Bank Records and Net Worth Increases 2 Page2

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Appellant asserts that Quinlan v. United States, 5th Cir. 1927, 22 F. 2d 95, requires a contrary interpretation of Section 3240. In that case, this Court expressed the view that 28 U. S. C. A. Sec. 121, which is the statutory predecessor of 28 U. S. C. A. Sec. 3240, had no effect on cases begun after the creation of a new district, and that the statute merely enabled the court in the old district "to retain jurisdiction of pending criminal cases which properly could not be begun in that court after the creation of the new district." Quinlan v. United States, supra at 98. If this interpretation of 28 U. S. C. A. Sec. 3240 is followed, appellant's contention would be upheld. However, both the plain meaning of the statute and a subsequent Supreme Court decision convince us that the above statement is not declaratory of the controlling principle.

In Lewis v. United States, 279 U. S. 63, 49 S. Ct. 257, 73 L. Ed. 615, the Supreme Court determined that the Eastern District of Oklahoma had jurisdiction to indict and try an offense committed in a county which had been transferred out of the Eastern District into the newly created Northern District after the commission of the offense but before the return of the indictment. While it is true, as is pointed out by the appellant, that this decision rested in part upon the language of the jurisdictional provisions of the act creating the new Northern District, the Supreme Court clearly stated that the result reached was also in accord with 28 U. S. C. A. Sec. 101. See Lewis v. United States , supra at 791. This interpretation of the statute is consistent with the clear import of the language used therein. Section 3240 empowers an altered district to commence prosecutions after the change by indicting for offenses committed within its prior boundaries before alteration "the same as if such new district or division had not been created . . ." Mizell v. Vickrey, 10th Cir. 1929, 36 F. 2d 327. The district court here was correct in refusing to dismiss the indictment for lack of jurisdiction.

[Sufficiency of Indictment]

Appellant contends that the indictment was defective in that it failed to state an offense. The indictment alleged that Hayes did:

"Wilfully and knowingly attempt to evade and defeat . . . income tax due . . . by filing . . . with the district director . . . a false and fraudulent income tax return . . . in violation of section 7201 . . ."

The indictment is sufficient. It discloses the means by which Hayes attempted to defeat the tax even though tax evasion indictments need not contain such an allegation. Lott v. United States, 5th Cir. 1962, [62-2 USTC ¶9731] 309 F. 2d 115; Reynolds v. United States, 5th Cir. 1955, [55-2 USTC ¶49,146] 225 F. 2d 123. Both the statutory language and a reference to the specific section alleged to have been violated are incorporated within the charge. This in itself is sufficient if all the essential elements of the offense are contained in the statute. Worthy v. United States , 5th Cir. 1964, 328 F. 2d 386. Hayes was sufficiently apprised of the nature of the offense charged so as to permit him to prepare a defense and successfully plead former jeopardy if brought to trial in the future for the same offense. No more is required. United States v. Strauss, 5th Cir. 1960, 283 F. 2d 155. Appellant's attack on the indictment must fail.

[Opening Net Worth]

At the trial the Government relied upon the net worth method to establish its case. As stated in Merritt v. United States, 5th Cir. 1964, [64-1 USTC ¶9226] 327 F. 2d 820, 821, this method of proving income tax evasion

"Proceeds on the assumption that, if in a particular year the increase (not accounted for by nontaxable items) in a taxpayer's net worth plus his nondeductible expenditures exceeds his reported net income to a substantial extent, the excess represents unreported income and permits an inference of wilfulness on the part of the taxpayer."

An essential element of the prosecution's proof in this type of case is the establishment of an opening net worth. Hayes contends that this figure was not established "with reasonable certainty" as is required. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 75 S. Ct. 127, 99 L. Ed. 150. In support of this contention, Hayes asserts that the Government's calculation was inaccurate with respect to three particular items used in computing appellant's opening net worth.

[Cash on Hand]

The Government allowed $10,000 as a reasonable figure for cash on hand in 1951. This amount was based upon information offered by an accountant of the appellant who had been given a power of attorney to represent him in tax matters. A Government agent testified as to the accountant's calculations. Appellant objects to the use of this figure on the ground that it was established by hearsay testimony and because the Government failed to investigate Hayes' assertion that he placed $64,000 in a safety deposit box in a Tallahassee bank in 1951. Neither objection has merit.

It is clear that appellant's accountant was acting within the scope of his employment and authority when he indicated his estimate of the extent of Hayes' cash reserves to the Government agent. Thus the accountant's statement is admissible against Hayes as an admission by an authorized agent. The hearsay objection is not tenable. Laird v. Air Carrier Engine Service, 5th Cir. 1959, 263 F. 2d 948; Cox v. Esso Shipping Co., 5th Cir. 1957, 247 F. 2d 629. It seems appropriate to note here that the accountantclient privilege under Florida Statute Sec. 473.15 (1967) is not applicable in a Federal criminal proceeding. Falsone v. United States, 5th Cir. 1953, [53-2 USTC ¶9467] 205 F. 2d 734.

[Cash Hoard]

As to appellant's claim of a $64,000 cash hoard, we agree that the Government should investigate leads furnished by the taxpayer in arriving at an opening net worth. Merritt v. United States, supra. The record here shows that the Government did all that was required of it. During the investigation of this case, the Revenue agents repeatedly requested information concerning the amount of Hayes' cash on hand, yet no indication of $64,000 cash on hand in 1951 was made. Moreover, the Government agent did not learn of the Tallahassee safety deposit box until some time in 1962 at which time the funds, according to Hayes' testimony, had been depleted. Hayes had previously told a Government agent that he generally kept no more than $1,000 to $4,000 cash on hand at any one time. Under these circumstances, sufficient investigation by the Government is apparent, and the issue raised by Hayes' cash hoard claim was properly submitted to the jury.

[Cost Basis of Land]

The appellant makes an attack upon the $2,000 cost basis allowed by the Government for five and one-half acres of land sold by Hayes in 1959. Use of this basis, which was supplied by Hayes' accountant, resulted in a higher capital gain for the tax year involved. Appellant contends that use of this $2,000 basis was improper because the Government had previously allowed him and his wife a $5,000 cost basis on their joint tax return when the property was sold in 1959. Apparently it is believed that the Government is somehow estopped by this allowance. No authority is cited in support of this position. The record fails to show that the Government entered into a statutory agreement assigning $5,000 as the basis for the land. Under these circumstances, no estoppel can be found. See Sherwin v. United States, 9th Cir. 1963, [63-2 USTC ¶9550] 320 F. 2d 137; United States v. Hardy, 4th Cir. 1962, [62-1 USTC ¶9286] 299 F. 2d 600.

[Cost Basis of Apartments]

The last net worth item challenged by Hayes is the cost value of partially constructed apartments as of January 1, 19 58. Appellant testified that the apartments were seventy-five percent completed on that date, and that a value of $9,000 should have been assigned to the cost of the apartments. Instead, the Government credited the apartments with a cost value of $3,500. This figure was taken from appellant's 1957 income tax return. Apparently, no other record of construction costs had been kept. These facts presented an issue which the jury resolved with sufficient evidence to support its determination. No error was committed. It seems appropriate to say here that use of the cost value asserted by appellant would have no effect on appellant's opening net worth for the years 1959 and 1960.

[Prior Convictions]

Hayes' next specification of error states that the district court committed error by admitting into evidence testimony relating to appellant's prior convictions. It is argued that these convictions are so remote in time that they have no bearing on appellant's present credibility.

It can not be doubted that a defendant who takes the stand in his own defense may be cross-examined concerning his prior convictions. Reese v. United States , 5th Cir. 1965, 353 F. 2d 732. Such inquiry is permitted for the purpose of impeachment as to credibility. Taylor v. United States , 5th Cir. 1960, 279 F. 2d 10. However, as stated in Fire Association of Philadelphia v. Weathered, 5th Cir. 1932, 62 F. 2d 78, 79:

"The length of time that should elapse before a conviction for felony ceased to have any probative value cannot be fixed by the law, but must be left to the sound discretion of the trial court."

The record indicates that, before ruling on the admissibility of evidence of the prior convictions, the trial judge carefully considered both the nature of the prior offenses and the length of time that had elapsed since their commission. Considering these same factors, we find no abuse of discretion. If error were committed, the lack of prejudice caused thereby would prevent a reversal on this ground. See Steele v. United States, 5th Cir. 1957, [57-1 USTC ¶9607] 243 F. 2d 712.

[Cross-Examination]

Further attacking the Government's conduct during the cross-examination of Hayes, it is asserted that error was committed when the United States Attorney asked the following question: "Did you escape from prison?" To this, appellant respondent: "I did not. Yes, yes."

The question is improper and prejudicial, Hayes argues, because it sought to establish, not whether Hayes had been convicted of a crime, but whether Hayes had escaped. As noted by appellant, evidence of prior conviction is admissible; evidence of previous misconduct is not. Rob erson v. United States , 5th Cir. 1957, 249 F. 2d 737.

Hayes, unfortunately, cannot receive the benefit of the rule upon which he relies. In response to a question asked by defense counsel during direct examination, the appellant stated:

"One day I left [prison] and went back about three or four months later and they marked up an escape against me, and they still turned me outside even then. I was never locked up."

In the face of this statement, Government counsel's inquiry was not without the scope of permissive cross-examination.

[Self-Incrimination]

Appellant urges that error was committed when Government agents and Government counsel commented on appellant's failure to make any explanation for his substantial increase in net worth. A reversal of appellant's conviction would generally be required on this ground. Griffin v. California , 380 U. S. 609, 85 S. Ct. 1229, 14 L. Ed. 2d 106. Here, however, peculiar circumstances may demand a different result.

After a preliminary investigation of appellant's books and records, the Government agents, at the request of appellant, obtained all further information from appellant's accountants. One of these accountants testified at the trial that after he indicated to Mr. and Mrs. Hayes the substantial increase in their net worth, he asked them: "Do you know where it came from, or are these figures correct?" The accountant then testified that no explanation of the increase in net worth was offered. Significantly, no objection to this testimony was raised.

After this accountant's testimony, one of the Government's tax investigators was called to the stand. On cross-examination, defense counsel attempted several times to establish that the agent had made unfounded and unnecessary assumptions as to Hayes' net worth. In response to such questions, the agent stated that no one would furnish him with different figures. An example of such an exchange is the following:

"Defense counsel: Haven't I repeatedly asked you if you would let me know specifically, what specific items you wanted so we could get them for you?

"Govt Agent: Repeatedly I asked. We did that repeatedly. We told you we wanted to know how much cash he had. Repeatedly we failed to hear it. This was done on numerous occasions."

Again, no objection was raised.

Later in the trial, another Government agent testified that no explanations as to the increased net worth had been made by anyone. At this time, defense counsel objected. This objection was overruled, but during the testimony of this agent the trial judge advised the jury that Hayes had the right to remain silent. On cross-examination, testimony concerning the lack of explanation was intentionally elicited by defense counsel through the following questions:

"Do you remember indicating to us at that conference . . . that if a satisfactory explanation could be made of any unexplained increases in net worth . . . you did not feel criminal liability existed?

"Did I understand your testimony earlier today, to say that if a satisfactory explanation had been forthcoming you would have settled the case?

"The fact that Mr. and Mrs. Hayes and I remained silent and did not come forward with an explanation, that is why we are here today?"

Appellant further asserts that Government counsel improperty commented to the jury on his failure to make explanations. The United States Attorney attempted in closing argument to discredit Hayes' claim to a $64,000 cash hoard by stating that Hayes had never made such a claim prior to the trial. No objection was raised at this time. Defense counsel thereafter twice alluded to the fact that Hayes had been advised to remain silent by his attorneys. In the latter part of the Government's closing argument, the Government attorney replied to these statements by suggesting the unlikelihood of Hayes remaining silent if the cash hoard claim were true. At this time, the following objection was raised:

"Your Honor, we respectfully object to his referring to what the court may do with respect to his explanation."

This objection was overruled.

Following these arguments, the trial judge again instructed the jury that the defendant was entitled to refuse to make any statements during the investigation and that the jury should draw no inference from the fact that the defendant elected to exercise this privilege.

It does not appear that any prejudicial error resulted from the comments which the appellant contends were improper. Much of the relevant testimony and argument was either not objected to, or was directly invited by the conduct of defense counsel. Furthermore, if there were any prejudicial impact from the statements, it was erased by the trial judge's several admonitions to the jury.

[Miscellancous Defenses]

The appellant makes three additional contentions. These also are without merit. First, what this Court stated in Myers v. United States, 5th Cir. 1966 [66-1 USTC ¶9371] 356 F. 2d 469, convinces us that the trial court committed no error in admitting into evidence and submitting to the jury two net worth summaries prepared by the Government. Second, no error can be found in the following charge to the jury:

"The attempt to evade or defeat a tax must be a wilful attempt: that is, it must be done knowingly, made with the specific intent to defeat the Government, from the Government a tax, imposed by the income tax laws which was the duty of the defendant to pay the Government. In other words, attempt must be knowingly made with the specific purpose of defrauding the Government of some substantial amount of income tax wilfully due from the defendants, or one of them.

"A fraudulent tax return is one that is false and known to be false by the person making it or causing it to be made and filed with the intent to deceive."

This language adequately defines "willfulness," and no prejudicial error resulted from the trial judge's failure to include the phrase "bad purpose" within the charge. Third, whether or not Hayes' attempt to defeat income taxes due the United States was wilful constituted an issue which was properly submitted to the jury. That body's resolution of the issue is supported by substantial evidence.

The judgment and sentence of the district court should be and are hereby

AFFIRMED.

