an individual. So even if these large losses were sustained
by Cutlass, Schafer's income would be unaffected, unless he sold his
stock at a loss or the corporation was adjudged bankrupt. Neither
exception took place, and we therefore find that the government fully
satisfied its
Holland
burden.
Conclusion
If
it is true that "[t]axes are what we pay for civilized
society," Compania General de Tabacos de Filipinas v. Collector,
275
U. S.
87, 100, 48 S. Ct. 100, 105, 72 L. Ed. 177 (1927) (Holmes, J.,
dissenting), the defendant failed his duty to some sixty thousand
dollars.
The
Judgment of conviction is
AFFIRMED.
1
26
U. S.
C. §7201, the applicable statute, provides:
Any
person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, shall be fined not more than $10,000, or imprisoned not more
than 5 years, or both, together with the cost of prosecution.
2
Appellant was sentenced to five years imprisonment on Count 1 and three
years probation on Counts 2 and 3, with probation to commence upon the
expiration of, or legal release from, imprisonment under Count 1. As a
special condition of probation, the defendant was to pay a fine of
$10,000 and cooperate with the IRS in the payment of all taxes, interest
and penalties due on his 1971, 1972 and 1973 income. Appellant argues
that the five-year sentence of imprisonment actually amounts to a life
sentence and therefore exceeds the statutory sanction. However, there is
no indiciation in the record that appellant is in poor health, nor is
there any indication of his age. Even if such evidence had been
introduced, the argument would be without merit. In the federal system
today, a trial judge has broad discretion in the determination of the
sentence to be imposed upon a convicted defendant. See, e.g.,
United States
v. Tucker, 404
U. S.
443, 446, 92 S. Ct. 589, 30 L. Ed. 2d 592 (1972). The sentence imposed
was within the statutory limits and is unassailable on appeal, absent
some clear showing that the trial judge abused his discretion. Gore
v.
United States
, 357
U. S.
386, 393, 78 S. Ct. 1280, 2 L. Ed. 2d 1405 (1958); Finch v.
United States
, 5 Cir. 1974, 493 F. 2d 455, 456;
United States
v. Saunders, 5 Cir. 1970, 435 F. 2d 683, 684.
3
See T. Veblen, The Theory of the Leisure Class (1899).
4
There was substantial evidence introduced and admitted at trial from
which the jury could infer that the defendant paid for many of these
purchases with checks drawn on the accounts of his businesses,
particularly the accounts of National and Custom. For example, Mr.
Rob
ert A. Siegel, a noted stamp dealer and auctioneer with 47 years'
experience, testified that the defendant made at least 29 separate
purchases of stamps from him in the years 1969-71, and he identified a
number of checks he had received from the defendant in satisfaction of
those purchases. Most of these checks were drawn on the accounts of
National and Custom and were signed by the defendant. Several other
stamp dealers also testified as to their transactions with the defendant
and identified their invoices and the checks which they had received
from Schafer in payment. In elaborate and detailed testimony, the
government's expert witness, an IRS agent who had testified in some
seventy tax evasion cases, summarized the purchases and sales of stamps
and demonstrated year-end investments in stamps for the years 1969-1972
of, respectively, $4,945.82; $34,488.60; $218,723.28; $309,255.36.
5
The net worth method is explained in detail in Duke, Prosecutions for
Attempts to Evade Income Tax: A Discordant View of a Procedural Hybrid,
76 Yale L. J. 1 (1966). In this case, the government's expert witness
fully explained the theory and the mechanics of the net worth approach
to the jury.
Appellant
argues that he was denied due process because the government actually
prosecuted him on the specific item-omission theory when he was prepared
to defend against a net worth prosecution. Besides one generalized
reference to a dividend from
Stereo
Village
, he fails to point to any other instances in the record. We are at a
loss to understand the argument, for it is clear that evidence of
specific items of unreported income is admissible in a net worth case to
show a "likely source" from which the net worth increases may
have come. Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121, 138, 75 S. Ct. 127, 99 L. Ed. 150 (1954). Furthermore, appellant
has demonstrated neither surprise nor prejudice, and he did not make any
objection at trial that the government was utilizing a specific
item-omission theory.
6
The defendant objected at trial, and continues to object on appeal, that
the government failed to prove the beginning net worth (at the end of
1969) with any degree of certainty. The implication of the assertion is
that Schafer possessed a large collection of stamps at the beginning of
the period, the subsequent sale of which might have accounted for the
apparent increase in his net worth. He therefore concludes that the
government has failed to meet its
Holland
burden of establishing the beginning net worth with reasonably
certainty. We think this argument is flawed for several reasons. In the
first place, the IRS agents contacted all persons with whom the
defendant bought and sold stamps during the years in question. These
names were supplied by the defendant himself. The net worth approach
depends upon identifying all transactions in the assets, not simply the
fact of possession of assets. That is, if Schafer owned one million
dollars worth of stamps at the beginning of the period, purchased two
hundred thousand dollars of stamps during the year, and sold one hundred
thousand dollars of stamps during that same year, his investment in
stamps would have increased by one hundred thousand dollars. It is
immaterial whether the stamps sold come from the original holdings or
from the year's purchases; the object is to measure the change in
investment in the particular asset as a result of purchases and sales.
Second, even if the increase in net worth were attributable to the sales
of other stamps, the defendant has failed to disclose the identity of
the buyers. In such a case, when the government has pursued all the
leads provided by the taxpayer, he "remains quite at his
peril." Holland v. United States, supra, 348
U. S.
, at 138-39, 75 S. Ct. 127.
7
Appellant raises a host of related arguments, none of which have any
merit. First, he argues that the expert should not have been allowed to
testify, but he cites no authority and we can find nothing to support
him. See Fed. R. Evid. 702-705. Second, he claims that the expert's
testimony "was speculative, not based on sufficient evidence and
was not sufficient to prove a tax due and owing beyond a reasonable
doubt". Brief for appellant at 10. We have discussed the arguments
surrounding the stamp collection at note 6, supra. Appellant
claims that the government failed to assign values to assets of known
existence, such as song copyrights. In the first place, there was no
indication from Schafer that he owned such assets. Secondly, there was
no indication that he bought or sold such assets during the prosecution
years. See, pp. ----- (slip op. pp. 7155-7156), supra. Finally,
appellant urges that the testimony surrounding the ice cream parlor
lacked specificity. It seems that appellant is the only one confused
about this particular testimony. When appellant bought WABB, Inc., which
owned the ice cream franchise, he paid for that purchase with a check
from Custom. Williams charged appellant with an asset in WABB, Inc., and
credited him with a liability to Custom in the same amount. In short,
this purchase did not affect the net worth computation. Finally,
appellant contends that the trial court should have directed a verdict
of acquittal based upon alleged errors and inconsistencies in the
expert's testimony. We find these contentions either repetitive (and
dismissed elsewhere in this opinion) or insubstantial (and therefore
dismissed summarily here).
8
Circumstantial proof of intent may be made in a variety of ways:
By
way of illustration, and not by way of limitation, we would think
affirmative willful attempt may be inferred from conduct such as keeping
a double set of books, making false entries or alterations, or false
invoices or documents, destruction of books or records, concealment of
assets or covering up sources of income, handling of one's affairs to
avoid making the records usual in transactions of the kind, and any
conduct, the likely effect of which would be to mislead or to conceal.
If the taxevasion motive plays any part in such conduct the offense . .
. may also serve other purposes such as concealment of other crime.
Spies
v. United States [43-1 USTC ¶9243] 317
U. S.
492, 499, 63 S. Ct. 364, 368, 87 L. Ed. 418, 423.
Willfulness
may also be shown by affirmative acts of evasion such as concealment of
financial transactions and the providing of false or incomplete
information in an attempt to hamper the investigation . . .. Holland
v. United States [54-2 USTC ¶9714], 348 U. S. 121, 75 S. Ct. 127,
99 L. Ed. 150 (1954); United States v. Stone [70-2 USTC ¶9630],
431 F. 2d 1286 (5th Cir. 1970), cert. denied, 401 U. S. 912, 91 S. Ct.
879, 27 L. Ed. 2d 811 (1971); Windisch v. United States [61-2
USTC ¶9720], 295 F. 2d 531 (5th Cir. 1961); McGrew v. United States
[55-1 USTC ¶9439], 222 F. 2d 458 (5th Cir. 1955). A consistent pattern
of understatement has been held to present a jury question as to
willfulness, United States v. Tunnell, 481 F. 2d 149 (5th Cir.
1973); Holland v. United States, supra, as had [sic] the failure
to report a very substantial amount of income, United States v.
Schechter [73-1 USTC ¶9376], 475 F. 2d 1099 (5th Cir. 1973); Wardlaw
v. United States [53-1 USTC ¶9335], 203 F. 2d 884 (5th Cir. 1953).
Finally making false statements to Treasury agents has been held to
constitute the type of affirmative act of evasion necessary to permit a
§7201 conviction. United States v. Beacon Brass Co. [52-2 USTC
¶9528], 344
U. S.
43, 73 S. Ct. 77, 97 L. Ed. 61 (1952); United States v. Newman
[72-2 USTC ¶9719], 468 F. 2d 791 (5th Cir. 1972).
United
States v. Burrell [75-1 USTC ¶9152], 5 Cir. 1974, 505 F. 2d 904,
911.
Generally,
therefore, proof "of repetitious conduct [is] admissible for the
limited purpose of showing the intent of the appellant, where, otherwise
it might be claimed that the acts in the tax years were either
inadvertent or innocent. See Escobar v. United States [68-1 USTC
¶9125], 5 Cir. (1967), 388 F. 2d 661." United States v.
Jernigan [69-1 USTC ¶9397], 5 Cir. 1969, 411 F. 2d 471, 473.
[77-2
USTC ¶9581]
United States of America
, Plaintiff-Appellee v. Lydell Marshall, Defendant-Appellant
(CA-5),
U. S. Court of Appeals, 5th Circuit, No. 75-3751, 557 F2d 527, 8/12/77,
Aff'g unreported DC decision
[Code Sec. 7201--result unchanged by '76 Tax Reform Act]
Crimes: Understatement of income: Cash expenditures case: Opening
funds: Accuracy of figures.--The defendant was properly convicted,
through the cash expenditures method of proof, of willfully understating
his 1971 income. The government was not obliged to prove his opening
available funds for 1971 since it established that amount as of the
beginning of 1969 (the defendant had been acquitted as to 1969 and 1970)
and had shown the total of taxable and nontaxable receipts for the
following years. Nor was he prejudiced by the presentation to the jury,
by the government's witness, of summary figures relating to his
financial situation.
Gerald
J. Gallinghouse, United States Attorney, Mary W. Cazalas, Assistant
United States Attorney, New Orleans, La. 70130, for plaintiff-appellee.
Richard M. Olsen, 234 Loyola Bldg., New Orleans, La. 70112, Corinne
Hopkins, 1500 N. B. C. Bldg., New Orleans, La. 70112, Lydell Marshall,
3520 Eagle St., New Orleans, La., for defendant-appellant.
Before
MORGAN and HILL, Circuit Judges, and NOEL, Senior District Judge. *
NOEL,
Senior District Judge:
In
this appeal, Lydell Marshall seeks the reversal of his conviction on the
third count of an indictment that charged him with willfully
understating his income for the year 1971 in violation of 26 U. S. C. §7201.
1 The first
and second counts charged that
Marshall
also understated his income for the years 1969 and 1970. The jury
returned a verdict of "not guilty" as to those two years. To
establish its case, the Government employed the cash expenditures method
of proof. That method consists of showing that the sum of a defendant's
expenses and disbursements for a particular taxable year exceed the
total of his reported income, nontaxable receipts, and available cash at
the beginning of the year in question. For the year 1969, the Government
projected
Marshall
's adjusted gross income as $9,930.11, whereas
Marshall
reported an income of $4,670.00. In 1970,
Marshall
reported his adjusted gross income as $6,950.00, whereas the Government
projected a total of $17,414.21. In 1971, the year for which
Marshall
was convicted, the Government projected an adjusted gross income of
$12,248.11 as against a reported income of $5,399.00. The Government
projected that
Marshall
owed an additional $1,927.61 in income taxes for 1971.
Marshall
admitted during cross-examination that he won substantial sums at
gambling that he did not report on his income tax returns.
Marshall
argues two points of error. First, he
alleges that the Government failed to establish the amount of his
opening available fund for each of the taxable years in question,
including the year 1971 for which he was convicted. Second, Marshall
argues that the Government's summary witness placed before the jury
summary figures that contained mathematical errors, as well as figures
that were not justified by direct testimony, so as to create a false
impression of consistent understatement and intention to defraud. We
have tested these arguments against the requirement that we view the
evidence in its most favorable light to the Government, 2 and have
concluded that the evidence presented was clearly sufficient to sustain
the jury's verdict. Accordingly, we affirm the conviction.
