Bank Records and Net Worth Increases
1 Page6
1
The Federal Rules of Evidence became effective on July 1, 1975; the jury
returned its verdict on June 26, 1975, so Federal Rule 404(b) was not
controlling. Nonetheless, even in its proposed form, Rule 404(b) was in
accord with the rulings of this circuit. See also 2 J. Weinstein &
M. Berger, Evidence ¶404[08] (1975) (Rule 404(b) merely codifies prior
federal doctrine concerning evidence of post bad acts).
2
Appellants also argue that the existence of an opportunity or method by
which Goichman could avoid reporting his taxable income "speaks for
itself," Brief for Appellant at 43, and that the government was
creating a "non-issue" in order to get this evidence in. We
find no merit in that argument. On the contrary, evidence concerning a
direct endorsement of insurance (settlement) checks was especially
relevant here, as the government later introduced evidence that during a
prosecution year some $90,000 in bank loans were repaid by checks
endorsed by Goichman. The weight of the evidence was properly for the
jury.
3
Because the style and references in the document bear on its
admissibility, we reprint the document in its entirety. It reads:
History
of Children's Assets
1966
In
June, 1966, I purchased three savings certificates at PNB in my name for
my three children in the total sum of $15,000.00.
In
November, 1966, I purchased two earnings certificates at the PNB in my
wife's name for Gail and Jeff in the total sum of $10,000.00.
1967
In
January, 1967, I purchased two savings certificates at the 2nd Fed.
S&L Assn. in the name of my wife for Gail and Daniel amounting to
$15,000.00.
In
March, 1967, I purchased a savings certificate at Colonial Fed. S&L
in the sum of $10,000.00 in my name or my wife's name for Daniel.
In
July 1967, the $15,000.00 in PNB was renewed for another year.
In
November, 1967, the other $10,000.00 savings certificates in PNB were
closed.
In
November 1967, a $16,000 savings at First Fed. S&L Assn. in wife's
name for children was opened up. This still remains.
1968
In
April, 1968, the $10,000.00 savings certificate at Colonial was closed.
In
April, 1968, a $15,000 savings certificate at First Federal S&L
Assn. was opened in my name for my children and closed in July, 1968.
In
July, 1968, the $15,000.00 in savings certificates at 2nd Fed. S&L
were closed.
In
July, 1968, the $15,000.00 in savings certificates at PNB were closed.
In
July, 1968, $35,000.00 in savings certificates were opened in my wife's
name for the three children at
West Phila
. Fed. S&L Assn. This still remains.
Summary
1966 $25,000.00 PNB
1967 $15,000.00 2nd Federal
$10,000.00 Colonial
$16,000.00 First Fed. S&L remains.
The $50,000.00 at PNB, 2nd Fed.
1968 & Colonial were closed.
$35,000.00 was opened at West
Phila. Fed. S&L--remains.
Mutual Funds--They all remain
Oppenheimer 9-29-67 $ 5,000.00
Invest 9-29-67 $ 5,000.00
Revere 10-31-67 $10,000.00
Revere 5-31-68 $10,000.00
[76-1
USTC ¶9470]
United States of America
v. William Goichman
U.
S. District Court, East. Dist. Pa., Criminal No. 74-515, 407 FSupp 980,
1/20/76
[Code Sec. 7201]
Tax evasion: Criminal prosecutions: Proof: Net worth method: Source
and application of funds.--Taxpayer's conviction by a jury of
attempted tax evasion for taxable years 1968 and 1969 and upheld based
on increase in net worth. Holland v. United States, 54-2 USTC ¶9714,
348
U. S.
121 (1954), followed. The jury determined that the taxpayer, an
attorney, wilfully intended to evade taxes by his consistent and
substantial understatement of income, filing returns with knowledge more
income should be reported, failure to include all sources of income in
his records, understatement of income in prior years and overstatement
of business expenses.
Gilbert
J. Scutti United States Attorney,
Philadelphia
,
Pa.
for plaintiff.
Rob
ert F. Simone,
Rob
inson, Bldg., 8th Floor,
Phildelphia
,
Pa.
, for defendant.
Opinion
CLARY,
District Judge:
This
is a net worth prosecution under 26
U. S.
C. §7201 for willful attempt to evade or defeat payment of income tax.
The defendant, William A. Goichman, a cash basis taxpayer, is an
attorney who formerly practiced law in
Philadelphia
. He now resides in
Beverly Hills
,
California
.
On
September 10, 1974, the grand jury handed up a two-count indictment
charging the defendant with attempting to evade payment of income taxes
in the taxable years 1968 and 1969. The case was transferred to my
calendar by the Honorable Clifford Scott Green of this District on May
14, 1975. The case was specially listed for trial on June 16, 1975. On
June 26, 1975, the jury returned a verdict of guilty on both counts. The
defendant filed post-trial motions for judgment of acquittal and for a
new trial. On October 29, 1975, I heard oral argument on the motions.
For the reasons which follow, the motions are denied.
I.
To sustain a conviction under §7201, the Government must prove three
elements: the existence of a tax deficiency, willfulness, and some
affirmative act constituting an evasion or an attempted evasion of
income taxes. Sansone v. United States [65-1 USTC ¶9307], 380
U. S.
343 (1965), Lawn v. United States [58-1 USTC ¶9189], 355
U. S.
339 (1958), Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121 (1954).
In
this case, the Government used the "net worth method" to prove
the existence of a tax deficiency. This procedure was approved by the
Supreme Court in
Holland
v.
United States
, supra.
In
a new worth case, the Government first attempts to establish an
"opening net worth"--the total value of all the taxpayer's
assets for the last year preceding the years under prosecution. In this
that year was 1967. The government then proves increases in the
taxpayer's net worth at the end of each of the prosecution years. Here,
those years were 1968 and 1969. The Government then adds nondeductible
living expenditures. If the resulting figure is substantially greater
than the taxable income reported by the taxpayer for any one of the
prosecution years, the Government claims the excess is taxable income
which was not reported. Holland, supra, 348
U. S.
at 125, United States v. Massei [58-1 USTC ¶9326], 355
U. S.
595 (1958).
The
Government has the burden of proving the opening net worth figure with
"reasonable certainty." Holland, supra, 348
U. S.
at 132. In this case, the Government used a source and application of
funds analysis to show the amount of money available to the defendant
from 1956, the year he graduated from law school, to 1967. The
Government next computed the defendant's net worth by adding the total
value of all assets owned by him on December 31, 1967. Because of the
great disparity between the defendant's actual net worth on that date,
and the total funds available to him as calculated by the Government
agent he was credited with no cash on hand for the net worth
computation.
The
Government next showed increases in net worth in the years 1968 and
1969. These increases were primarily in three classes of assets: stocks,
bank accounts, and real estate investments. According to the Government,
the defendant's net worth increased about $50,000 in 1968 and about
$75,000 in 1969. These increases exceeded by a substantial margin the
taxable income the defendant reported in those years.
Having
shown net worth increases in excess of reported taxable income, the
Government must either negate all possible non-taxable sources of income
to explain the increases, or it must prove a likely source of taxable
income which was not reported. The Government need not prove both. United
States v. Massei [58-1 USTC ¶9326], 355
U. S.
595 (1958), United States v. Calles, 482 F. 2d 1155, 1159 (5th
Cir. 1973). In this case, the Government showed a likely source, the
defendant's law practice, but it also introduced extensive evidence
tending to negate the possibility of nontaxable sources.
Where
the case rests on circumstantial evidence, as this one does, the
Government must also investigate any leads furnished by the defendant,
but in the absence of leads it need not negate every hypothetical
explanation for the bulge in net worth. Holland v. United States,
supra, 348
U. S.
at 138; United States v. Procario [66-1 USTC ¶9263], 356 F. 2d
614, 617 (2d Cir. 1966), cert. denied, 384
U. S.
1002 (1966).
"Willfulness"
in the tax offenses set forth in 26
U. S.
C. §§ 7201-7207 refers to a bad purpose or evil motive to do the thing
which the law forbids. Negligence, even gross negligence, is not
sufficient to establish willfulness for purposes of these statutes. This
bad purpose of evading payment of income tax can be shown by the
deliberate filing of false returns which the defendant knew did not
accurately reflect his taxable income. United States v. Bishop
[73-1 USTC ¶9459], 412 U. S. 346, 359-61 (1973); Holland v. United
States, supra, 348 U. S. at 139; Spies v. United States [43-1
USTC ¶9243], 317 U. S. 492, 498-99 (1943); United States v. Vitiello
[66-2 USTC ¶9480], 363 F. 2d 240, 242 (3rd Cir. 1966); United States
v. Greenlee [75-1 USTC ¶9488], 517 F. 2d 899, 904 (3rd Cir. 1975).
Here, the evidence showed a pattern of diverting settlement checks the
defendant received in his law practice in such a way that they did not
come to the attention of the accountant who prepared the defendant's tax
returns. There was other circumstantial evidence including, of course,
the defendant's background and education.
See
,
United States
v. Rischard [73-1 USTC ¶9151], 471 F. 2d 105, 108 (8th Cir.
1973).
The
Government has the burden of proving every element of the offense,
though not to a mathematical certainty. However, once the Government
shows that the defendant's net worth increased substantially more than
the taxable income he reported and that the defendant's way of doing
business permitted the non-disclosure of income, and where the defendant
supplied the Government with no leads to a source of non-taxable funds
to explain these increases, and where the increases themselves had every
appearance of coming from taxable income, the defendant remains quite at
his peril. Holland v. United States, supra, 348
U. S.
at 138-39, United States v. Slutsky [73-2 USTC ¶9733], 487 F. 2d
832, 842 (2d Cir. 1973), cert. denied, 416
U. S.
937, reh. denied, 416
U. S.
1000 (1974).
With
these considerations in mind, I now pass to the evidence adduced at
trial.
II.
The evidence upon which the jury could have based a verdict of guilty
was as follows:
The
Government credited the defendant with an opening net worth on December
31, 1967, of $173,643.52. The net worth figure represented the total of
cash in banks, business assets, stocks on hand, and the purchase price
of his residence which was fully paid for, less liabilities. This
figure, when added to accumulated depreciation, exceeded the actual
funds available as of December 31, 1967 by more than $15,000.00. The
actual funds figure was based on an exhaustive analysis of the
defendant's financial history from 1956, the year he graduated from law
school, to the end of 1967, the last pre-prosecution year.
To
arrive at the actual funds figure, the defendant was credited with
having $10,000 in 1956, the starting point of the Government's
calculations. This was based on sworn testimony by the defendant in a
support proceeding in Common Pleas Court in
Montgomery
County
in 1970, in which he stated that he did not think his assets exceeded
$10,000 at that time. The $10,000 starting point figure was corroborated
by the fact that the defendant graduated from law school in 1955, that
he and his wife lived in an apartment for a year after their marriage in
1957 and by the fact that when they first purchased a home in 1958, they
paid $11,400 and placed about $1,000 down.
It
was further corroborated by defendant's testimony in
Montgomery
County
that he received no gifts exceeding $1,000 in wedding gifts, that he
inherited no money, and that he does not gamble.
He
was next credited with a total adjusted gross income for the years 1956
to 1959 of $30,746.60. This figure represents four times $7,687.40,
which was the adjusted gross reported by the defendant in 1960. No tax
returns were available for the years preceding 1960. The figure was
based on the defendant's testimony in
Montgomery
County
that his income gradually rose over the years with no significant jumps.
This was corroborated by certificates of assessment containing code
numbers which indicated joint returns were filed by the Goichmans
showing an adjusted gross income of less than $10,000, by an application
for employment with the Pennsylvania Public Utilities Commission dated
October 24, 1957, showing a salary of $4,500 a year as a law clerk, P.
U. C. pay records showing defendant's salary was $7,173.50 in 1958 and
$7,168.00 in 1959, by Pennsylvania mercantile license tax records for
defendant's law firm dated May 26, 1959, indicating gross receipts of
$2,603.00 and Philadelphia net profits tax records showing that no
return was filed for the firm in 1958 and that on June 1, 1960, a return
was filed which indicated a net profit of $7,788.00.
(The
defendant's first legal position was law clerk to Judge Sporkon of the
Common Pleas Court
. While serving in this capacity, he was also an associate of Max
Deroff. In 1958, he went into partnership with Martin Krimsky. The
Philadelphia
tax records relate to the firm of Krimsky and Goichman. The City was
unable to locate any records relating to this firm other than the ones
introduced into evidence. In November 1957, the defendant was hired as
an Assistant Attorney General assigned to the Public Utilities
Commission. In 1963, the defendant dissolved his partnership and he
became a sole practitioner from that date forward.)
Finally,
the adjusted gross income as reported on the defendant's Form 1040 joint
tax returns for the years 1960, to 1967, totalled $183,681.25. The 1964
joint return showed that Beverly Goichman realized $883.50 in income
from a business partnership.
To
these figures were added depreciation, dividend exclusions, and 50%
excess capital gain, as reported on the 1960 to 1967 returns. From the
gross figure were deducted itemized deductions, Federal taxes paid and
other expenditures per the 1960 to 1967 returns. The actual funds
available were calculated to be $157,149.52 as of December 31, 1967. As
we have seen, this figure was exceeded by the defendant's net worth as
of that date by more than $15,000. Accordingly, for the defendant to
have $1.00 cash in hand not accounted for by the Government's analysis,
he would have to have at least $15,000 as well.
An
alternative actual funds analysis used 1963 as a starting point. This
was based on a mortgage application for purchase of a property located
in
Abington
Township
,
Montgomery
County
which listed assets including $15,000 in cash and $4,500 in stocks and
other investments. This computation yielded an actual net funds
available figure as of December 31, 1967, of $145,128.67. The negative
cash position of the defendant using this analysis is, therefore, even
larger.
In
making the net worth calculation, the Government included numerous bank
accounts maintained by the defendant, and his wife either in their own
names or in trust for their children. The total figure at the end of
1967 was $72,863.01. The full amount was charged to the defendant, based
on testimony in the Montgomery County support proceeding that he
supplied all the funds for such accounts and that his wife never worked,
on a complaint in equity also filed in Montgomery County in 1969, in
which the defendant again claimed that he supplied all funds for such
accounts, and on a "history of children's assets" in which the
defendant in the support proceeding claimed to have purchased a number
of certificates in the children's name. This "history" was a
certified and exemplified exhibit from the support proceeding.
The
Government also charged the defendant with the full cost value of stocks
on hand on $50,357.36. A number of these accounts were in the name of
Beverly Goichman. The basis for charging the full value of these
holdings to the defendant was his testimony in the support proceeding,
the complaint in equity in which he claimed to have provided funds for
numerous specific stocks and mutual funds in his wife's name, and a
series of letters to Goodbody & Co. on the defendant's stationary
transferring funds and stock to two accounts in Beverly Goichman's name.