[Dissenting Opinion]

GODBOLD, Circuit Judge, Dissenting:

During the investigative stages of this case, appellant "failed to explain" to the satisfaction of the government agents his substantial increase in net worth, and at times he specifically invoked his constitutional privilege to remain silent. In his closing arguments to the jury the government counsel commented on this failure to explain and on the invocation of the privilege. The majority concedes that these remarks normally would require a reveral of the case under the rationale of Griffin v. California, 380 U. S. 609, 85 Sup. Ct. 1229, 14 L. Ed. 2d 106 (1965). But my brothers find that "peculiar circumstances" require a different result in this case. ¹

The comments of the government counsel could hardly have been more prejudicial. ² Repeated reference was made to the failure to explain an increase in net worth as shown by the government's calculations. Comment was made on the fact that Hayes "stood on his constitutional rights." The members of the jury were asked whether they would have done the same. In the first volley of the prosecution barrange, during the initial closing argument by the prosecutor, the jury was told:

This would have been a way if they had disclosed that vast amount of money they had hoarded, this would have been a way that you gentlemen would not have been sitting here four and a half days. ³ This trial would never have come up; these people would never have been indicted; nothing would have happened. All they had to do was make a truthful explanation of this increase and that would have ended the matter. That would have ended the matter.

* * *

If Mr. Hayes had that money prior to 1950, he could not have been indicted. All he had to do was to come forward and tell Mr. Snyder that he had these funds.

* * *

[T]hese were conferences set up with appointments, to find out where the difference was between the government's figures and their figures, give a reasonable explanation of it--make an explanation of it, [the governmental agents] said, give us a reasonable explanation and we will cease this investigation and that will be the end of it, Mr. and Mrs. Hayes will not have to go through this endurance of being indicted and coming to trial and taking a chance of whether or not they will have to go to jail or not, this eliminates every bit of it. Why didn't they tell it? Why didn't they disclose it? They disclosed it the first time on this witness stand here the other day. You heard it the same time I did. ⁴

To the above line of argument by the prosecution the first defense counsel to argue responded:

The evidence shows that I told him and her that they would make no statements, at first, and Members of the Jury, that is their right under our Constitution and government. And if they choose not to explain to an enforcement officer of any government, then they have that right and can reserve the right to explain to the Members of the Jury and the Court under the rules of evidence as to what their explanation might be.

Then in the middle of his argument the second defense counsel said:

First of all, I remind you again, that the defendants, and his Honor will instruct you, that the defendants have no duty to prove themselves innocent. Furthermore, they have no duty to make any disclosures to the government and, furthermore, both Mr. Varn and I follow the practice when a lawyer is employed he tries to take care of his client and his business.

In his final closing argument the prosecutor delivered the coup de grace:

[Defense counsel Varn] also knows that if he had Mr. Ervin [also defense counsel] had come forth with any explanation as to the increase in his income he is charged with in 1958, 1959 and 1960, and come up here and said, "we have $64,000 in 1950" and been able to substantiate that, there would never have been a case. And yet they have a right to stand on their Constitutional Rights and not to say anything. But would you do it? Would you do it, and wait and be indicted and come up here and go through this trial, and wonder if you were going to prison, and say nothing.

It is to these last remarks that the defense made the objection quoted by the majority. The court's response to the objection was, "The jury will be appropriately instructed as to the matter in the full Charges of the Court. Let's move on." Government counsel resumed, saying:

Mr. Varn is the one that brought that up and I think I have a right to reply to it. ⁵ I don't think that any of you would sit back and wait and be indicted before coming forth and giving a reasonable explanation. You will have to decide that. That is one of the things for you to decide. . . .

No "peculiar circumstances," no curative instructions, ⁶ no theories of waiver, invitation, or failure to object with precision (or to object at all), can make a silk purse of this sow's ear.

It is essential to distinguish between a defendant's Fifth Amendment privilege and the elements of the government's prima facie case set out in Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 75 Sup. Ct. 127, 99 L. Ed. 150 (1954). In Holland the Supreme Court said that "once the government has established its case the defendant [in a net worth prosecution] remains quiet at his peril." Id. at 138-39, 75 Sup. Ct. at --, 99 L. Ed. at 166. This "failure to explain" relates to the proof the defendant may--or may not--adduce at the trial. It does not shrink the scope of the Fifth Amendment as it applies to pretrial investigation.

My reading of the record impels me to conclude that throughout the trial government counsel misconceived the interplay of the Holland principle and the Fifth Amendment. The government's position was not that Hayes, either personally or through his accountants or attorneys, waived his privilege against self-incrimination during the investigation. Nor was it that Hayes' testimony from the stand was so inconsistent with his prior exercise of the privilege as to permit the admission of evidence concerning that prior exercise for impeachment purposes. Compare Grunewald v. United States [57-1 USTC ¶9693], 353 U. S. 391, 77 Sup. Ct. 963, 1 L. Ed. 2d 931 (1957); United States v. Marcus [68-2 USTC ¶9599], 401 F. 2d 563 (2d Cir. 1968); petition for cert. filed, 4 Crim. Law Rep. 4140 (Jan. 8, 1969). ⁷ Rather, the government's position was that the taxpayer had a right during the investigation to stand on his privilege and not produce evidence or otherwise explain his increase in net worth, but that his exercise of the privilege coupled with his offering of an explanation for the first time at the trial was a substantive indication of guilt. ⁸ In short, the government used appellant's exercise of his Fifth Amendment privilege as an affirmative weapon to convict.

An accused cannot be penalized for exercising his constitutional privilege against self-incrimination either through comment on his failure to take the stand, Griffin v. California, 380 U. S. 609, 85 Sup. Ct. 1229, 14 L. Ed. 2d 106 (1965); Anderson v. Nelson, -- U. S. --, -- Sup. Ct. --, 20 L. Ed. 2d 81 (1968), or by testimony at trial of a pretrial exercise of the privilege, Grunewald v. United States [57-1 USTC ¶9693], 353 U. S. 391, 77 Sup. Ct. 963, 1 L. Ed. 2d 931 (1957); Walker v. United States , 5 Cir. 1968, -- F. 2d -- [No. 25572, Dec. 11, 19 68]; Helton v. United States , 221 F. 2d 338 (5th Cir. 1955). In like manner he is protected from prosecutorial comment at trial on his pretrial exercise of the privilege.

Only a few weeks ago in Walker v. United States , supra, this court said:

We would be naive if we failed to recognize that most laymen view an assertion of the Fifth Amendment privilege as a badge of guilt. As said by Mr. Justice Frankfurter, speaking for the Court:

"This constitutional protection must not be interpreted in a hostile or niggardly spirit. Too many, even those who should be better advised, view this privilege as a shelter for wrongdoers. They too readily assume that those who invoke it are either guilty of crime or commit perjury in claiming the privilege. Such a view does scant honor to the patriots who sponsored the Bill of Rights as a condition to acceptance of the Constitution by the ratifying States."

Ullmann v. United States , 1956, 350 U. S. 422, 426, 427. -- F. 2d at --. In Walker the government was allowed to elicit from one of its witnesses, the owner of credit cards used by the accused in a Dyer Act case, that in a pretrial conversation he asked the accused, "Just how did you get my credit cards?" and the defendant responded, "I refuse to answer on the ground it might incriminate me." This was held error. Prosecutorial comment on this matter in argument to the jury, though without objection, was held so improper and prejudicial as to constitute plain error.

Nearly 15 years ago this court said in Helton v. United States , supra:

The constitutional protection against self-incrimination does not begin with a trial of a defendant on the charges against him. History tells us that it was the preliminary inquisition, prior to trial on the merits, which gave rise to the abuses, which resulted in the recognition of the privilege against self-incrimination. Under our law it is not the function of police officers to determine for the benefit of the jury whether or not a person under arrest on suspicion of crime has given a sufficient explanation, or any explanation at all, and the fact that the accused here remained silent rather than risk unwitting distortion of his statement by a police officer at a later date does not give in law, and should not give in fact, rise to an inference of guilt.

221 F. 2d at 341-42.

The language of Mr. Justice Black in his concurring opinion in Grunewald also is pertinent:

I can think of no special circumstances that would justify use of a constitutional privilege to discredit or convict a person who asserts it. The value of constitutional privileges is largely destroyed if persons can be penalized for relying on them. It seems peculiarly incongruous and indefensible for courts which exist and act only under the Constitution to draw inferences of lack of honesty from invocation of a privilege deemed worthy of enshrinement in the Constitution.

353 U. S. at 425-26, 1 L. Ed. 2d at 955.

For these egregious errors of constitutional dimensions, this case should be reversed and appellant granted a new trial.

¹ Implied in the majority discussion is the view that the Fifth Amendment privilege against self-incrimination extended to the Internal Revenue investigation of the income tax affairs of the appellant and his wife. I am in accord with that view; therefore, I do not discuss the availability of the privilege. See generally, McKay, Self-Incrimination and the New Privacy, 1967 Supreme Court Review 193.

² As to whether a prosecutor's comment on a defendant's pretrial assertion of the Fifth Amendment is, in the words of the majority, "prejudicial error." cf. Anderson v. Nelson, -- U. S. --, -- Sup. Ct. --, 20 L. Ed. 2d 81, 83 (1968): "[C]omment on a defendant's failure to testify cannot be labeled harmless error in a case where such comment is extensive, where an inference of guilt from silence is stressed to the jury as a basis of conviction, and where there is evidence that would have supported acquittal." In Chapman v. California , 386 U. S. 18, 87 Sup. Ct. 824, 17 L. Ed 2d 705 (1967), the Supreme Court held that before a comment on an assertion of the Fifth Amendment can be found harmless the court must be able to declare its belief that it is harmless beyond a reasonable doubt.

³ This remark, standing alone and not objected to, is so fraught with prejudice and appeal to improper motives that it should reverse this case.

⁴ These comments establish that, contrary to the majority's contention, the further prejudicial remarks made by the government counsel in his final argument were not "invited" by defense counsel.

⁵ This not only added to the prejudice but was factually incorrect as well. The initial comment on the pretrial failure to explain was made by the prosecutor. See text at note 4, supra.

⁶ The court's charge was not as all-curative as the majority say. The judge charged that under the Fifth Amendment one is not required to speak against himself or give a statement and that no inference was to be drawn from the fact tnat during the investigation the accused refused to make any statement. However, immediately prior to that the trial judge had instructed that if the defendant offered an explanation as to the source of funds the government could not disregard it and the jury could consider failure of the government to check out an explanation if made, and then the judge said: "And if the defendants failed to supply information in that regard you may consider such failure, . . ."

⁷ Marcus presented a different question than is before us. The agent there testified to admissions made to him by the defendant during the investigation. Defense counsel argued to the jury that on other and later occasions the defendant had refused to answer the agent's questions, and that from this fact the jury should conclude that the agent's testimony of earlier admissions actually made was not to be believed. The court held it was not ground for mistrial that in response to this defense attack on the credibility of a key government witness the prosecutor argued that the accused, once it became clear to him he was under investigation, was unwilling to submit to question and answer under oath.

⁸ Professor Steven Duke points out the practical effects of the taxpayer's pretrial claim of privilege, one of which is the consequence here occurring of the exercise being treated as evidence of guilt. See Duke, Prosecutions for Attempts to Evade Income Tax: A Discordant View of a Procedural Hybrid, 76 Yale L. J. 1 (1966). In the instant case the prosecution's approach is exemplified by the fact that in response to appellant's motion for a bill of particulars seeking details of the government's calculations, the government stated, and reiterated, that the defendants had been afforded opportunities to explain their tax deficiencies but "no explanation has been forthcoming."

 

 

[66-2 USTC ¶9649] United States of America , Plaintiff v. Anthony J. Rossi, Defendant

U. S. District Court, West. Dist. N. Y., CR. 8690-C, 10/4/65

[1954 Code Sec. 7201]

Criminal penalties: Tax evasion: Reconstruction of income: Net worth-expenditures method: Burden of proof.--On the evidence (including the Government's reconstruction of the taxpayer's income for the taxable years under the net worth-expenditures method) the jury found the taxpayer guilty on all four counts of an indictment charging that he wilfully and knowingly attempted to evade taxes for the years 1956 through 1959.

Andrew J. Phelan, Assistant United States Attorney, U. S. Court House, Buffalo , N. Y., for plaintiff. Charles J. McDonough, McDonough, Boasberg, McDonough & Beltz, 930 Walbridge Bldg., Buffalo, N. Y., William De Filippo, 408 East Church St., Elmira, N. Y., for defendant.

BURKE, District Judge.

Court's Charge:

MEMBERS OF THE JURY: This case arises out of an indictment filed by the Grand Jury. The indictment contains four counts involving the tax years 1956 through 1959. Each count charges the defendant with wilfully and knowingly attempting to evade and defeat part of the income tax due and owing by him for the indictment years by filing a false and fraudulent income tax return in which he knowingly understated his net worth for each of the indictment years, thereby evading part of the tax which was rightfully due.

[Indictment]

All four counts of the indictment charge a violation of the same statute. The statute provides that any person who wilfully attempts in any manner to evade or defeat any tax imposed by Internal Revenue Laws shall be subject to the punishment provided by the statute.

* * *

The law requires that a return be filed by every person who has gross income exceeding a certain figure. The figure is not important because for each of the indictment years the defendant has filed an income tax return and the returns were signed by the defendant and his wife. She is not a defendant and is not charged with any violation. All of those tax returns for the years in question are in evidence and may be examined by the jury in the jury room.

Under this statute the Government has the burden to show beyond a reasonable doubt that for each of the indictment years the defendant owed a tax, that he knew that the tax was due, and that with such knowledge he wilfully attempted to evade or defeat payment of the tax or a part thereof by filing what he knew to be a false and fraudulent income tax return.

Each count of the indictment is a separate charge and each count must be considered separately and a conclusion of guilt or innocence be made by you on each separate count.