[Opening
Funds]
As
authority for his contention that the Government must prove the opening
available funds for each year of the taxable years in question,
Marshall relies on Dupree v. United States [55-1 USTC ¶9169],
218 F. 2d 781 (5th Cir. 1955). In that case, as here, the Government
employed the expenditures method of proof to show that the defendant
willfully understated his income. This Court reversed the conviction
because the Government failed to establish the opening available funds
for the pertinent time period. This Court explained:
The
trial court below properly charged that each prosecution year must stand
alone, and that the Government must prove opening available funds for
each year; for, obviously in a prosecution for the year 1946, there
would be a complete failure of proof unless the excess expenditures
shown were shown to have come from income received during 1946 instead
of being expenditures in 1946 of accumulations from prior years, or even
of unreported income for 1945 or prior years.
218
F. 2d at 785.
Thus, where the Government employs the expenditures method of proof, it
must prove that yearly expenditures exceeded reported income and it must
establish, either directly or inferentially, that the expenditures were
made from taxable income. Where both requirements are not met, a
conviction cannot stand. E.g., Marcus v. United States [70-1 USTC
¶9213], 422 F. 752 (5th Cir. 1970).
Appellant
reads Dupree as requiring the Government to affirmatively prove
the amount of Appellant's opening available funds for each of the
taxable years in question. This reading of Dupree is correct, for
it is altogether clear that in cases where the expenditures method of
proof is employed the Government must present evidence that sufficiently
excludes the possibility that the defendant relied on previously
accumulated assets rather than on unreported taxable income. 3 However,
subsequent decisions of this Court have made clear that the Government
may establish the opening available funds for a beginning year and
proceed to show the total of taxable and nontaxable receipts for the
following consecutive years to prove its case. E.g., United States v.
Penosi [72-1 USTC ¶9103], 452 F. 2d 217 (5th Cir. 1971), cert.
denied, 405 U. S. 1065, 92 S. Ct. 1495, 31 L. Ed. 2d 795 (1972); United
States v. Cook [75-1 USTC ¶9134], 505 F. 2d 659 (5th Cir. 1974), cert.
denied 421 U. S. 1000, 95 S. Ct. 2397, 44 L. Ed. 2d 667 (1975).
Where that is done, the opening available funds for the beginning year
(gifts, inheritance, and the like) and income received less
disbursements paid during the beginning year establish the opening
available funds for the following year. In addition to establishing a
defendant's opening available funds, the Government also has the burden
of proving that the expenditures in question were not made from other
nontaxable sources, such as gifts, loans, or bequests.
In
this case, an Internal Revenue Service agent testified in the form of a
stipulation between counsel that he and other agents investigated
Marshall
's assets as of December 31, 1968, as well as nontaxable sources of
income to
Marshall
during the following three years, including sales of assets
Inheritances, insurance proceeds, bank accounts, and gifts. The
investigation included a survey of some 60 banking and financial
institutions in the New Orleans Metropolitan area, as well as interviews
of
Marshall
's family and friends.
Marshall
does not question the investigation's thoroughness, and on the basis of
the record we are of the view that the investigating agents did all they
could be reasonably expected to do to uncover
Marshall
's assets. See United States v. Beasley [75-2 USTC ¶9725], 519
F. 2d 233 (5th Cir. 1975), vacated on other grounds [76-2 USTC ¶9555],
425 U. S. 956, 96 S. Ct. 1736, 48 L. Ed. 2d 201 (1976); United States
v. Newman [72-2 USCT ¶9719], 468 F. 2d 791 (5th Cir. 1972), cert.
denied, 411 U. S. 905, 93 S. Ct. 1527, 36 L. Ed. 2d 194 (1973). The
investigation did uncover the existence of a bank account and certain
capital and nontaxable assets that
Marshall
received during the threeyear period from 1969 to 1971 for which he was
given credit in the Government's case. 4
Marshall
's defense was that he possessed a cash
hoard at the end of 1968 amounting to approximately $7,000. He argued
that the expenditure of that cash fund explained the discrepancy between
his expenditures and his reported income. The Government introduced
evidence showing that
Marshall
would have had to save 131/2[%] of his income of approximately $5,300 a
year from 1958 to 1968 to accumulate $7,000, and that
Marshall
made substantial credit purchases during 1969, 1970 and 1971. The
Government also showed that the investigation of
Marshall
's affairs disclosed no corroborating evidence of the cash hoard. The
issue was essentially one of defendant's credibility and viewed in its
entirety, the evidence presented of Marshall's opening net worth in 1969
and his expenditures and receipts during the following two years was
sufficient to allow a reasonably minded jury to validly draw the
inference that Marshall possessed no cash hoard at the beginning of
1971, the year in question.
[Accuracy
of Figures]
Appellant
also contends that the figures that the Government's summary witness
presented to the jury contained certain mathematical errors and did not
fairly reflect the direct evidence presented by the Government. Although
several of these alleged errors concern the 1969 and 1970 tax years, we
nonetheless must address them here because any error with respect to
those years might affect the existence or size of a cash asset at the
beginning of 1971. Initially, appellant argues that he ought not have
been charged with expenditures of some $11,791.11 in alleged capital
contributions in 1970 and 1971 to a business in which he was a partner.
It is true that the uncontroverted evidence showed that appellant
himself did not make those contributions to the partnership's capital
account. Those sums were actually deposited to his account by another
partner. It is equally true, however, that the jury could reasonably
have found that those sums contributed on appellant's behalf were in
payment for services rendered to the partnership and taxable as ordinary
income as such. Appellant also complains that the Government summary
figures reflected that he deposited $1,000 more to his savings account
in 1969 than he actually did. The exhibits introduced into evidence at
trial bear out this assertion, and show that the $1,000 deposit ought to
have been reflected as having been made in 1970. This error could have
no possible bearing on the jury's finding of guilt with respect to 1971
taxable year. The salient point in this regard is that the error could
not have misled the jury into assuming that appellant had less
funds on hand at the beginning of 1971 than he actually did. Appellant
has alleged one other error in the Government's summary figures
involving the Government's failure to credit Appellant with an $800
gift. Even assuming that this omission constituted error of some form,
we find it harmless as a matter of law. Even had appellant been credited
with $800 in nontaxable income in 1971, the overwhelming weight of the
evidence would nonetheless have demonstrated that appellant
substantially understated his income.
AFFIRMED.
*
Senior District Judge for the Southern District of Texas sitting by
designation.
1
That statute provides:
Any
person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, shall be fined not more than $10,000, or imprisoned not more
than 5 years, or both, together with the cost of prosecution. Aug. 16,
1954, c. 736, 68A Stat. 851.
2
Glasser v.
United States
, 315
U. S.
60, 62 S. Ct. 457, 86 L. Ed. 680 (1941); Fitzpatrick v.
United States
, 410 F. 2d 513 (5th Cir. 1969).
3
This requirement implements the rule that in circumstantial evidence
cases the Government must introduce evidence from which the jury might
reasonably conclude that every reasonable hypothesis has been excluded
but that of guilt. E.g., United States v. Willoz [71-2 USTC ¶16,016],
449 F. 2d 1321, 1323 (5th Cir. 1971); Vick v. United States, 216
F. 2d 228, 232 (5th Cir. 1954).
4
The Government credited
Marshall
with $1,300 of nontaxable income in 1969 from the sale of two
automobiles. For the year 1970,
Marshall
was credited with $2,175 in nontaxable receipts from withdrawals from
his savings account. For the year 1971,
Marshall
was credited with receiving $3,452.18 in settlement of a lawsuit for
personal injuries, and with a withdrawal of almost $1,000 from his
savings account.
[80-1
USTC ¶9390]
United States of America
, Plaintiff-Appellee v. John David Gardner, Defendant-Appellant
(CA-9),
U. S. Court of Appeals 9th Circuit, No. 76-1874, 611 F2d 770, 1/11/80,
Affirming unreported District Court decision
[Code Sec. 7201]
Criminal penalties: Willful evasion of tax: Constitutional rights:
Net worth method: Discovery: Willfulness.--The taxpayer's conviction
for willfully attempting to evade income taxes in 1968, 1969, and 1970
was upheld. The court rejected the taxpayer's argument that the
government's plea bargaining offer burdened his right to stand trial and
not to cooperate with the investigation because the additional
threatened charges were charges on which the taxpayer could be
prosecuted. The trial court properly denied the taxpayer's motion to
dismiss because government affidavits and impeachment of the taxpayer's
witness refuted the taxpayer's charges that evidence had been obtained
through electronic surveillance. It also properly denied the taxpayer's
request for exculpatory government documents because it determined, in
camera, that the documents were insufficiently material. The government
properly used the net worth and expenditures method to establish the
taxpayer's true income, and this showed a consistent pattern of
substantial income understatement from which the jury could infer
willfulness. Evidence and testimony concerning two interviews the
taxpayer had with the IRS were properly admitted because the IRS had
warned the taxpayer of his Fifth Amendment rights and because his
counsel was present on both occasions. The taxpayer's counsel provided
him with the effective representation guaranteed by the Sixth Amendment.
Bert
Deixler, Assistant United States Attorney, Los Angeles, Ca. 90012,
Leonard Sharenow, Finley, Kumble, Eagner, Heine & Underberg, 2029
Century Park East, Los Angeles, Ca. 90067, for plaintiff-appellee.
Elliott E. Stanford,
Los Angeles
, Ca. for defendant-appellant.
Before:
ANDERSON and HUG, Circuit Judges, and EAST *, District
Judge.
Opinion
HUG,
Circuit Judge:
John
David Gardner appeals his conviction on three counts of willfully
attempting to evade federal income taxes, in violation of 26
U. S.
C. §7201. The jury found that
Gardner
had understated his taxable income in each of the years 1968, 1969, and
1970.
Gardner
raises numerous contentions on appeal, none of which requires reversal
of his conviction. We affirm.
I.
After Gardner's indictment on three counts of tax evasion, the
Government sought to strike a plea bargain with
Gardner
. The Government offered to abandon plans to seek a second indictment
against
Gardner
on charges of filing false statements to secure loans and to dismiss two
counts of the original indictment if
Gardner
pleaded guilty to one count of tax evasion and cooperated with the
Government in another criminal investigation involving other suspects.
Gardner
rejected the offer. Subsequently,
Gardner
was convicted on all three counts of tax evasion, and the Government
obtained an indictment against
Gardner
on the charges of filing false statements.
Gardner
contends that the Government's threat to obtain the second indictment
created an appearance of vindictiveness which impermissibly burdened his
rights to stand trial and to refuse to cooperate with the criminal
investigation. 1
In
Bordenkircher v. Hayes, 434
U. S.
357 (1978), a state prosecutor offered to recommend a lenient sentence
for a criminal defendant if the defendant agreed to plead guilty to a
felony charge. Additionally, the prosecutor threatened to obtain an
indictment under a recidivist statute, which carried a heavier penalty
then the original charge, if the defendant chose to stand trial. The
Supreme Court held that, so long as the defendant was free to accept or
reject the offer, the prosecutor could lawfully present the defendant
with the alternatives of pleading guilty or facing charges on which he
was plainly subject to prosecution.
Id.
at 363-65.
Gardner
does not assert that the Government had no probable cause to prosecute
him on the charges of filing false statements, and it is clear that
Gardner was free to accept or reject the offer proposed by the
Government in plea bargaining. Consequently, in light of Bordenkircher,
we must reject
Gardner
's contention that the Government's offer unlawfully impinged upon
Gardner
's right to plead not guilty and stand trial. See id. Similarly,
the Government could lawfully seek to induce
Gardner
to cooperate in another criminal investigation. Cf.
United States
v.
Warren
, 594 F. 2d 1046, 1049 (5th Cir. 1979) (offer by prosecutor to drop
charges against witness in exchange for testimony against codefendant).
II.
During pretrial proceedings,
Gardner
moved to dismiss the indictment on the ground, inter alia, that
the Government had obtained evidence against him through the use of
illegal electronic surveillance.
Gardner
supported his allegations with affidavits submitted by one Darthard
Perry, a one-time paid informant for the Federal Bureau of
Investigation. Those affidavits stated that
Gardner
was under frequent electronic surveillance by federal authorities. In
response, the Government produced the affidavit of F. B. I. Agent
Stephen Moss, which stated that the records of the Washington D. C.
headquarters and two field offices of the F. B. I. indicated that
Gardner
had not been the subject of electronic surveillance. Moss had personally
checked the records of one field office and had obtained reports from
the other offices. In addition, the Government communicated to the court
the statement of a member of the Department of Justice, Tax Division,
that each of six federal agencies had reported that it had not conducted
electronic surveillance of
Gardner
.