The
next step in the Government's case was to show an increase in net worth
in the prosecution years. In 1968, the defendant's net worth (assets
less liabilities) increased to $219,208.37. In 1969, it increased to
$294,047.20. The cash in banks total increased from $72,863.01 in 1967
to $85,257.07 in 1968 and to $99,659.73 in 1969. The cash in banks
figure included $18,869.85 in a Western Savings Fund Society account
opened in 1969. There was testimony that this account may have been, at
least in part, an escrow account for holding client's funds at interest.
The
stock holdings increased from $50,357.36 in 1967 to $64,012.72 in 1968
to $68,504.39 in 1969.
Although
many of these stock holdings were in Beverly Goichman's name, the
defendant repeatedly claimed in
Montgomery
County
proceedings to have supplied all the funds for these assets.
There
was a small increase in non-cash business assets.
The
heart of the government's case, however, was a series of real estate
partnership investments in 1968 and 1969. The value of these investments
grew from zero in 1967 to $24,192.00 in 1968 and to $84,313.00 in 1969.
These figures represented capital account balances from a total initial
investment in four partnerships of $100,000 in the prosecution years.
These investments are shown on four Form 1065 Partnership returns filed
in 1968 and 1969 on which the defendant is listed as a partner. The
first was Peoria Towers Associates, formed on October 4, 1968. The
second was Allegheny Industrial Associates, formed on January 31, 1969.
The third was Triester Riviera Oaks Associates, formed on July 17, 1969.
The last was Triester Coach and Four Associates, formed on September 4,
1969. The defendant invested $25,000 in each of these partnerships.
These investments are in the defendant's name alone, and in the support
proceeding, he testified that his wife had nothing to do with them.
The
total increase in the defendant's net worth in 1968 was $53,743.82. In
1969 it increased again by $74,838.83. In 1968, the defendant reported
taxable income of $27,791.17. In 1969, he reported taxable income of
$17,895.70.
The
Government's expert next attempted to show what his true income must
have been and what the tax liability would be. To the increases in net
worth for each prosecution year were added adjustments to reflect
itemized deductions claimed in those years, federal tax payments, gifts
to the children, and, for 1969 only, a list of other personal living
expenses enumerated in a list of family expenditures for that year in an
exhibit from the
Montgomery
County
proceedings. Deductions were made for capital gain and dividend
exclusions and for cash available shown on the children's returns. The
adjustments totalled $32,356.75 for 1968 and $30,120.58 for 1969.
The
adjustments to net worth did not attempt to reflect other evidence in
the case, again from the defendant's testimony in the support
proceeding, regarding the defendant's life-style during this period.
This evidence indicated that he owned several cars, including a
Cadillac, that he and his wife made several trips to places like
Acapulco
,
Jamaica
,
London
and
Aruba
, that he employed a full-time maid for several years, and that he
purchased a number of expensive gifts for his wife.
These
figures yield an adjusted gross income of $86,100.57 in 1968 and
$104,956.41 in 1969. After allowing for itemized deductions and personal
exemptions, the taxable income that emerges is $77,300.51 in 1968 and
$95,573.81 in 1969. The tax liability on these taxable incomes was
$33,971.72 in 1968 (instead of $7,504.95 reported by the defendant) and
$46,595.81 in 1969 (instead of $4,169.87 as reported). The tax liability
was calculated from the tax tables for joint returns and includes the
tax surcharge applicable in the years 1968 and 1969. The alternate tax
computation yields slightly different results.
The
Government next showed that the defendant had a source of income which
could have provided funds for these investments without being reported
on his tax returns. That source was his law practice.
The
witness Michaels, a C. P. A. who prepared the defendant's tax returns in
the years 1966 to 1970, described the method used by the defendant and
himself to compute the defendant's taxable income. He said the defendant
maintained two accounts at Philadelphia National Bank. One was an escrow
account; one was a personal account. The defendant was supposed to
deposit all funds received in his law practice into the escrow account.
When any item became income to the defendant, the fee would be
transferred from the escrow account to the personal account. Michaels
would then compute the defendant's income by comparing the two bank
statements at the end of the year.
If
an item of income did not reach these accounts, it would escape
Michaels' attention and would not be included as income on the tax
return. Michaels testified he did include the defendant's salary from
the Pennsylvania Utilities Commission, but he stated the defendant never
gave him any indication he received income from his private practice
other than the items listed in the bank statements. He stated he was not
aware of the existence of the WSFS "escrow" account.
The
defendant's testimony in the support proceeding corroborated this method
of accounting, but he stated there that he sometimes received cash fees
and he sometimes cashed settlement checks for clients. He maintained,
however, that he supplied his accountant with these cash figures orally.
The
government produced three former clients of the defendant, the witnesses
Flaxman, Keilman and Schleinkofer. Each identified settlement checks
from insurance companies dated in 1967. The witness Tanitsky, a claims
manager with American Mutual Liability Insurance Company, identified two
additional settlement checks payable to a Helen Gladfelter in 1967.
Flaxman, Keilman and Schleinkofer testified that after endorsing their
checks, the defendant paid them their share of the settlement in cash or
by issuing another check. All five of these checks have the statement on
the back "pay to the order of Goodbody and Company."
The
government also produced two letters on the defendant's stationary
addressed to Goodbody and Company. These letters, dated September 28,
1967, and January 2, 1969, list a number of checks which were enclosed
in payment of bills for the purchase of securities. The letters state
that the Flaxman, Keilman, Schleinkofer and Gladfelter checks are
enclosed.
At
the support proceeding, the defendant also outlined the method by which
he raised money for the $100,000 in real estate partnership investments.
He said he would pledge savings certificates and then pay off the loans
out of income when it was earned. He said "to some extent" he
paid off the loans the same way he paid for the stocks--with endorsed
settlement checks. (N. T. 4-76)
Finally,
the government produced notes representing loans totalling $90,000 made
to the defendant by First Federal Savings and Loan Association in the
prosecution years.
The
first of these notes for $25,000 is dated September 11, 1968, less than
one month before the formation of Peoria Towers Associates in which the
defendant invested $25,000. This note was paid off by November 20, 1968.
The payment slips show it was paid in part by checks in the amounts of
$325.00, $2,500.00, $1,000.00, $10,382.80, $600.00, $1,500.00,
$1,700.00, and $1,800.00.
The
second of these notes, in the amount of $15,000 is dated January 6,
1969, less than one month before the formation of Allegheny Industrial
Associates in which the defendant invested $25,000. This note was paid
off by January 28, 1969, with payments of $15,000 and $5.69.
The
third note, for $25,000, is dated June 2, 1969, about a month-and-a-half
before the formation of Triester Riviera Oaks Associates in which the
defendant invested $25,000. This note was paid off by August 15, 1969.
The payment slips indicate payment by checks in the amounts of
$3,900.00, $1,989.00, $400.00, $1,200.00, $500.00, $500.00, $13,000.05
and $10,000. The amounts credited as payments on three occasions are
$10,000, $8,000 and 7,127.03. The total amount of the checks exceeded
the amount of the payment made by $5,873.02 on one occasion and by
$489.00 on another occasion.
The
last note, for $25,000, is dated August 14, 1969, less than one month
before the formation of Triester Coach and Four Associates in which the
defendant invested $25,000. This note was paid off by September 8, 1969.
The payment slips indicate payments by checks of $10,124.15, $9,002.83,
$35.17 and $5,873.02. The government also introduced a copy of a check
for $10,124.15 dated September 2, 1969, drawn on the Western Savings
Fund account the defendant claimed was an escrow account. It was made
payable to First Federal Savings and Loan. The $10,124.15 payment on
this last note was made on September 5, 1969.
As
an alternative theory for the source of the $100,000 invested in 1968
and 1969, defense counsel read in a portion of the transcript from the
support proceeding in which the defendant stated his tax returns for
those years did not accurately reflect the amount of cash he had
available because the business expenses he deducted "may have been
exaggerated." (N. T. 4-65).
In
response, the prosecutor had the following question and answer from the
same transcript read to the jury:
Q.
But either they are exaggerated, in which case you had a lot more cash,
or if they are not exaggerated, then it's a fair question as to where
you got the hundred thousand dollars from. Isn't it?
A.
That's a possible theory. It could have been exaggerated. There might
have been more money there. Maybe there was cash I didn't report. Maybe
there was transactions that I haven't presented to the Court which grew
out of other transactions. There may be--yes, there are maybes. (N. T.
4-71).
The
defendant put on no evidence at all, except that which came in as a
result of cross-examination.
The
evidence at this state must be viewed in the light most favorable to the
Government. Glasser v.
United States
315
U. S.
60, 80 (1942). Moreover, questions of the weight of the evidence or the
credibility of any of the witnesses are foreclosed by the verdict of the
jury. United States v. Greenlee, supra, 517 F. 2d at 903. Viewed
in this light, there was substantial evidence from which the jury could
have found beyond a reasonable doubt that the defendant willfully
attempted to evade payment of the tax that was due on his true taxable
income in 1968 and 1969, and that the amount of tax deficiency was
substantial. The jury could have found that he did this by failing to
report substantial amounts of income in the form of settlement checks
which he used to pay for his investments. The jury could also have
inferred, from the admission by the defendant that his business
deduction "may have been exaggerated," that he attempted to
evade his taxes by falsifying both ends of his returns--by overstating
his business expenses and understating his gross income.
III.
The defendant has submitted a lengthy, incoherent brief raising almost a
score of points and citing numerous inapposite cases in support of his
post-trial motions. Some of these arguments are repeated at several
different places. However, at no point does he directly confront the
core of the Government's case--the source of the $100,000 he invested in
real estate partnerships in the prosecution years.
At
oral argument on the motions, defense counsel confined himself to a few
major points aimed primarily at the Government's opening net worth
figure, at the element of willfulness, and at allegedly prejudicial
comments by the prosecutor and the trial judge. I will consider the
defendant's contentions seriatum.
A.
Admissibility of Evidence
The
defendant challenges the admissibility of the complaint in equity in the
case of William A. Goichman v. Beverly Goichman, Common Pleas
Court, May Term, 1969, in Montgomery County (G-39); exhibits from the
support proceeding, Beverly Goichman v. William A. Goichman,
Common Pleas Court, November Term, 1969, in Montgomery Courty; the
evidence relating to the diversion of settlement checks; the
Philadelphia tax records (G-23 A, B, C,); the Goodbody records (G-34 A,
B, C, D, E F), the 1963 mortgage application (G-26 A), and the proof of
repayment of loans made to purchase the real estate interests (G-71 A,
B; G-72 A, B, C; G-73 A, B, C; G-74 A, B, C).
1.
The Complaint in Equity: The defendant argues that it was
prejudicial to admit the complaint without also requiring the Government
to introduce the answer. This argument is not easy to understand. The
complaint is an admission sworn to under oath by the defendant. The
answer was certainly as available to the defendant as to the Government,
and if it contained material beneficial to his case, he could have
introduced it. The Government is not required to present both the
prosecution and the defense. But the whole issue is irrelevant anyway
because any allegation of ownership Beverly Goichman may have made does
not change the fact that the defendant claimed to have supplied the
funds for the assets in controversy in that proceeding. The defendant is
charged with evading income taxes, after all, not a personal property
tax.
2.
The Exhibits From The Support Case: The defendant complains that
the tax returns for 1961 and 1962 are incomplete in that they lack a
Schedule C, and that the "history of children's assets" is not
shown to have been introduced by the defendant in that case. These
exhibits are all certified and exemplified copies of exhibits introduced
in the support proceeding. The tax returns for 1961 and 1962 show on the
front page that no Schedule C was filed in those years. The history of
children's assets bears a defense exhibit number, and it refers to the
defendant's wife and children. Finally, the information contained in the
exhibits is verified by the complaint in equity and by the bank and
stock broker records.
3.
Diversion of Settlement Checks: This evidence consists of copies
of five checks, copies of two letters to Goodboy and Company on the
defendant's stationery purporting to enclose those checks in payment of
the defendant's account, and testimony by the defendant's accountant as
to how the defendant's income tax returns were prepared. Since these
records relate to 1967, the argument is that the defendant is prejudiced
by evidence which tends to show underreporting in 1967, a year barred
from prosecution by the state of limitations. He argues further that the
evidence has slight probative value because there was no evidence to
diversion of checks in 1967 to similar conduct in the prosecution years.
Evidence
of this kind is relevant and admissible to show "motive,
opportunity, intent, preparation, plan, knowledge, identity, or absence
of mistake or accident." Rule 404(b), Federal Rules of Evidence.
See also United States v. Stirone, 262 F. 2d 571, 576 (3rd Cir.
1958), rev'd on other grounds, 361 U. S. 212 (1960); United States v.
Hines, 470 F. 2d 225, 227-28, cert. denied, 410 U. S. 968
(1973); United States v. Parenti [71-2 USTC ¶9613], 326 F. Supp.
717 (E. D. Pa. 1971), aff'd [73-1 USTC ¶9147] 470 F. 2d 1175
(3rd Cir. 1972), cert. denied, 411 U. S. 965 (1973). This
evidence was admitted for the limited purpose of showing opportunity or
method of generating unreported income. The jury was so cautioned. (N.
T. 8-30, 31).
The
evidence was connected to the prosecution years through the
payment slips attached to the notes evidencing loans made to the
defendant from First Federal to raise $90,000 of the $100,000 he
invested in real estate in the prosecution years, and through the
testimony from the support case.
4.
The
Philadelphia
Tax Records: The defendant complains these are inconsistent in
showing gross earnings of $2,000 and net profits of more than $7,000.
These were actually two sets of records for two different years. In any
case, they were only offered in corroboration of admissions and other
evidence that the defendant's gross income in the years 1958 and 1959
and less than $10,000.
5.
The Goodbody Records: The defendant objects that the custodian
who presented these records is an employee of Merrill, Lynch, Pierce,
Fenner and Smith and was not employed by Goodbody. The witness, however,
was the section manager in charge of the liquidation of Goodbody and
Company, he spent several weeks with Goodbody in 1970 as a consultant,
Merrill, Lynch became the owner of all Goodbody records through a
subsidiary, and the witness worked with these records on an everyday
basis. Finally, I took judicial notice of Securities and Exchange
Commission NASD and New York Stock Exchange bookkeeping regulations
covering the securities industry. (N. T. 3-75).
6.
The Proof of Loan Repayment: Finally, the defendant complains
that the proof of repayment of the $90,000 in loans to purchase real
estate prejudiced him because he was not given these exhibits in advance
of trial. This argument is entirely specious. The first evidence of the
existence of the loans was introduced by defense counsel on
cross-examination of one of the Government's experts. The Government had
no leads to these loans because, although the defendant testified in the
support case that he raised the capital for his real estate investments
by pledging certificates of deposit, he also testified that he owed no
money--as indeed the repayment slips show he did not. Moreover, no
interest was reported on his 1968 and 1969 tax returns. In practical
effect, the loans were rebuttal evidence. At the trial, it was the
Government, not the defendant, that was taken by surprise. If the
Government had not been able to prove that each of the loans had been
repaid in a year of borrowing, the case may well have been a proper one
for dismissal. Under the circumstances, the defendant's claim of
prejudice is preposterous.