[Reconstruction of Income]

In this case the Government relies solely upon what we call circumstantial evidence, as distinguished from direct evidence, to prove the charges against the defendant. What the Government is attempting to show is that the defendant for all of the indictment years had taxable income which he knew to be taxable and which he knowingly omitted in his filed returns, with the wilful attempt to evade payment of a large part of the tax which he knew to be due. This case would be much simpler to understand and to follow if the Government could on direct proof. If the Government relied show by the defendant's own books or records how much taxable income the defendant had, the books themselves would be direct evidence of such income, provided they were books or records which adequately and sufficiently reflected his gross taxable income. This case is not that simple. The Government claims that available books and records of the defendant did not adequately reflect or show his whole taxable income. The Government claims that he had income from his regular enterprises which was not shown or disclosed on the books which he kept for those enterprises. If there is a showing by the Government that the defendant's available books or records did not adequately show his gross taxable income for the indictment years, the Government has the right to use circumstantial evidence in an attempt to reconstruct by the best means available, in the absence of direct evidence, his total gross taxable income for the indictment years. So, the Government has undertaken to show his total gross taxable income by what is known as the net worth-expenditures method. By this method the Government undertakes to prove what assets the defendant had at the beginning of the first indictment year by showing his assets as of December 31, 1955, and what he had at the end of the year, December 31, 1956, and in the same manner for the other three indictment years, 1957, 1958 and 1959. It subtracts what he had at the beginning of the year in question from what he had at the end of the year in question, and to that difference it adds whatever sums it can prove that he spent in the year in question. The resulting figure is supposed to be his gross taxable income for each year in question. The defendant has filed for each of the indictment years his tax return showing gross income. The difference between what the defendant has reported for any indictment in his tax return and the figures the Government has arrived at under the net worth-expenditures method for that year is supposed to be his unreported taxable income for that year. But the Government must prove more than that. It must prove a probable or likely source from which it could be reasonably inferred that the net worth increase came from. Even though a likely or probable source may be shown, it does not follow conclusively that that was the true source. So, the Government must, in addition to that, exclude the possibility that what the defendant received could have come from some non-taxable source such as gifts, inheritances, loans, or some other non-taxable source. To equate net worth increase and expenditures to taxable income, the Government must have proof of a likely taxable source and nullify non-taxable sources. In this connection the Government need not nullify every conceivable non-taxable source, but only those known or concerning which the defendant has offered explanations susceptible to being checked. The theory of this net worth-expenditures method is that if expenditures, added to any increase in net worth, exceeded the reported income for any indictment year, the inference may be reasonably drawn that the defendant's total income for that year was not properly reported. That is only the theory. Whether the inference reasonably flows from the proof, you will have to determine on the evidence in the case. I have told you before that this method used by the Government of attempting to reconstruct the defendant's gross taxable income for the indictment years is based upon circumstantial evidence, which was the best available evidence in the absence of direct evidence. Circumstantial evidence is not as valuable as direct evidence. Common sense tells us that. In a case of this kind where practically the whole Government's case rests upon circumstantial evidence, it should be scrutinized with the utmost care and caution to insure that no injustice shall be done to the defendant. To justify the use by the Government of this net worth-expenditures method you must be satisfied on all the evidence in the case that the defendant had a probable or likely source of taxable income for each or the indictment years other than that disclosed in his income tax returns. You must be satisfied that the source of his undisclosed income was income received from his various enterprises which was not reflected in his filed income tax returns. He had a number of business ventures. He was the sole owner of the Rossi Bowling Hall, the Paramount Lanes Bowling Hall, the Rossi Bakery, the Rossi Distributing Company, the Rossi Terminal Garage, and he owned the Rossi Warehouse and Development Corporation jointly with a nephew, Dominic Rossi.

[Fraudulent Intent to Evade Tax]

There are various schemes, subterfuges or devices that might possibly be resorted to in an attempt to evade or defeat a tax. The specific one alleged in the indictment in this case is that of filing a false and fraudulent return with the intent to defeat his tax liability. The gist of the crime charged consists of a wilful attempt to escape or evade the payment of part of the tax known to be due.

To warrant a conviction the attempt to evade and defeat the tax must be a wilful attempt. That is, it must be made with the intent to deceive and keep from the Government a tax due under the Internal Revenue Laws.

The Government is not required to prove the precise or exact amount by which the defendant understated his taxable income for any of the indictment years, nor to show the exact and precise amount of the tax evaded. It is only required to show that his taxable income was intentionally substantially understated for each of the indictment years and with the intention to evade the tax to warrant a conviction for each one of the indictment years. One of the elements on which the Government has the burden of proof is that the defendant knew that he had gross income which was subject to tax and that with such knowledge he knowingly filed a return which intentionally understated his gross income for the purpose of concealing it from the Government, so as to evade payment of a tax due thereon.

* * *

[Government's Case]

As to each of the charges contained in the four counts of the indictment, the Government has the burden of establishing these four elements: (1) It must establish the opening net worth, that is his total assets at the beginning of the year, with reasonable accuracy, not exactly or precisely, but with reasonable accuracy. This is necessary so as to foreclose the possibility that expenditures made in any year, or net worth increases in any year, were derived from prior accumulated income. Simply stated, a man's net worth is the difference between his assets and his liabilities at any given time. It is the difference between what he owns and what he owes at that time. If he has more assets at the end of a year than he had at the beginning of a year, and if his liabilities remain the same, his net worth will have increased. In determining this increase, however, bear this in mind, only the cost price of the asset is considered. Increases in market value of assets are not taken into account. Exhibit G-222, that large chart, is the Government's asset statement. You will have it before you on the chart in the jury room. On that chart the Government has fixed the opening net worth at the beginning of each of the indictment years.

The Government claims that among the assets comprising the defendant's opening net worth as of January 1, 19 56, was cash on hand, that is, currency in the sum of $1,200. Like all other opening assets, the Government has the burden of establishing this not exactly but with reasonable accuracy. The Government claims that the defendant's cash on hand as of January 1, 19 56, was $1,200 and that he had the same amount of cash on hand on January 1st of each succeeding year. You must determine on all the evidence in the case whether or not the Government has sustained this burden of proof with respect to opening cash on hand as of January 1st of each year.

No person has any legal obligation to deposit cash in a bank. The defendant had the legal right to keep any amount or amounts of cash he saw fit in his place of business or anywhere else that he desired.

It is for you to determine on the evidence whether all of the assets of the defendant in each of the indictment years have in fact been included in the opening net worth for each of these years. If you find that the evidence does not establish the opening net worth with reasonable accuracy, then all of the subsequent calculations based on the opening net worth would be in error. If you do find errors in the opening net worth statement, it is for you to determine what effect, if any, such errors have on the ultimate figure of claimed additional taxable income computed for any of the indictment years.

The second element which the Government must prove is that the alleged increase in net worth and expenditures for each of the indictment years was derived from income of the defendant during that particular year.

The third element which the Government has the burden of establishing is that the alleged increase in net worth and expenditures for the given year were from taxable income received during that particular year, and not derived from some nontaxable source, such as gifts, inheritances or loans, or some other non-taxable source.

The fourth element that the Government must prove as to each of the particular counts is that the taxable income was wilfully and knowingly undisclosed with the deliberate intention of deceiving the Government and evading the tax known to be due thereon.

All four of these are necessary elements as to each of the counts of the indictment. The failure to establish any one of these elements as to any particular year would make it necessary to find the defendant not guilty as to that particular year.

The Government has the burden of establishing all four of the elements that I have just referred to as to each particular count of the indictment and it has the burden of establishing those elements beyond a reasonable doubt. That burden of establishing guilt beyond a reasonable doubt never shifts to the defendant. The defendant has no burden to prove his innocence. You should be careful in your deliberations not to impose that burden upon him.

* * *

[Criminal Prosecution]

This is a criminal prosecution in which the defendant is charged with four separate violations. It is not a civil proceeding for the assessment of alleged deficiency in income tax and penalties against the defendant. The defendant's civil liability, if any, for such additional taxes and penalties must be determined in an entirely separate proceeding and before a different tribunal and is in no way dependent upon the outcome of this criminal prosecution. There is no burden upon the defendant in a criminal prosecution to establish his net worth at any time. The defendant's evidence on this point, however, has been offered and may be considered on the question of whether or not the Government has sustained its burden of proving the defendant's opening net worth with reasonable accuracy.

The various charts, summaries and schedules offered by the Government and received in evidence with respect to alleged opening net worth and alleged increases in net worth and alleged expenditures during the indictment years, have no independent existance or evidentiary value in and of themselves. They are used only as a convenient graphic method of assembling the evidence. The evidentiary value which is to be given to such exhibits is entirely dependent upon the underlying testimony or documentary proof upon which the charts, summaries and schedules are based, and upon the accuracy and credibility of testimony or documentary proof upon which the charts, summaries and schedules are based.

During the course of this trial the defendant, through his counsel, has made various motions which were denied. I think it unnecessary to go into the nature of the motions. All that I want to say in that regard is that those motions raised only questions of law which were passed upon by the Court in denying the motions. The denial of the motions is not to be taken as any indication of the guilt or innocence of the defendant, nor of the feeling of the Court in that regard.

Remember that there are four separate counts, four separate crimes charged in the indictment. Each count for each of the indictment years must be considered separately and each count must have a separate finding of guilty or not guilty.

[Evidence]

During the tax years 1956 through 1959, Mrs. Scott was a bookkeeper employed by the defendant. She kept books pertaining to some, but not all, of the defendant's various enterprises. A large part of the receipts in each of the defendant's enterprises was in cash. The defendant deposited his receipts in a business bank account maintained for each business enterprise. He also deposited in these accounts the proceeds of loans received by him. Some time after the end of each year, for tax purposes, the defendant's method was to compute his gross receipts by adding the total bank deposits, then adding the amount of his payroll which was paid in currency, and which did not go into the bank accounts, and all the amounts paid in cash for petty cash disbursements, which also was not deposited in banks. He would then subtract the proceeds of loans deposited in the accounts, because loan proceeds were not income. He would also substract certain sums which had been deposited, and which had not been recorded in his records under what he denominated as "money by others" accounts. This record of account "money by others" included some nondeductible personal expenditures, some purchases of capital assets, repayment of loans, and certain properly deductible items such as withholding tax payments, Social Security payments, and bowling prize money, which he was holding in escrow for various bowling leagues until distribution.

Salvati was an experienced accountant. He had previously been employed by the Internal Revenue Service. He prepared defendant's income tax returns for the years 1954 through 1960, which period, of course, included the years in question, 1956 through 1959. He obtained some of the information for making these returns from the defendant, and some from Mrs. Scott and from available books. There was also made available to him during his time of his working on the income tax returns the disbursement journals recording the disbursements made during the year, mostly by check, but some in cash. Each of these disbursements journals had summary sheets without breakdown which purported to summarize in various categories, the disbursements made during the year. In making the returns Salvati said that he used the summary sheets and that he thought there was no need to examine the supporting data for the summary sheets, which was available in the disbursement journals. In computing income for the year Salvati said that he did not include items listed under petty cash expenditures in the disbursement journals. These items should have been added because the cash used to make those petty cash expenditures was never deposited in the bank accounts. In one of the years, 1959, I believe, he deducted the total amount listed in the account "money by others" of about $42,000. He said he thought this was entirely bowling prize money. In fact, it was made up largely of items not properly deductible to arrive at total business income received. The disbursement journals showed that this account "money by others" contained largely items which were not properly deductible in arriving at total business income received during the year, in addition to bowling prize money which was properly deductible.

It must be apparent from the evidence in the case that the defendant's gross taxable income was in fact substantially understated, at least for the years 1957, 1958 and 1959. Defendant's chart, Exhibit D-43, prepared by the defendant's accountant witness, establishes that it was. By that chart he showed additions to income for 1957 of $36,382.87. This figure he reduced by certain deductions which he said Salvati should have reflected in the return amounting to $5,157.49, leaving a net addition to 1957 gross income of $31,225.38, according to his calculations on the chart. The same chart showed $20,056.29 additions to gross income for 1958. This was reduced by certain deductions which he said Salvati should have reflected in the return amounting to $504.03. This left a net addition to 1958 gross income of $19,552.26, according to his calculations on the chart. The same chart showed $29,355.97 additions to income for 1959. This figure he reduced by $7,947.43, consisting of items which he said Salvati should have reflected in the return. This left a net addition to 1959 gross income according to his calculations, of $21,408.54 shown on the chart.

The balance of the chart was prepared to show that the defendant in the years 1957 through 1959 was entitled to claim in his filed returns additional depreciation by a method of depreciation not used by Salvati in making the returns. By deducting these totals of additional depreciation which he said the defendant was entitled to claim in his 1957, 1958 and 1959 returns but not included by Salvati, he arrives at net additions to gross income after additional depreciation $26,381.32 for 1957; $173.50 for 1958; and minus $5,654.81 for 1959.

Regardless of what depreciation was actually claimed in the filed returns, or what could have been claimed under some other method of depreciation, the defendant was required by law to make a true statement in the return of his gross taxable income for the year. The only effect of allowable depreciation would be to reduce his tax liability. It would not relieve him of the obligation to make a true statement of his gross taxable income for the year.

So, the question is squarely presented, at least for the years 1957, 1958 and 1959, when gross income was substantially understated, without dispute on the evidence in the case, whether the understatement of gross income in the filed returns was made knowingly and wilfully by the defendant, with the intention on his part to evade part of his tax liability. The defendant claims that the understatement of gross taxable income was due to the mistakes, negligence and incompetence of Salvati in making his tax returns and by Salvati's failure to arrive at his true taxable income by having resort to defendant's books and records made available of Salvati in making the returns.

During the course of these instructions I have referred at times to some of the evidence in the case. In so doing I have given my recollection of the evidence, aided somewhat by my notes. You are not at all bound by my recital of the evidence. My memory might be faulty in some respects and my notes might be in error. Wherever your recollection of the evidence is different than mine you should rely upon your own recollection of the evidence and not upon my recital of the evidence.

[Accountant's Negligence Claimed]

The duty to file income tax returns is personal to every taxpayer. Mistakes made in good faith are not fraudulent. No person, however, who is able to read and write, and who signs and files a tax return, may escape the responsibility of acting in good faith, and of acting without evil intent, as to the correctness of the information in the return which he signs and files, whether the return is prepared by him, or prepared by another for him. If the evidence shows beyond a reasonable doubt that the defendant intended to conceal known tax information as to his taxable income in his filed returns for the years 1956 through 1959, he was not acting in good faith. No person may escape responsibility for the knowledge of facts actually known by him, merely by disclaiming knowledge of such known facts. A taxpayer charged by law with the personal duty of filing a tax return, cannot sign and file or authorize the filing of a return which he in fact knows is false, and then escape responsibility for the falsity of the return with such guilty knowledge, simply because the return was prepared by someone else.