The
trial court initially criticized the Government's response for lack or
specificity in Moss's affidavit and for the Government's failure to
produce an affidavit from the agent who personally checked the F. B. I.
records at the Washington D. C. headquarters. However, the court denied
the motion to dismiss without prejudice to its renewal after trial. Upon
renewal of the motion to dismiss after trial, the court accepted the
Government's denial of electronic surveillance and denied
Gardner
's motion.
Gardner
contends that the Government inadequately negated his allegations of
illegal surveillance, warranting reversal of the conviction.
Upon
a preliminary showing by a criminal defendant that he was the victim of
illegal electronic surveillance, the prosecution must unequivocally
affirm or deny the use of such surveillance. See 18 U. S. C. §3504(a)(1);
United States
v. Alter, 482 F. 2d 1016, 1026-27 (9th Cir. 1973). However, a
general or unsupported claim by the defendant requires only a response
appropriate to that claim. See
United States
v. See, 505 F. 2d 845, 856 (9th Cir. 1974), cert. denied,
420
U. S.
992 (1975). The specificity of the prosecution's denial and the
comprehensiveness of the search on which the denial is predicated must
be measured against the specificity of the allegations of unlawful
electronic surveillance and the strength of the support for those
allegations. See
United States
v. Alvillar, 575 F. 2d 1316, 1321 (10th Cir. 1978);
United States
v. See, 505 F. 2d at 856 n. 18.
Perry's
affidavits, the chief support for
Gardner
's allegations, were thoroughly impeached by testimony taken at hearings
on the motions to dismiss and at trial. 2 In light of
the general nature of
Gardner
's allegations and the failure to provide substantial support for those
allegations, the Government's denial of electronic surveillance was
adequate. Absent a stronger showing by
Gardner
, first-hand inspection of the F. B. I. records by the Government's
affiant was not required; the information received by Moss and stated in
his affidavit was sufficient. See United States v. Yanagita, 552
F. 2d 940, 945 (2nd Cir. 1977); In re Weir, 495 F. 2d 879, 881
(9th Cir.), cert. denied, 419
U. S.
1038 (1974). The district court properly accepted the Government's
denial of
Gardner
's allegations of electronic surveillance.
III.
During the trial,
Gardner
directed a general request to the Government to produce "all
evidence within the Government's knowledge or possession which may be
favorable to the accused and is material to either guilt or
punishment." The trial court made a similar request. In response,
the Government submitted to the court for in camera inspection
the excised portions of two documents and the full text of several other
documents. The Government had determined that the matter submitted to
the court contained information that was potentially material to the
issue of the credibility of Government witnesses. After review, the
district court turned a single document over to the defense; the court
concluded that the remaining information was insufficiently material to
require disclosure.
On
appeal,
Gardner
does not assert that he has discovered specific, exclupatory evidence
improperly suppressed by the Government. Rather, he contends that the
procedure adopted by the Government and approved by the district court
inadequately protected his constitutional rights.
The
prosecution may not suppress exculpatory evidence that is material to
the issue of guilt or punishment. Brady v.
Maryland
, 373
U. S.
83, 87 (1963). In a case in which a general request for exculpatory
evidence is made, the test for materiality is whether the suppressed
evidence "creates a reasonable doubt that did not otherwise
exist."
United States
v. Agurs, 427
U. S.
97, 112 (1976).
In
response to a request for exculpatory evidence the prosecution does not
have a constitutional duty to disclose every bit of information that
might affect the jury's decision; it need only disclose information
favorable to the defense that meets the appropriate standard of
materiality. See Agurs, 427
U. S.
at 108-112. If the prosecution is uncertain about the materiality of
information within its possession, it may submit the information to the
trial court for an in camera inspection and evaluation. See id.
at 106 (prosecutor may respond to specific request by "submitting
the problem to the trial judge."); United States v. Ross
[75-1 USTC ¶9428], 511 F. 2d 757, 765 (5th Cir.), cert. denied,
423
U. S.
836 (1975).
In
this case, the Government properly submitted to the trial court for in
camera evaluation only those documents or portions of documents that
it determined were arguably subject to disclosure under Brady and
Agurs; sensitive information not meeting that standard could be
deleted or withheld. We reject
Gardner
's assertion that the excision of portions of two of the submitted
documents indicates that the deleted portions contained material,
exculpatory information. The court was in a position to determine
whether it needed to see the excised portions of documents in its in
camera inspection in order to make a proper evaluation. Absent a
more concrete showing that the Government improperly suppressed material
evidence, we find no reversible error in the procedure utilized by the
district court. See United States v. Frazier, 394 F. 2d 258, 262
(4th Cir.), cert. denied, 393
U. S.
984 (1968).
IV.
To establish that
Gardner
had reported less than his total income, the Government employed the
"net worth and expenditures method" of estimating taxable
income.
Gardner
contends that the evidence presented by the Government was insufficient
to support his conviction for willful attempt to evade income taxes. In
particular,
Gardner
argues that the Government's evidence was speculative and error-prone,
that the element of willfulness was inadequately established, and that
the admission into evidence of a chart summarizing the Government's case
was unduly prejudicial.
The
net worth method of establishing taxable income may be employed if the
prosecutor (1) accurately establishes the defendant's opening net worth,
(2) identifies a likely source of taxable income from which it may be
inferred that the defendant's increase in net worth arose, and (3)
conducts a reasonable investigation of any leads that suggest that the
defendant properly reported his income. See Holland v. United States
[54-2 USTC ¶9714], 348
U. S.
121, 130-38 (1954); United States v. Hom Ming Dong, 436 F. 2d
1237 (9th Cir. 1971). The prosecution must prove "every element of
the offense beyond a reasonable doubt though not to a mathematical
certainty."
Holland
, 348
U. S.
at 138. A case involving the use of the net worth method should be
carefully reviewed on appeal.
Id.
at 129. Nonetheless, we must uphold the verdict of the jury if, viewing
the evidence in the light most favorable to the Government, there is
relevant evidence from which the jury could reasonably have found
Gardner
guilty beyond a reasonable doubt. See
United States
v. Friedman, 593
U. S.
109, 115 (9th Cir. 1979).
The
requirements of
Holland
were met in this case. The Government adequately established defendant's
opening net worth for each tax year, and it identified various business
firms, with which
Gardner
was associated, as likely sources of unreported taxable income. There is
no evidence that the Government failed to investigate leads that
suggested
Gardner
's innocence.
The
evidence upon which
Gardner
ultimately was convicted showed that
Gardner
owed significantly less in delinquent taxes than the amount charged in
the indictment. However, this discrepancy was due chiefly to the
Government's decision during the trial to credit certain defense
testimony relating to tax liability and to adjust its estimate of
taxable income accordingly. We have reviewed
Gardner
's assertions that the Government's calculations were
"errorprone," and we find that the Government's proof based on
the "net worth and expenditures method" was not subject to a
sufficient margin of error to undermine the support for the jury's
verdict. Cf.
United States
v. Keller, 523 F. 2d 1009, 1012 (9th Cir. 1975) (proof of tax
evasion not upset by allegations of minor errors in Government
computation).
The
element of willfulness may be inferred by the jury from evidence of a
consistent pattern of underreporting large amounts of income. United
States v. Vannelli, 595 F. 2d 402, 405 (8th Cir. 1979); see Keller,
523 F. 2d at 1011;
Holland
, 348
U. S.
at 139. After adjustment in light of defense testimony, the Government's
evidence indicated that
Gardner
had underreported more than $10,000 in taxable income in each of three
successive years for a total of more than $60,000 in unreported taxable
income over a three-year period. The jury could reasonably infer from
this evidence that
Gardner
had willfully attempted to evade his income taxes.
Finally,
we reject
Gardner
's contention that the defense was unduly prejudiced by the Government's
use of a chart summarizing the assets, liabilities and expenditures of
the appellant. The Government initially employed the chart as a
testimonial aid for a Government witness. The Government witness who
presented the chart was examined and cross-examined extensively with
respect to the sources of the figures on the chart. The chart was a
summary of facts and calculations which were in evidence. There was no
objection to the utilization of the chart at the time the witness
testified. The use of the chart in court contributed to the clarity of
the presentation to the jury, avoided needless consumption of time and
was a reasonable method of presenting the evidence. It was well within
the discretion of the court to permit this use pursuant to Fed. R. Evid.
611(a). Having thus utilized the chart without objection with a full
opportunity for the defendant to challenge the facts, figures,
calculations and underlying documents upon which the chart was based, it
was not reversible error to admit the chart in evidence. See
United States
v. Johnson, 460 F. 2d 20, 22 (9th Cir. 1972). See generally Fed.
R. Evid. 1006; 5 Weinstein's Evidence ¶1006[01], at 1006-2-1006-4.1
(1978). 3
V.
At trial, Internal Revenue Service Agent Caesar Cantu was examined with
respect to the second of two investigatory interviews with
Gardner
. At one point the witness testified, "Mr. Gardner wanted to ask me
something but he wasn't sure in what areas he would incriminate himself
if he began . . ." Defense counsel immediately moved for a
mistrial. The district court denied the motion but ordered the statement
stricken from the record on the ground that it constituted an
inadmissible conclusion on the part of the witness with respect to
another's state of mind. In addition, the court admonished the jury that
the statement was
totally
and entirely irrelevant and immaterial to any issue in this case and
should not be considered by you in any way in your deliberations and
considerations of the factual issues of this case.
Gardner
contends that the court's admonition did not cure the prejudicial effect
of the stricken testimony, and that the court erred in denying his
motion for a mistrial.
The
trial court is in the best position to determine whether an incident
merits a mistrial.
United States
v. Nace, 561 F. 2d 763, 768 (9th Cir. 1977). We will not
overturn the trial court's denial of a motion for a mistrial unless the
defendant can show an abuse of the court's discretion. Tisnado v.
United States
, 547 F. 2d 452, 460 (9th Cir. 1976). The stricken testimony in this
case was not highly prejudicial. The court's admonition to the jury to
disregard the statement was adequate to protect
Gardner
's right to a fair trial. We find no abuse of the court's discretion in
denying the motion for a mistrial.
VI.
Gardner complains that Agent Cantu failed to advise
Gardner
of his constitutional rights before each of the two noncustodial
investigatory interviews conducted by Cantu.
Gardner
did not move the trial court to suppress evidence obtained from these
interviews. Rather, he argues on appeal that Cantu's failure to give
proper warnings, when viewed in combination with the trial court's
denial of
Gardner
's motion for a mistrial, resulted in "reversible error,"
presumably by denying
Gardner
a fair trial. 4
There
is no constitutional requirement that the warnings outlined in Miranda
v. Arizona, 384
U. S.
436 (1967), be given to a taxpayer before a noncustodial interview
conducted by an agent of the IRS in connection with a criminal tax
investigation. Beckwith v. United States [76-1 USTC ¶9352], 425
U. S.
341 (1976). Published procedures of the IRS, however, require agents to
give similar warnings at the initial meeting with the taxpayer in a
criminal tax investigation:
At
the initial meeting with a taxpayer, a Special Agent is now required to
identify himself, describe his function, and advise the taxpayer that
anything he says may be used against him. The Special Agent will also
tell the taxpayer that he cannot be compelled to incriminate himself by
answering any questions or producing any documents, and that he has the
right to seek the assistance of an attorney before responding.
United
States v. Sourapas [75-1 USTC ¶9379], 515 F. 2d 295, 297 n. 2 (9th
Cir. 1975) (quoting from IRS News Release IR-949 (November 26, 1968)).
In unusual circumstances, a failure of the IRS substantially to comply
with the requirements of this published procedure might provide grounds
for the suppression of the fruits of the improperly conducted interview.
See
United States
v.
Caceres
, 440
U. S.
741, 755-57 (1979). 5
We
find that Cantu substantially complied with IRS procedures. At the
initial interview with
Gardner
, Cantu gave
Gardner
all of the required warnings except that one relating to the right to
seek the assistance of counsel. Because
Gardner
was accompanied by his attorney at each interview, Cantu's failure to
advise
Gardner
of the right to seek counsel is inconsequential. See United States v.
Morse, 491 F. 2d 149, 156 (1st Cir. 1974) (compliance with substance
and spirit of procedure is adequate).
Cantu
did not repeat the warnings before his second interview with
Gardner
. However, the IRS published procedure requires only that the warnings
be given at the initial interview. See generally United States v.
Mathews, 464 F. 2d 1268, 1270 (5th Cir. 1972). Particularly in light
of the fact that
Gardner
was accompanied by counsel at both interviews, Cantu's statement of
rights at the first interview was adequate.
We
conclude that Cantu's actions did not result in reversible error,
whether they be viewed independently or in combination with other
aspects of the trial.
VII.
Finally,
Gardner
contends that he was denied his right under the Sixth Amendment to
representation by effective counsel.