B.
Opening Net Worth
The
defendant attacks the Government's opening net worth figure at four
points; the starting point net worth figure of $10,000 in 1955; the zero
cash-on-hand figure in 1967; the failure to do a full, separate net
worth analysis of the defendant's wife and children; and the failure to
include in any of the net worth analyses such property as household
furnishing and cash surrender value of insurance policies.
1.
The Starting Point: The principal basis for the $10,000 starting
point figure is the defendant's admission in the support proceeding that
his assets on graduation from law school probably did not exceed that
amount. The defendant argues the testimony is vague and uncorroborated.
The
general rule in net worth cases is that extrajudicial admissions must be
corroborated. Smith v. United States [54-2 USTC ¶9715], 348
U. S.
147 (1954); United States v. Calderon [54-2 USTC ¶9712], 348
U. S.
160 (1954). In each of those cases, however, the admissions were made to
Internal Revenue Service agents in the course of their investigation. In
Smith, the Court indicated that admissions made under other
circumstances, providing grounds for the inference of reliability, may
not have to be corroborated. Smith v. United States, 348
U. S.
at 155, note 3. In Cleveland v. United States [73-1 USTC ¶9357],
477 F. 2d 310 (7th Cir. 1973), the Seventh Circuit held that admissions
from in a divorce proceeding which were read to the jury in the tax
evasion prosecution need not be corroborated.
Cleveland
v. United State, 477 F. 2d at 313-14.
It
is not necessary to rely on the holding in
Cleveland
in this case, however, for the Government did present corroboration.
Admissions may be corroborated in two ways: (1) by separate evidence
tending to demonstrate the truth of the specific fact admitted, or (2)
by evidence tending independently to show evasion was attempted and the
defendant was responsible. United States v. Mathews [72-1 USTC ¶9352],
335 F. Supp. 157, 162 (W. D. Pa. 1971), appeal dismissed, 462 F. 2d 182,
cert. denied, 409
U. S.
896 (1972). As to the first type, the Supreme Court in Smith held
that the separate evidence is sufficiently corroborative if it bolsters
the admission and thereby proves the offense through the statements of
the defendant. 348
U. S.
at 156.
Here
there was independent evidence that the defendant graduated from law
school in 1955, that he and his wife lived in an apartment until 1957,
that when they purchased a home in 1958 they paid $11,400, placing 10%
down. This closely tracks the corroboration deemed sufficient in Smith
which consisted of that defendant's employment was a clerk at $40 a
week, and the purchase of a home for $9,600, placing less than one third
down. 348
U. S.
at 157-58.
The
defendant argues that this corroboration is derived from the same source
as the $10,000 figure, the testimony in the support case. The short
answer to this is that it is not true. The purchase price of the home is
shown on the face of the deed. The figure also is bolstered by the
application for a mortgage in 1963 which lists assets consisting of
$15,000 cash in banks and $4,500 in stocks. Further corroboration is
found in the two source and application of funds analyses, the one based
on the $10,000 figure of 1955, the other based on the application of
1963. Both analyses produced substantial negative cash positions by the
end of 1967. The Government and no leads to any cash hoard in 1955
sufficient to account for both the negative cash position and the
$100,000 invested in real estate in the prosecution years. No evidence
of such a hoard was produced at trial. In fact, looking at the evidence
as a whole, $10,000 is a rather generous estimate of the net worth a law
student could acquire before graduation.
In
light of the corroboration that was offered, it likewise cannot be
maintained that the admission is impermissible vague. The testimony
itself identifies assets as including a car, some bank accounts and some
stocks. This shows familiarity with his own financial affairs, an area
clearly not outside the defendant's competence. The weight to be given
the admissions was for the jury. Similarly, it was for the jury to give
whatever consideration it wished to defendant's cash hoard argument for
1955. Where there was no evidence of a substantial cash hoard as of that
date, let alone evidence that it was still on hand as of the end of
1967, the jury was certainly entitled to reject the argument. McGarry
v. United States [68-1 USTC ¶9204], 388 F. 2d 862, 868 (1st Cir.
1967), cert. denied, 394
U. S.
921 (1969).
2.
The Zero Cash Figure: The Government, as we have seen, credited
the defendant with no cash on hand in the opening net worth figure for
the end of 1967. While the defendant in his brief does not clearly
distinguish between the starting point figure and the opening net worth
figure, [he] appears to argue that the Government's own evidence shows
that he had cash. He points to settlement checks cashed in 1967 totaling
some $10,000, purchases of stock and bank deposits in 1968, and evidence
(though somewhat cryptic) of a safe deposit box.
The
Government's source and application of funds analysis produced an actual
funds figure as of the end of 1967 of $157,419.52. The net worth figure
however, was $173,643.52. Therefore, the analysis produced a negative
cash figure of more than $15,000. In other words, before the defendant
could have had one dollar to invest in real estate from a cash hoard, he
would have to have at least $15,000 to overcome the negative cash figure
indicated by the net worth analysis. If the defendant made other
purchases and investments, this only increases the amount of cash needed
before one dollar could be invested in real estate. In fact, the
Government's evidence showed increases in the value of stocks and bank
accounts totaling more than $25,000 in 1968. For the defendant to have
made these investments as well as the $25,000 real estate investment in
1968 from a cash hoard and not from income he would have required more
than $65,000 in cash, just to explain his investments in 1968. Even
these figures do not reflect expenditures for the defendant's rather
extravagant life-style during this period.
Even
if the evidence clearly showed that there was cash on hand, it was for
the jury to determine if there was enough to account for the sizable
increases in net worth in the prosecution years. Vloutis v. United
States [55-1 USTC ¶9262], 219 F. 2d 782, 793 (5th Cir. 1955). In a
case such as this where the Government conducted a thorough
investigation and still failed to find any cash, and the defendant
failed to offer any offsetting evidence of cash, the jury could
certainly have concluded there was no cash to find. Fowler v. United
States [65-2 USTC ¶9723], 352 F. 2d 100, 107 (8th Cir. 1965), cert.
denied, 383
U. S.
907 (1966); United States v. Mackey [65-1 USTC ¶9328], 345 F. 2d
499, 506 (7th Cir. 1965) cert. denied, 382
U. S.
824 (1965).
Contrary
to the situation in Dupree v. United States, 218 F. 2d 781,
785-87 (9th Cir. 1955), in which the Government ignored funds claimed to
be available by the defendant, and United States v. Uccellini [58
USTC ¶9313], 159 F. Supp. 491-495 (W. D. Pa. 1957), in which the
Government's own case negated the defendant's business as a likely
source, the Government here did take into account non-taxable sources in
reaching the zero cash figure. The defendant testified in the support
case that he had not received gifts in excess of $1,000, that he did not
gamble and that he did not inherit any money. As to the safe deposit
box, the Government had no lead from the defendant that it existed. In
the absence of leads, the Government is not required to negate every
conceivable source of non-taxable income, a matter that is particularly
within the knowledge of the defendant, when it does show a likely
taxable source. Holland v. United States, supra, 348
U. S.
at 138.
The
defendant complains that the defendant's testimony in the support case
that he received no gifts in excess of $1,000 is capable of two
interpretations. It could mean he received many gifts but none larger
than $1,000, or it could mean that the aggregate value of all gifts not
more than $1,000. Conceding this to be the case, this is an argument for
the jury. Presumably, the jury considered it and resolved the ambiguity
against the defendant.
3.
Net Worth of the Wife and Children: Had the Government failed to
make any net worth investigation of the wife and children, that failure
may well have been fatal to the case. United States v. Merriwether,
440 F. 2d 753, 756 (5th Cir. 1971); United States v. O'Malley
[55-1 USTC ¶9492], 131 F. Supp. 409, 411 (E. D. Pa. 1955). However, the
wife's and children's assets were studied. It is true that numerous bank
accounts and securities holdings were in their names, but ownership of
those assets is not relevant here. The defendant asserted in the support
case that he supplied all the funds for these assets. This claim is
repeated in the complaint in equity. There was no lead suggesting that
the wife and children could have purchased any of these assets with
their own funds. In fact, all the tax returns of the defendant were
joint returns. Only one of these returns showed that the wife generated
any income independently--the 1964 return on which she reported about
$880 in earnings from a business partnership. The defendant himself
testified in the support case that she never worked. The Government also
introduced all the tax returns it could locate which were filed by the
children. From all this evidence, the jury could properly have concluded
that the net effect of the wife and children on the net worth
computation for the defendant for any of the years under examination was
de minimis. United States v. Shy [75-1 USTC ¶9206], 383 F. Supp.
673, 676 (D. Del. 1974).
If
the wife or children had assets other than those indicated by the
evidence, there were no leads as to where to look for them. They cannot
be hypothesized out of nothing. The Government is not required, without
leads to negate every possible source of non-taxable income. Holland
v. United States, supra, 348
U. S.
at 138, Talik v. United States [65-1 USTC ¶9163], 340 F. 2d 138,
140 (9th Cir. 1965).
Most
importantly, however, none of these arguments confront the real estate
investments which clearly were purchased with the defendant's funds and
belonged to him alone.
4.
Omissions From the Net Worth Computation: The defendant argues
that the Government's case must fail because it did not include all
sources of funds in the opening net worth computation. It is not clear
if the defendant is referring to the starting point in 1955 of the
opening net worth in 1967. As to the starting point, the $10,000 figure
is based, as we have seen, on the defendant's own estimate of the value
of his car, stocks and bank accounts. The reason no other assets are
included is because those are the only assets the defendant said he had.
In other words, there were no leads to other assets as of that date. He
complains that the opening net worth figure fails to include such
personal property as household furnishings and insurance. But the cost
of acquiring these assets would represent an expenditure which would
only increase the negative cash position and thereby increase the amount
of nontaxable income he would need before he could invest in the real
estate. Similarly, capital withdrawals from partnership could not affect
the Government's figures because, if it was profit, it would be
reflected as adjusted gross income, and if it was a withdrawal of
capital the cost of acquiring the asset in the first place would already
have been reflected as an expenditure.
C.
Net Worth in the Prosecution Years
The
defendant complains of two items which were included in his new worth
for 1968 and 1969. The first of these is the $18,000 in the western
savings Fund Society account. In the support proceeding, the defendant
maintained that this was in escrow account, but that some of the funds
there were his own. This account was not labeled "escrow," his
accountant was not made aware of its existence, and part of one of his
loans from First Federal was paid with a check drawn on this account.
Therefore, the proper characterization of this account is foreclosed by
the verdict of the jury, which heard argument on the subject.
The
second item is the inclusion of assets of the wife and children as part
of the defendant's net worth in 1968 and 1969. As we have seen,
ownership of these assets is not relevant. The jury could have found
that the defendant supplied all the funds from the defendant's testimony
that his wife never worked, from tax returns listing her as a housewife,
from other testimony and exhibits in which the defendant claimed to have
supplied all funds for the children's assets, and from letters to
Goodbody from the defendant showing that he played an active role in his
wife's investments. Similarly, any profits from these assets would have
been reported on the tax returns. There were no leads to profits, if
any, not disclosed on the returns.
These
assets were properly included in the computation where there was no
evidence and no lead to their source other than the defendant himself. Talik
v. United States, supra, 340 F. 2d at 141.
Finally,
there was no grievous error in the Government's computations with
respect to the Revere Funds. In 1967, the defendant purchased $10,043.92
worth of these funds for his children. This was listed as an asset in
1967. In 1968, the defendant purchased $15,000 more of the funds and
gave all the stock to his children. None of the stock is listed as being
on hand as of December 31, 1968, but the gift is listed as an
expenditure for 1968. Thus the defendant spent $15,000 for stock in
1968, and that is what the evidence showed. In other words, the
$10,043.62 worth of Revere Funds purchased in 1967 is a wash item. It
disappears from the stock on hand column at the end of 1968 along with
the other Revere Funds purchased in that year. It reappears, not as an
asset, but as an expenditure in the adjustments to net worth for 1968 as
part of the $26,387.52 gift to the children.
Arguments
over the weight of this evidence are now foreclosed by the verdict. United
States v. Kleinman [58-2 USTC ¶9951], 167 F. Supp. 870 (E. D. N.
Y., 1958), relied on by the defendant, is not to the contrary. That case
held that where bank deposits were in the name of another, the
Government had to show by "affirmative proof" that the funds
were supplied by the defendant. 167 F. Supp. at 873. There such
affirmative proof was lacking. Here, it was not. Therefore, the case was
for the jury.
D.
Willfulness
The
defendant argues there is no proof of willfulness because there were no
badges of fraud such as those enumerated in Spies v.
United States
, supra, 317
U. S.
at 499. In United States v. Bishop [73-1 USTC ¶9459], 412
U. S.
346 (1973), the Supreme Court attempted to clarify the definition of
willfulness in the criminal tax statutes. It said that willfulness was
"bad faith or evil intent" to do the act proscribed by the
particular statute, in this case, to attempt to evade or defeat payment
of income taxes. 412
U. S.
at 359-61. This intent could be inferred from knowledge in the taxpayer
that more income should have been reported, 412
U. S.
at 360, or from any conduct the likely effect of which is to mislead or
conceal. 317
U. S.
at 499. Here, such conduct was shown by the diversion of settlement
checks without the knowledge of his accountant and by failure to keep
records of all sources of income.
Willfulness
is for the jury to decide. Windisch v. United States [61-2 USTC
¶9720], 295 F. 2d 531, 532 (5th Cir. 1961). The jury could have found
willfulness from the following affirmative acts by the defendant which
the evidence showed: (1) consistent and substantial understatement of
income, United States v. Burrell [75-1 USTC ¶9152], 505 F. 2d
904 (5th Cir. 1974), United States v. Lisowski [74-2 USTC ¶9784],
504 F. 2d 1268 (7th Cir. 1974); (2) filing returns with knowledge more
income should be reported, United States v. Fahey [75-1 USTC ¶9102],
510 F. 2d 302 (2d Cir. 1974), United States v. Rischard [73-1
USTC ¶9151], 471 F. 2d 105 (8th Cir. 1973); (3) failure to include all
sources of income in his records, Spies v. United States [43-1
USTC ¶9243], 317 U. S. 492 (1942); Holland v. United States, 348
U. S. at 139. United States v. Tunnell [73-2 USTC ¶9560], 481 F.
2d 149 (5th Cir. 1973), cert. denied, 415
U. S.
948 (1974), reh. denied, 416
U. S.
963 (1975), (4) understatement of income in prior years; United
States v. Colacurcio [75-1 USTC ¶9416], 514 F. 2d 1 (9th Cir.
1975); and (5) overstatement of business expenses.
IV.
The defendant contends that there were several errors at trial which
entitle him to a new trial. These include statements by the trial judge
either during the trial or in the charge, interruption of the jury's
deliberations, sending the Government summaries out with the jury, and
alleged prosecutorial misconduct.