If the defendant submitted information to Mrs. Scott, or to Salvati, intending it to be used in the preparation of his tax returns, and at the time he submitted such tax information he knew the information was false, or incomplete, or otherwise inadequate, and that the information he supplied would render the resulting tax returns false, he may not disclaim knowledge and responsibility for the tax returns merely because the return was not personally perpared by him; I do not mean to say that the defendant is chargeable with the errors or mistakes or negligence of Salvati. If the defendant supplied or furnished to Salvati, or to Mrs. Scott, to be transmitted by her to Salvati, all necessary information, or access thereto, which information was complete and correct, to the best of the defendant's knowledge and belief, and the defendant in reliance on the skill, knowledge and competence of Salvati, signed and filed the return prepared by Salvati, then if the return proved to be inaccurate or false, the defendant is not guilty of a fraudulent intent, unless he knew and realized that the prepared return was false and inaccurate, and with such guilty knowledge, he signed and filed it with the intention of deceiving the Internal Revenue Service, and with the intention of attempting to evade tax liability. However, the defendant was not entitled to rely on the taxable income computed by Salvati, or by Mrs. Scott, for Salvati's information in filing the returns, if in fact he knew the computation was false, or inaccurate, or if he knowingly and intentionally and with the intention of evading a tax withheld or permitted to be withheld the information, from which his taxable income could have been correctly computed.

I have told you that during the entire trial the burden is upon the Government to establish beyond every reasonable doubt, each and every essential element of the crime charged against the defendant, and that this burden never shifts to the defendant, and that the defendant has no burden to sustain and that if the defendant's evidence taken with the Government's evidence raises a reasonable doubt as to his guilt, there could be no conviction. As a necessary corollary of that I tell you now that there is no burden upon the defendant to take the witness stand in his own behalf. He was entirely within his rights in not taking the witness stand. That was his privilege and there can be no inference of guilt drawn from his failure to take the witness stand. The fact that he has not taken the witness stand in his own behalf should not be discussed by you in your consideration of the case.

There has been so much reference during the trial to the bill of particulars that I feel that I should say something about it, so that you will not be confused by the function of a bill of particulars. When an indictment is filed by the grand jury, a defendant has a right to ask the Court to direct that the Government supply him with the particulars in detail of the charge against him, so that he will not be surprised at the trial, and so that he may adequately prepare for trial and know in detail what he has to meet at the trial. It is supposed to limit the proof at the trial, and to prevent the Government from going beyond the particulars furnished to the defendant. But on the trial the Government may be unable to prove all of the details that it has furnished to the defendant. It may not be able to secure certain witnesses. It does not have to prove all that it has set forth in the bill of particulars, but if the Government attempts to go beyond what it has furnished the defendant in the bill of particulars, the defendant may object, and if the objection is well taken the Court will not admit the evidence. Many times during the case the Court was called upon to rule on objections by the defendant because it was not within the limits of the bill of particulars. In each instance the Court did rule on the objection, and I say to you now, that no evidence has been admitted in the case that was not within the limits of the bill of particulars as furnished to the defendant.

This is a criminal case and requires a unanimous verdict.

You may take all of the exhibits into the jury room.

Any requests or exceptions?

* * *

MR. McDONOUGH: Thank you, your Honor. I request your Honor to charge as requested in request No. 9.

THE COURT: In a net worth prosecution the complexity of the problem is such that it cannot be met merely by an application of general rules. A jury must approach the case in the full realization that the taxpayer may be ensnared in a system which though difficult for the prosecution to utilize is equally hard for the defendant to refute. Great care and restraint is required in the application of the net worth method.

MR. McDONOUGH: I believe your Honor has charged either verbatim or substantially our other written requests. However, in view of the summation of the prosecution I ask the Court to charge that the possible non-taxable sources of income which your Honor enumerated to some degree during the main charge would include any currency on hand as of January 1 of each of the indictment years.

THE COURT: I so charge.

MR. McDONOUGH: And I further request the Court to charge that with respect to the cash payments to Broadway Heating Company and Cady Electric Company and the total sums of $6,130 in 1958 and $3,000 in 1959, if in fact those cash payments were made from cash or currency on hand as of January 1 of each of those years, then such payments should not be added back to receipts for the purpose of determining additional taxable income during the year in which paid.

THE COURT: I so charge.

MR. McDONOUGH: Thank you, your Honor. That is all I have.

* * *

[Verdict]

[The jury finds the defendant guilty on all four counts as charged in the indictment.]

 

 

[66-1 USTC ¶9470] United States of America v. Anthony R. Fernicola, Appellant

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 15399, 361 F2d 864, 5/25/66, Aff'g an unreported District Court decision

[1954 Code Secs. 7201 and 7207]

Crimes: Wilful attempt to evade tax: Filing fraudulent returns: Proof by net worth method: Opening net worth.--Taxpayer's conviction for wilfully attempting to evade a large part of tax owing and for filing and causing to be filed false and fraudulent returns, proof of which was based upon increase in net worth, was affirmed. The Government satisfactorily established an opening net worth.

Michael A. Querques, Querques and Isles, 501 Central Ave., Orange, N. J., Benjamin Weiner, Weiner and Schoifet, 75 Paterson St., P. O. Box 1367, New Brunswick, N. J., for appellant. Richard A. Levin, Assistant United States Attorney, Federal Bldg., Newark, N. J., for appellee.

Before KALODNER and HASTIE, Circuit Judges and WRIGHT, District Judge.

Opinion of the Court

PER CURIAM:

Following a jury trial, defendant was found guilty on a three-count Indictment charging him with "wilfully and knowingly attempting to evade and defeat a large part of the income tax owing by him and his wife" for the years 1955, 1956 and 1957, and "filing and causing to be filed . . . a false and fraudulent joint income tax return" for the years stated.

Since the Government was unable to obtain from the defendant books or records of his medical practice reflecting payments of fees to him, it arrived at its calculations of the defendant's taxable income for the years involved via the "net worth" method and prosecuted its case at the trial in accordance therewith. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121 (1954); United States v. Pepe [66-1 USTC ¶9408], -- F. 2d -- (3 Cir. 1966), decided May 12, 19 66 .

The hard core of the appellant's contention on this appeal is that the Government failed to satisfactorily prove a substantial understatement of income during the tax years in the critical respect that it failed to meet its burden of proof on the score of establishing an "opening net worth" or total net value of the appellant's assets at the beginning of the sequence of tax years for which a deficiency was alleged.

On review of the record we are of the opinion that the appellant's contention is without merit and that there was ample basis for the jury's verdict. Other points presented by the appellant with respect to alleged errors at the trial do not merit discussion.

For the reasons stated the judgment of sentence of the District Court will be affirmed.

 

 

[64-1 USTC ¶9216]Ellen Armstrong and David J. Armstrong, Appellants v. United States of America , Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 18,736, 327 F2d 189, 1/21/64

[1954 Code Sec. 7201]

Income tax evasion: Net worth case: Burden of proof.--Conviction of the taxpayers for evasion of personal income tax was affirmed. The Government in its use of the net worth method introduced proof that the increases in the taxpayers' net worth were attributable to the undisclosed illicit business of selling "pep" pills rather than from money given to the taxpayers for safekeeping. Miscellaneous assignments of error were rejected.

John J. Bradley, Max Solomon, 215 W. 5th St. , Los Angeles , Calif. , for appellant. Francis C. Whelan, United States Attorney, Thomas R. Sheridan Assistant United States Attorney, Chief Criminal Section, Jo Ann Dunne, Assistant United States Attorney, Los Angeles, Calif., for appellee.

Before JERTBERG, MERRILL and BROWNING, Circuit Judges.

JERTBERG, Circuit Judge:

Following trial to a jury, the appellants Ellen Armstrong and David J. Armstrong, husband and wife, were convicted on each count of a four count indictment. The indictment charged that appellants did willfully and knowingly attempt to evade and defeat a large part of the income tax due and owing by them to the United States of America for the calendar years 1956 through 1959, respectively, in violation of Title 26 U. S. C. §7201, which in pertinent part provides:

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

[Facts]

In each of the four years in question, appellants filed a joint income tax return reporting as taxable income only the earnings received by appellant David J. Armstrong, as a bus driver for the Los Angeles Metropolitan Transit Authority. Taxable income reported for the year 1956 was the sum of $2,047.13, and the amount of tax due thereon was $409.44; taxable income reported for the year 1957 was the sum of $1,101.25 and the amount of tax due thereon was $220.15; taxable income reported for the year 1958 was the sum of $1,365.80 and the amount of tax due thereon was $273.16; taxable income reported for the year 1959 was the sum of $1,450.02 and the amount of tax due thereon was $290.00.

The record discloses that during the tax years in question, appellants maintained no books or records of account.

[Net Worth Method]

Using the so-called "net worth plus expenditures" theory of proof, the government established a net worth increase for appellants for each of the years 1956 through 1959, to which increase of net worth for each year was added the non-deductible expenditures of appellants for each of said years. The following computations resulted:

Calendar Year 1956

December 31, 19
55--Net Worth ..................         $12,609.57

December 31, 19
56--Net Worth ..................          19,416.47

Net Worth Increase .................                    $ 6,806.89

Expenditures not appearing in Net Worth Statement         6,017.08

Net Worth Increase plus personal Expenditures

equals Gross Income ..............................       $12,823.97

Calendar Year 1957

December 31, 19
57--Net Worth ...................         $26,626.24

Net Worth Increase ..........................            $ 6,845.78

Expenditures not appearing in Net Worth Statement ....                              6,777.45

Net Worth Increase plus personal Expenditures

equals Gross Income .......................              $13,623.23

Calendar Year 1958

December 31, 19
58--Net Worth ...................         $44,184.29

Net Worth Increase ........................              $17,922.05

Expenditures not appearing in Net Worth Statement ...      4,437.20

Net Worth Increase plus personal Expenditures

equals Gross Income .................................    $22,359.25

Calendar Year 1959

December 31, 19
59--Net Worth ........................    $51,530.12

Net Worth Increase ..................................    $ 7,354.93

Expenditures not appearing in Net Worth Statement ...     12,165.77

Net Worth Increase plus personal Expenditures

equals Gross Income .................................   $19,511.60

 

The appellants concede:

(1) The accuracy of the net worth computations adduced by the government;

(2) That the unreported gain in net worth of appellants for the years covered by the indictment is as follows:

1956 ....         $ 7,894.26

1957 ....           9,687.35

1958 ....          17,984.29

                  15,029.02;

1959 ....                and

 

(3) Assuming that the unreported gain in each year represents taxable income, the additional tax due for each of the years is as follows:

1956 ....         $ 1,775.32

1957 ....           2,184.89

1958 ....           4,785.87

1959 ....           3,792.87

[Undisclosed Illicit Business]

As a likely source that the unreported increases in the appellants' net worth were derived from an undisclosed illicit business, that is, the sale of "pep" pills, the government introduced the testimony of four local law enforcement officers attached to the narcotics detail of the County Sheriff 's Office and the narcotics division of the local Police Department.

One of these officers testified that on September 17, 19 56 he took from the appellant, Ellen Armstrong, a bag containing some 650 5-milligram tablets referred to as benzedrine or amphetamine and a small quantity of marijuana. Appellant stated that she had purchased the contents of the bag for $10.00. Another officer testified that on October 27, 19 56, he and another person with him purchased $30.00 worth of pills from the appellant, Ellen Armstrong; that shortly thereafter he returned to the appellants' apartment where both appellants were present; that he observed in appellant Ellen Armstrong's purse the $30.00 which he had paid her, plus twenty-three $1.00 bills. On a search of the apartment he recovered 500 amphetamine tablets, some dexedrine tablets, 103 amphetamine tablets, some nembutol capsules and some codeine tablets.

Another officer testified that on May 30, 19 57 he searched the apartment of appellants while both were present and recovered several bottles containing various pills. He also found $1,031.00 in currency in a dress hanging in the closet. Appellant, Ellen Armstrong, stated that she had obtained the money from selling pills, with the exception of $400.00 which she had won at Las Vegas . Appellant Ellen Armstrong stated to the officer that she purchased the pills for $35.00 a bottle and that the usual sales price was ten pills for a dollar. Another officer testified that he searched the premises of the appellants on June 25, 19 59. In the basement he found three sacks of twelve bottles of assorted pills. In the apartment he recovered several bottles of pills and an envelope containing $953.00 in currency.

As a part of the government's case, government agents testified as to pre-trial interviews with the appellants in which appellants stated in substance: that their only source of income was from David Armstrong's employment as a bus driver; that they had only two bank accounts, consisting of a checking account in the name of Ellen Armstrong and a small savings account in trust for their son; later when confronted with the existence of other accounts, they admitted the existence of two other savings accounts under the name of Ellen Fletcher, an alias.

[Evidence Supporting Net Worth Increases]

The net worth increases for each of the years in question was established by the following evidence: loans receivable, purchase of 1957 automobile in November 1956, loans payable, Trust Deeds of the approximate value of $4,400.00 purchased under the name of Helene Sabatelli, and net bank deposits of $54,570.07, of which cash deposits consisted approximately of 74%. These banks deposits were made to the various accounts above mentioned.

Proof of the non-deductible expenses consisted of the following evidence: living expenses, payment of insurance premiums, fees paid to an attorney in the amount of $9,300.00, bond premiums in the amount of $3,375.00, and other non-deductible expenditures in the approximate amount of $675.00. While the record discloses that the bond premiums were, in fact, bail bond premiums, and that the expenditures in the approximate sum of $675.00 were, in fact, expended to pay fines for violations of the Business and Professions Code of the State of California, the District Judge refused to permit the government to show that the expenditures were made for bail bond premiums and for payment of fines.