Gardner
asserts that his trial counsel was guilty of numerous omissions in the
investigation and trial of his case.
As
a criminal defendant,
Gardner
enjoyed the right to "reasonably competent and effective
representation." Cooper v. Fitzharris, 586 F. 2d 1325 (9th
Cir. 1978) (en banc), cert. denied, 440
U. S.
974 (1979). The omissions that
Gardner
attributes to his counsel either are inconsequential or are related to
reasonable tactical decisions necessitated by the limits on time and
resources associated with any litigation. Although another attorney
might have tried the case differently, and perhaps more skillfully, we
conclude that
Gardner
's counsel provided reasonably competent and effective representation
satisfying the requirements of the Sixth Amendment.
VIII.
The judgment of the district court is affirmed.
*
The Honorable William G. East, Senior
United States
District Judge, District of Oregon, sitting by designation.
1
To the extent that
Gardner
seeks dismissal of the second indictment on grounds of vindictive
prosecution, that relief is properly sought before the court trying the
charges for filing false statements, a separate case. Because we find
that Gardner's rights were not violated, we need not consider what
relief could be granted in this case if the Government had acted
improperly during the course of plea bargaining.
2
Perry's own testimony was inconsistent with key statements in his
affidavits. In evaluating
Gardner
's showing of electronic surveillance and the Government's response, we
give greater weight to the testimony, which was subject to cross
examination, than to the affidavits. See Matter of the Grand Jury,
524 F. 2d 209, 216 (10th Cir. 1975), cert. dismissed, 425
U. S.
927 (1976).
3
Gardner
relies on this court's decision in Lenske v. United States, 383
F. 2d 20 (9th Cir. 1967). In Lenske, however, the accuracy of the
chart used by the Government was vigorously and effectively challenged,
and the use of the chart was only one of several factors contributing to
the court's decision to reverse the conviction. This court in United
States v. Abbas, 504 F. 2d 123 (9th Cir. 1974), cert. denied,
421 U. S. 928 (1975), stated that the better practice was to use the
charts as a testimonial aid for witnesses and as a visual aid for
counsel in argument, but not to submit the charts to the jury. However,
the court found no reversible error where the defense had a full
opportunity to cross examine the witness who testified relative to the
charts, to indicate any errors in the charts and to present any similar
demonstrative evidence in presentation of the defense case. A limiting
instruction was also given in Abbas. Although the defendant in
the present case objected to the chart being admitted in evidence and
going to the jury, the record does not disclose whether any limiting
instruction was sought or given, and such an instruction was not
essential to preclude reversible error in this case.
4
In arguing that these factors combine to constitute reversible error,
Gardner
asks this court to consider as well his counsel's failure to conduct a voir
dire examination of Cantu to determine whether Cantu gave the proper
warnings.
Gardner
does not specify how he was prejudiced by this omission. In any event,
this complaint is more appropriately considered in conjunction with
Gardner
's contention that he was deprived of the effective assistance of
counsel.
5
In Caceres, the Supreme Court reversed this court's decision in United
States v. Caceres, 545 F. 2d 1182, 1187 (9th Cir. 1976), and
rejected a more rigid rule of exclusion first adopted by this court in United
States v. Sourapas [75-1 USTC ¶9379], 515 F. 2d 295 (9th Cir.
1975).
[78-2
USTC ¶9754]
United States of America
, Plaintiff-Appellee v. Tommy Hiett, Defendant-Appellant
(CA-5),
U. S. Court of Appeals, 5th Circuit, No. 77-5214, 581 F2d 1199,
10/16/78, Affirming unreported District Court decision
[Code Sec. 7201--result unchanged by the '76 Tax Reform Act]
Crime: Tax evasion: Burden of proof: Net worth method: Taxable v.
nontaxable sources of income.--The taxpayer was properly convicted
of tax evasion through the use of the net worth method of reconstructing
income. Because the taxpayer gave no leads as to any possible nontaxable
sources of income, the government carried its burden of proving that the
taxpayer's unreported income was taxable income by showing that it
conducted a thorough investigation that failed to reveal any nontaxable
source. Furthermore, the government was not required to prove that the
taxpayer had no unclaimed deductions.
Joseph
S. Chagra, 718 Southwest Center, 300 East Main, El Paso, Tex. 79901,
Towner Leeper, 444 Executive Center, Suite 112, El Paso, Tex. 79902, for
plaintiff-appellee. Jamie C. Boyd, United States Attorney, Le Roy Morgan
Jahn, Charles J. Muller, Malcolm Logan, Wayne F. Speck, Assistant United
States Attorneys, San Antonio, Tex. 78206, Richard B. Buhrman,
Department of Justice, Washington, D. C. 20530, for defendant-appellant.
Before
COWEN *, Senior
Judge, GOLDBERG and AINSWORTH, Circuit Judges.
GOLDBERG,
Circuit Judge:
This
is an appeal from a conviction for two counts of income tax evasion in
violation of 26
U. S.
C. §7201.
Evidence
presented at trial showed that from 1964 to 1970 appellant Hiett's chief
source of income was a divorce consulting firm. During this time
appellant routinely paid his bills by check. The divorce consulting firm
closed in late 1970 or early 1971. At about that time appellant began
paying for everything in cash, including such large purchases as a house
and an airplane. He filed no individual tax returns for 1971 or 1972.
This led the government to investigate his tax liabilities for those
years.
In
its investigation the government used the net worth method of
reconstructing income. Under that method the IRS showed substantial
increases in appellant's net worth for the years in question and found
that appellant had taxable income of $16,000 in 1971 and $28,000 in
1972. Appellant did not cooperate in the investigation, nor did he offer
any explanation for his increased net worth. The jury found him guilty
of income tax evasion for the years of 1971 and 1972. He appeals.
I.
The principal issue raised on appeal concerns the government's burden of
proof in a criminal prosecution for income tax evasion. To establish a
§7201 violation, the government must prove (1) the existence of a tax
deficiency, (2) an affirmative act constituting an evasion or attempted
evasion of the tax due, and (3) willfulness. Sansone v. United States
[65-1 USTC ¶9301], 380
U. S.
343, 351, 85
S. Ct.
1004, 13 L. Ed. 2d 882 (1965). Because a §7201 violation is a criminal
offense, the government must prove each element of the crime beyond a
reasonable doubt. On appeal Hiett contends that the government failed to
prove beyond a reasonable doubt that there was a tax deficiency.
To
establish a tax deficiency, the government must show first that the
taxpayer had unreported income, and second, that the income was taxable.
The government has several customary ways of overcoming the first
hurdle. Here it used the net worth method of reconstructing income. 1 Appellant
does not contest the government's calculations under that method.
The
government, however, does not satisfy its burden of proving a tax
deficiency simply by showing that the taxpayer had unreported income for
the year in question. In addition, the government must prove that the
unreported income was taxable income. This is the aspect of the
government's case which appellant contests. Under the Supreme Court's
decisions, the government can satisfy this burden in either of two ways.
It can show that there is a likely taxable source of the unreported
income, Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121, 138, 75 S. Ct. 127, 99 L. Ed. 150 (1954), or it can negate all
possible nontaxable sources of that income. United States v. Massei
[58-1 USTC ¶9326], 355
U. S.
595, 78 S. Ct. 495, 2 L. Ed. 2d 517 (1958). Since the government
concedes that it did not establish a likely taxable source of
appellant's unreported income, the issue narrows to whether the
government negated all possible nontaxable sources within the meaning of
Massei. If it did, the income must have come from a taxable
source.
It
is impossible, of course, to negate every possible nontaxable
source. In the typical case, the taxpayer gives the IRS
"leads" to possible nontaxable sources. Some cases have held
that the government satisfies its burden if it negates each of these
leads. E.g., Kramer v. Commissioner of Internal Revenue [68-1
USTC ¶9200], 389 F. 2d 236 (7th Cir. 1968). Here, however, appellant
provided no leads for the government to negate. He notes that the
self-incrimination clause of the fifth amendment and the requirement
that the government bear the burden of proof in criminal prosecutions
prevent the government from forcing him to provide leads. He seems to
suggest that taxpayers who provide leads to the IRS stipulate that the
search for nontaxable sources can be narrowed to an investigation of
just those leads. This permits the government to convict those taxpayers
by simply negating their proffered leads. Because appellant provided no
leads, he argues that the search cannot be narrowed and the government
must negate every possible source of nontaxable income. Since that is an
impossible task, appellant contends that he cannot be convicted.
To
adopt appellant's position would require the government to exhaust the
inexhaustable--to conduct an absolutely limitless investigation. It
would cast the government in the role of a conjurer, forcing it to pull
nontaxable sources out of a hat. Appellant would require the government
to embark on a Magellan-like expedition in order to prove that the
unreported income was taxable. Not only would the government have to
circle the globe in its search, it would also have extra orbital
responsibility, since appellant's position requires it to prove a cosmic
negative. To state appellant's position is to establish its absurdity.
If Massei and
Holland
are to have viability in our jurisprudence, they cannot be read to
sanction such a result.
Our
cases adequately rebut appellant's position. In United States v.
Boulet [78-2 USTC ¶9628], 577 F. 2d 1165 (5th Cir. 1978) and United
States v. Penosi [72-1 USTC ¶9103], 452 F. 2d 217 (5th Cir. 1971),
both prosecutions for income tax evasion, we held that the government
satisfies its burden of proving that income is taxable if it conducts a
thorough investigation that fails to disclose any nontaxable source.
Appellant would have us distinguish Penosi and Boulet. In
those cases, he correctly asserts, the government did not use the net
worth method to prove that the taxpayer had unreported income. The
government used the expenditures method in Penosi and the bank
deposits method in Boulet. 2 However,
appellant's attempted distinction fails. It confuses the first issue,
whether the taxpayer had unreported income, with the second issue of
whether the income was taxable. Whatever method the government uses to
answer the first question, the inquiry into possible nontaxable sources
is wholly distinct. Thus Penosi and Boulet are
indistinguishable on this issue, and they control this case. With the
addition of Hiett, the Penosi and Boulet twins
become triplets. We therefore hold that in an income tax evasion case
based on the net worth method of proof, when the taxpayer gives no leads
as to nontaxable sources, the government satisfies its burden of
negating all possible nontaxable sources within the meaning of Massei
by showing that it conducted a thorough investigation that failed to
reveal any nontaxable source.
For
purposes of this standard, a thorough investigation must be, of course,
one which removes any reasonable doubt that the defendant's unreported
income came from nontaxable sources. In this case the government made
such an investigation. It contacted banks and third parties--including
appellant's family--in an attempt to find out if appellant received any
income by gift, loan, inheritance, or other nontaxable source. The
government located no nontaxable sources that could account for
appellant's unreported income. As we explained in Penosi,
the
government cannot be expected to conduct an exhaustive nationwide
investigation when the defendant supplies no relevant leads . . . the
government agent did enough to carry the burden of proof when he
interviewed friends and relatives and checked with financial and
government institutions at both the present and former residences of the
defendant.
United States
v. Penosi, 452 F. 2d at 220.
We
wish to emphasize that our holding in no way shifts the burden of proof
to the defendant. He is not required to supply leads or testify in
court. The burden of establishing a taxable source remains on the
government throughout the trial. But, as we stated in Penosi,
once "the results of the investigation were put into evidence, the
government established a prima facie case, and by remaining
silent, . . . [the defendant] took the risk that the jury would believe
the government's witnesses and find him guilty."
Id.
After the government establishes its prima facie case, the
taxpayer defendant--like all other defendants--"remains quiet at
his peril." Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121, 138-39, 75 S. Ct. 127, 99 L. Ed. 150 (1954).
II.
Appellant raises another issue on appeal related to the government's
burden of proof. He contends that the district court erroneously placed
the burden of proof on him to show that his expenditures were for
business and not personal purposes. In other words appellant argues that
the government, to carry its burden of proof in a prosecution for income
tax evasion, must prove that the defendant has no unclaimed deductions.
We
hold that the district court correctly placed the burden of proving
deductions on appellant. The law in this area is clear. In a prosecution
for income tax evasion, once the government has established the
defendant's unreported income and has allowed both the deductions that
the defendant claims and those that it can calculate without the
defendant's assistance, it is not then required to prove that the
defendant has no other deductions. The burden of proving additional
deductions is on the defendant. United States v. Garguilo [77-1
USTC ¶9402], 554 F. 2d 59, 62 (2d Cir. 1977); Siravo v. United
States [67-1 USTC ¶9446], 377 F. 2d 469, 473 (1st Cir. 1967); McClanahan
v. United States [61-2 USTC ¶9550], 292 F. 2d 630, 632 (5th Cir.
1961); United States v. Stayback [54-1 USTC ¶9345], 212 F. 2d
313, 317 (3d Cir. 1954).
III.