A.
Statements by the Trial Judge:
In
his brief, the defendant cites numerous statements that he claimed
prejudiced him. At the hearing, however, defense counsel pressed only
one of these. As to the others, a careful reading of the transcript
reveals that they have been lifted out of context and given a strained
interpretation. The brief ignores other cautionary instructions to the
jury, and therefore these contentions are not worthy of further comment.
The
contention argued by counsel at the hearing was a portion of the charge
which stated generally that an indictment is not evidence but an
accusation which the defendant is called upon to answer. He objects that
this is an improper comment on his Fifth Amendment privilege. The charge
complained of is part of a general criminal charge which has been given
probably to thousands of criminal juries over the years. This part of
the charge refers of course to the defendant's duty to plead guilty or
not guilty and has nothing to do with the Fifth Amendment. Any ambiguity
that may have been created in the jurors' minds was cured a few moments
later when the jury was instructed as to burden of proof and presumption
of innocence. (N. T. 8-7-9).
B.
Interruption of Jury Deliberations:
The
defendant objects to the fact that the jury was sent home for the
evening. This has been the standard practice in this District in the
circumstances of this case. No publicity surrounded the case. The hour
was late. The jury was admonished to discuss the case with no one. (N.
T. 8-49, 50). The following morning, the jury was asked if any of them
discussed the case with anyone, and they all said they did not. (N. T.
9-3). In the light of United States v. Piancone, 506 F. 2d 748,
750-51 (3rd Cir. 1974), and Byrne v. Matczak, 254 F. 2d 525, 529
(3rd Cir. 1958), cert. denied, 358
U. S.
816 (1958), this contention is likewise not worthy of more discussion.
C.
The Summaries:
The
defendant objects that the summaries prepared by the Government
witnesses were allowed to go out with the jury. While it is true that
the Supreme Court in
Holland
, supra, cautioned against the use of charts and summaries in net
worth cases, 348
U. S.
at 129-30, such summaries have been consistently approved when used not
as evidence but as an aid to the jury, with guarding instructions. United
States v. Johnson [43-1 USTC ¶9470], 319
U. S.
503, 519 (1943); Gariepy v. United States, 189 F. 2d 459, 462
(6th Cir. 1951); Smith v. United States [57-1 USTC ¶9242], 239
F. 2d 168 (6th Cir. 1956), cert. denied, 353
U. S.
983 (1957) reh. denied, 354
U. S.
944 (1957);
United States
v. Parenti, supra, 326 F. Supp. at 728.
In
this case the jury was instructed that the summaries were not evidence
and could only be considered if they found there was competent evidence
in the record to support the computations. (N. T. 8-26). The summaries
themselves were cross referenced to the exhibits and testimony they
purported to reflect, and the individuals who prepared them were
subjected to searching cross-examination. The use of such summaries are
particularly appropriate in a case like this that embraces a thirteen
year period and myriad transactions in securities, bank accounts,
savings certificates, and real estate. See
United States
v. Parenti, supra, 326 F. Supp. at 728.
The
defendant objects that these summaries omitted some items and contained
errors. This contention has been answered elsewhere and need not be
restated. He also objects that the summaries contained evaluations of
credibility, citing Steele v. United States [55-1 USTC ¶9438],
222 F. 2d 628 (5th Cir. 1958), and United States v. Ward, 169 F.
2d 460 (3rd Cir. 1948) for the proposition that this is impermissible.
However, the defendant does not point to any place in the transcript
where the Government witnesses passed on credibility. An independent
review of the record does not disclose any place where either summary
witness evaluated the credibility of any evidence. The only item which
conceivably involved credibility was the Western Savings account. The
defendant's contentions with respect to the account have likewise been
considered elsewhere in this opinion and need not be restated.
Otherwise, the record reveals that the Government accepted all the
documentary and other evidence in the case at face value. Accordingly,
the rule of law cited by the defendant does not appear to be relevant.
D.
Prosecutorial Misconduct:
The
defendant objects to argument on summation that the people who pay taxes
are the victims of people who evade their taxes (N. T. 7-100), and to an
analogy between the crime of tax evasion and other crimes such as bank
robbery and burglary (N. T. 7-99).
The
prosecutor is entitled to strike hard blows but the foul ones. Berger
v.
United States
, 295
U. S.
78, 88 (1935). Statements made by the Assistant U. S. Attorney during
the trial must be viewed in the "totality of the
circumstances."
United States
v. Newman, 490 F. 2d 139, 147 (3rd Cir. 1974). While some
statements--such as those expressing an opinion on guilt based on facts
not in evidence--are so inherently prejudicial as to per se
require a new trial, United States v. Schartner, 426 F. 2d 470,
478 (3rd Cir. 1970), the general rule is to determine case-by-case
whether the defendant was actually prejudiced. United States v.
Somers, 496 F. 2d 723, 740-41 (3rd Cir. 1974), cert. denied,
419
U. S.
832 (1974). Moreover, a prosecutor's remark made in reply to, or in
rebuttal of, an improper inference suggested by defense counsel does not
result in that prejudice which requires a new trial. United States v.
Somers, supra, 496 F. 2d at 741.
A
careful reading of the summation arguments of both counsel reveals that
the defendant suffered no prejudice by the prosecutor's remarks. Both
remarks were made in the context of trying to explain the difference
between a civil and a criminal tax action, and to argue that tax evasion
is a serious crime. These arguments in turn were required to meet a
defense strategy aimed at downplaying the crime and emphasizing the
existence of a civil remedy for the Government. For example, at one
point in cross-examination, defense counsel remarked. "So no matter
which way it works out here he's still going to have to pay the piper in
the civil case. Correct?" (N. T. 5-99). At another point he brought
President Nixon into the case: "In the case of Nixon where he owed
the Government $550,000 and he had false affidavits filed and
everything, they merely went against him civilly. Isn't that
correct?" (N. T. 7-78). Finally, on closing argument he attempted
to prejudice the jury against the Internal Revenue Service by referring
to news stories about personal files on taxpayers kept by the Service.
(N. T. 7-142). Under the circumstances, therefore, the prosecutor's
remarks were within the range of fair argument to answer these tactics.
V.
The Court is of the same opinion as Judge Green that there is no merit
to the defendant's motion to dismiss for preindictment delay, which was
incorporated by reference in his brief on the post-trial motions.
There
being no other grounds for granting either the motion for judgment of
acquittal or the motion for a new trial, both motions are accordingly
denied.
Order
An
Now to Wit, this 20th day of January 1976, for the reasons set forth in
the Opinion filed concurrently herewith, it is Ordered, Adjudged and
Decreed that defendant's motion for judgment of acquittal or in the
alternative, for a new trial, be and they are hereby Denied.
[75-2
USTC ¶9655]
United States of America
, Appellee v. Richard G. Mogavero, Appellant
(CA-4),
U. S. Court of Appeals, 4th Circuit, No. 75-1026, 521 F2d 625, 8/14/75,
Reversing and granting a new trial in unreported District Court decision
[Code Sec. 7201]
Criminal penalties: Evidence: Net worth increase: Instructions to
jury: Improper.--Taxpayer's conviction for willfully filing false
and fraudulent income tax returns was reversed and a new trial was
granted. The conviction was based on legally sufficient evidence that
the taxpayer had unreported net worth increases but the instructions to
the jury had placed upon the taxpayer the burden of proving beyond a
reasonable doubt that his parents were the source of his funds in order
to gain acquittal. In a net worth income tax prosecution, the burden of
disproving a taxpayer's claimed source of nontaxable receipts rests on
the government. Thus, the instruction was in error.
Scott
P. Crampton, Assistant Attorney General, Richard B. Buhrman, Gilbert E.
Andrews,
Rob
ert Lindsay, Department of Justice, Washington, D. C. 20530, George
Beall, United States Attorney, Baltimore, Md., for appellee. Stephen N.
Shulman, Adrian C. May, Jr., David Diener, Cadwalader, Wickersham &
Taft, 1000 Connecticut Ave., Washington, D. C., for appellant.
Before
WINTER, BUTZNER, and WIDENER, Circuit Judges.
WINTER,
Circuit Judge:
Found
guilty of filing false and fraudulent individual income tax returns for
the years 1967-1970 in violation of 26 U. S. C. §7201, Richard Mogavero
appeals, asserting as grounds for reversal that the evidence was
insufficient to convict him, that the instructions to the jury were
prejudicially erroneous, and that there was error in the district
court's refusal to poll the jury on its verdict. We think that the
evidence was legally sufficient to permit the jury to find him guilty
beyond a reasonable doubt, but we conclude that there was a fatal error
in the instructions given the jury requiring reversal and a new trial.
The district court's refusal to poll the jury after its verdict was
recorded is unlikely to arise at a second trial, and we see no need to
pass on its propriety.
I.
Viewed in the light most favorable to the government, the proof
established that over the years in question defendant's net worth
substantially increased over and above that which he reported as taxable
income. Indeed, it indicated that his unreported income for the years in
question aggregated $164,680.31. To rebut the logical inference that his
increased net worth indicated that he under-reported his taxable income
in that amount, defendant claimed that the increases were attributable
to two loans to him of $80,000 and $84,000, repectively, in the form of
currency, from his parents. The first was allegedly made sometime
between 1966 and 1970, and the second sometime after March 11, 1968,
when his parents gave him a power of attorney to handle their affairs
and he made the loan to himself under the power. The proceeds of the
latter loan were allegedly invested in the Briarwood Inn, a now defunct
business enterprise of which defendant was the proprietor.
The
government's evidence further showed that while defendant, in his 1967
tax return, claimed an interest deduction on a $5,000 balance on a loan
from his father, he did not claim any interest deduction on the loans of
$80,000 and $84,000, respectively for any years. In 1967, 1970 and 1971,
defendant filed five financial statements with banks and insurance
companies; none showed any liabilities to defendant's parents. Finally,
a source and application of funds statement reflecting the financial
history of defendant's parents between 1955 and 1970 showed that between
1955 and 1964 defendant's parents spent or invested substantially more
than they were known to have received, during 1965 and 1966 they may
have accumulated $10,171.90, and that during 1967 to 1970 they may have
accumulated approximately $1,750. Thus, the inference that they lacked
the means to make the loans as claimed by defendant could logically be
drawn. Defendant countered with evidence that for some past period his
father had been a bookmaker.
Although
conflicting, we think that the evidence was legally sufficient to permit
the jury to find that defendant willfully filed false and fraudulent
income tax returns for the years 1967 to 1970.
II.
In view of the defense that loans from defendant's parents explained his
substantial increase in net worth, defendant asked that the jury be
instructed as follows:
If
you are not convinced beyond a reasonable doubt that the
defendant's parents were not the source of the cash money, that
the defendant failed to report on his tax returns, then you would find
the defendant not guilty. (Emphasis added.)
Conversely,
if you are convinced beyond a reasonable doubt that the defendant's
parents are not the source of the cash money that the defendant failed
to report in his tax return during each of the years involved, then you
would find the defendant guilty as to each or any of those years.
While
purporting to grant the requested instruction, the district court
eliminated the double negative in the first paragraph of the request and
told the jury:
In
this case the defendant has maintained that the increases in his net
worth were the result of cash monies he received in loans from his
parents, and the cash monies belonging to his parents that he expended
under a power of attorney.
The
prosecution must prove beyond a reasonable doubt this is not true in
order for you to find the defendant guilty.
If
you are convinced beyond a reasonable doubt that the defendant's
parents were the source of the cash money, that the defendant
failed to report on his tax returns, then you would find the defendant
not guilty. (Emphasis added.)
Conversely,
if you are convinced beyond a reasonable doubt that the defendant's
parents are not the source of the cash money that the defendant failed
to report in his tax return during each of the years involved, then you
would find the defendant guilty as to each or any of thoe years.
The
sentence in the instruction given that "[i]f you are
convinced beyond a reasonable doubt that the defendant's parents were
the source of the cash money . . . then you would find the defendant not
guilty" is not the equivalent of the requested instruction that
"[i]f you are not convinced beyond a reasonable doubt that
the defendant's parents were not the source of the cash money . .
. then you would find the defendant not guilty." The instruction
given casts the burden on the defendant to prove beyond a reasonable
doubt that his parents were not [sic] the source of his funds in order
to gain acquittal. This was error, because Holland v. United States
[54-2 USTC ¶9714], 348 U. S. 121 (1954), and United States v. Massei
[58-1 USTC ¶9326], 355 U. S. 595 (1958), both hold that in a net worth
income tax prosecution the burden of disproving a defendant's claimed
source of nontaxable receipts rests on the government. If that burden is
not met by proof persuasive beyond a reasonable doubt, a defendant is
entitled to acquittal. The requested instruction correctly stated the
applicable rule of law, because it applied the proper standard as to
burden of proof.
The
government concedes that, standing alone, the instruction given would
constitute reversible error. The government argues vigorously, however,
that the error was overcome when the charge, containing repeated general
references to the government's burden to prove each element of its case,
is considered in its entirety. We are not persuaded.
It
is true that the jury was told about the government's burden of
proof--that the burden of proof is always on the government to prove
beyond a reasonable doubt every essential element of the crimes charges,
that the burden is never on the defendant, and that, in the instant
case, the burden was on the government to prove beyond a reasonable
doubt that any amounts reflected in the defendant's increased net worth,
plus nondeductible expenditures, were from taxable rather than from
nontaxable sources. The flaw in the government's logic is that these
instructions were all cast in the form of general statements as to
burden of proof. The erroneous instruction was addressed to specific
findings--application of the general statements to the facts as the jury
might find them and the form of verdict which would follow. As a
consequence, we think it unlikely that the jury, in making the specific
finding of guilt or innocence, would correctly apply the general
statements in the contravention of the district court's literal
language. Thus, we cannot conclude that the error was overcome.
III.
As we have stated, the dispute about the proper time to poll individual
jurors on the jury's verdict is unlikely to arise at a new trial. We do
not deem it necessary to consider it.
Reversed;
New Trial Granted.
[75-1
USTC ¶9456]
United States of America
, Plaintiff-Appellee v. Charles H. Bush, Defendant-Appellant
(CA-5),
U. S. Court of Appeals, 5th Circuit, No. 74-3902, Summary Calendar, *, 512 F2d
771, 5/8/75, Affirming unreported District Court decision
[Code Sec. 7201]
Criminal penalties: Income not reported: Net worth method: IRS
procedure, protection of Constitutional rights.--The taxpayer's
conviction for tax evasion was affirmed on appeal. The court concluded
that the taxpayer had been informed of his rights and had knowingly and
voluntarily waived his right to counsel. The court also determined that
the government had properly utilized the net worth method by crediting
the taxpayer with a zero cash basis at the beginning and ending of the
taxable year.
R.
Jackson B. Smith, United States Attorney, Edmund A. Booth, Jr.,
Assistant United States Attorney, Augusta, Ga., for plaintff-appellee.
William C. Calhoun, 1116 S. Finance Bldg.,
Augusta
,
Ga.