[Taxpayer Contentions]

On their own behalf appellants, in substance, testified: that the unreported increases in net worth adduced by the government comprise money which had been received from one Clifford Bell, which they deposited in the various accounts; that they did not believe that they owned the money delivered to them by Mr. Bell, or had responsibility for any income tax on such money or any interest it might earn while in the bank; that Mr. Bell was a tenant in the apartment building in which appellants lived; that he was single; that in 1956, Bell gave to appellant Ellen Armstrong from twelve to fifteen hundred dollars; that she eventually deposited it in the bank account under the name of Ellen Flectcher, an alias; that in 1957 she opened another savings account under the name of Fletcher, and thereafter made deposits in said accounts with moneys accumulated from funds given to her periodically by Bell; that at one particular time Bell gave her $3500.00; that she had no idea how much money Bell had given to them; that she kept no record of moneys received from Bell nor did she at any time give him any receipt; that money received from Bell was to be for safekeeping; that Bell never asked her where she kept the money; that Ellen Armstrong had sold some "pep" pills during the years in question, which cost her $10.00 to $15.00 for a bottle of 1,000 pills; that the selling price was ten pills for a dollar; that she made "some" money; that appellant David Armstrong deposited $1500.00 and $1300.00 to the various accounts of money given to him by Mr. Bell in 1960; that money given to them by Bell had been used for personal purposes, such as payment of attorneys fees in the amount of $1500.00 on one occasion, $1250.00 on another occasion, $2500.00 on another occasion, purchase of an automobile, $2500.00 to acquire a trust deed account in the name of Sabatelli; that Bell consented to the use of the money whenever appellants were in "difficulty"; that Mr. Bell passed away about a year and a half prior to the trial.

[Specification of Errors]

Appellants' specification of errors may be grouped as follows:

1. Insufficiency of the evidence to establish the currently taxable nature of the unreported increase in net worth;

2. Errors of the District Court in instructing, and refusing to instruct, the jury;

3. Errors of the District Court in the admission of testimony; and

4. Error committed by the government in advising the jury that appellants were engaged in illegal activity.

In approaching appellants' contentions, it is to be noted that appellants concede the mathematical accuracy of the yearly net worth computations adduced by the government, and the existence of the unreported increases in net worth as established by the government's proof. In this respect, appellants state in their brief:

"At the trial of this matter the government introduced evidence of net worth computations of appellants' income for the years covered by the indictment. Appellants did not contest the accuracy of such computations at the trial and they are not now raising such issue in presenting this appeal."

[ Holland Case]

In Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121 (1954), at pages 137-138, it is stated:

"Increases in net worth, standing alone cannot be assumed to be attributable to currently taxable income. But proof of a likely source, from which the jury could reasonably find that the net worth increases sprang, is sufficient."

[Burden of Proof]

Hence, in order to sustain the burden of proof in a net worth case of income tax evasion, the government must produce evidence that increases in appellants' net worth for the tax years in question were attributable to currently taxable income, or must produce evidence from which the jury can infer that fact. Holland v. United States, supra; Kasper v. United States [55-2 USTC ¶9576], 225 F. 2d 275 (9th Cir. 1955).

In the instant case as a likely source that the increases in appellants' net worth for the tax years in question were attributable to currently taxable income, the government introduced proof that the increases in appellants' net worth were attributable to the undisclosed illicit business of selling "pep" pills.

Illegal gain as well as legal gain constitutes taxable income. James v. United States [61-1 USTC ¶9449], 366 U. S. 213 (1961); Rutkin v. United States [52-1 USTC ¶9260], 343 U. S. 130 (1952); Beck v. United States [62-1 USTC ¶9227], 298 F. 2d 622 (9th Cir. 1962), C. D. 370, U. S. 919.

Appellants only reported source of income during the tax years in question was wages derived from appellant David Armstrong's employment as a bus driver. No contention is made that they received, during the tax years in question, any money or property by way of gift, inheritance, or other source except that some unreported income was received from the sale of "pep" pills. Their explanation of apparent increases in net worth was that such increases were comprised of money given to them by Bell during the tax years in question, for safe-keeping. We must assume from the jury's verdict that the jury placed no credence in such explanation.

A careful examination of the transcript in this case discloses abundant evidence to support the implied finding of the jury that the illicit sale of "pep" pills was a likely source of the unreported increase in net worth, and represent currently taxable income. In a net worth case, the government need not prove the specific source of proved increases in net worth in order to demonstrate their tax character as income; it is sufficient for it to prove a "likely source" from which the jury could reasonably find that the net worth increases sprang. Holland v. United States, supra; United States v. Sclafani [59-1 USTC ¶9357], 265 F. 2d 408, (2nd Cir. 1959), C. D. 360 U. S. 918.

[Error in Giving Instructions]

Appellants complain of the refusal of the District Court to give to the jury two instructions proffered by the appellants. One of these proffered instructions charged the jury that it could not return a verdict of guilty on circumstantial evidence alone, or when the case of the government rests substantially on circumstantial evidence unless the proved circumstances are not only consistent with the hypothesis that the defendants are guilty of the crime but are irreconcilable with any other rational conclusion. In Strangway v. United States [63-1 USTC ¶9183], 312 F. 2d 283 (9th Cir. 1963), we held that the refusal to give such instruction is not error, and stated at page 285:

"The proposed instruction is not in accord with the currently-accepted rule in the federal courts. See Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 139-140, 75 S. Ct. 127, 99 L. Ed. 150; Bolen v. United States, 9 Cir., 303 F. 2d 870, 874."

We find no error on the part of the District Court in refusing the proffered instruction.

In the other proffered instruction refused by the District Court the instruction charged the jury that if the evidence is susceptible of two constructions, each of which appears to be reasonable, and one of which points to guilt and the other to innocence, the jury must reject the construction which points to guilt.

The record discloses that the District Court fully instructed the jury on the presumption of innocence, on the requirement that guilt be established beyond a reasonable doubt, on the meaning of the term "reasonable doubt", on circumstantial and direct evidence, and informed the jury that in respect to either direct or indirect evidence the defendants' guilt must be established beyond a reasonable doubt from all of the evidence in the case. We find no error in refusing to give the proferred instruction.

Appellants also claim error in the giving by the District Court of the following instructions:

1. "The law makes no distinction between taxable income which is lawful and that which is unlawful in determining liability for income taxes, with the exception that embezzled funds are not to be considered."

2. "It is reasonable to infer that a person ordinarily intends the natural and probable consequences of acts knowingly done or knowingly omitted. So unless the contrary appears from the evidence, the jury may draw the inference that the accused intended all the consequences which one standing in like circumstances and possessing like knowledge should reasonably have expected to result from any act knowingly done or knowingly omitted by the accused."

In considering the first quoted instruction, we note that under decisions of the Supreme Court embezzled funds would not constitute taxable income during the tax years in question. James v. United States, supra; United States v. Wilcox [46-1 USTC ¶9188], 327 U. S. 404 (1946); Beck v. United States , supra.

While appellants proffered no instruction on the subject of embezzlement, they contend that the instruction given was ambiguous in that it does not conclude whether embezzled funds are to be considered nontaxable or taxable income, and that the jury should have been clearly instructed that "embezzled funds are not to be considered taxable income." We find no prejudicial error. While more precise language might have been employed, we believe that the meaning conveyed by the instruction was the illegal income, unless derived from embezzlement, is taxable income. We find in the record slight, if any, evidence that appellants embezzled any funds from Bell . In fact, their testimony is that funds entrusted to them by Bell , and used for personal purposes, was with Bell 's knowledge and permission.

In respect to the second quoted instruction, appellants contend:

"This instruction advises the jury that they may find the accused guilty from the the circumstances that they filed income tax returns in which their income was understated, unless the contrary appears from the evidence.

"Appellants contend that in this type of prosecution intent is an essential element to be alleged and proved as a fact, and may not rest on a presumption. It is for the jury, under all the circumstances, to say whether the intent required by the statute to constitute the offenses existed in the minds of the accused. The charge challenged by appellants withdraws from the jury the consideration of whether the appellants intended to evade their income tax liability."

[No Reversible Error in Instructions]

It is to be noted that the court did not instruct that unlawful intent must be presumed from the fact that they filed income tax returns in which their income was understated. The instruction makes no reference to a presumption relating to intent, but speaks only of permissible inferences. The instruction cannot be considered in isolation but must be considered in context with all of the instructions. We have reviewed the instructions given and among them note the following:

"[s]pecific intent must be proved before there can be a conviction";

"Specific intent, as the term itself suggests, requires more than a mere general intent to engage in certain conduct.";

"A person who knowingly does an act which the law forbids, or knowingly fails to do an act which the law requires, intending with bad purpose either to disobey or to disregard the law, may be found to act with specific intent.";

"An act or failure to act is done knowigly if done voluntarily and purposely, and not because of mistake or inadvertence or other innocent reason.";

"An essential element of the offense with which the defendants are charged in each count is willfulness. An act is done 'willfully' if done voluntarily and purposely and with the specific intent to do that which the law forbids. Willfulness implies bad faith and evil motive. You must find some element of evil motive and want of justification on the part of the defendant.";

"With regard to the offense charged in the counts of the Indictment, if you do not find that specific and positive purpose and and evil intent to evade a tax obligation known to be due on the part of the defendants has been proved by the Government beyond a reasonable doubt, then you must find the defendants not guilty.";

and that an essential element required to be proved in order to establish the offense charged was the fact that the defendants in some manner willfully attempted to evade or defeat the additional tax "with the specific intent to defraud the Government of such additional tax." We find no neversible error in the giving of the instruction. See Bateman v. United States [54-1 USTC ¶9341], 221 F. 2d 61 (9th Cir. 1954); Baker v. United States, 310 F. 2d 924 (9th Cir. 1962), C. D. 372 U. S. 954.

Appellants contend that the testimony of the four law enforcement officers, above summarized, was too meager to establish a likely source of the unreported increases in net worth, and despite its relevancy should not have been admitted into evidence over appellants' objection because of its prejudicial character in showing appellants were engaged in an illicit activity. As previously noted, we are satisfied that there is abundant evidence in the record of a likely source from which the jury could reasonably find that the net worth increases sprang. Appellants concede that during the course of the trial the District Judge repeatedly admonished the jury that they were not to consider whether appellants were engaged in some illegal activity. Attention is also called to the fact that the jury was instructed not to consider, in their deliberations, whether the sale of the "pep" pills was legal or illegal.

We believe that the testimony was relevant, pertinent and highly probative in establishing the taxable nature of the annual increases in net worth, and that the government is not precluded from showing a likely source of the increase in a net worth prosecution because the proof establishes criminal activity on the part of the accused. United States v. Johnson [43-1 USTC ¶9470], 319 U. S. 503 (1943); Rutkin v. United States , supra; United States v. Brott [59-1 USTC ¶9276], 264 F. 2d 433 (2nd Cir. 1959), C. D. 359 U. S. 985.

On redirect examination by the government, one of the law enforcement officers was asked the question:

"Q. Of your personal knowledge, though, can someone, a member of the jurors, (sic) engage in the sale of these drugs in the State of California ?

"A. Not legally."

Appellants contend that the question and answer were not relevant to establish a "likely source" and that the effect of the testimony was to prejudice the jury and deny them a fair trial. Appellants made no objection to the question at the time it was asked, nor did they move to strike the answer. Neither did they request a limiting instruction as to the purpose for which such evidence might be considered by the jury. On its own volition the District Court informed the jury that "this evidence has been offered to show a likely source of income. Whether there was any crime committed or not you are not concerned with." Under these circumstances and the context of the entire case, we are of the view that no prejudice resulted to the appellants.

[Hearsay Evidence]

Finally, appellants object to the admission into evidence, over their objection of hearsay, of the testimony of the law enforcement officer participating in the search of appellants' apartment in June 1959. During the search the telephone rang. In the presence of both appellants, the officer answered the telephone. He testified that he heard a male voice ask,

`Is this Dave?'

I said, 'Yes. What can I do for you?'

The male voice said, 'I want to pick up a half.'

I said, 'A half of what, a half a roll?'

The male voice said, 'Hell, no. I want to pick up a half bottle of bennies.'" [a type of "pep" pill].

Appellants contend that the testimony received was hearsay, highly prejudicial to them, and operated to deny them a fair trial. The government contends that the evidence was admissible "as competent circumstantial evidence showing the nature of the premises and that some or all of the persons found therein were engaged in the business of selling pills." In Reynolds v. United States [55-2 USTC ¶49,146], 225 F. 2d 123 (5th Cir. 1955) C. D. 350, U. S. 914, the defendants were convicted on five counts, each charging a gambling tax offense by engaging in the business of accepting wagers as defined in 26 U. S. C. §3290, in violation of 26 U. S. C. §2707(c), as made applicable by 26 U. S. C. §3294(c). At page 131, it is stated:

"The evidence of the telephone conversations received by the raiding officers was competent, we think, as circumstantial evidence going to show the operation of a lottery."

[Conclusion]

While not free from doubt, we think that the testimony of the officer was a relevant circumstances tending to show that the premises was a place wherein the occupants were engaged in selling "pep" pills. In any event we are unable to agree in the context of the entire trial the testimony was of such gravity as to constitute reversible error.

The judgment of conviction is affirmed.

 

 

[65-2 USTC ¶9498]Otto W. Heider, Sr., and Irene E. Lawrence, Appellants v. United States of America , Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 19,334, 347 F2d 695, 6/15/65, Affirming District Court, 64-1 USTC ¶9165, 231 F. Supp. 223

[1954 Code Sec. 7201 and 1939 Code Sec. 145(b)]

Tax evasion: Fraudulent returns: Reconstruction of income: Net worth method.--The district court's findings that the taxpayer was guilty of tax evasion were upheld. Reconstruction of the taxpayer's income by the net worth method of accounting disclosed that the taxpayer had income which had not been reported. The district court found that the taxpayer willfully failed to divulge taxable income.

William E. Dougherty, 618 S. W. 5th Ave., Portland, Ore., H. Myron Gleason, 710 S. W. Third Ave., Portland, Ore., for appellants. Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph M. Howard, Norman Sepenuk, Jack M. Cotton, Department of Justice, Washington, D. C. 20530, Sidney I. Lezak, United States Attorney, Charles H. Habernigg, Assistant United States Attorney, Portland, Ore., for appellee.