The third issue raised on appeal is whether the trial court correctly
admitted into evidence certain testimony of an IRS agent who
investigated the appellant. The disputed colloquy between the prosecutor
and the agent is as follows:
Q:
During the course of your investigation, how did you proceed? What did
you do?
A:
We attempted to interview Mr. Hiett and--
.
. .
Q:
And did you meet with Mr. Hiett and Mr. Leeper [appellant's attorney] at
that time?
A:
Yes, we did.
Q:
Did you inform Mr. Leeper and Mr. Hiett that you were investigating tax
liabilities of Mr. Hiett?
A:
Yes.
.
. .
Q:
All right. After informing him of the investigation, what, if anything,
happened? Did Mr. Leeper continue the interrogation at that time or the
conference at that time?
A:
No, sir, the interview was terminated at that point.
Q:
All right. Did you have occasion during your investigation thereafter to
ever meet again with Mr. Leeper or Mr. Hiett?
A:
No, I did not.
Appellant
argues that under United States v. Hale, 422 U. S. 171, 95 S. Ct.
2133, 45 L. Ed. 2d 99 (1975), the admission of this testimony
constituted prejudicial error because it informed the jury that he had
exercised his right to remain silent during the IRS investigation. In Hale,
the defendant, while under arrest for robbery, exercised his right to
remain silent when questioned by the police as to the source of money
found on his person. At trial the defendant explained that his ex-wife
had given him the money. The Supreme Court held, under its advisory
power over federal courts, that in this case it was prejudicial error
for the trial court to permit cross examination of the defendant
concerning his silence during the police interrogation. The court so
held because it found that the probative value of the testimony
regarding the defendant's pre-trial silence was outweighed by the
prejudicial impact of admitting it into evidence.
Id.
at 180, 95
S. Ct.
2133.
We
cannot hail the Hale case into the Hiett trial. Hale
does not control this case. The testimony the appellant complains of was
not nearly as prejudicial as was the testimony at issue in Hale.
Here, the disputed testimony was not even a clear comment on the
appellant's exercise of his right to remain silent. The witness merely
stated that the interview was terminated and the parties never met
again. It certainly does not have the prejudicial impact of
testimony--such as that in Hale--indicating that an accused
remained silent in the face of police interrogation at the time of
arrest. See
United States
v.
Griffin
, 530 F. 2d 101, 103 (5th Cir. 1976).
Furthermore,
the testimony in this case has greater probative value than the
testimony challenged in Hale. In Hale the defendant's
pre-trial silence was only probative on the issue of his credibility.
And, as we have said, "doubt should not be cast upon [a
defendant's] . . . credibility as a penalty for exercising his
prerogative to make no statement to the arresting officer." United
States v. Impson, 531 F. 2d 274, 277 (5th Cir. 1976), cert.
denied, 434
U. S.
1050, 98 S. Ct. 900, 54 L. Ed. 2d 803 (1978). In this case, however, the
testimony about appellant's silence is probative, not on the issue of
appellant's credibility, but on whether the government satisfied its
burden of proof. As we explained, the government must show that it
conducted a thorough investigation of the taxpayer's sources of income.
If the taxpayer provides leads to nontaxable sources, the government
must negate them. Holland v. United States [54-2 USTC ¶9714],
348
U. S.
121, 138, 75 S. Ct. 127, 99 L. Ed. 150 (1954). Here, the challenged
testimony simply allowed the government to show that it had asked
appellant for leads and received none. In order to prove that it
conducted the requisite thorough investigation, the government should be
allowed to show that it sought out the person most likely to provide
relevant leads. Thus it was instrumental to the government's case that
it show that appellant provided no leads. While in Hale the
challenged testimony was not so important to the prosecutor's case. We
therefore hold that the trial court properly admitted the testimony.
IV.
Appellant's final contention on appeal is that a portion of the
prosecutor's closing argument constitutes reversible error. The
challenged statements are those in which the prosecutor seems to vouch
for the two IRS agent witnesses. 3
As
appellant contends, the trial court may commit reversible error by
allowing a prosecutor to vouch for his witnesses in closing argument. E.g.,
United States v. Arteaga-Limones, 529 F. 2d 1183, 1190 (5th Cir.
1976), cert. denied, 429
U. S.
920, 97 S. Ct. 315, 50 L. Ed. 2d 286 (1976); United States v. Brown,
451 F. 2d 1231, 1235 (5th Cir. 1971). But, to decide if such a closing
argument constitutes reversible error, we must examine the argument as a
whole in the context of the entire case.
United States
v.
Corona
, 551 F. 2d 1386, 1388 (5th Cir. 1977). In this case the defense
counsel, throughout his closing argument, attacked both the attitude of
IRS agents toward appellant and the quality of their work. The
prosecutor, as an advocate, is entitled to make a fair response to the
arguments of defense counsel. United States v. Millet, 559 F. 2d
253 (5th Cir. 1977); United States v. Bursten [72-1 USTC ¶9152],
453 F. 2d 605, 611 (5th Cir. 1971), cert. denied, 409
U. S.
843, 93 S. Ct. 44, 34 L. Ed. 2d 83 (1972); United States v. Cohen,
418 F. 2d 68, 69 (5th Cir. 1969). Under the circumstances of this case,
the government's remarks fall within the doctrine of fair reply.
Even
if the prosecutor's remarks did not fall within the fair reply doctrine,
we would not be convinced that they constitute reversible error. The
thrust of the prosecutor's remarks was that the IRS agents did a
commendable job. This, by any reasonable interpretation, would mean that
they conducted a thorough investigation of appellant's fiscal affairs.
Evidence of this was in the record, and whether the agents did a good or
bad job was a proper subject for argument. We therefore hold that the
challenged portions of the prosecutor's closing argument were not
improper.
For
these reasons the judgment of the district court is affirmed.
AFFIRMED.
*
Senior Judge of United States Court of Claims, sitting by designation.
1
To establish unreported income under the net worth method, the
government must establish the taxpayer's net worth at the beginning of
the tax year in question. Then the government must establish the
taxpayer's net worth at the close of that year. It subtracts the former
figure from the latter to show the taxpayer's increase in net worth for
the year in question. This figure is further adjusted by (1) adding to
it the taxpayer's nondeductible personal expenditures for the year and
(2) subtracting from it the taxpayer's allowable deductions. If, as in
appellant's case, the taxpayer filed no return for the year in question,
this "adjusted net worth increase" is presumed to be the
taxpayer's unreported income for that year. See Holland v. United
States [54-2 USTC ¶9714], 348
U. S.
121, 125, 75 S. Ct. 127, 99 L. Ed. 150 (1954).
2
In both cases the government established that the taxpayer's opening net
worth was too small to account for his expenditures or bank deposits.
This justified the conclusion that the taxpayer had unreported income.
3
The prosecutor said, "I am proud of these fellows that work long,
hard hours for these
United States
. They try their dead level best to see that the proper taxes are
collected, because I think its important that this Nation have a good
defense . . . [they] have done a commendable job."
[76-1
USTC ¶9351]
United States of America
, Appellee v. Nicholas L. Bianco, Appellant
(CA-2),
U. S. Court of Appeals, 2nd Circuit, Docket No. 75-1244, 534 F2d 501,
4/8/76, Affirming an unreported District Court decision
[Code Sec. 7203]
Crimes: Willful failure to file return: Reconstruction of income:
Evidence: Fourth Amendment violation: Use of Grand Jury testimony.--The
taxpayer's conviction, in a jury trial, for five counts of willful
failure to file income tax returns was upheld by the Court of Appeals.
The taxpayer's contention that the government, in reconstructing his
income, could not prove with reasonable certainty that his cash
expenditures for the tax years in question came from currently taxable
income, rather than from nontaxable income or income received in prior
tax years, could not be substantiated. The taxpayer's further contention
that admission of evidence obtained as a result of a mail watch on the
taxpayer by the IRS constituted a violation of his Fourth Amendment
rights was also without merit since the taxpayer had not objected to
admission of such evidence in the prior proceeding. Finally, the court
rejected the taxpayer's claim that his prosecution was the result of
testimony given by him in a Grand Jury proceeding since the government
had received from other sources the information used in prosecuting the
taxpayer.
Charles
E. Brookhart, Scott P. Crampton, Assistant Attorney General, Gilbert E.
Andrews,
Rob
ert E. Lindsay, Department of Justice, Washington, D. C. 20530, David G.
Trager, United States Attorney, Brooklyn, N. Y., for appellee. Gerald L.
Shargel and James M. LaRossa, 522 5th Ave., New York, N. Y., LaRossa,
Shargel & Fischetti, New York, N. Y., for appellant.
Before
HAYS, MULLIGAN and MESKILL, Circuit Judges.
MESKILL,
Circuit Judge:
Nicholas
L. Bianco appeals from a judgment of conviction entered in the United
States District Court for the Eastern District of New York after a jury
trial before Thomas C. Platt, District Judge, of five counts of
willfully failing to file income tax returns for the years 1967 through
1971 in violation of $7203 of the Internal Revenue Code of 1954, 26 U.
S. C. §7203.
I.
Bianco claims on this appeal that the government failed to prove that he
had sufficient income in the disputed years to require his filing of
returns. Specifically, he asserts that the government failed to prove
with "reasonable certainty" that his cash expenditures during
the years in question had not been made either from assets on hand prior
to those years or from non-taxable sources of income.
The
government prosecuted the case by the "cash expenditure"
method of proof, a variant of the "net worth" method, which
permits circumstantial proof of a defendant's taxable income in cases
where the prosecution is unable directly to show specific items of such
income. These two indirect methods of proof have been explained and
distinguished by the First Circuit in Taglianetti v. United States
[68-2 USTC ¶9479], 398 F. 2d 558 562 (1st Cir. 1968), aff'd.,
[69-1 USTC ¶9295], 394 U. S. 316 (1969), as follows:
"The
net worth method involves the ascertaining of a taxpayer's net worth
positions at the beginning and end of a tax period, and deriving that
part of any increase not attributable to reported income. This method,
while effective against taxpayers who channel their income into
investment or durable property, is unavailable against the taxpayer who
consumes his self-determined tax free dollars during the year and winds
up no wealthier than before. The cash expenditure method is devised to
reach such a taxpayer by establishing the amount of his purchases of
goods and services which are not attributable to the resources at hand
at the beginning of the year or to non-taxable receipts during the
year." (footnotes omitted). 1
In
the case at bar, the government proved, and Bianco does not contest,
that he made expenditures in each prosecution year far in excess of the
amount which, if the figure had been derived entirely from taxable
income in that year, would have required him to file returns. 2 Nor does
Bianco contest the prosecution's proof that no returns were filed by him
in any of the prosecution years. His sole challenge to the sufficiency
of the government's case rests upon his contention that it failed to
prove that the expenditures were "not attributable to the resources
at hand at the beginning of the year or to non-taxable receipts during
the year." More specifically, Bianco contends that the government
failed to satisfy the requirement of "the establishment, with
reasonable certainty, of an opening net worth." Taglianetti v.
United States, supra, 398 F. 2d at 564.
The
"reasonable certainty" requirement is derived from the Supreme
Court's opinon in Holland v. United States [54-2 USTC ¶9714],
348 U. S. 121, 132 (1954), a case which was prosecuted on the net worth
rather than the cash expenditure theory and which involved a prosecution
which attempted to show a specific deficiency rather than only income
over the threshold amount necessitating the filing of tax returns.
Nevertheless, the government properly concedes in the present case that
the "reasonable certainty" standard applies in cash
expenditure cases, albeit in a slightly different manner from that
discussed in
Holland
.
"In
a typical net worth case, as
Holland
, precise figures would have to be attached to opening and closing net
worth positions for each of the taxable years to provide a basis for the
critical subtraction. In a cash expenditures case reasonable certainty
may be established without such a presentation, as long as the proof . .
. makes clear the extent of any contribution which beginning resources
or a diminution of resources over time could have made to
expenditures." Taglianetti v. United States, supra, 398 F.
2d at 565; see also United States v. Fisher, supra, 518 F. 2d at
842 n. 7.
In
the instant case, the government attempted to show that Bianco's
beginning resources were non-existent and thus could not have
contributed at all to his expenditures during the tax years. To that
effect, Special Agent Louis Nahmias testified about his investigation
into Bianco's financial background. He testified that he had examined
the records of the Kings County Clerk's Office, the county in which
Bianco had lived from 1962 through 1972, but could find no record of any
real estate in Bianco's name. He testified further that he had
circulated letters to approximately 100 banks in
Brooklyn
, all of which responded that they had no assets or accounts in Bianco's
name. Nahmias further testified that he checked with a brokerage house
in order to determine whether or not Bianco had had any securities
holdings or dealings, which inquiry also produced negative results. He
also testified that he made inquiries of insurance brokers, doctors,
schools, hospitals, the telephone company, the electric company, and an
attorney who had performed legal services for Bianco during the
prosecution years. Finally, there was testimony that investigation had
been made of the probate records in
Providence
,
Rhode Island
, where Bianco's family lived. Those records revealed no inheritance
from either Bianco's mother or father, both of whom had passed away
earlier. An interview with Bianco's sister was also conducted in
Providence
. These investigations failed to reveal any assets held by Bianco at
any time, prior to or during the prosecution years.