, for defendant-appellant.
Before
GEWIN, GOLDBERG and DYER, Circuit Judges.
PER
CURIAM:
Appellant
Charles Bush was found guilty by a jury on a one-count indictment
charging him with income tax evasion for the calendar year 1971 in
violation of 26 U. S. C. §7201. On appeal, he contends (1) that his
motion to suppress certain evidence should have been granted and (2)
that he was entitled to a judgment of acquittal because the government
allegedly failed to carry the burden of proof as to his net worth. We
find no merit in either contention and we affirm the judgment of
conviction.
Appellant
argues that evidence obtained from him during the first interview with
Internal Revenue Service personnel should have been excluded at trial.
He asserts that he did not properly waive his right to have an attorney
present at the interview and that the government agents used fraud and
deceit to encourage him to proceed with the interview unassisted by an
attorney. We have carefully reviewed the record, including a transcript
of the interview in question, and we find that appellant was given the Miranda-like
warnings pursuant to established I. R. S. procedures, that he understood
his right to counsel, and that he intelligently, knowingly, and
willingly chose not to have counsel present. Furthermore, we can find
nothing in the record to support his allegation of fraud and deceit on
the part of the government agents. We hold that appellant has failed to
meet his burden of proof on this issue. See United States v. Dawson,
486 F. 2d 1326 (5th Cir. 1973); United States v. Tonahill [70-2
USTC ¶9511], 430 F. 2d 1042 (5th Cir. 1970).
At
the trial, a government witness testified that, in computing appellant's
income by the net worth method, appellant was given credit for zero cash
on hand both at the beginning and at the end of the tax year under
consideration. Appellant contends that this was improper because he had
related to I. R. S. personnel that he had certain sums of money at the
beginning and at the end of the year 1971. There is, however, other
evidence to support the government's use of the zero cash on hand
figure. For example, an amended joint tax return filed by appellant for
1971 reflected zero cash on hand at the end of the calendar years 1970
and 1971. Moreover, we note that, since a zero cash on hand figure was
used for the beginning as well as the end of the tax year, this did not
affect the determination of appellant's income for 1971 because the net
worth method of computation depends on increases in assets to reflect
income. With reference to cash on hand, the government gave appellant
the benefit of the doubt by not finding an increase in his net worth in
that respect. The government did not fail to meet its burden of proof as
to appellant's net worth as argued, and, accordingly, he was not
entitled to a judgment of acquittal.
Affirmed.
*
Rule 18, 5th Cir., see Isbell Enterprises, Inc. v. Citizens Casualty
Co. of New York et al., 5th Cir. 1970, 431 F. 2d 409, Part I.
[75-1
USTC ¶9206]
United States of America
, Plaintiff v. Ira Lee Shy, Defendant
U.
S. District Court, Dist. Del., Criminal Action No. 74-26, 383 FSupp 673,
11/4/74
[Code Sec. 7203]
Criminal penalties: Willfull failure to file returns: Willfulness:
Use of net worth method: Opening net worth: Sources of income: Motion
for acquittal.--Motion for judgment of acquittal was denied on one
count of an indictment for willful failure to file income tax returns
where the defendant admitted receiving at least $10,000 gambling income
and he did not argue that the evidence of willfulness was insufficient
to put before a jury. Motion for acquittal on a second count for the
same offense involving a different year was also denied. The
government's use of the net worth method in this failure-to-file case
was no less reliable than it had been in tax evasion cases (both were
used to try to prove that the income received was more than the amount
claimed). Further, the government's proof, dealing with the opening net
worth and the sources of income, satisfied the standards set in
Holland
, SCt, 54-2 USTC ¶9714.
John
H. McDonald, Assistant United States Attorney,
Wilmington
,
Del.
, for plaintiff. Carl Schnee,
Suite
1110
, Bank of Delaware Bldg.,
300 Delaware Ave.
,
Wilmington
,
Del.
, for defendant.
Opinion
LAYTON
, District Judge:
By
his motion for judgment of acquittal made pursuant to Rule 29(c), F. R.
Crim. P., the Defendant challenges the Government's exclusive reliance
on the net worth method to prove one count of an indictment for willful
failure to file income tax returns. 1
Ira
Lee Shy was tried before a jury on an indictment charging willful
failure to file income tax returns for the years 1970 (Count I) and 1971
(Count II), in violation of 26 U. S. C. §7203. The jury was unable to
agree upon a verdict, and the Court declared a mistrial. Defendant has
renewed his motion for judgment of acquittal.
Rule
29 states the standard: a judgment of acquittal is to be entered
"if the evidence is insufficient to sustain a conviction. . .
." The evidence ". . . and the inferences to be drawn from it
must be taken in the light most favorable to the Government . . . [and]
the sufficiency of the evidence must be judged upon the record as a
whole."
United States
v. Feldman, 425 F. 2d 688, 692 (3 Cir., 1970).
The
offense with which the Defendant is charged contains three elements
which must be proved: (1) duty to file--that the Defendant received at
least $1700.00 in gross income in the year charged, (2) failure to
file--admitted as to each count herein, and (3) willfulness in respect
to failure to file--in controversy herein.
The
net worth method, which Defendant challenges as applied to this case,
was used solely to show that the Defendant had a duty to file--that he
earned more than $1700.00 in each year charged.
Count
II
Were
Defendant's arguments accepted, I find that they would not justify
acquittal on Count II (1971). Disregarding all net worth evidence, there
is in the record Defendant's admission that he received at least
$10,000.00 in gambling income in 1971. 2 The
requirement to file and the failure to file being admitted, only the
issue of willfulness is in controversy. Defendant does not argue that
evidence of willfulness was insufficient to put before a jury.
Count
I
No
proof of actual income was made for the year 1970. It is in this count
that the Government relied exclusively upon the net
[Use
of Net Worth Method]
[Use of Net Worth Method]
The
Defendant points out that an exhaustive search of reported cases fails
to uncover one in which the net worth method has been used exclusively
to prove duty to file. 3 He argues:
"(W)henever
the theory . . . has been applied by other courts, the . . . defendants
have been charged with some type of fraud or misrepresentation . . . in
the filing of their returns. Therefore, it was proper . . . to allow the
government to utilize this theory by utilizing prior admissions (in the
form of tax returns) or current admissions (again in the form of tax
returns) in proving net worth. In the case at bar, such theory must
fail."
Even
if Defendant's observation were correct, 4 his argument
would miss the point of allowing net worth proof. In evasion cases it is
used to show a factual discrepancy between the amount the taxpayer
reported as income and the amount the Government contends he actually
received. In this failure-to-file case it was used to show a factual
discrepancy between the amount of income the Defendant claimed to have
received in the years charged (i. e., less than $1700) and the
amount the Government claims he received (i. e., more than
$1700). Defendant has pointed to no factor which would make the net
worth method less reliable in the latter instance than in the former. 5
[Opening
Net Worth]
In
his second attack upon the method's application in this case, Defendant
accurately states the law:
"It
is clear that the net worth theory rests in large part upon the
government's ability to establish, with reasonable certainty, an
operning net worth, to serve as a starting point, from which to
calculate the future increases in the defendant's assets."
He
argues that since at the Government's starting point, 12-31-69,
Defendant is credited with the rather meagre assets of two cars plus
$100.00 cash on hand, the Government failed in its obligation to show a
"solid net worth starting point."
If,
indeed, Defendant had substantially greater assets on that date,
Defendant is correct. But it may properly be inferred from the record
that he did not. The jury reasonably could have believed representations
by Government witnesses that they made every effort to collect
independent data on Defendant's financial condition at the
"starting point," and that, so far as could be found, this was
all he owned. United States v. Penosi [72-1 USTC ¶9103], 452 F.
2d 217, 220 (5 Cir., 1971), cert. den. 405
U. S.
1065. Defendant did take the stand and he did not claim to have owned
more at the "starting point" than that with which the
Government credited him. See United States v. Mackey [65-1 USTC
¶9328], 345 F. 2d 499, 506 (7 Cir., 1965) cert. den. 382
U. S.
824; United States v. Adonis [55-1 USTC ¶9310], 221 F. 2d 717,
718 (3 Cir., 1955); United States v. Frank [57-1 USTC ¶9675],
245 F. 2d 284 (3 Cir., 1957). Compare United States v. O'Malley
[55-1 USTC ¶9492], 131 F. Supp. 409 (E. D. Pa., 1955).
No
case cited by the Defendant stands for the proposition that the
Government is obliged to credit a taxpayer with enough fictional assets
and nonexistent prior tax returns to build a "solid" starting
point. Again, this was the point of the
Holland
case--the Government having presented the results of a comprehensive
effort to ascertain opening net worth, the Defendant may furnish
"leads" as to whatever the Government may have missed, or he
may claim that he had assets at that time which are unknown to the
investigators. The Defendant herein did neither.
Holland
, 138-9.
[Sources
of Income]
There
remains Defendant's contention that the net worth statement erroneously
included possessions and expenses pertaining either to both Defendant
and his wife or to his wife alone. 6 Had the
Government failed to make a net worth investigation about the wife,
Defendant would be correct. United States v. Meriwether [71-1
USTC ¶9390], 440 F. 2d 753, 756 (5 Cir., 1971). However, the
Government's investigation included possible income sources for
Defendant's wife. Like the Defendant, she had filed to income tax
returns for the years previous. Unlike the Defendant, she had no
apparent source of income. Defendant's own testimony indicated that she
worked only occasionally. "This was all relevant and its weight for
the jury." Frank, supra, at 287. The jury could properly
have inferred from the record that the net effect of the wife on the net
worth calculations for the Defendant was de minimis.
[Conclusion]
I
hold that the Government's use of the net worth method as if in an
evasion case did not render it unreliable in this failure-to-file case,
and that the Government's proof satisfied the standards set in the Holland
case. Defendant's motion will be denied.
Submit
Order.
1
For explanation of this method, see Holland v. United States
[54-2 USTC ¶9714], 348
U. S.
121 (1954).
2
Although Defendant testified to this as part of the Defense's case, he
was not "filling in a gap" in the prosecution's case. The
Government put into evidence Defendant's admission to an Internal
Revenue agent that he had received $10,000.00 from illegal gambling in
1971. But even if this admission came to light only in the Defendant's
case, after denial of Defendant's motion for acquittal made at the close
of the Government's case, the rule in the Third Circuit is that the
Court should consider it in ruling upon the renewed motion for
acquittal. United States v. Belgrave, 484 F. 2d 915, 917 (3 Cir.,
1973);
United States
v. Feldman, supra.
3
But see United States v. Johnson, 460 F. 2d 20 (9 Cir., 1972),
and United States v. Walker, 479 F. 2d 407 (9 Cir., 1973),
failure-to-file cases in which the net worth method was used to
corroborate other evidence.
4
In the evasion case of United States v. Schipani [66-2 USTC ¶9512],
362 F. 2d 825, 826 (2 Cir., 1966) cert. den. 385
U. S.
934, the Defendant kept no records and filed no return. The case was
tried on the net worth theory.
5
See generally Annotation. 2 L. Ed. 2d 1870 et seq. It is true that, by
definition, failure-to-file cases involve no affirmative submissions by
the taxpayer which the Government can show to have been purposefully and
wrongfully made. The effect is to force the Government to prove
circumstantially the essential element of willfulness. See
Holland
, supra, at 139. Proof of the element of willfulness is separate
from proof of duty to file. It is to proof of willfulness that
Defendant's argument should properly pertain. The jury could have found,
from the record as a whole, sufficient proof of willfulness to sustain a
conviction.
The
apparent absence of failure-to-file cases in which the method has been
used exclusively can be explained only by speculation. One possibility
is that the Government's burden of proof on the duty-to-file issue is
usually met so easily that resort to this complicated and confusing
method is unnecessary. Another possibility is that since failure-to-file
is a misdemeanor, ordinarily the Government might not proceed with cases
that are difficult to prove.
6
The inclusion in the opening net worth calculation of cars in which the
wife had an interest can only have helped the Defendant.
[74-1
USTC ¶9258]
United States of America
, Appellee v. W. Horace Lowder, Appellant
(CA-4),
U. S. Court of Appeals, 4th Circuit, No. 73-1176, 492 F2d 953, 2/22/74,
Aff'g unreported District Court decision
[Code Secs. 6531 and 7206(1) and 18 U. S. C. Sec. 371]
Crimes: Conspiracy to defraud U. S.: Statute of limitations: False
returns: Net worth method: Evidence.--A secretary-treasurer of six
corporations was properly convicted of conspiring with the corporations
to defraud the United States by obstructing the IRS in its task of
computing and collecting revenue. The six-year statute of limitations on
prosecutions for certain tax law violations, not the general five-year
statute on violations of federal laws, applied to the action, so the
prosecution was not barred. He was also properly convicted on two counts
of filing false returns. The evidence was sufficient on these counts and
the net worth method was properly used.
Scott
P. Crampton, Assistant Attorney General, Meyer Rothwacks, John P. Burke,
Rob
ert L. Baker, Richard P. Slivka, Department of Justice, Washington, D.
C. 20530, for appellee. W. Horace Lowder, pro se.
Before
WINTER, CRAVEN, and BUTZNER, Circuit Judges.
PER
CURIAM:
W.
Horace Lowder was convicted in January, 1973, in a trial by jury, of one
count of conspiracy to defraud the United States by obstructing the
Internal Revenue Service in its task of computing and collecting revenue
(18 U. S. C. §371) and two counts of knowingly filing false corporate
income tax returns (26 U. S. C. 7206(1)). Lowder was sentenced to two
years' imprisonment on each count and was fined $10,000 on the
conspiracy count and $5,000 on each of the other two counts.
[Background]
The
government's case was based on the theory that Lowder utilized his
intimate connection with six family-owned corporations to foster an
intricate scheme whereby their tax liability would be obscured and
evaded, in the years 1961-65. The basic facts as to those years for each
corporation follow:
(1)
All Star Mills, Inc. (Mills): The original family corporation,
founded in 1932 by Lowder's father; principal business was sale of flour
and animal feed; Lowder's ownership 111/2%. There were 26 other
stockholders.
(2)
Lowder Farms, Inc. (Farms): A second family-owned corporation,
founded in 1950 by Lowder's father and uncle; principal business of beef
cattle and farming; Lowder's ownership 111/2%. There were 24 other
stockholders.
(3)
All Star Hatcheries, Inc. (Hatcheries): Founded in 1959 by Lowder
for the business of hatching and growing poultry (broilers); Lowder and
wife owned 100% of stock.
(4)
All Star Foods, Inc. (Foods): Founded in 1959 by Lowder to raise
layers and produce and market eggs; Lowder owned 51% through stock held
by him and Hatcheries. Mills owned 49%.
(5),
(6) All Star Industries, Inc., and Consolidated Industries,
Inc., were both named as co-conspirators but their activities did
not play any significant role. The former was formed in 1961 to hold a
mortgage on property owned by Foods; the latter was formed to be the
legal owner of a farm. Lowder owned 100% of the former, 331/3% of the
latter.