Before MERRILL and KOELSCH, Circuit Judges, and JAMESON, District Judge.

MERRILL, Circuit Judge:

In this appeal from conviction of tax evasion appellants' general position is that the District Court [64-1 USTC ¶9165] failed to exercise that care and restraint which is necessary if it is to escape the pitfalls inherent in the net-worth method of establishing guilt of this crime. Holland v. U. S. [54-2 USTC ¶9714], 348 U. S. 121, 129 (1954). We cannot agree. The case was tried to the court without jury and the court, in a written opinion, has carefully considered the disputed aspects of the case. Before us appellants renew many of the contentions made below which were dealt with by the District Court. Upon all of these we agree with the District Court for the reasons set forth in its opinion.

Appellants' principal contention is that the evidence establishes the facts to be contrary to the factual determinations of the District Court as incorporated in its written opinion. Specifically, appellants refer to the facts respecting their intent to defraud, the opening net-worth statements, the River Bend garage inventory, prepaid insurance, the "cash hoard," the Sheridan Church loan, and certain loans receivable. In general, appellants attack the sufficiency of proof respecting appellant Lawrence . In all of these respects we conclude from the record that the findings are not clearly erroneous.

Appellants also contend that the court erred in failing to give due consideration to an asserted failure of proof by the United States in certain other respects. We find no merit in these contentions. As to the establishing of "middle balances" as of December 31, 19 53, there is evidence that these balances were based upon the same sources of information as were opening (December 31, 1952), and closing (December 31, 1954), balances which appellants had stipulated were correct. As to static real estate and certain personal chattels, it appears that the balances of these assets remained constant throughout the period, and that if inaccuracies existed they would offset themselves and eliminate prejudice.

We find no basis whatsoever for appellants' remaining contentions that the court prejudged the question of intent and shifted the burden of proof to appellants; that there was undue delay in presenting charges to the Grand Jury and in bringing appellants to trial; that they were not provided with an adequate and timely bill of particulars.

Judgment affirmed.

 

 

[65-1 USTC ¶9163] Rob ert J. Talik, Appellant v. United States of America , Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 19,200, 340 F2d 138, 1/6/65, Affirming unreported District Court decision

[1954 Code Secs. 446 and 7201]

Evasion of tax: Reconstruction of income: Net worth increase method: Evidence.--A criminal conviction for evasion of income tax, based on the net worth method of reconstructing income, was upheld where the taxpayer failed to introduce any evidence at the trial and failed to show any definite error in the government's computation.

Lawrence P. D'Antonio, Johnson, Darrow, D'Antonio, Hayes & Morales, Valley National Bldg., Tucson, Ariz., for appellant. C. A. Muecke, United States Attorney, John E. Lindberg, Assistant United States Attorney, Tucson, Ariz., for appellee.

Before MADDEN, Judge of the Court of Claims, and HAMLEY and KOELSCH, Circuit Judges.

MADDEN, Judge:

In the United States District Court for the District of Arizona, the appellant was tried before a jury and found guilty as charged in all three counts of a three-count indictment. The indictment was for wilfully attempting to evade federal income taxes of himself and his wife for the years 1956, 1957 and 1958, in violation of section 7201 of title 26 of the United States Code. The district court entered judgment upon the verdict of guilty, and sentenced the appellant to imprisonment for eight months. This court has jurisdiction of the appeal under section 1291 of Title 28 of the United States Code.

The Government's method of proving that the appellant's taxable income was larger than that which he reported on his income tax returns for the years in question was the "net worth" method. This method, of course, consists in showing that the net worth, on a cost basis, of the assets which a taxpayer owned at the end of a taxable year is greater than the net worth at the beginning of the year, and then adding to the difference the non-tax-deductible expenditures of the taxpayer made during the year. The sum of these two figures is treated as taxable income unless, by gift, devise, inheritance or other non-taxable acquisition, the taxpayer's net worth has been increased during the year.

At the trial the Government presented evidence purporting to prove substantial increases in the appellant's net worth during each of the years in question. The appellant presented no evidence at all. He does, however, take strenuous exception to the propriety of some of the Government's evidence, and to the conclusions which the jury and the district court drew from it.

[Net Worth Increase Method]

In determining whether there has been, in a taxable year, an increase in net worth, the net worth at the end of the preceding taxable year is the starting figure. The Government's computation credited the appellant with a net worth of $48,694.52 on December 31, 1955. From that starting figure, the Government's computation of an increase in net worth during the year 1956 was made. The $48,694.52 figure included, along with various other assets, $18,523.81 in bank deposit accounts. It also included $2,429.02 of "cash on hand." The Government's expert who made up, from all the evidence in the whole case presented by the other Government witnesses, a brief summation, and who testified from that summation, stated that there was no evidence in the case to support a figure of $2,429.02 of cash on hand; that the figure was merely an assumption on his part; that he had made the assumption because there was no evidence of cash on hand at the end of 1955; that there was evidence of cash on hand of $2,429.02 at the end of 1956, of $961.89 at the end of 1957, and of $1,403.09 at the end of 1958; there was testimony by the appellant's accountant, based upon written communications to him from the appellant, that the cash on hand figures for the ends of the years 1956, 1957 and 1958 were as recited above, and that "these figures are reasonable and they are within what would be reported by Mr. Talik." The accountant had no figure for the end of 1955. The Government's expert witness assumed, in the absence of any evidence to the contrary, that the cash on hand at the end of 1955 was no more than the highest figure in any of the three following years, and he used that highest figure, the one for the end of 1956, in his computation. If the figure was too high, that was to the advantage of the appellant, since it reduced the amount by which his net worth increased in 1956. We think it was necessary for the Government's witness to make some inference, in the circumstances, and that the inference which he made was not unfair to the appellant.

The Government presented evidence of a "likely source" ¹ of the money which increased the assets of the appellant during the years in question, viz., the restaurant business of the appellant. It showed that the appellant kept his books and records in such a manner that they could not be subjected to verification. ² It showed that the only explanation given by the appellant during the investigation of his tax affairs for the increase in his net worth was a false explanation which included an attempt by him to induce a relative to alter a note owing by the relative to the appellant from $3,000 to $30,000.

[Joint Returns]

The fact that the income tax returns involved in this case were joint returns of appellant and his wife rather than returns of the appellant alone requires some discussion in this opinion. The returns for the years 1956 and 1957 were joint returns of the appellant and his then wife, Marie Talik. Marie Talik died in 1958 and in that year the appellant married Gwen Talik. The tax return for 1958 was a joint return of the appellant and Gwen Talik. The appellant complains that the summation by the Government's expert, hereinbefore discussed, was headed, " Rob ert Talik," rather than, " Rob ert Talik, Marie Talik and Gwen Talik." The appellant's point is that in determining the assets at the beginning of each tax year it would be necessary, since these were joint returns, to include, along with the assets of Rob ert Talik, those of Marie Talik at the beginning of the years 1956 and 1957, and of Gwen Talik at the beginning of the year 1958. The expert witness explained his use of the name of Rob ert Talik alone as the heading of his summation on the ground that this was Rob ert Talik's lawsuit, in which his wives were not involved. That explanation was satisfactory to the district court and the summation remained in that form. The substantive question, of course, is whether the summation in fact took account of the assets, if any, owned by Marie Talik and Gwen Talik at the beginning of the taxable years in which they were included in the returns.

As we have said, the appellant presented no evidence at all. The Government evidence of assets at the end of the year 1955 (the beginning of 1956) included $18,523.81 on deposit in joint bank accounts in the names of appellant and Marie Talik. Thus those starting assets of Marie Talik were included in the computation. If there were others, there was no evidence of them and no leads had been given as to where to look for them. We can see no reason for hypothesizing them out of nothing. To require the Government, without leads furnished by the taxpayer, to negate every possible source of non-taxable income would be to require the impossible. Holland v. United States, supra, at p. 138; Olender v. United States, CA 9, [56-2 USTC ¶10,077] 237 F. 2d 859, 865; Vloutis v. United States , CA 5, [55-1 USTC ¶9262] 219 F. 2d 782, 791.

Marie Talik died on April 15, 19 58. The appellant was the admin istrator of her estate, which consisted only of her community interest in the equity which she and appellant had in their residence. Her interest was appraised, in the probate proceedings, at $3,338.13. That interest passed to the appellant, and was treated, in the Government's accounting in this case, as a non-taxable acquisition of the appellant.

Gwen Talik became the appellant's wife in 1958. She had been a waitress in the appellant's restaurant before their marriage. If she, at their marriage, brought in assets which were present in the net worth of the appellant and herself at the end of 1958, and which, therefore, should not be counted as taxable income in 1958, there was no evidence of that fact at the trial, and no lead had been given which pointed toward such a fact. The evidence did show that all of the money which went into the joint bank account of the appellant and Gwen, after their marriage and the inclusion of her name in the account, was deposited by the appellant.

[Joint Accounts]

A large item which the Government's expert allocated in his computation as an asset to be taken into account in determining whether or not there had been an increase in net worth in 1958 was a savings and loan association account in the amount of $40,340.63, a joint account of appellant and his daughter, Sharon Talik, then ten years old. It was opened on April 11, 19 58, by a deposit of $5,485.11, which was on that day transferred from another account containing a balance of that exact amount, which other account was in the name of Rob ert and Marie Talik. Also on April 11, 19 58, $18,989.93 was deposited in the Rob ert and Sharon account. That money had been withdrawn on that day from a joint account of " Rob ert or Marie" Talik, in another savings and loan association. During the rest of the year 1958, further deposits were made in the Rob ert and Sharon savings account, bringing the balance at the end of 1958 to a total amount of $40,340.63.

The appellant urges that it was improper for the Government to count in the $40,340.63 as relevant to the 1958 tax return of the appellant, without determining a starting figure for the child Sharon 's interest in the account. In his testimony, the Government's expert justified his inclusion of the entire amount in the assets of the appellant by saying that either the joint account belonged to the appellant, in which case it was properly includible in his assets, or that whatever part of it belonged to Sharon had been given to her by her parents, and would be a personal expenditure by them which would be added to the year's increase in assets in computing taxable income by the net worth method.

The evidence does show, as to the opening day deposits of $5,485.11 and $18,989.93 in the Rob ert and Sharon account, that the money came from the child's parents. We need not suppose that she purchased her interest in the account rather than receiving it as a gift from her parents. As to the additional deposits in the account after April 11 and down to December 31, 19 58, there is no evidence as to where they came from. The appellant furnished no lead to the Government's investigators as to any source for this money other than himself. It would have been extraordinary for any donor to the child, other than the father, to have put the child's gift into an account from which the father could have drawn it out and, so far as appears, lawfully used it as his own. We think that, upon either of the alternative theories presented by the Government's expert, the $40,340.63 in the Rob ert and Sharon Talik joint account was properly taken into account in his computation.

[Conclusion]

It was permissible for the Government's expert to infer that when Kautenberger received a loan of $6,000 by a check from a broker who was in the mortgage loan business and gave his note for $6,000 to Rob ert and Marie Talik, the money for the loan to Kautenberger had been furnished to the broker by the Taliks.

The appellant complains of some instructions given by the district court, and of its failure to give other instructions requested by the appellant. We find no error in regard to instructions.

The judgment of the district court is affirmed.

¹ Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 138.

² United States v. Calderon [54-2 USTC ¶9712], 348 U. S. 161, 166.

 

 

[62-2 USTC ¶9624] United States of America , Appellee v. George W. Vardine, Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 27269, 305 F2d 60, 7/11/62, Unreported District Court decision rev'd in part and aff'd in part

[1954 Code Sec. 7201 and 1939 Code Sec. 145(b)]

Wilful evasion: Felony conviction: Proof by net worth reconstruction: Assignment of errors: Evidence: Instructions.--The court affirmed taxpayer's conviction for the wilful evasion of taxes as to 1954 but reversed the conviction as to 1953 because of prejudicial error. There was no error: (1) in the court's leaving the issue of wilfulness to jury where taxpayer claimed bookkeeping errors and an improper bad debt deduction were made without his knowledge by his attorney; (2) in failure of government agent to investigate claim that proceeds of unrecorded checks were used to pay business expenses since the net worth computation would be unaffected in any event; (3) in disallowing proof of accounts payable by taxpayer since he reported income on the cash and not the accrual method; and (4) in leaving the issues regarding cash on hand, ownership of certain securities, and nontaxable income from an alleged insured casualty loss to the jury. There was prejudicial error in the court's failure to instruct the jury, in considering the net worth reconstruction, to reduce taxpayer's year-end checking account balances by the amount of outstanding checks and to consider new assets as the sum of the basis of traded-in assets plus cash paid instead of the full cost of the new assets.

Dante M. Scaccia, Assistant United States Attorney, Syracuse, N. Y. (Justin J. Mahoney, United States Attorney, Albany, N. Y., on brief), for appellee. Louis Lombardi, 34 Jay, Schenectady, N. Y. (Harold E. Blodgett, 408 State St., Schenectady, N. Y., on brief), for appellant.

Before LUMBARD, Chief Judge, WATERMAN and HAYS, Circuit Judges.

LUMBARD, Chief Judge:

The defendant was tried before Judge Foley and a jury on two counts of wilfully evading personal income taxes in 1953 in violation of §145(b) of the Internal Revenue Code of 1939 and in 1954 in violation of the successor section, §7201 of the Internal Revenue Code of 1954. The government used the net worth method to prove the amount of unreported income, and the jury convicted on both counts. Judge Foley sentenced the defendant to six months' imprisonment on each count to run concurrently and fined him $2,000 on each count. On appeal the defendant raises, inter alia, the sufficiency of the judge's charge to the jury, the adequacy of the evidence, and numerous alleged trial errors. We believe that the charge was not erroneous and that the evidence of guilt was adequate. We find, however, two specific errors as to the admission and use of evidence. Since these were prejudicial as to the indictment year 1953 but not as to 1954, we reverse the conviction as to 1953 and affirm as to 1954.