The
Government's case, however, did not rely entirely upon Agent Nahmias'
tetimony about his fruitless search for assets. It introduced Bianco's
1962 income tax return which reported only a modest wage or salary
income for that year. There was also evidence introduced that Bianco had
not filed tax returns for the years 1963, 1964 and 1965, the government
thereby attempting to create the inference that the failure to file in
those years negated the probability that Bianco had had sufficient
income then to have accumulated assets on which to have lived during the
later prosecution years. 3 Further,
Samuel S. Sezzen, Esq., an attorney who has specialized in collection
matters since 1936, testified that in the early part of 1966 he used his
normal "general procedure" but was unable to locate any assets
from which to satisfy a $436.40 judgment entered earlier against Bianco.
4
The
totality of this evidence clearly was sufficient for the jury to have
concluded that Bianco had insufficient assets at the beginning of the
prosecution period to have supported his expenditures in any of those
years. Bianco presented no defense and offered no evidence in this case.
His major contention on appeal appears to be that the prosecution failed
to negate the possibility of a so-called "cash hoard,"
although there is not one speck of evidence to indicate that Bianco had
such a cache or where it might have come from. He points to the evidence
elicited on the cross-examination of several prosecution witnesses that
he had been making lavish expenditures during the latter part of 1966,
just before the beginning of the prosecution period. Those expenditures,
in the form of a down payment on an automobile and the "wining and
dining" of a female acquaintance, according to Bianco, show that
the government's case was fatally defective. Such evidence, however,
does not tend to establish the existence of assets of any kind, since
the jury could well have believed that Bianco was simply living from
hand to mouth, spending whatever income he had at that point.
Of
course, as in any criminal prosecution, the defendant is under no
obligation to prove any particular set of facts, including the existence
of a non-taxable source, such as a "cash hoard" from which his
expenditures were made. But once the government has introduced
sufficient evidence from which the jury could conclude with reasonable
certainty that no such assets existed, the defendant remains silent at
his own peril. Holland v. United States, supra, 348
U. S.
at 138-39; United States v. Penosi [72-1 USTC ¶9103], 452 F. 2d
217, 220-21 (5th Cir. 1971), cert. denied, 405
U. S.
1065 (1972); United States v. Shipani, 362 F. 2d at 830.
Much
of what we have said with respect to the government's duty to establish
a lack of adequate funds from which the expenditures could have been
made applies with equal or greater force to Bianco's contention that the
government failed sufficiently to negate all other possible sources of
nontaxable income during the prosecution years. As mentioned above, the
government conducted a thorough investigation, including a search of the
Providence
,
Rhode Island
probate records and an interview with Bianco's sister in
Rhode Island
, in an attempt to discover whether or not he had been the recipient of
any gifts, loans or inheritances. The investigation revealed no such
nontaxable income nor any "leads" which the government
neglected to investigate. 5 "Once
expenditures are established, the government cannot be expected to
conduct an exhaustive nationwide investigation when the defendant
supplies no relevant leads as to where he got the money he admittedly
spent." United States v. Penosi, supra, 452 F. 2d at 220.
Bianco's
major attach upon the government's investigation into possible sources
of non-taxable income centers upon its failure to negate the possibility
that Bianco had received an inheritance in
Brooklyn
or that his wife had received any inheritances. These post hoc
suggestions, however, do not render insufficient the search that was
conducted. There is nothing in the record to suggest that Bianco had any
relatives in
Brooklyn
. To the contrary, it was apparent that Bianco's roots and family were
located in
Providence
,
Rhode Island
. Similarly, from all that appears in the record, there was no reason
for the government to have suspected that his wife had received an
inheritance of any kind. To require the government to conjure up
testators who may have contributed to Bianco's cause, without some
suggestion as to who those persons may have been, would create a burden
which the prosecution could never meet.
Finally,
it should be noted that the government introduced evidence from which
the jury could have inferred that Bianco was receiving income from
taxable sources during the prosecution years. While that evidence was
hardly conclusive, it was sufficient to show at least one "likely
source" of taxable income. The government introduced a loan
application, an insurance claim and a lease application, all of which
were made by Bianco during the prosecution years and which indicated
that Bianco was self-employed by the Easy Floorwaxing Company. 6 Further,
there was direct testimony by a
Manhattan
businessman that Bianco personally had arranged for an delivered to him
a $10,000 loan. The loan transaction carried with it weekly interest
payments of $250 and has been properly characterized as a
"loanshark" transaction. Although the testimony again was not
conclusive with respect to how much of the interest payments went into
Bianco's pockets as opposed to those of his associates, the jury was
entitled to infer that Bianco's involvement in the transaction was not
entirely altruistic and that at least part of the $2,000 interest paid
during an eight week period in 1967 was income to him.
We
need not hold on the state of the record in this case that such evidence
of a "likely source" would be sufficient by itself to relieve
the prosecution of the duty to negate probable sources of non-taxable
income, see Holland v. United States, supra, 348 U. S. at 138,
but merely that such evidence, together with the evidence of the
government's fruitless search for sources of non-taxable income, is
sufficient to support an inference by the jury that the expenditures
proved were attributable to currently taxable income. Cf. United
States v. Massei [58-1 USTC ¶9326], 355
U. S.
595 (1958).
II.
During the course of Agent Nahmias' testimony at trial, it was revealed
that the Internal Revenue Service ("IRS") had maintained a
"mail watch" on Bianco's incoming mail for almost ten years. 7 It was
further revealed that the evidence of at least one of the expenditures
proved at trial had been derived from the mail cover. Bianco neither
objected to such evidence nor did he move to suppress it at trial; on
this appeal he challenges its admission on the ground that the mail
cover was an unreasonable search and seizure in violation of the Fourth
Amendment. He seeks to circumvent the rule announced in United States
v. Indiviglio, 352 F. 2d 276, 277, (2d Cir. 1965) (en banc), cert.
denied, 383 U. S. 907 (1966), that generally "the failure to
make proper objection before the trial court to the admission of the
challenged evidence forecloses review of the asserted error" by
claiming that this Court's decision in United States v. Leonard,
524 F. 2d 1076 (2d Cir. 1975), petition for cert. filed, 44 U. S.
L. W. 3429 (Jan. 16, 1976), significantly changed, after his trial, the
prior law with respect to the constitutionality of mail covers, which
prior law would have made objection at trial futile. See
United States
v. Indiviglio, supra, 352 F. 2d at 280 and n. 7. We disagree and
hold that Bianco's claim cannot be raised at this stage in the
proceedings.
In
Ex parte Jackson, 96 U. S. 727 (1878), the Supreme Court made
clear that the Fourth Amendment prohibited warrantless opening of sealed
letters and packages except in cases involving income international
mail, where the enforcement of the customs laws justifies an incursion
into the sanctity of such mail. This Court, in United States v.
Costello [58-2 USTC ¶9544], 255 F. 2d 876, 881 (2d Cir. 1958), cert.
denied, 357
U. S.
937 (1958), pet. for rehearing denied, 358
U. S.
858 (1958), interpreted the
Jackson
opinion as necessarily implying that "without offense to
Constitution or statute writing appearing on the outside of envelopes
may be read and used." Bianco asserts that the Costello
opinion made clear that any objection he might have made at trial would
have been futile.
After
Bianco's trial, this Court approved a mail cover employed by the IRS in
United States
v. Leonard, supra. The mail cover there involved the copying and
recording of the postage meter numbers on all incoming mail from
Switzerland
which bore no return address. The object of that mail cover was to match
the postage meter numbers on the envelopes with meter numbers registered
to Swiss banks in an attempt to discover which American citizens might
be using secret Swiss bank accounts to hide unreported income. In
affirming the IRS's use of such a broad mail cover, which monitored all
incoming Swiss mail to previously undetermined addresses, Judge Friendly
commented that "[i]t may well be that, in these days of increased
concern for the protection of privacy, the statement in Costello
should not be read as an absolute, permitting, for example the
Government to copy the outside of every envelope received by every
citizen." United States v. Leonard, supra, 524 F. 2d at
1087. Bianco's assertion now is that Judge Friendly's comment
significantly changed the law of this Circuit with respect to the
validity of mail covers by indicating that the Court will now hear
objections to excesses in such investigative techniques where previously
it would not. We disagree.
Judge
Friendly's dicta in Leonard stated what should by now be obvious:
that any particular investigative means, including mail covers, are
subject to abuse and excesses, and that such excesses might serve
to distinguish this Court's prior decision that the reading of the
outside of an envelope does not violate any constitutional principles.
The Costello case certainly was not to the contrary. Indeed, Costello's
main thrust involved a determination as to whether or not the mail watch
in that case violated federal statutes prohibiting interference with the
mails, and thus, inferentially, violated standards of due process and
fundamental fairness by securing a conviction on the basis of evidence
derived from means which violated the law; its implication was that the
Court would not sanction the use of such unlawful investigative means
regardless of whether or not the mail watch was a "search"
within the Fourth Amendment's domain. The Court, of course, found no
infirmities, either statutory or constitutional, in the mail watch
considered there. Thus Judge Friendly's opinion in Leonard did
nothing to alter the Costello rationale; it merely recognized
that most appellate decisions, including Costello, are capable of
being distinguished on their particular facts. Significantly, Leonard
expressed doubt, citing Mr. Justice Harlan's concurring opinion in Katz
v. United States, 389 U. S. 347, 360 (1967), that the reading of the
outside of envelopes in incoming international mail could violate
anyone's "reasonable expectation of privacy" and thus the
Fourth Amendment, since such mail is subject to inspection and opening
in aid of the enforcement of the customs laws. Given that doubt, the
comment in Leonard to the effect that an overbroad mail cover may
not pass constitutional muster obviously refers to concerns falling
outside of the Fourth Amendment's scope, that is, due process concerns
existing long before Bianco's trial.
We
of course express no opinion as to whether or not the mail cover in this
case involved such excesses or abuses that would offend principles of
due process or any statutory prohibitions. Bianco's remedy was to move
to suppress or to object to any evidence derived from the mail cover.
Having failed to do so, he cannot now assert his challenges to the mail
cover in this Court. United States v. Indiviglio, supra.
III.
Bianco's final claim, raised below and decided against him after a full
evidentiary hearing, is that the federal tax prosecution was derived
from testimony given by him in a state Grand Jury under a grant of
transactional immunity. Kastigar v.
United States
, 406
U. S.
441 (1972); Murphy v. Waterfront Comm'n, 378
U. S.
52 (1964). Bianco testified before that Grand Jury on five occasions
from March through June of 1970. 8 Bianco
points to several questions asked by the state District Attorney, David
Katz, which involved the fact that Bianco had made certain expenditures,
that he had received income from at least one source and that he had not
filed federal tax returns. According to Bianco "[t]he very nature
of these questions suggest [sic] circumstantial support that this
testimony may have indeed provided the prime moving force for . . .
[his] subsequent tax prosecution." 9
Bianco
points out that once he has demonstrated that he testified under a grant
of immunity at a state Grand Jury with respect to the subject of a
subsequent federal prosecution, the burden is on the government not only
to show that its evidence was not tainted by or derived from that
testimony but also to show that its evidence was secured from
independent legitimate sources. Kastigar v. United States, supra,
406
U. S.
at 460; Murphy v. Waterfront Comm'n, supra, 378
U. S.
at 79 n. 18. 10 At a
hearing based upon Bianco's contentions, the government produced two
witnesses, David Katz, the state District Attorney who had questioned
Bianco in front of the Grand Jury, and Agent Nahmias, who was the case
agent handling Bianco's investigation after the Grand Jury appearance.
After hearing these two witnesses and after reviewing the government's
entire file on the Bianco investigation, the district court allowed the
case to proceed. We find that the district court's decision is supported
by the evidence adduced at the hearing.