Lowder
throughout the relevant years was the active manager of the affairs of
each corporation. He held, among others, the position of
secretary-treasurer in each, was in charge of the overall business and
financial operations for all, including bookkeeping, and signed each of
the corporate tax returns. That Lowder was responsible for the practices
alleged to have constituted a scheme to cover up tax liability was not
disputed by him; the other shareholders and officers apparently gave him
a free hand in decision making.
The
four active corporations were Mills, Farms, Foods, and Hatcheries, all
of whose books and records were kept in the offices of the original
company, Mills. Almost all of the paper work--handling sales invoices,
posting accounts, etc.--was handled by Mills' employees.
In
addition to regular business with third parties, these four
corporations, along with the two inactive ones, engaged in a substantial
number of inter-corporate transactions. Their records over the four-year
period showed that some $17 million was transferred by checks running
from each corporation to the five others; that some $5 million of this
amount was attributable to loans extended or loans repaid; and that the
remaining $12 million was reflected as expenses on the books of the
paying corporations. The nature and validity of these expensed
transfers--whether the amounts represented transactions in real goods
and services or whether they were mere transfers of money fraudulently
treated as "expenses" to avoid a showing of profits--was the
crux of the case before the jury.
[Contentions]
The
major contentions advanced by Lowder are: (1) conviction on the first
count was barred by the statute of limitations, 18
U. S.
C. §3282; (2) the employment of a net worth method in count two was
erroneous; (3) the convictions on each count rested on insufficient
evidence. For the major portion of the proceedings in the district court
and before us, Lowder represented himself. There is no claim that his
lack of counsel was the result of indigency. In January, 1972, three
months after his indictment and one year before the trial, Lowder
discharged his retained attorney over a fee dispute. The legal and
factual complexity of the charges have made his chosen course hazardous,
but we have endeavored to scrutinize the record and give the assigned
errors full consideration. We decline, however, to hear argument pro
se.
Count
I
The
conspiracy conviction is assailed as barred by the applicable statute of
limitations. We do not agree and, therefore, we affirm.
Lowder
and the six corporations were charged with conspiring, from January,
1961, up through the date of the indictment, Cotober 8, 1971, to defraud
the United States "by impeding, impairing and obstructing the
lawful functions of the Internal Revenue Service, . . . in the
ascertainment, computation, assessment and collection of revenue"
from the four active corporations.
As
alleged and proved the essence of the government's case was that: (1)
each corporation had a different accounting year--Mills was on a
calendar year basis and the other five were each on different fiscal
years; (2) the transfers of money, ostensibly paid for supplies such as
feed, would usually occur in large amounts towards the close of the
fiscal year for the transferor/"purchaser"; (3) these
transfers, treated as expenses, would in virtually every instance wipe
out then-existing profits which had been accumulating to the transferor
during its taxable year; (4) the "seller"/transferee would in
turn eliminate the effect these amounts had on its books as receipts
(and potential profits) when its taxable year closed a few months later
by another transfer similarly expensed, and so on, in a process denoted
as "rolling" by the investigating agent; (5) the transfers of
money, in the aggregate, overstated the value of the goods actually
changing hands, i. e., Mills did sell feed to Hatcheries, but not nearly
in the quantities which would justify the amounts expensed on the books;
(6) the fact that Mills and Farms were on an accrual basis method of
accounting and Hatcheries and Foods were on a cash basis method was
utilized by Lowder to obscure the real transactions; and (7) the
underlying documents--invoices, ledger cards, etc.--against which the
validity of these transfers could have been checked were deliberately
destroyed or concealed.
Of
the eighteen alleged overt acts, all of which were corporate income tax
filings for the years in question, the latest occurred on March 14,
1966, the date of the filing of Mills' return for the previous
calendar year. The date of the indictment is October 8, 1971,
approximately five years and seven months after the date of the last
overt act alleged therein.
Before
the trial, the court ruled that the six-year statute of limitations
specified in 26, U. S. C. §6531(a) applied to the conspiracy count as
well as to the fraudulent filing charges. Lowder asserts that the first
count, charging a conspiracy to defraud under 18 U. S. C. §371, was
governed by the general five-year limitation period specified in 18 U.
S. C. §3282, 1 but we think
the six-year limitation period in 26 U. S. C. §6531 governs. The
general conspiracy statute, 18
U. S.
C. §371, contains no period of limitations. Limitations, for
indictments under §371, are those supplied by other provisions of law,
or where there are none, by 18
U. S.
C. §3282 which is a general statute of limitations applicable
"[e]xcept as otherwise expressly provided by law." Thus, §3282
applies where no other statute is applicable, and, stated conversely,
its application is ousted when there is a special limitation period
prescribed for a specific offense.
In
the case of prosecutions of violations of the tax laws, 26
U. S.
C. §6531 provides, in relevant part:
No
person shall be prosecuted . . . for any of the various offenses arising
under the internal revenue laws unless the indictment is found or the
information instituted within 3 years next after the commission of the
offense, except that the period of limitation shall be 6 years--
(1)
for offenses involving the defrauding or attempting to defraud the
United States
or any agency thereof, whether by conspiracy or not, and in
any manner . . ..
It
thus appears that for a conspiracy to defraud the United States by
filing false and fraudulent tax returns--the crime charged against
Lowder, §6531 prescribes a six-year period of limitations and, as part
of the overall statutory scheme, §3282, by its terms, is inapplicable.
Two
authorities do apparently stand opposed to what seems to be this fairly
obvious statutory scheme: Grunewald v. United States [57-1 USTC
¶9693], 353
U. S.
391 (1957); and United States v. Klein [57-2 USTC ¶9912], 247 F.
2d 908 (2 Cir. 1957), cert. denied, 355
U. S.
924 (1958).
In
Klein, on an indictment charging a §371 conspiracy to defraud in
language virtually identical to that contained in count one here, the
court, as a prelude to its discussion of the evidence showing the period
that the conspiracy continued, stated that 18 U. S. C. §3282 was
applicable. In Grunewald, on an indictment charging a conspiracy
`to defraud the United States in the exercise of its governmental
functions of
admin
istering the internal revenue laws'" the Court stated that the
"first question before us is whether [the §371 count] was barred
by the applicable three-year statute of limitations. 8" 353
U. S.
at 396. The footnote was to §3282 (amended in 1954 to provide for the
present five-year period).
The
government argues that the language in both cases represents not
holding, but dicta, since the precise issue here was not contested by
the parties. Especially in Grunewald, we do not think that the
language was dicta. On the other hand, the language was not part of the
main holdings in either case; it was not with respect to any issue which
was fully briefed and pressed; and it seems nothing more than mere
inadvertence on the part of both courts that the specific language of §6351,
and its predecessors, was overlooked. We, therefore, conclude to follow
the specific statutory language, rather than the contrary statements in Grunewald
and Klein and hold that the applicable limitation period was six
years. The prosecution against Lowder on count one was not barred.
Count
II
Lowder
was convicted on count two of knowingly subscribing to a false income
tax return. 26 U. S. C. §7206(1). The corporate tax return for
Hatcheries for the fiscal year ending May 31, 1965, reported taxable
income, before net operating loss deduction and special deductions, of
$39,815.44. The government charged that the figure was deliberately and
substantially understated.
The
government offered a computation showing the increased net worth of
Hatcheries for that fiscal year in order to establish the substantiality
of the understatement. The computation for Hatcheries for that year was
derived from a more extensive net worth computation which embraced all
six corporations over the 1961-65 four-year period on a calendar year
basis. The latter showed a total unreported taxable income in excess of
$1.5 million for all corporations over the period, with a resulting
estimated unreported tax liability of over $400,000.
From
the four-year (calendar-year basis) net worth computation, the
government's expert witness extracted the computation of net worth
increases over that period for Hatcheries alone. Since the increases for
Hatcheries were still on a calendar-year basis, they were then converted
by monthly pro-ration to reflect fiscal year increases as of each May
31st, Hatcheries' closing date. Thus, for the fiscal year ending May 31,
1965, 7/12th of the 1964 net worth increase was added to 5/12ths of the
1965 net worth increase to arrive at a 12-month fiscal year net worth
increase of $151,372.44. Since Hatcheries' return reported taxable
income of $39,815.44, the computation reflected additional taxable
income for the fiscal year ending May 31, 1965, of $111,557.00.
Having
examined the exhibits and retraced the computations, we cannot accept
Lowder's claim that this derivation should not have been admissible as
proof of understatement. As we understand his brief, his objection
amounts to a claim that the government cannot cour through complexity of
the apparent scheme to the substance of corporations' financial
activities. The net worth method was most appropriate in this case where
the gross figures appearing on the books and transferred to the tax
returns were suspect and the underlying documentation was unavailable.
See Johnson v. United States [64-1 USTC ¶15,537], 325 F. 2d 709
(1 Cir. 1963). More specifically, since utilization of the different
fiscal year dates was apparently an integral part of the scheme to
"roll" income to avoid taxation, we think the government was
properly allowed to pierce the surface by its pro-rata derivation. Holland
v. United States [54-2 USTC ¶9714], 348
U. S.
121, 131 (1954).
Lowder
also attacks the conviction on count two on the additional ground of
insufficient evidence. That the taxable income was properly shown to
have been understated is already settled. Lowder signed the return. As
to the requisite criminal intent, the jury may of course infer that from
circumstantial evidence. United States v. Barnes [63-1 USTC ¶9247],
313 F. 2d 325 (5 Cir. 1963). Such a basis existed, to cite but one
example, in Lowder's failure to produce verifying documents for large
expense items on Hatcheries' books for the instant year, at times in
1966 when, according to other testimony, the documents should have been
in the corporate offices.
Construing
the evidence most favorably for the government, we find it was
sufficient to permit the jury to adjudge Lowder guilty beyond a
reasonable doubt. Bell v. United States [50-2 USTC ¶9499], 185
F. 2d 302 (4 Cir. 1950), cert. denied, 340
U. S.
930 (1951). The conviction on count two must therefore stand.
Count
III
The
conviction on count three was also for knowingly filing a false return
under 26
U. S.
C. §7206(1). The government charged that, as to Hatcheries' tax return
for the fiscal year ending May 31, 1966, Lowder deliberately failed to
report $33,704.28 of taxable income as represented by three checks: (1)
two checks from Foods to Hatcheries, dated December 30, 1965, totaling
$32,519.28, which amount the government showed was expensed at that time
on Foods' books; (2) one check from Farms to Hatcheries dated November
29, 1965, in the amount of $1,185.00, which amount was expensed at that
time on Farms' books.
The
only objection raised by Lowder is that the evidence was insufficient.
He claims that the government failed to show any actual loss of revenue
since, by his version, the Foods checks had been mislaid from the dates
of making until February, 1967, at which time they were recorded on
Hatcheries' books and computed in the income for that next fiscal year.
But what Lowder might have done in subsequent years was irrelevant to
whether he filed the return for the instant fiscal year knowing that
those checks should have been reported as income to Hatcheries. The jury
evidently did not believe his story, and we cannot say that they were
unwarranted in so doing. That checks totaling over $33,000--money which
at least could have been earning interest--were mislaid for fourteen
months, and turned up after the IRS agent had begun his investigation,
was sufficient to support the verdict on the element of intent. Bell
v. United States, supra.
Lowder's
miscellaneous assignments of error, which he merely listed without
discussion in his brief, have been considered. They do not warrant
discussion and are devoid of merit.
For
the reasons stated, the convictions on each count are affirmed.
AFFIRMED.
1
Section 3282 provides:
Except
as otherwise expressly provided by law, no person shall be prosecuted .
. . for any offense, not capital, unless the indictment is found or the
information is instituted within five years next after such offense
shall have been committed.
[73-2
USTC ¶9787]
United States of America
, Plaintiff-Appellee v. David M. Sarvis, Defendant-Appellant
(CA-9),
U. S. Court of Appeals, 9th Circuit, No. 73-1719, 488 F2d 526, 11/7/73,
Aff'g unreported District Court decision
[Code Sec. 7203]
Crimes: Tax evasion: Evidence: Net worth.--The Court of Appeals
found that the District Court did not err in admitting evidence of the
taxpayer's net worth as relevant to the issue of willfulness in
determining whether the taxpayer willfully attempted to evade tax and
willfully filed a false return. Accordingly, the taxpayer's conviction
of attempted tax evasion and making and subscribing to a false return
was upheld.
Charles
E. Brookhart, Scott P. Crampton, Assistant Attorney General, Meyer T.
Rothwacks, John P. Burke, Laurence J. Whalen, Department of Justice,
Washington, D. C. 20530, Sidney E. Smith, United States Attorney, Thomas
C. Frost, Assistant United States Attorney, Boise, Idaho, for
plaintiff-appellee. Jesse R. Walters, James W. Derr, Derr Bldg., 817 W.
Franklin St., P. O. Box 1006, Boise, Idaho, C. L. Green, 612 Hays,
Boise, Idaho, for defendant-appellant.
Before
CHAMBERS, CHOY and WALLACE, Circuit Judges.
PER
CURIAM:
Sarvis
was convicted by a jury of attempted tax evasion and making and
subscribing to a false return. In shotgun fashion, he asserts 42 alleged
errors. In many instances, he fails to spell out his argument and
provide us with suitable authority. We affirm.
One
question deserves comment. In United States v. Walker [73-1 USTC
¶9426], 479 F. 2d 407 (9th Cir. 1973), we reversed a tax case due to
the admission of evidence pertaining to the increased net worth of the
taxpayer. In criminal prosecutions evidence of net worth must be used
with "great care and restraint." Holland v. United States
[54-2 USTC ¶9714], 348
U. S.
121, 129 (1954). Appreciation, gifts, and other nontaxable or unrealized
income may significantly increase the value of a person's property to
make increases in net worth an inaccurate reflection of taxable income.
These dangers make it imperative that the court closely scrutinize the
use of net worth evidence.
Id.
at 125. Thus, in
Walker
, a failure to file case, we held that evidence of increases in
net worth was improperly admitted where the government had already
established that the defendant had a duty to file. Once the government
had established this duty, the evidence had no relevancy and could only
have resulted in prejudicing the defendant in the eyes of the jury.
In
the present case, however, Sarvis had filed a return and the questions
were whether he had willfully attempted to evade and willfully filed a
false return. The district court admitted evidence of his net worth as
relevant to the issue of willfulness. Willfulness must be established by
independent evidence and may not be inferred from a mere understatement.
Id.
at 139. Nevertheless, where the taxpayer has no records or records that
are inadequate to show his actual tax liability, a consistent pattern of
understatement as shown by proof of increases in net worth may give rise
to an inference of willfulness. Id.; see Feichtmeir v. United States
[68-1 USTC ¶9217], 389 F. 2d 498 (9th Cir. 1968). The district court
correctly admitted the evidence on this issue and there was no error.
AFFIRMED.