The defendant operated an industrial laundry business under the name of Star Overall Cleaning & Supply Company (Star) in Schenectady , New York , as a sole proprietorship. Star rented and laundered overalls and uniforms. In some cases the individual employee who wore the overalls or uniform paid Star's charges and in others his employer paid. Star also rented and laundered industrial wiping cloths. The government alleges that the defendant obtained unreported income by cashing some of the checks received from Star's customers without entering them on Star's books or reporting the income on his federal income tax return.

A second alleged source of unreported income is undeclared dividends. In the years 1948 to 1953 the defendant reported no dividends, and in 1954 he reported $255 of dividends. ¹ The government agent testified that according to financial reports the defendant should have received dividends in the years 1950, 1951, 1952, and 1953 in the amounts of $965, $1,674, $2,023, and $1,596, respectively.

The government submitted a summary statement of the defendant's assets, liabilities, and personal expenses, ² which showed net worth bulges, i.e., an excess of income computed on the net worth method over income reported on annual federal income tax returns, for the calendar years 1949 through 1954. The net worth bulges for the two indictment years, 1953 and 1954, were $13,922 and $20,475, respectively, computed as follows:

                                                     1953            1954

Taxable income computed on

the net worth method ......................         $18,148         $27,440

Taxable income reported on defendant's

returns ...................................           4,226           6,964

Unreported income .........................         $13,922         $20,475

The bulges for the four previous years, 1949 through 1952, totaled $47,725 and were admitted only as proof of wilfulness. See, e.g., United States v. Ford [56-2 USTC ¶9823], 237 F. 2d 57, 60, 65, 67 (2 Cir. 1956).

The principal defense was that the defendant neither handled Star's books nor made out his own tax returns, and that unreported rental income was due to the default of Star's bookkeeper while unreported dividends were due to the default of the defendant's attorney, and that both were without defendant's knowledge. However, Benjamin Segal, the attorney who prepared defendant's 1948 through 1953 tax returns, testified that he had asked the defendant each year whether he had received any dividends, and the defendant had replied no. The trial judge correctly left the issue of wilfulness to the jury. See United States v. Schenck [42-1 USTC ¶9363], 126 F. 2d 702, 706-07 (2 Cir. 1942), cert. denied, 316 U. S. 705 (1942).

The defendant offered two reasons why he had nonfraudulently understated his taxable income on his 1953 and 1954 returns. He had taken a deduction for $2,700 for bad debts on his 1953 income tax return. Since he reported income only as it was received, i.e., was on the cash basis, he was not entitled to such a deduction. If the defendant took this deduction erroneously but not fraudulently, the 1953 bulge would have been explained consistent with lack of wilfulness to the extent of $2,700.

The second reason was explained by a certified public accountant whom the defendant had retained to examine his books in preparation for trial. He testified that certain income and expense items had been erroneously entered. The net effect of these errors was to reduce the 1953 and 1954 net incomes shown on the defendant's books approximately $5,000 and $6,800, respectively, below their actual levels. Since the defendant's tax returns were prepared from his books of account, these errors were reflected on his tax returns. If the errors were made by the defendant's bookkeeper without defendant's knowledge, the bulge would have been explained consistently with lack of wilful tax evasion to the extent of $5,000 in 1953 and $6,800 in 1954.

Both as to the bad debt deduction and as to the bookkeeping errors, the trial judge was correct in leaving the issue of wilfulness to the jury. And it was, therefore, proper for the government to resolve these issues against the defendant in preparing its summary of the defendant's net worth. The defendant could have introduced his own summary, resolving these factual questions in his favor. Scanlon v. United States [55-1 USTC ¶9508], 223 F. 2d 382, 391 (1 Cir. 1955).

I. On appeal the defendant claims that he used most of the money procured from cashing the unrecorded rental checks to pay business expenses which were not deducted on his income tax returns, and thus that the unreported income and expenses offset each other. The failure of the government agent to investigate this claim was, the defendant argues, reversible error. We disagree.

When a taxpayer furnishes leads which might reasonably explain his net worth bulge inconsistent with guilt, the government must investigate these leads or the trial judge should consider the taxpayer's explanations as true. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 135-36 (1954). This leaves the burden of proof of tax evasion on the government, putting only the burden of production on the defendant. Id. at 137-39. However, if the defendant had actually expended the unreported income to pay unreported deductible expenses, he would not have had the cash on hand at the year end and his net worth would not have been increased. Thus, the defendant's claim does not tend to explain his net worth bulge.

The government had, in fact, introduced evidence of the unreported checks not as proof of the defendant's bulge, but only as proof of his intent, id. at 139, and as proof of a likely source of unreported taxable income, id. at 138-39. Rather than requiring the government to prove the negative proposition that the defendant had no other deductions, it is reasonable to require the defendant, if he wishes to disprove intent and likely source, to bear the burden of going forward when he alleges that he had additional deductions not claimed on his income tax return. See Clark v. United States [54-1 USTC ¶9291], 211 F. 2d 100, 103 (8 Cir. 1954), cert. denied, 348 U. S. 911 (1955); United States v. Link [53-1 USTC ¶9230], 202 F. 2d 592, 593-94 (3 Cir. 1953); United States v. Bender [55-1 USTC ¶9142], 218 F. 2d 869, 871-72 (7 Cir. 1955), cert. denied, 349 U. S. 920 (1955); United States v. Lennon [57-2 USTC ¶9785], 246 F. 2d 24, 27 (2 Cir. 1957), cert. denied, 355 U. S. 836 (1957).

II. The defendant also contends that the trial judge erred in refusing to allow proof of defendant's accounts payable for overalls and uniforms purchased which would have reduced the defendant's net worth. The trial court was correct. Taxpayers may elect various methods of accounting for use on their income tax returns. Although a taxpayer's total taxable income over the long run should be the same regardless of the method of accounting selected, in any given year a taxpayer on the accrual basis may have a substantially different amount of taxable income than if he had chosen the cash basis. The purpose of a net worth computation is to check the accuracy of the amount of income reported by the taxpayer. Thus, if the taxable income reported on his return is correct, and if no errors creep into the asset, liability, and expenditure figures used to ascertain successive years' net worth, the income computed on the net worth basis and that reported on his tax return should be the same. This is possible only if the figures used in computing net worth are keyed to the taxpayer's method of accounting. If a taxpayer disregards his accounts payable in reporting income on his annual tax return, i.e., reports as a cash basis taxpayer, then the government in computing his net worth in order to check the income reported on his tax return must also disregard these amounts. Whether this computation reflects net worth as accountants define it, i.e., the excess of the value of assets over liabilities, is irrelevant, United States v. O'Connor [60-1 USTC ¶9163], 273 F. 2d 358, 361 (2 Cir. 1959), since the government is not seeking to determine the taxpayer's true worth but rather to verify the accuracy of his income tax return for a particular year.

An examination of the defendant's tax returns and books of account discloses that he reported sales and purchases on the cash method of accounting, disregarding accounts payable for purchased overalls and uniforms. Therefore, the trial court correctly excluded proof of such payables in reconstructing his taxable income on the net worth method. See Clark v. United States [54-1 USTC ¶9291], 211 F. 2d 100, 105 (8 Cir. 1954), cert. denied, 348 U. S. 911 (1955); Scanlon v. United States [55-1 USTC ¶9508], 223 F. 2d 382, 389 (1 Cir. 1955); Leeby v. United States [51-2 USTC ¶9497], 192 F. 2d 331, 334 (8 Cir. 1951).

III. The defendant raises five claimed factual mistakes in the government's net worth summary. However, on each the trial judge properly left the conflicting testimony to the jury and properly permitted the government to base its net worth summary on its version of the facts. See Smith v. United States [56-2 USTC ¶9830], 236 F. 2d 260, 263-64 (8 Cir. 1956), cert. denied, 352 U. S. 909 (1956); United States v. O'Connor [56-2 USTC ¶9956], 237 F. 2d 466, 467-75 (2 Cir. 1956). Only three of these alleged errors require discussion.

The government listed the defendant's cash on hand at December 31, 19 48, the starting point for the government's net worth summary, at $10,000 and the cash on hand at the end of each year from 1949 to 1954 at $300. The government based its figures on an oral admission the defendant had made to a revenue agent. The agent testified that the defendant had said during an interview that before 1948 his mother had given him approximately $10,000 which he retained in cash until 1949 when he deposited the remainder in a savings account, and thereafter kept only $200 to $300 on hand. Since the defendant testified at trial that these figures substantially understated his cash on hand, there must be corroborating evidence to make a case for the jury. Smith v. United States [54-2 USTC ¶9715], 348 U. S. 147 (1945); United States v. Calderon [54-2 USTC ¶9712], 348 U. S. 160 (1954). The record is replete with evidence corroborating the defendant's admission that he did not have large amounts of cash on hand after December 31, 19 49. The defendant periodically borrowed money to meet payrolls and other indebtedness. Furthermore, there frequently were judgments outstanding against him during this period. These facts are sufficient to permit the question of cash on hand to go to the jury. See Friedberg v. United States [54-2 USTC ¶9713], 348 U. S. 142 (1954); United States v. Sclafani [59-1 USTC ¶9357], 265 F. 2d 408, 411-12 (2 Cir. 1959), cert. denied, 360 U. S. 918 (1959); United States v. Ford [56-2 USTC ¶9823], 237 F. 2d 57, 62-63 (2 Cir. 1956). See also Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 132-34 (1954).

The defendant testified that he owned $3,800 of securities purchased through Bache & Co. that were not shown on the summary sheet and that $3,000 of his 1952 cash inflow was due to a casualty loss and thus was non-taxable income. The government agent testified that he knew nothing of these two claims. As previously discussed, the government must investigate all of the taxpayer's reasonable explanations of his net worth bulge inconsistent with guilt or the trial judge may consider the explanations as true. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 135-36 (1954). Thus if Vardine told the government agents about the securities and the casualty loss a sufficient period before the trial to permit investigation and they did not follow up these leads, the trial judge should have assumed their validity and required the government to reflect them on their summary statement. Scanlon v. United States [55-1 USTC ¶9508], 223 F. 2d 382, 388-89 (1 Cir. 1955). However, the defendant introduced no evidence that he gave these leads to the government before trial. Therefore, Judge Foley correctly left these issues to the jury.

IV. The defendant presses two claims which have merit. As proof of the balance in defendant's checking account the government introduced the amount shown on the bank's records on December 31 of each year. The defendant then introduced evidence that he had checks outstanding at the end of the years 1952, 1953 and 1954. The trial judge left it up to the jury whether to deduct these outstanding checks from the defendant's year-end checking account balance, and the government, on their net worth summary, showed the balance as it stood on the bank's books. This was error. When a cash basis taxpayer delivers his check without any limitation on the payee's ability to cash it immediately, the taxpayer is entitled to a deduction at the time of delivery. Clark v. Commissioner [58-1 USTC ¶9361], 253 F. 2d 745 (3 Cir. 1958). Therefore, the trial court should have instructed the jury as a matter of law to reduce the defendant's year-end checking account balance by the amount of the outstanding checks and the government to follow suit on its net worth summary statement. See United States v. O'Connor [56-2 USTC ¶9956], 237 F. 2d 466, 475 (2 Cir. 1956); United States v. Altruda [55-2 USTC ¶9592], 224 F. 2d 935, 942 (2 Cir. 1955). The amount of outstanding checks were as follows:

December 31, 19
52
 ....         $ 417.

December 31, 19
53 ....         1,824.

December 31, 19
54 ....           309.

These figures would have reduced the defendant's 1953 net worth bulge by $1,407 and increased his 1954 bulge by $1,515. The government contends that since the net effect of these errors favors the defendant, there has been no harm. But since there are two separate indictment years, each must be considered separately.

The other error concerns machinery and trucks. During 1953 and 1954 the taxpayer purchased new machinery and trucks for his business. As part payment of the purchase price he traded in used machinery and trucks. In four instances the trade-in allowance was larger than his adjusted basis in the assets traded-in. The Internal Revenue Code provides that such paper gains on a trade-in of old for new equipment shall not be recognized. Internal Revenue Code of 1954, §1031; Internal Revenue Code of 1939, §112(b)(1). Gain on the traded-in asset is postponed by taking as the basis of the new asset the basis of the old asset plus any additional cash paid. 1954 Code §1031(d); 1939 Code §113(a)(6). The trial judge left it to the jury whether to accept the new assets at their full selling price or at the lower price that would be computed by excluding the gain on the trade-in and permitted the government to show these assets at the higher value on their net worth summary. This was error. The government argues that the defendant "waived" his rights under §1031 of the 1954 Code and its predecessor by erroneously taking depreciation deductions on the higher basis. But §1031 and its predecessor are mandatory, not optional; a taxpayer cannot elect not to use them. Therefore, the trial judge should have instructed the jury as a matter of law to accept the lower basis for these assets and directed the government to alter its net worth computation accordingly. See United States v. O'Connor [56-2 USTC ¶9956], 237 F. 2d 466, 475 (2 Cir. 1956); United States v. Altruda [55-2 USTC ¶9592], 224 F. 2d 935, 942 (2 Cir. 1955). These errors caused the defendant's net worth bulge to be overstated by $592 in 1953 and $761 in 1954.

The total effect of the two errors can be summarized as follows:

                                        1953                  1954

                                                         [TEH] * $

Outstanding checks ..........         $1,407               (1,515)

Trade-ins ...................            592                   761

Total errors against the

defendant ...................         $1,999       [TEH] * $ (754)

* Figures in parenthesis are favorable to the defendant.

While the 1953 error of $1,999 is small in comparison to the 1953 bulge of $13,922 shown on the government's net worth summary, it is impossible to tell how many of the factual questions the jury decided in the defendant's favor. In view of the other items in dispute, ³ the $1,999 error might, therefore, have accounted for the entire 1953 bulge as it was found by the jury or it might have been sufficiently material in relation to the bulge found by the jury so that we should not second guess whether they would have convicted on this count. See Flemister v. United States [58-2 USTC ¶9904], 260 F. 2d 513, 517 (5 Cir. 1958).