Agent
Nahmias testified that he had not been aware of the fact that Bianco had
testified before any Grand Jury until shortly before the instant hearing
and that he had at that time still not seen the transcript of the state
Grand Jury testimony. He further testified that he never had any contact
with any state officials who had been involved in the Grand Jury
proceedings. He testified that he conducted the investigation entirely
on his own but conceded that there had been other federal agents
connected with the Brooklyn Organized Crime Task Force with whom he had
consulted during the course of his investigation and that when he began
his investigation in September, 1971, he consulted both FBI reports on
Bianco and a report of a prior IRS Intelligence Division agent's
investigation, which report and investigation were concluded
significantly prior to Bianco's Grand Jury appearance. 11 District
Attorney Katz testified that he had not had any conversation or
discussions with any federal agents or authorities with respect to the
Bianco Grand Jury appearance. He stated that the minutes of the Grand
Jury proceeding had been kept under lock and that only he and a clerk in
his office had access to the file. According to Katz's testimony,
Bianco's appearance before the Grand Jury had been in connection with an
investigation into a shooting and alleged industrial and labor
racketeering in
Brooklyn
; he could not recall his reason for asking Bianco his source of income
and whether or not he had filed tax returns. He was sure, however, that
he had not been requested to ask those questions by federal authorities
and that he had not communicated the results to them, nor to anyone else
other than perhaps his superior or another district attorney.
It
developed at the hearing that there was one possible link between the
District Attorney's office and the Brooklyn Organized Crime Task Force.
That link was Detective John Capabianco, the liaison officer between the
two offices. Katz testified, however, that he had not discussed Bianco's
testimony with Capabianco. Further, near the close of the hearing, the
government offered by letter to the court and to defense counsel to
produce Capabianco and indicated that Capabianco would testify that he
had not given any information from the Bianco Grand Jury proceedings to
any federal authorities. The district court and the defense apparently
felt that the government's representation was sufficient since the
hearing ended with Katz's testimony.
The
evidence as described was certainly sufficient to demonstrate not only
that the federal prosecution made no use of Bianco's immunized testimony
but also that it had no access to it or knowledge of its existence.
While it might have been better for the government to have placed
certain other IRS revenue and intelligence agents on the stand to
testify as to their lack of knowledge of the testimony, Mr. Katz's
testimony that he had not transmitted outside of his office any
information about Bianco's appearance is sufficient to show no use by
federal agents of any information garnered from that appearance.
Admittedly, there was no intentionally erected "Chinese wall"
between the state District Attorney's Office and the federal agents, cf.
United States
v. Sapere, Docket No. 75-1278 (2d Cir. February 13, 1976), slip op.
1891, but the record is sufficient to demonstrate that no information
trickled through the natural barriers between the state and federal
authorities.
The
proof at the hearing was also sufficient to demonstrate that the
government's tax prosecution arose from sources independent from the
immunized testimony. At the Grand Jury, Bianco testified that he had not
filed federal tax returns, that he made his living by betting on horses,
that he had been in an unsuccessful business called "Easy
Floorwaxing," that he paid $215 per month in rent on his apartment
and that he had purchased an automobile from Kaplan Buick, which
automobile was financed through Bankers Trust Company. He thus testified
about nonfiling, possible sources of taxable income and possible
expenditures, all items of interest to the government's tax prosecution.
Agent Nahmias' testimony, together with the file examined by the
district court, showed independent sources for all of these items.
Bianco
claims that his admission that he had income from gambling and that he
had not filed returns created the impetus for the present prosecution.
The fact that Bianco had not been filing federal income tax returns
since 1963, however, was nothing new to the IRS. Bianco had been the
subject of a continuing intelligence division investigation long before
his Grand Jury appearance. That initial investigation for the earlier
tax years was closed with a report by Special Agent Langone, dated
December 27, 1968, because that agent could not prove sufficient
expenditures for those years to warrant prosecution. Agent Nahmias
testified although that phase of the investigation had been closed, the
IRS had maintained a continuous active interest in Bianco's status as a
taxpayer. Bianco's claim that his admission before the Grand Jury of
non-filing was the spur behind his tax prosecution seems to be
disingenuous. Bianco's reference to gambling as a source of income was
also information readily available to Agent Nahmias from a source not
connected with the Grand Jury. Nahmias testified that after he was
assigned to the case he examined Bianco's arrest record at the New York
City Police Department. That record included an arrest for gambling. It
should also be noted that when Agent Nahmias filed his report
recommending prosecution, he did not include gambling as a source of
Bianco's income. 12
Similarly,
evidence that the prosecution did use at Bianco's trial also came from
sources other than the Grand Jury. Agent Nahmias' report indicated that
Bianco's possible sources of taxable income were from his loansharking
activities and from his connection with the Easy Floorwaxing Company.
The loansharking obviously came from a source other than the immunized
testimony since that activity was never discussed at the Grand Jury. 13 Although
Agent Nahmias did not specifically indicate where he had obtained the
leads to the Easy Floorwaxing Company as a source of income, Agent
Langone's file, closed prior to Bianco's Grand Jury appearance,
contained references to that business activity. Finally, the Kaplan
Buick and Bankers Trust Company references, used by the prosecution both
as an expenditure and as a lead to Easy Floorwaxing, as well as
references to rent paid by Bianco, were also contained in Agent
Langone's pre-Grand Jury file. The FBI file also contained reports,
dated prior to the Grand Jury appearance, in which the financing of
Bianco's car through Bankers Trust Company was mentioned.
Thus
it is clear that all of the information contained in Bianco's testimony
which could have been used by Agent Nahmias in his investigation, with
the possible exception of the gambling source of income which was never
used as such by the prosecution, was already known to federal agents
prior to that testimony. It is obvious that information possessed prior
to the Grand Jury appearance is information derived from sources other
than that appearance. 14
Affirmed.
1
The quoted passage from Taglianetti was quoted with approval by
this Court in United States v. Fisher [75-2 USTC ¶9766], 518 F.
2d 836, 841 (2d Cir. 1975), cert. denied, --
U. S.
--, 44
U. S.
L. W. 3558 (December 16, 1975).
2
In tax years 1967 through 1971, the evidence indicated that Bianco
expended $4,284.68, $5,924.99, $9,898.25, $8,916.49 and $10,217.01
respectively. In each of the first three years, 1967, 1968, and 1969,
taxpayers with gross income in excess of $600 were required to file tax
returns. For the final two years of the prosecution period, because he
had become married, the threshold gross income figure applicable to
Bianco was $2,300. See Pub. L. 91-172, Title IX, §941(a), 83 Stat. 726,
amending §6012 of the Internal Revenue Code of 1954, 26
U. S.
C. §6012.
3
Bianco challenges the admission into evidence of his failure to file
returns in those years as an unjustifiable use against him of his
presumption of innocence. See United States v. Schipani [66-2
USTC ¶9512], 362 F. 2d 825, 829-30 (2d Cir.), vacated and remanded,
[67-1 USTC ¶9115] 385
U. S.
372 (1966). In Schipani this Court described the use of such
evidence as "unnecessary" given the complete and thorough
exhaustion of sources of non-taxable income but failed to find its use a
cause of reversal. Furthermore, in Schipani, the government's
reliance upon the failure to file to show no income during those years
appeared to have been inconsistent with proof tending to show that
Schipani had had income in those years. There was no inconsistency in
this case, there having been no proof of any income or expenditures made
by Bianco in 1963, 1964 or 1965.
In
any event, the admission of such evidence finds support, if not
acceptance, in decisions of the Supreme Court and three other circuits,
see Smith v. United States [54-2 USTC ¶9715], 348 U. S. 147, 157
(1954); United States v. Caserta [52-2 USTC ¶9540], 199 F. 2d
905, 907 n. 5 (3d Cir. 1952); Hanson v. United States [51-1 USTC
¶9118], 186 F. 2d 61, 66-67 (8th Cir. 1950); United States v.
Skidmore [41-2 USTC ¶9716], 123 F. 2d 604, 610 (7th Cir. 1941), cert.
denied, 315 U. S. 800 (1942), and, even assuming its admission to
have been error, we find insufficient prejudice to the defendant to
justify reversal here.
4
Although Sezzen's testimony did not reveal what, other than the service
of an unfruitful restraining notice upon a bank near Bianco's last known
address, that "general procedure" was, the fact that Sezzen
discovered no assets was some evidence from which the jury could infer
that they did not exist.
5
It should be noted that Agent Nahmias' investigation of insurance
companies uncovered a non-taxable $3,000 payment to Bianco in 1969
resulting from the theft of his automobile. That payment was properly
credited against his expenditures in that year. Similarly, another
nontaxable insurance payment of $1,750 to Bianco in 1968 was discovered
and credited against that year's expenditures.
6
In the lease application, made in 1968, it was stated that Bianco had
income of $125; it is not clear whether that was a weekly or monthly
income.
Biano
claims that Agent Nahmias' testimony that he could not, after
investigation, confirm the existence of the Easy Floorwaxing Company
renders worthless Bianco's admissions of employment during the tax
years. While these admissions are hardly conclusive when uncorroborated,
they are nevertheless sufficient independent evidence since they were
made under circumstances having nothing to do with the commission or
investigation of the crime charged. Cf. Warszower v.
United States
, 312
U. S.
342, 347-48 (1941).
7
Agent Nahmias was never asked to define what a "mail watch"
was in the context of this case when he admitted that that technique was
employed against Bianco. We shall asume, since there is no hint to the
contrary in the record and since Bianco's brief in this Court so
assumes, that the "mail watch" or "mail cover"
involved only the inspection and recording of the names and return
addresses on the envelopes in his incoming mail.
8
Bianco also appears to have testified before a federal Grand Jury, but
he does not claim on this appeal that his appearance there under a grant
of immunity was in any way misused.
9
Appellant's brief p. 43.
10
At oral argument the government urged that if it proved that it had no
access to the immunized testimony, it would be relieved of the burden of
showing the independent legitimate sources of its evidence. Arguably,
one could read both Kastigar and Murphy as having assumed
that federal prosecutorial officials would be aware of the immunized
testimony, and that given such knowledge, the non-use, alternative
source burdens must then be applied. Given our view that the government
met both Kastigar burdens in this case, we express no opinion on
the government's argument.
11
At defense counsel's suggestion and with the prosecution's full
agreement, the district court examined the entire government file
including the FBI reports in camera in an attempt to eliminate
the need to call as witnesses other federal agents. The court indicated
that there was nothing in the file indicating that the state Grand Jury
proceedings were ever referred to. It should be noted that upon this
Court's request, the file was sealed and transmitted to use for our
complete examination.
12
That source was never used by the prosecution in the presentation of its
case.
13
Mr. Katz did ask Bianco if he was engaged in a loan business; Bianco
replied in the negative.
14
Bianco also contends that the entire trial was prejudiced because the
prosecuting attorney had read the transcript of the immunized testimony
prior to trial, citing primarily United States v. McDaniel, 482
F. 2d 305 (8th Cir. 1973). Aside from the fact that Bianco failed to
raise this contention below, we find McDaniel to be inapposite
and the argument to be otherwise without merit. In McDaniel the
prosecutor had read the entire transcript prior to his knowing that it
had been immunized and prior to the indictment in that case having been
filed. The McDaniel court concluded that the prosecutor's
"use" of the testimony could include such things as
"assistance in focusing the investigation, deciding to initiate
prosecution, refusing to plea-bargain, interpreting evidence, planning
cross-examination, and otherwise generally planning trial
strategy." United States v. McDaniel, supra, 482 F. 2d at
311.
Here
the prosecutor read the transcript only in preparation of the
government's defense to Bianco's motion to dismiss. The investigation of
the case was already complete and, as has been pointed out in the text,
that investigation already contained and the prosecutor already knew
everything in the testimony germane to the tax case. The only
"use" to which the prosecutor could have put his reading of
the transcript was to defend against the motion to dismiss.
[77-1
USTC ¶9115]
United States of America
, Appellee v. William A. Goichman, Appellant
(CA-3),
U. S. Court of Appeals, 3rd Circuit, No. 76-1132, 547 F2d 778, 11/22/76,
Affirming District Court decision, 76-1 USTC ¶9470, 407 F. Supp. 980
[Code Sec. 7201--result unchanged under the '76 Tax Reform Act]
Criminal penalties: Evasion of tax: Willfulness: Proof of deficiency:
Admissibility of evidence: Motion for new trial.--Conviction of the
taxpayer for tax evasion was affirmed on appeal. The Court of Appeals
held that the district court did not commit reversible error in
admitting into evidence five checks relating to 1967, a pre-prosecution
year, since the evidence was admitted for the limited purpose of showing
opportunity or method of generating unreported income, and the jury was
instructed accordingly. Furthermore, it was not error for the court to
admit into evidence a document entitled "History of Children's
Assets," since the government produced sufficient evidence to
establish that the document was authentic. Finally, the court held that
a particular remark by the trial judge did not warrant reversal or a new
trial, since the prejudicial effect of the comment, if any, appeared to
be negligible and, in light of the evidence, could not have affected the
jury's verdict.
Gilbert
J. Scutti, Assistant United States Attorney, J. Clayton Undercofler,
III, Walter S. Batty, Jr., Office of United States Attorney,
Philadelphia, Pa. 19106, for appellee. Stephen M. Feldman, Francis R.
Tunney, Jr., Feldman & Feldman, Suite 2090, 1845 Walnut St.,
Philadelphia, Pa. 19103, for appellant.