[73-2
USTC ¶9560]
United States of America
, Plaintiff-Appellee v. Perry Russell Tunnell, Defendant-Appellant
(CA-5),
U. S. Court of Appeals, 5th Circuit, No. 72-3787, 481 F2d 149, 7/18/73,
Aff'g an unreported District Court Decision
[Code Secs. 446 and 7201]
Attempt to evade tax: Willfulness: Reconstruction of income: Net
worth method: Burden of proof.--The Government properly applied the
net worth increase method of reconstructing the taxpayer's income.
Further, the requisite evil motive and affirmative act were present for
a determination of a willful attempt to evade tax.
Rob
y Hadden, United States Attorney, Tyler,
Tex., Richard P. Slivka, Scott P. Crampton, Assistant Attorney General,
Meyer Rothwacks, Department of Justice, Washington, D. C. 20530, for
plaintiff-appellee. J. W. Tyner, Jerry Bain, 237 S. Broadway,
Tyler
,
Tex.
, for defendant-appellant.
Before
AINSWORTH, GOLDBOLD and INGRAHAM, Circuit Judges.
AINSWORTH,
Circuit Judge:
Perry
Russell Tunnell was convicted on each of three counts for willfully
attempting to evade federal income tax during the years 1965, 1966, and
1967, in violation of 26 U. S. C. §7201 (1970). 1 The central
issue on appeal concerns the sufficiency of the Government's evidence
based on the net worth method. We affirm.
I.
One of the essential elements which the Government had to prove was that
taxpayer owed tax on at least some unreported income for each of the
three years named in the indictment. Because taxpayer's records were
inadequate, the Government utilized the so-called "net worth
method" described and approved in the leading Supreme Court case of
Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121, 125, 75 S. Ct. 127, 130 (1954):
In
a typical net worth prosecution, the Government, having concluded that
the taxpayer's records are inadequate as a basis for determining income
tax liability, attempts to establish an "opening net worth" or
total net value of the taxpayer's assets at the beginning of a given
year. It then proves increases in the taxpayer's net worth for each
succeeding year during the period under examination and calculates the
difference between the adjusted net values of the taxpayer's assets at
the beginning and end of each of the years involved. The taxpayer's
nondeductible expenditures, including living expenses, are added to
these increases, and if the resulting figure for any year is
substantially greater than the taxable income reported by the taxpayer
for that year, the Government claims the excess represents unreported
taxable income. In addition, it asks the jury to infer willfulness from
this understatement, when taken in connection with direct evidence of
"conduct the likely effect of which would be to mislead or to
conceal." Spies v. United States [43-1 USTC ¶9243], 317
U. S.
492, 499, 63 S. Ct. 364, 368, 87 L. Ed. 418.
See
also United States v. Newman, 5 Cir., 1972, [72-2 USTC ¶9719]
468 F. 2d 791, cert. denied, 411
U. S.
905, 93 S. Ct. 1527 (1973) [41 L. W. 3516]; Lee v.
United States
, 5 Cir., 1972, 466 F. 2d 11.
In the present case the Government determined the correct taxable income
and tax to be the amounts set out below, compared to the taxable income
and tax actually reported by Tunnell on his returns, as follows:
Government Determination Tunnell Reported
Year Income Tax Income Tax
1965 .... $ 9,236.73 $ 971.55 $ 181.52 $142.08
1966 .... 35,579.77 5,942.14 2,241.98 113.33
1967 .... 34,783.42 7,738.31 (20,864.63) -0-
To
rely on determinations of income by the net worth method, it was
necessary that the Government establish Tunnell's opening net worth at
the start of 1965 with reasonable certainty, introduce evidence
supporting the inference that his net worth increased due to currently
taxable income, and negate all reasonable explanations and leads
furnished by Tunnell which were inconsistent with guilt. See
Holland
, 348
U. S.
at 132, 135, 137, 75
S. Ct.
at 134-36. In examining the record we find that the Government sustained
its burden.
Based
on a detailed financial analysis, the Government determined Tunnell's
assets on December 31, 1964 to be $57,686.89, including cash on hand,
cash in banks, the Pines Motel and Trailer Park, some farm land he
inherited, mobile homes, automobiles, trucks, and deferred expenses. But
he had offsetting liabilities of $64,447.55, so the Government set his
opening net worth at a deficit of $6,760.66, which we find to be fully
supported by the record. Counsel for taxpayer objected to the
Government's introduction into evidence of tax returns for 1962, 1963,
and 1964, and when the jury during its deliberations requested the 1963
and 1964 returns, counsel also objected to the district judge's allowing
the jury to see the returns again. These returns were admissible and
could be viewed by the jury at its request, because the small amounts of
income reflected in these returns were relevant to corroborate the
asserted deficit net worth as of December 31, 1964. The returns
consistently showed the taxpayer had little income during the prior
three years. Furthermore, the district judge gave the jury a proper
limiting instruction that the documents could only be considered for the
limited purpose of determining Tunnell's opening net worth.
The
Government showed that the likely source of Tunnell's net worth
increases was from taxable income, as opposed to exempt income, by
showing that he could have had income from the Pines Motel other than
that reported. Appellant objected to testimony that this motel, in
addition to providing the taxable income generally expected, also
provided Tunnell with an opportunity for income from prostitution
activities. This was necessarily admissible to fulfill the Government's
responsibility under
Holland
of showing a likely source for the unreported income over the three-year
period. Tunnell, himself, volunteered the information to a Government
agent that he had two to four girls working for him during all three
years of 1965 through 1967 and that he made as much as $12,000 from
their prostitution in one year. 2 This income
was taxable even if it was unlawful. See James v. United States
[61-1 USTC ¶9449], 366
U. S.
213, 219, 81
S. Ct.
1052, 1055 (1961).
The
only leads furnished by taxpayer as inconsistent with guilt were that he
had available $20,000 to $21,000 from the sale of a motel in
Galveston
during the prior tax year of 1964, that he "floated" checks,
and that he borrowed money to live on during the years 1965 through
1967. The sale of the motel was reported on his 1964 return as a loss,
and the correctness of that return was not disputed by the Government.
Thus no tax was due on the proceeds received from the sale at an amount
less than the basis. But contrary to appellant's assertion in his brief
that he had $20,000 available as a result of the sale, testimony by one
of two other people with interests in the motel indicates that a
promissory note of about $15,000 had to be paid after the sale and the
remaining $5,000 from the sale was divided among three people, so that
Tunnell probably got less than $2,000.
"Floating"
checks was defined as writing a check in excess of the amount in the
bank account but then depositing money from another account in time to
cover the check. Evidence indicates that Government agents thoroughly
reviewed Tunnell's assets and liabilities and bank accounts to negate
either his borrowing money or his floating checks as sufficient to
account for the net worth increases.
II.
As inferred by the Supreme Court from the words "willfully
attempts" in the statute, the second and third necessary elements
for conviction are evil motive by the defendant Tunnell and an
affirmative act to carry out his scheme to evade tax. See 26
U. S.
C. §7201 (1970); Spies v. United States [43-1 USTC ¶9243], 317
U. S.
492, 63 S. Ct. 364 (1943). See generally United States v. Bishop
[73-1 USTC ¶9459], --
U. S.
--, 93
S. Ct.
2008 (1973) 41 L. W. 4765]. Here the consistent pattern of understating
large amounts of income coupled with evidence of inadequate records kept
by taxpayer permits an inference of willfulness sufficient to create a
jury question. See generally
Holland
, supra, 348
U. S.
at 139, 75 S. Ct. at 137; Holbrook v. United States, 5 Cir.,
1954, [54-2 USTC ¶9640] 216 F. 2d 238, cert. denied, 349
U. S.
915, 75 S. Ct. 605 (1955). The requisite affirmative act can be found in
the filing of false tax returns for each year of the indictment.
Appellant
raises several other points which we have considered and find to be
without merit.
AFFIRMED.
1
Section 7201 reads as follows:
Any
person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, shall be fined not more than $10,000, or imprisoned not more
than 5 years, or both, together with the costs of prosecution.
2
This evidence thus differs from that presented in Armes v.
Commissioner, 5 Cir., 1971, [71-2 USTC ¶9539] 448 F. 2d 972, 975-76
n. 2, where the evidence of prostitution activities never reached beyond
suspicion and innuendo.
[73-2
USTC ¶9544]
United States of America
, Plaintiff-Appellee v. Hector R. Calles, Defendant-Appellant
(CA-5),
U. S. Court of Appeals, 5th Circuit, No. 72-3195 Summary Calendar, *, 482 F2d
1155, 7/11/73, Aff'g unreported District Court
[Code Secs. 446 and 7201]
Tax evasion: Net worth method: Reconstruction of income: Trial
errors: Proof.--On the evidence, the trial court properly determined
under the "net worth method" of reconstructing income that the
taxpayer wilfully failed to report income during the years in question.
An opening net worth of zero was established with reasonable certainty.
Consequently, the taxpayer's conviction for tax evasion was affirmed.
Additionally, assertions by the taxpayer that the trial court committed
various trial errors so that he was denied a fair trial were rejected.
Rob
ert W. Rust, United States Attorney,
Miami, Fla., Scott P. Crampton, Assistant Attorney General, Meyer
Rothwacks, Department of Justice, Washington, D. C. 20530, for
plaintiff-appellee. Lawrence E. Hoffman, 12-D Miami Beach Federal Bldg.,
Miami Beach, Fla., for defendant-appellant.
Before
THORNBERRY, GOLDBERG and RONEY, Circuit Judges.
RONEY,
Circuit Judge:
After
a jury trial, appellant Hector R. Calles was convicted on two counts of
wilfully attempting to evade and defeat his income tax liability for the
years 1969 and 1970, in violation of 26 U. S. C. A. §7201. He was
sentenced to two concurrent four-year terms in prison. On appeal,
appellant contends (1) that the Government failed to establish, by means
of the "net worth method," that he had taxable income during
the years charged in the indictment, and (2) that various trial errors
entitle him to a new trial. We affirm.
[Facts]
At
the trial, the Government developed this preliminary evidence: Appellant
Calles is a Cuban citizen born in 1931, has a college education plus two
years of law school in Cuba, and claims to have been a government
official in the early days of the Castro government. He entered the
United States
illegally in 1962 and has eluded the Immigration authorities ever since.
He has never filed an income tax return. He established residence in
Miami
, but he has held his assets in the name of others. For example, his
$68,000 home is in his wife's name, his yacht, Roxanna II, has been held
in the names of at least two and possibly three friends, and his
automobiles were registered under the name of "Santora."
According
to the testimony of several federal and state law enforcement officials,
appellant claimed various employments and occupations in conversations
with them. For example, on May 25, 1968, he claimed to be in the jewelry
business. On December 6, 1969, he said that he was the owner or manager
of a ladies' wear store. On November 17, 1970, he told police that he
was a merchant. On December 13, 1970, he said that he was a lobsterman
and lobster dealer in
Miami
and the
Bahamas
.
In
interviews with Government agents, appellant discussed what he termed
his business activities in this country. He claimed that, after several
years of inactivity subsequent to entering the United States, he
invested and lost $32,000 in a partnership named Ablado Couture; engaged
in an illegal nightclub operation in which he asserts that he invested
$19,000; invested and lost $2,500 in a firm called B. A. U.
International; in 1968 invested between $25,000 and $30,000 in the
Roxanna Boutique in New York. This last claimed investment, however, was
cast in doubt or at least clarified by the statement of Yolanda Alonzo,
appellant's mother-in-law. When contacted by Government agents, Mrs.
Alonzo stated that she was the owner of the Roxanna Boutique and that
appellant's only investment was $2,000.
When
questioned about his income, appellant gave two "sources" of
funds. First, he claimed that many people brought money out of
Cuba
to him, from a hoard that he had built up as a Cuban official. He named
only two such people and, since both of them had fled to other countries
to avoid criminal prosecutions in the
United States
, his claim could not be verified. Second, appellant told the Government
agents that he could call certain persons who would give money to him if
he asked for it. He refused to identify these persons, but he told the
Government agents that he would kill these people if the money was not
forthcoming.
At
the trial, appellant testified that his wife had no independent income
during the years specified in the indictment, and he stated that his
wife had never received any inheritances, gifts, or loans.
[Proof
Necessary for Tax Evasion]
I.
To sustain a conviction under Section 7201, the Government must prove
three elements: the existence of a tax deficiency, willfulness, and an
affirmative act constituting an evasion or an attempted evasion of the
tax. Sansone v. United States [65-1 USTC ¶9307], 380
U. S.
343 (1965).
The
Government employed the "net worth method" to establish the
tax deficiency here. The procedure for this method was approved in Holland
v. United States [54-2 USTC ¶9714], 348
U. S.
121, 125 (1954):
In
a typical net worth prosecution, the Government, having concluded that
the taxpayer's records are inadequate as a basis for determining income
tax liability, attempts to establish an "opening net worth" or
total net value of the taxpayer's assets at the beginning of a given
year. It then proves increases in the taxpayer's net worth for each
succeeding year during the period under examination and calculates the
difference between the adjusted net values of the taxpayer's assets at
the beginning and end of each of the years involved. The taxpayer's
non-deductible expenditures, including living expenses, are added to
these increases, and if the resulting figure for any year is
substantially greater than the taxable income reported by the taxpayer
for that year, the Government claims the excess represents unreported
taxable income.
See
also United States v. Massei [58-1 USTC ¶9326], 355
U. S.
595 (1958); United States v. Newman [72-2 USTC ¶9719], 468 F. 2d
791 (5th Cir. 1972), cert. denied, 411
U. S.
905 (1973); United States v. Penosi [72-1 USTC ¶9103], 452 F. 2d
217 (5th Cir. 1971), cert. denied, 405
U. S.
1065 (1972).
The
Government's computation of appellant's taxable income for the years in
question shows a net worth of $0 on December 31, 1968; $15,521.42 on
December 31, 1969; and $64,898.33 on December 31, 1970. Thus, according
to the Government's figures, appellant's net worth increased by
$15,521.42 during 1969 and by $49,376.91 during 1970. Combining these
figures with proven non-deductible expenditures, the Government's expert
caculated a tax liability of $4,117.82 for 1969 and $19,135.93 for 1970.
[Use
of Net Worth Method]
1.
Appellant contends that the zero net worth figure is not supported by
the proof and is in fact contrary to his mode of living during 1968, the
preprosecution year. We disagree. When appellant arrived in this country
in 1962, he made a sworn statement that his assets consisted of only
$925. In late 1962, he was living in a $60 per month room and his last
month's rent had been paid by a friend. Also in 1962, he borrowed $2,500
from a friend, a debt that remains unpaid. In 1963, he excused his
burglary of a store by claiming that he needed funds to buy medicine. In
1967 or 1968, he was unable to pay the $1,000 medical expenses incurred
with the birth of a child, so he was forced to seek financial assistance
from his mother-in-law. In 1969, when he bought a $28,000 home he was
unable to make the required down payment and was forced to resort to
second and third mortgages, the latter for $600.