The two errors did not harm the defendant as to 1954, but on the contrary, reduced the net worth bulge shown on the government's summary below what it should have been. Although the jury might have been relying on the apparent 1953 bulge, which we have found to be at least partially erroneous, as proof of wilfulness in 1954, the other proof of defendant's intent was sufficient to preclude reversal as to 1954. The fact that defendant consistently failed to report his dividend income and cashed Star's checks without recording them on the books or reporting them on his return coupled with the consistent net worth bulges for the four years preceding the prosecution years make the $1,999 error in 1953 insignificant in proving wilfulness as to 1954. Cf. United States v. Sclafani [59-1 USTC ¶9357], 265 F. 2d 408, 412-13 (2 Cir. 1959), cert. denied, 360 U. S. 918 (1959); Scanlon v. United States [55-1 USTC ¶9508], 223 F. 2d 382, 388-89 (1 Cir. 1955).

Affirmed as to 1954 and reversed as to 1953.

¹ Since the defendant's 1954 return was not filed until 1958, three years late, government agents were already checking his 1953 return when the 1954 return was prepared.

² As Judge Foley explained in his charge, such a statement is not evidence but only a convenient summary of the evidence for the jury's use.

³ The defendant testified that the bad debt deduction on his 1953 tax return and the errors in his books in 1953 were not wilful; if believed, this would account for $7,700 of the bulge.

 

 

[62-1 USTC ¶9139] United States of America , Plaintiff-Appellee v. Eugene Dempsey Burgin, Defendant-Appellant

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 14604, 297 F2d 63, 12/16/61, Affirming an unreported District Court decision

[1954 Code Sec. 7203]

Wilful failure to file return: Net worth and expenditures method: Taxpayer's admissions corroborated by independent evidence.--The Court of Appeals upheld taxpayer's conviction for wilfully failing to file tax returns for 1957 and 1958. The Court found that the Government, who was using the net worth method to determine taxpayer's income, had presented sufficient independent evidence to corroborate taxpayer's admissions, made to Internal Revenue Agents, of being a "fence" operating gambling games and conducting a bail-bond business.

Rob ert D. Simmons, Assistant United States Attorney, Federal Bldg., Louisville, Ky. (William E. Scent, United States Attorney, Rob ert D. Simmons, Assistant United States Attorney, Louisville, Ky., on brief), for plaintiff-appellee. John R. S. Brooking, Hughes, Clark & Burke, Covington Trust Bldg., Covington, Ky. (Cobb & Brooking, 708 Coppin Bldg., Covington, Ky., on brief), for defendant-appellant.

Before SIMONS, MARTIN and WEICK, Circuit Judges.

PER CURIAM:

Appellant was convicted by verdict of a jury on two counts, charging that he wilfully and knowingly failed to file income tax returns with the appropriate officer for the calendar years 1957 and 1958, in violation of Section 7203, I. R. C. (1954). 26 U. S. C. A., Section 7203. He was sentenced by Judge Shelbourne to six months' imprisonment on each count, the sentences to run concurrently.

Two Internal Revenue Agents testified, in effect, that the appellant had admitted to them that, during the years in question, he had operated "Bust Out" gambling games [in which crooked dice and marked cards are used]; and that he had been a "fence," that is he had dealt in the purchase and sale of stolen goods. He had also conducted a bail-bond business during a portion of one year. However, he did not testify at his trial.

On this appeal, it is urged on behalf of appellant that, in a criminal prosecution for wilful failure to file income tax returns, the prosecution--when using the net worth and expenditures method--must corroborate the extrajudicial admissions of the defendant by independent evidence as to the defendant's sources of taxable income.

We think that, on the record here, there was sufficient corroborating evidence to meet the standards required by Smith v. United States [54-2 USTC ¶9715], 348 U. S. 147; United States v. Calderon [54-2 USTC ¶9712], 348 U. S. 160; and United States v. Massei [58-1 USTC ¶9326], 355 U. S. 595. Receipts relating to his bail-bond business, examined by investigators, established the defendant's admission that he had been in the bail-bond business during the year 1958. Also, his purchased of expensive items (including a boat and some automobiles) which ran greatly in excess of $600 per year is corroborative evidence.

The jury evidently did not believe the testimony of appellant's wife, that she had supported him from money earned by her as a prostitute; nor, apparently, did not jury believe the testimony of another woman who had been appellant's "girl friend," that she had loaned him $5,000 during the period of their intimacy.

We think there was substantial evidence to support the verdict of the jury. The judgment of the United States District Court is, accordingly, affirmed.

 

 

[60-1 USTC ¶9115] United States of America , Appellee v. William Coleman and Doris Coleman, Appellants

(CA-2), U. S. Court of Appeals, 2nd Circuit, No. 25733, 272 F2d 108, 12/3/59, Affirming unreported District Court decision

[1939 Code Sec. 145(b)--same as 1954 Code Sec. 7201]

Tax evasion: Individual and corporate imcome taxes: Bank records and net worth increases.--Judgments of conviction against the taxpayers, husband and wife, for attempting to evade their individual income taxes and attempting to evade corporate income taxes owed by wholly owned corporations was sustained. The government's use of the net worth method for the taxpayers' individual liability, supported by use of the bank deposit and cash disbursement method for their corporations to show the source of unreported income as well as the falsity of the sales figures in the corporate returns, was approved.

[1939 Code Sec. 145(b)--same as 1954 Code Sec. 7201]

Tax evasion: Jury trial: Instructions to jury: Continuance: Improper comment: Testimony by counsel.--The taxpayers claimed error based upon the court's refusal of additional time for new counsel to prepare a defense, the court's charge to the jury, the denial of the wife's motion to sever a count against her husband alone, and the jury's failure to comprehend the theories on which the case was presented. These claims of error was rejected, the evidence failing to establish their propriety or that the taxpayers were prejudiced or that the court had abused its discretion. The taxpayers also claimed that the prosecution's summing up was inflammatory and prejudicial. But the only portion open to criticism was the assurance by counsel that the time between the finish of the IRS investigation and trial was used to make sure that the charges were fully justified by the evidence. This approached testimony by counsel, but was not sufficient ground for reversal.

Paul J. Curran, Assistant United States Attorney, (S. Hazard Gillespie, Jr., United States Attorney, Otis Pratt Pearsall, Assistant United States Attorney, on brief) for appellee. Harry L. Palmer, 321 West 125th Street , New York , N. Y., for appellants.

Before CLARK, Chief Judge, MOORE, Circuit Judge, and SMITH, District Judge.

SMITH, District Judge:

Defendant-appellants William and Doris Coleman, husband and wife, were convicted on trial to the jury in the Southern District of New York [58-2 USTC ¶9525], jointly on Counts One and Two of attempting to evade individual income taxes for the years 1952 and 1953 by filing false and fraudulent joint income tax returns and on Counts Four and Five of attempting to evade corporate income taxes for the years 1951 and 1952 owed by their wholly-owned corporation, Blue Grass Cafe, Inc., by filing false and fraudulent corporate tax returns. William was also convicted on Count Three of attempting to evade corporate income taxes for 1952 owed by Brown Twins Restaurant, Inc., of which he was president, by filing a false and fraudulent corporate tax return.

[Facts]

The government proceeded on the net worth theory so far as the individuals were concerned, supported by use of the bank deposit and cash disbursement analysis method as to the two corporations to demonstrate the source of unreported income of the individuals as well as the falsity of the sales figures in the corporate returns.

Defendant Doris Coleman was an experienced bookkeeper, employed during the years in question as head bookkeeper at Leeds Travelwear Corporation, at a salary of $7,000 for 1952 and $8,650 for 1953. She also worked nights at the Blue Grass Cafe. No income was reported from any earnings of William. No receipt of income from either corporation was declared. The government proof purported to show an increase in the joint net worth of the defendants of some $4,000 in 1952, and an additional $10,000 in 1953, which the government ascribes to unreported dividends from the two restaurant corporations. The government proof purported to show that the corporate returns which showed net losses in the years in question, were falsified primarily by substantial understatement of sales. The defendants' version of the situation was the proof failed to show understatement of sales and that the corporate payments to or for the individual defendants were more than repaid by contributions from Doris' Leeds' salary to the corporations to make up in part for their losses.

The government's theory was amply supported by evidence which the jury could credit. Indeed, it would have been credulous in the extreme to have accepted defendants' story of straining to meet corporate losses from Doris' salary at a time when the proof showed the purchase even though partly on credit of a $38,000 house, furniture, and an $8,000 Cadillac. Once the jury was satisfied that the entries were false, and that defendants' denial of receipts from the corporations was false in the light of their net worth increases, a finding of intent to evade was not only permissible, but almost inevitable. Cf. Spies v. United States, 317 U. S. 492 [43-1 USTC ¶9243]; Holland v. United States, 348 U. S. 121 [54-2 USTC ¶9714].

[Claims of Error]

Defendants claim prejudice from refusal of additional time for new counsel to prepare a defense. The case was originally scheduled to commence in the first week in January 1959. The government and Mrs. Coleman's counsel, Mr. Perlmutter, were ready to proceed on January 27. William Coleman's then counsel, Mr. Edwards, was reported ill and the case was referred back to the calendar part. On January 28 the case was assigned for trial to begin February 16. On February 9, Mr. Gill, new counsel, came in and requested three weeks to prepare. This was denied, but trial was adjourned to February 19. A further request for adjournment on February 19 was denied, a jury was drawn, and the case then adjourned to the following Tuesday, February 24, 19 59. On February 24, Mr. Meyers, who actually tried the case, came in with Mr. Gill to represent the defendants. A further motion for continuance was denied. Presentation of the government's case took until March 5. No further requests for adjournment were made. The matter of adjournment was within the discretion of the court. Isaacs v. United States , 159 U. S. 487, 489. This discretion was unexceptionably exercised here.

The claim is made of error in permitting the prosecution to switch from a net worth theory of proof to a bank deposit and expenditure theory. The short answer to this is that the prosecution never did switch theories, but used the bank deposit and expenditure method to demonstrate not only the false sales entries in the corporate returns, but also the probable source of the individual net worth increases.

The prosecution's summing up is attacked as inflammatory and prejudicial. On the contrary, it appears temperate and constructive. The only portion open to criticism is the assurance by counsel that the time between the finish of the Internal Revenue Service investigation and trial was used to make sure that the charges were fully justified by the evidence. This approaches testimony by counsel. It would have been far better had counsel been content to point out the complexity of proof, as he did, and allow the jury to draw its own inferences as to the reason for the time consumed. This one slip in a long trial, of no great apparent weight, is not sufficient ground for reversal. United States v. Greenberg, 2 Cir., 268 F. 2d 120.

The charge was clear, comprehensive and adapted to the evidence in the case. The attacks upon it are without substance.

Defendant Doris Coleman attacks the denial of her motion to sever Count Three, against William alone. The ruling was within the discretion of the court and clearly correct. No prejudice is or could be shown. The evidence which came in on this count was admissible in any case on the counts relating to the joint returns.

Finally, defendants made the broad claim that the jury failed to comprehend the theories on which the case was presented. There is no basis shown for this claim. The theories were fully and carefully covered by the court, both in the course of the trial and in the charge.

The judgments of conviction are in all respects affirmed.

 

 

[59-1 USTC ¶9161] United States of America , Plaintiff-Appellee v. Paul DeLucia, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 12399, 262 F2d 610, 12/31/58, Aff'g and rev'g unreported District Court decision

[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]

Income tax evasion: Appeal from jury findings.--A jury found taxpayer guilty on two counts for making false statements regarding his income tax for 1948 and 1949, and on a third count found that he filed a false return for 1950. It is held that the false statements for the years 1948 and 1949 were not made by taxpayer on two occasions as charged. On the first occasion, although he accompanied his attorneys to a conference with revenue agents, the transcript does not show that he himself made any statements at that meeting. On the second occasion, only taxpayer's attorney and a third person appeared before the revenue agent. The remarks of the third person regarding taxpayer's net worth were hearsay. Therefore, conviction on the first two counts should be reversed. Conviction on the third count is upheld, the court holding that the action was timely, that the use of the net worth method was proper, the Government having shown a possible likely source of unreported income, and that the trial court did not err in refusing to direct the submission to taxpayer of certain memoranda in the possession of the Government. The court correctly turned over to him only what in its opinion had any relation to the testimony of the Government witness.

Rob ert Tieken, United States Attorney, John Peter Lulinski, William Barnett, Chicago , Ill. , for plaintiff-appellee. William Scott Stewart, 77 West Washington, Chicago , Ill. , for defendant-appellant.

Before DUFFY, Chief Judge, and HASTINGS and PARKINSON, Circuit Judges.

PARKINSON, Circuit Judge:

Defendant-appellant, hereinafter referred to as DeLucia, was found guilty by a jury on the first three counts of a four count indictment returned and filed on March 4, 19 57 . The fourth count charged DeLucia and one Joseph Bulger with conspiracy. The jury acquitted both defendants on Count IV.

[Income Tax Evasion]

Counts I and II charged DeLucia with violation of §7201, Internal Revenue Code of 1954, in that he willfully attempted to evade payment of his income tax for the years 1948 and 1949 by making false statements concerning his income for those years. Count III charged a violation of §145(b), Internal Revenue Code of 1939, alleging that DeLucia filed a false return for the year 1950.

DeLucia was sentenced to serve three years and to pay a fine of $5,000 as to each count, the sentences to run consecutively. This appeal followed.

DeLucia attacks his conviction on Counts I and II upon the theory that there was a complete failure of proof that he made or caused to be made any false statements concerning his income for the years 1948 and 1949.

[Statements of Attorneys]

The first false statement, according to the Government, was made on September 1, 19 54, when DeLucia with two attorneys, a Mr. Bernstein and Mr. Stewart, his present counsel, appeared before Mr. T. N. Smith, Group Supervisor and Special Agents Stonesifer and Scholz of the Internal Revenue Department. A transcript was made of this meeting and is in the record.