Before
VAN DUSEN, HUNTER and WEIS, Circuit Judges.
PER
CURIAM:
This
is an appeal from a conviction for a willful attempt to evade or defeat
payment of income taxes, in violation of 26
U. S.
C. §7201. Defendant, William A. Goichman, argues on appeal that certain
documents were improperly admitted at trial and that a remark by the
trial judge warrants a retrial. After careful consideration of these and
other contentions, and a thorough review of the record, we find no
reversible error.
I.
Section 7201 of Title 26 of the United States Code 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.
The
elements of a §7201 violation are easily stated: the government must
prove the existence of a tax deficiency, an affirmative act constituting
an evasion or attempted evasion of the tax due, and will-fulness. Sansome
v. United States [65-1 USTC ¶9307], 380
U. S.
343, 351 (1965); United States v. House [75-2 USTC ¶9782], 524
F. 2d 1035, 1038-39 (3d Cir. 1976). To determine the existence of a tax
deficiency in this case, the government used the net worth method. Under
the net worth method, the government attempts to establish by
circumstantial proof the existence of unreported income by selecting an
opening year for which it can reasonably ascertain the defendant's net
worth and comparing that amount with a closing year's net worth. Any
estimated nondeductible living expenses during that period are added to
the closing net worth. The opening net worth is subtracted from the
closing net worth to gauge the amount of unreported income the defendant
must have had. But the government's burden does not rest there, it must
then either prove that there is a likely source of the unreported
income, Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121 (1954), or negate all possible nontaxable sources of that income.
United States
v. Mazzei, 355
U. S.
595 (1958).
Furthermore,
when the government bases its case on circumstantial evidence, as it did
here, it has the additional burden of investigating any possible sources
offered by the defendant as legitimate explanations of the increase in
his net worth. This depends entirely on the defendant's offer of
relevant leads; the government "is not required to negate every
possible source of nontaxable income, a matter peculiarly within the
knowledge of the defendant." Holland v. United States, supra
at 138.
Here,
the government did establish a likely source of unreported income, the
method by which this defendant conducted his law practice. Moreover,
there was extensive evidence negating the existence of any nontaxable
sources, and the defendant appears to have suggested no likely leads. In
denying defendant's post-trial motions, the district court thoroughly
discussed the government's proof in this case. See United States v.
Goichman [76-1 USTC ¶9470], 407 F. Supp. 980 (E. D. Pa. 1976). We
will briefly discuss three of appellant's claims: the admissibility of
evidence concerning checks endorsed to defendant's stockbroker during a
pre-prosecution year; the admissibility of a document entitled
"History of Children's Assets"; and the court's remark that
"[w]hy this case is here is as simple as ABC."
II.
A. The first ground urged for reversal is the admission of evidence
relating to 1967, a pre-prosecution year, consisting of five checks
Goichman received in settlement of personal injury cases. Goichman
maintained two accounts at Philadelphia National Bank: an escrow
account, which held the total amounts received in settlement, and an
attorney account into which Goichman would then deposit the amount of
settlement that represented his fee. His accountant would treat deposits
to the attorney account as taxable income; settlement receipts would not
be counted as taxable unless and until they were deposited in that
attorney account.
The
five checks received in settlement in 1967, exhibits G44 to G47B, were
not deposited in Goichman's attorney account. Instead they were endorsed
to Goichman's stockbroker, Goodbody & Co., for stock purchased by
Goichman. Thus it is quite possible that Goichman's accountant did not
include the five checks as taxable income in the pre-prosecution year of
1967.
Appellant
claims the district court committed reversible error in admitting the
1967 checks because (1) there was no evidence that Goichman had earned
any part of the sums represented by the checks, and (2) if there was
earned income, there was no showing that any of it had gone unreported.
The district court, however, admitted the evidence "for the limited
purpose of showing opportunity or method of generating unreported
income," 407 F. Supp. 980, 992 (E. D. Pa. 1976), and the jury was
instructed accordingly.
This
circuit has long held that evidence of other crimes or bad acts, despite
its inadmissibility to prove the crime in question, is admissible
"if relevant for any purpose other than to show a mere propensity
or disposition on the part of the defendant to commit the crime." United
States v. Stirone, 262 F. 2d 571, 576 (3d Cir. 1958), reversed on
other grounds 361
U. S.
212 (1960). As with any other relevant evidence, the trial court is to
weigh its relevance against any prejudice that may occur to the
defendant. See also United States v. Hines, 470 F. 2d 225, 227-28
(3d Cir. 1972). The new Federal Rules of Evidence 1 would not
exclude this evidence of other offenses merely because it relates to a
pre-prosecution year and was not proven to be an "offense." It
was relevant as proof of a likely method of concealing taxable income.
Federal Rule 404(b) provides:
(b)
Other crimes, wrongs, or acts. Evidence of other crimes, wrongs,
or acts is not admissible to prove the character of a person in order to
show that he acted in conformity therewith. It may, however, be
admissible for other purposes, such as proof of motive, opportunity,
intent, preparation, plan, knowledge, identity or absence of mistake or
accident.
As
the advisory committee notes, the above refers only to the initial
admissibility of the evidence. For the determination of whether the
relevance outweighs any prejudice, we are reminded that "[n]o
mechanical solution is offered." 28
U. S.
C. Rule 404, Advisory Committee Note to Subdivision (b).
In
this case, Goichman's bypass of his attorney account was relevant to
show opportunity or method of generating unreported income. The jury was
properly instructed that it could consider those five 1967 checks only
for that purpose. We find no abuse of discretion in the trial court's
determination that the relevance of those checks was not outweighed by
possible prejudice to defendant.
We
also find no merit in appellant's contention that the government had to
prove that the 1967 bypass of the attorney account itself constituted an
offense, by showing that the checks represented some income and that the
income was never reported. The latter would be a fair statement of the
government's burden for the prosecution years, but not for a
pre-prosecution year when the evidence is admitted solely to show that
defendant could generate unreported income, not that he did
so. 2
B.
The second alleged error is also a question of the admissibility of
evidence. A document entitled "History of Children's Assets,"
exhibit G41(A), was admitted for the purpose of showing that various
assets of Goichman's children were purchased by Goichman. The document
was found in the clerk's office of the Court of Common Pleas in
Montgomery County
,
Pennsylvania
, by an IRS agent. There had been a proceeding in equity, William A.
Goichman v. Beverly Goichman, in that court, in which Mr. Goichman
claimed to have provided the funds for many of his wife's and children's
assets, which he wanted returned to him. Several documents from that
proceeding were introduced in the criminal case sub judice.
The
"History of Children's Assets" is a two-page unsigned
document, typewritten except for the title, which is in block printing
by hand. Both pages contain the seal and signature of the clerk of the
Court of Common Pleas, and a certification that they are "[f]rom
original record docket." On the back of the second page is a mark
in black felt-tip pen, about one-half inch in height, "D-15." 3
Appellant
correctly contends that the certification on the document does not
govern its admissibility. It is well-settled that "no certified
copy whatever may be used where the original record itself is not
admissible under the rules of evidence for the purpose in hand." 5
J. Wigmore, Evidence §1677, p. 862 (Chadbourn rev. 1974).
Appellant
contends the document is inadmissible because the only evidence to
connect the document to Goichman was (1) references to "may
wife" and "Gail, Jeff, and Daniel" (the first names of
Goichman's three children) and (2) the "crytic symbol, D-15"
on the back. For the first point appellant relies on 7 J. Wigmore,
Evidence §2130, at 570 (3d ed. 1940), for the proposition that contents
cannot be used until there has first been external evidence to connect
the document to the defendant. For the second point, that
"D-15" is merely a cryptic symbol, appellant argues that the
government produced no evidence to show that the document was even used
as an exhibit during the support proceeding.
Clearly
this document could not be admitted without some proof of its
authentication. As Wigmore puts it, "[t]he foundation on which
rests the necessity of authentication is not any artificial principle of
Evidence, but an inherent logical necessity."
Id.
§2129, at 564. And, generally, the contents themselves are not
capable of providing this authentication unless they happen to reveal
certain knowledge that could be true of only one individual, id.
§2148 at 606, which is not true here because Goichman's wife would be
privy to the same knowledge alleged.
What
appellant overlooks is that the showing of authenticity is not on a par
with more technical evidentiary rules, such as hearsay exceptions,
governing admissibility. Rather, there need be only a prima facie
showing, to the court, of authenticity, not a full argument on
admissibility. Once a prima facie case is made, the evidence goes to the
jury, and it is the jury who will ultimately determine the authenticity
of the evidence, not the court. The only requirement is that there has
been substantial evidence from which they could infer that the document
was authentic, United States v. Natale, 526 F. 2d 1160, 1173 (2d
Cir. 1975), cert. denied, 96 S. Ct. 1724 (1976); United States
v. King, 472 F. 2d 1, 7 (9th Cir.), cert. denied sub nom. Arias
v. United States, 414 U. S. 864 (1973); United States v.
Addonizio, 451 F. 2d 49, 69 (3d Cir.), cert. denied, 405 U.
S. 1048 (1972); United States v. Tellier, 255 F. 2d 441, 448 (2d
Cir. 1958); 5 J. Wigmore, Evidence §2135 (3d ed. 1940). See also Fed.
R. Ev. 901(a) (not in effect at time of trial).
Here
there was sufficient evidence to let the jury consider the relevance and
weight of the document. It was certified as being part of the docket
record in the prior Montgomery County support proceeding; it referred to
children having the same first names as did Goichman's; the contents are
corroborated (as pertaining to Goichman) by Goichman's complaint in that
Montgomery County proceeding, exhibit 639, which was correctly
attributed to appellant; and by bank statements as well. See
United States
v. Sutton, 426 F. 2d 1202 (D. C. Cir. 1969); McFarland v.
McFarland, 176 Pa.Super. 342, 107 A. 2d 615 (1954). In sum, the
document was supported by a prima facie showing of authenticity.
Moreover,
even if it had been error to admit G41A, that error would have been
harmless, as the government had other evidence pertaining to the source
of Goichman's children's assets, such as his complaint in the above
county proceeding.
C.
The third, and final, alleged error we discuss is appellant's claim that
the trial judge improperly expressed an opinion as to Goichman's guilt,
within the hearing of the jury. The remark occurred while defense
counsel was conducting cross-examination of an IRS employee, asking the
witness how the regional office decides which tax evasion cases to
select for criminal prosecution. The trial judge remarked "It's as
simple as A B C in this case. Why this case is here is as simple as A B
C." Defense counsel did object to the remark at that time, but did
not request cautionary instructions to the effect that the jury was to
disregard any such comments the trial judge may have made during the
course of the trial.
In
examining whether a particular remark by the trial judge warrants
reversal and a new trial, we must consider the remark in its complete
context and ask what effect in may have had on the jury. Here we are
dealing with a single remark, directed somewhat impatiently at defense
counsel or at the IRS witness. The matter being discussed on
cross-examination was the selection procedure used by the regional IRS
office in determining in which of the delinquent tax cases it should
proceed criminally, instead of civilly. In a general sense, this is an
examination of the perennial issue of prosecutorial discretion: how the
appropriate official decides whom among a group of offenders to single
out for prosecution. Here the defense counsel may have hoped to elicit
from the IRS witness an arbitrary selection procedure, which may have
elicited sympathy from the jury. Instead the judge interjected that he,
at least, knew why this case had been selected. Our inquiry is limited
to what the jury may have thought the judge knew. We would grant a new
trial only if we decided that the jury would have interpreted this
remark to mean that the judge thought the defendant was guilty, even
though the remark stated only that the judge understood why this case
had been selected.
In
United States v. Williams, 530 F. 2d 1157 (5th Cir. 1976), the
court considered a remark by the trial judge who examined relevant
fingerprint evidence in an armed robbery case and commented that he was
"satisfied." This sort of comment is quite similar to the one sub
judice in that it could mean that the fingerprint evidence satisfied
the judge on the issue of defendant's culpability, or, on the other
hand, it could mean simply that the judge was satisfied with the quality
of the fingerprints, or the argument for their introduction. The Fifth
Circuit held that: "Viewing the record in its entirety, the
prejudicial effect of the comment, if any, appears negligible and, in
light of the evidence, could not have affected the jury's verdict."
Id.
at 1158. See also United States v. Lord, 475 F. 2d 763 (9th Cir.
1973), cert, denied, 419 U. S. 878 (1974) (upholding narcotics
conviction when judge remarked that he found defendant's entrapment
"story" incredible and did not believe it).
While
we need not express approval of the trial judge's remark in this case,
judging its effect from a careful consideration of the entire record we
find no reversible error.
III.
We have examined appellant's other contentions and find them without
merit. For the foregoing reasons, the judgment of the district court
will be affirmed.