We
recognize that the "net worth method" requires an accurate and
definite showing of an opening net worth, for the figure is the keystone
of the "net worth method" calculation process. Nevertheless,
the Government's evidence provides substantial and sufficient support
for the jury to conclude that appellant's zero net worth at the close of
1968 had been established with the requisite "reasonable
certainty." Holland v. United States, supra at 132.
2.
Appellant contends that the Government was required to prove a likely
source of income and to negate all possible sources of nontaxable
income. This argument incorrectly states the law. As the Supreme Court
made clear in United States v. Massei, supra, at 595: "In Holland
we held that proof of a likely source was 'sufficient' to convict in a
net worth case where the Government did not negative all the possible
nontaxable sources of the alleged net worth increase." Thus, the
rule is that the Government in a "net worth method" case must
either prove a likely source of income or negate all possible
sources of nontaxable income. It need not do both.
In
the case before us, the Government presented evidence of both of these
alternatives. First, appellant's statements that people who refused to
send money to him when asked were killed established him as an
extortionist and provided a likely source of taxable income. Second,
appellant's statement to the Government agents that he had no income
except that from his extortions and from his failing businesses
indicates no nontaxable source of income. Finally, we note the Supreme
Court's admonition in
Holland
, supra:
But
where relevant leads are not forthcoming, the Government is not required
to negate every possible source of non-taxable income, a matter
peculiarly within the knowledge of the defendant.
348
U. S.
at 138. See also
United States
v. Newman, supra.
The Government's proof was sufficient on this point.
3.
Appellant contends that the evidence does not support a finding of
either willfulness or affirmative conduct by him. He claims that his
mere failure to file a return does not constitute a sufficient willful,
affirmative act to satisfy Section 7201.
What
must the Government show to establish the necessary affirmative
willfulness? In Spies v. United States [43-1 USTC ¶9243], 317
U. S.
492 (1943), the Supreme Court spoke to this requirement:
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.
317
U. S.
499.
Other courts have held that willfulness may be inferred from such
actions as holding assets in others' names, Chinn v. United States
[56-1 USTC ¶9141], 228 F. 2d 151 (4th Cir. 1955), making false
explanations, United States v. Callanan [72-1 USTC ¶9111], 450
F. 2d 145 (4th Cir. 1971), and making inconsistent statements to
Government agents, United States v. Jett [65-2 USTC ¶9706], 352
F. 2d 179 (6th Cir. 1965), cert. denied, 383 U. S. 935 (1966).
Moreover, this Court recently stated in United States v. Newman,
supra, that "[i]t is clear that making false statements to
Treasury agents for the purpose of concealing income constitutes a
sufficient affirmative act to satisfy [Section] 7201." 468 F. 2d at
794.
In
the case at bar, appellant held all of his assets in others' names. He
made false and inconsistent statements and explanations, such as his
$25,000 alleged investment in the Roxanna Boutique which in reality was
but a $2,000 investment, his various claimed occupations, and his claim
of a cash hoard in a friend's safety deposit box that was proven to be
empty. He made false statements to Treasury agents, such as denying that
he owned a boat. Moreover, appellant admitted that he was aware that he
should have filed income tax returns. Hence, the jury could infer
affirmative willfulness from these facts.
[Trial
Errors Contended]
II.
Appellant contends that several errors during the trial mandate reversal
for a new trial. We find no merit to these contentions, either singly or
in combination.
1.
Appellant argues that the trial court erred when it permitted the
Government to introduce evidence of his financial condition in 1962,
1963, and 1967. He rests this objection on two bases: first, that the
evidence was irrelevant, since the indictment charged only crimes
allegedly committed in 1969 and 1970; and second, that the evidence,
even if relevant, was too remote.
We
find no error here. Appellant had claimed that his 1969 and 1970
expenditures were made out of a cash hoard brought to this country from
his native
Cuba
. Thus, his standard of living and his statements were relevant to prove
or to disprove its existence. The same issue surfaced in Holland v.
United States, supra, where 1948 was the prosecution year and
evidence of taxpayers' behavior in the 1920's and 1930's was admitted to
negate the existence of the hoard. Certainly, since Holland
requires the Government to investigate all exculpatory leads and
explanations offered by the defendant in a "net worth method"
case and to show in court the results of that investigation, once
appellant raised the defense of the hoard then the Government was
required to rebut it. The evidence here objected to was neither
irrelevant nor too remote.
2.
Appellant contends that the District Court erred in permitting several
law enforcement officers to testify about conversations that they had
had with appellant. He argues that, even if relevant, that evidence
should have been excluded because its prejudicial and inflammatory
effect outweighed its relevancy.
A
District Court has wide discretion in determining relevancy and
materiality, and its ruling will not be distrubed absent a showing of an
abuse of that discretion. United States v. Allison, 474 F. 2d 286
(5th Cir. 1973); United States v. Garr, 461 F. 2d 487 (5th Cir.),
cert. denied, 409
U. S.
880 (1972); O'Brien v. United States, 411 F. 2d 522 (5th Cir.
1969). Although the rule is clear that the prosecution must not employ
evidence of prior crimes for the purpose of showing either the
defendant's criminal character or his propensity to commit crimes, e.g.,
United States v. Garber, 471 F. 2d 212 (5th Cir. 1972),
nevertheless, evidence of prior criminal conduct is admissible if
relevant for another purpose and if its probative worth is not
outweighed by its prejudice. See, e.g.,
United States
v. Payne, 467 F. 2d 828 (5th Cir. 1972), cert. denied, --
U. S.
-- (1973).
Applying
this balancing test, we conclude that the officials' testimony did not
unfairly prejudice appellant. Only one witness testified about a
particular violation of the law, and that testimony established that
appellant had justified a burglary by complaining that he needed money
to buy medicine. The testimony was plainly relevant to rebut appellant's
claim of a cash hoard. Moreover, the jury was cautioned twice about the
limited purpose of this testimony. The District Court acted well within
its discretion in dealing with this testimony. Cf. United States v.
Abshire, 471 F. 2d 116, 118 (5th Cir. 1972) ("The inclusion of
references to 'jail' or 'prison' does not disqualify essential,
otherwise relevant, testimony").
3.
Appellant complains that he was denied a fair trial when he was not
permitted to examine his Immigration and Naturalization Service file. At
the trial, in response to appellant's motion to examine the file, the
Government admitted that the file might contain exculpatory material,
searched the file briefly, and tendered the single exculpatory item
producible under Brady v. Maryland, 373 U. S. 83 (1963). When
appellant renewed his motion to examine the file, the District Court
held an in camera inspection of the file and denied production, ruling
that the file contained no material relevant to appellant's defense.
This ruling was correct. The file contained no statements of Government
witnesses, and appellant had no right under either Rule 16, F. R. Crim.
P., or the Jencks Act, 18 U.S.C.A. §3500, to examine it.
4.
Appellant contends that the District Court erred when it "cut
off" his attempts to disprove the zero net worth figure established
by the Government for the preprosecution year of 1968. He points to two
such instances. First, when cross-examining the Government's "net
worth method" expert, appellant's counsel was not permitted to
inquire about the income figure developed for 1968. Second, appellant
later attempted to introduce this evidence directly, but was again
unsuccessful. These rulings were correct. Appellant's income in 1968, as
derived from his expenditures for that year, was irrelevant to disprove
his net worth at the close of that year.
5.
Finally, appellant contends that he was denied a fair trial because the
jury took with it into the jury room an exhibit containing an
inadmissible statement by appellant admitting that he had been
previously arrested for carrying a concealed weapon. During the trial,
counsel for both appellant and prosecution had agreed that that
particular statement was irrelevant and should be excised before the
exhibit was given to the jury. The trial court instructed both counsel
to check the exhibits before the jury received them, but neither
attorney noticed the failure to delete the objectionable statement.
After about three hours, appellant's counsel remembered that the
statement had not been excised and notified the Court. After the exhibit
and been removed from the jury room, with the statement not deleted, the
Court examined the jury members and concluded that there was no
reasonable possibility that any prejudice had inured to appellant.
This
error does not require a new trial. First, the trial court asked each
juror if he or she remembered examining that particular exhibit. No one
answered affirmatively. The Court then instructed the jury to disregard
anything that they might have seen on the exhibit in question. We
discern no error in either this procedure or the Court's conclusion that
the trial process had not been irretrievably tainted. Second, upon
discovery of the error, appellant's counsel did not move for a mistrial;
he sought only the cautionary instruction that was given. Having made a
conscious choice not to move for a mistrial, appellant may not now on
appeal complain of the trial court's failure to declare one. Ladakis
v.
United States
, 283 F. 2d 141 (10th Cir. 1960).
Even
if this set of circumstances constituted error, we conclude that it was
harmless beyond reasonable doubt. Appellant was entitled to a fair trial
not a perfect one, and in our judgment he received a fair trial.
United States
v. Harden, 469 F. 2d 65 (5th Cir. 1972):
Rarely,
if ever, is a hotly contested adversary proceeding conducted perfectly,
but in our judgment appellant received a fair trial in this case.
469
F. 2d at 66.
AFFIRMED.
*
Rule 18, 5th Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty
Co. of
New York
, et al., 431 F. 2d 409, Part I, (5th Cir. 1970).
[73-1
USTC ¶9304]
United States of America
, Plaintiff-Appellee v. Kenneth Vanderburgh, Defendant-Appellant
(CA-9),
U. S.
Court of Appeals, 9th Circuit, No. 72-2549, 473 F2d 1313, 2/9/73
[Code Sec. 7201]
Criminal penalties: Tax evasion: Agent's warning of rights:
Instructions to jury: Use of net worth method: Miscellaneous errors
asserted.--Conviction for willful evasion of taxes was affirmed. IRS
agents gave the defendant adequate warning of his rights when first
contacted. The instructions to the jury, taken as a whole, covered the
requested defense instructions refused by the trial court. The
government was allowed to prove its case by use of the net worth method
even though the defendant's books were claimed to be complete and
adequate. Miscellaneous errors asserted by the defense were not cause
for reversal.
Dean
C. Smith, United States Attorney, Carroll D. Gray, Assistant United
States Attorney, Spokane, Wash., for plaintiff-appellee. Howard A.
Anderson, Gerald A. Rein, Morrison, Huppin, Ewing & Anderson, 521
Parkade Plaza, Spokane, Wash., for defendant-appellant.
Before
KOELSCH and WRIGHT, Circuit Judges, and EAST, * District
Judge.
PER
CURIAM:
The
Judgment of Conviction on two counts of income tax evasion for the
reporting years of 1965 and 1966, under Title 26 U. S. C. Section 7201,
is affirmed.
The
Defendant-Appellant asserts eleven errors of law. We conclude all eleven
asserted errors are without merit and comment on only these:
Issue
1
The
investigating Internal Revenue Special Agents failed to give the
Defendant an adequate warning of his rights when he was initially
contacted.
The
record reveals a more than adequate warning under U. S. v. Chikata
[70-1 USTC ¶9448], 427 F. 2d 385 (9 Cir. 1970) and the books of account
were voluntarily turned over. Simon v. U. S. [70-1 USTC ¶9212],
421 F. 2d 667 (9 Cir. 1970), cert. denied 90
S. Ct.
1691.
Issues
5, 6, 7, 8 and 9
These
requested instructions were partisan pinpoints of phases of the
Defendant's defense. The record reveals that the substance of the
requested instructions refused by the trial court were adequately
covered by the instructions given, when considered as a whole.
Issue
10
It
was error to permit the Government to prove its case through the net
worth method because the Defendant maintained a complete and adequate
set of books of account.
The
record reveals the set looked good at first blush, but, also,
substantiates the truism of these sage words:
"DeLucia
also contends that where he himself kept a set of books and records the
District Court erred in permitting use of the net worth method of proof.
This would mean that simply because taxpayer has kept a set of books,
the veracity of which is in question, the Government is estopped from
going beyond those books to prove their falsity or inaccuracy. This is
absurd." U. S. v. DeLucia [59-1 USTC ¶9161], 262 F. 2d 610,
614 (7 Cir. 1958). Defendant's enlargement on bail is revoked, effective
now.
Affirmed.
*
Honorable William G. East, Senior
United States
District Judge for the District of Oregon, sitting by designation.
[73-1
USTC ¶9147]
United States of America
v. John C. Parenti, Appellant
(CA-3),
U. S. Court of Appeals, 3rd Circuit, No. 72-1263, 470 F2d 1175,
12/26/72, Affirming District Court, 71-2 USTC ¶9613, 326 F. Supp. 717
[Code Sec. 7201]
Crimes: Tax evasion: Defenses: Inspection of evidence.--Taxpayer's
challenges to the trial judge's rulings on the admission of evidence and
his instructions to the jury failed to demonstrate prejudicial error.
Holland
v. United States [54-2 USTC ¶9714], was dispositive of
taxpayer's challenge to the government's "net worth" method of
proof. Further, it was held, the evidence was sufficient to support the
jury's verdict. Accordingly, the judgment of conviction was affirmed.
Joseph
H. Reiter, Department of Drug Abuse and Law Enforcement, 308 Walnut St.,
Philadelphia, Pa., for appellee. Benjamin R. Donolow,
22 S. 22nd St.
,
Philadelphia
,
Pa.
, for appellant.
Before
KALODNER, ADAMS and ROSENN, Circuit Judges.
Opinion
of the Court
PER
CURIAM:
This
appeal is from a judgment of conviction entered by the District Court
pursuant to a jury verdict finding the defendant-appellant John C.
Parenti guilty of attempting to evade and defeat payments of his 1961,
1962 and 1963 income taxes in violation of 26 U. S. C. A. §7201.
On
this appeal Parenti challenges as prejudicial error ten of the trial
judge's rulings on the admission of evidence and two of his instructions
to the jury. He also challenges as unconstitutional the Government's use
of the "net worth" method of proof. Finally, he contends that
the Government's evidence was insufficient to sustain the jury's verdict
and that the trial judge erred in denying his motion for a directed
verdict.
On
review of the record we are of the opinion that Parenti's challenges to
the trial judge's rullings on the admission of evidence and his
instructions to the jury fail to demonstrate prejudicial error. Holland
v. United States [54-2 USTC ¶9714], 348
U. S.
121 [1954], is dispositive of Parenti's challenge to the "net
worth" method of proof. We are further of the opinion that the
evidence was sufficient to support the jury's verdict.
Judicial
economy would not be served by a detailed discussion of Parenti's
challenges to the sufficiency of the evidence and to the trial judge's
rulings on the admissibility of evidence and his instructions to the
jury, in light of the exhaustive consideration they were accorded in
Judge Troutman's well-reasoned Opinion 1 denying
Parenti's motion for a judgment of acquittal or, in the alternative, a
new trial.
For
the reasons stated the judgment of conviction will be affirmed.
1
Judge Troutman's Opinion is reported at [71-2 USTC ¶9613] 326 F. Supp.
717 (E. D. Pa. 1971).