Bank Records and Net Worth Increases 3 Page2

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The evidence as to the increase in the net worth during the year 1943 consisted largely in proofs of currency expenditures during that year in amounts greatly in excess of the $90,131 income reported by appellant for the year 1943, and of all his declared available resources. The largest single expenditures was of $100,000, paid in two installments for the purchase of a farm, $45,000 in currency of small denominations up to $50 bills, the latter part of March, 1943, and the balance, $34,000 of which was in currency, shortly thereafter. This farm was carried on appellant's records at an original cost of $55,000 which appellant told Loyd, upon inquiry by Loyd as to the discrepancy in the figures, was all he paid. In addition, the evidence showed large expenditures on the farm including $73,546 for improvements, $128,925 for cattle and hogs, $33,559 for feed, and $10,821 for miscellaneous items.

[Black Market Receipts]

Appellant also told Loyd that the $71,000 miscellaneous income reported in his 1943 return was from "commissions" which he also said constituted the source of the money paid for the farm and the large expenditures thereon. These commissions he explained to Loyd as "tips" paid to him for telling people where they could buy meat. However, he said he could not remember the names of any such persons, nor where he had sent them to procure the meat. When Loyd pointed out to him that their investigations indicated that he had spent two or three hundred thousand dollars more than he had available according to his 1943 income tax return, and asked him to explain the difference, where the money had come from, he replied that he could not offer any explanation as to where it had come from.

In addition to the large currency expenditures by appellant, amounting to $283,455, the record also showed that appellant used two bank accounts in the name of an agent, none of the transactions of which was entered in his own books and records. The total of deposits in these two accounts amounted to $91,971 for the year 1943, none of which was reflected in appellant's books. In addition, appellant also had an account in his own name in one bank, not shown in his books, and deposits in this account aggregated $85,499. Loyd testified that he questioned appellant about this latter account, and appellant denied having any such account. The Government construed this as evidence of appellant's concealment of his resources and transactions. The evidence showed a total of $151,909 expenditures of which there was no record whatever in appellant's books and records. As a further part of this pattern of concealment, the evidence showed that appellant had on record two mortgages aggregating $37,500 on properties owned by him which were in fact dummy mortgages, representing no indebtedness on the part of appellant. The evidence also showed that on several occasions he had his agent purchase cashier's checks for him from several different banks, aggregating $35,000, paying cash furnished by himself therefor.

To establish the fact of a possible source of the income indicated by appellant's huge expenditures, the Government introduced the evidence of seven meat peddlers all of whom testified that during the year 1943, they paid overceiling prices for meat purchased from the Empire Packing Company, paying the excess in currency either to Chapman direct, or to one of two salesmen both of whom testified that they received payments for the excess which they turned over to appellant who directed them not to keep any record of such payments. In each case, payment was made to Empire for the regulation price. Only one of the peddler witnesses testified as to exact amounts, and he stated that his overpayments started in April, 1943, and continued through December of that year, amounting to six or seven thousand dollars in all, paid to the two salesmen who testified that they collected overceiling prices for appellant. This evidence was not introduced to prove the amount of appellant's receipts from illegal sources,--in fact the Government made no attempt to prove the total of such receipts. It was only to establish the possible source of the funds used for the expenditures which so substantially exceeded appellant's declared available resources.

[Large Personal Expenditures]

Appellant contended that his admittedly large currency expenditures were made from accumulations of currency over a period of years, kept by him in safety deposit boxes. To establish this defense he introduced a witness, Hirsch, who testified that early in 1943 he accompanied appellant to a bank where the latter had a safety deposit box, and while there had occasion to observe the contents of his deposit box. He said that he saw a large amount of cash wrapped in bundles. His testimony regarding this was as follows:

"I said, 'Sam,'--I was rather shocked and I had mentioned this to him before; I said, 'You know the bank across the street burned down, and it seems you have at least $200,000, maybe $210,000 in cash, in here, get rid of it, do not keep it in one place, am I not right in the amount?'

"He said, 'I believe it is about $225,000. I recently counted it.'

* * *

"I said, 'Sam, you should do something; I have talked to you about this before and after today I am just going to keep my mouth shut.'

"So he said, 'I will take out $50,000,' and he proceeded to count it out and put it in his pocket."

Appellant also introduced the evidence of an accountant, Kulbarsh, who testified that from his examination of appellant's records, the testimony of witnesses, and the tax return for the year 1943, he determined that appellant had cash available for the year 1943 in the amount of $460,020. He also testified that from his examination of data for the years 1913 to 1942, obtained from appellant's income tax returns and information furnished by the Bureau of Internal Revenue, he ascertained that, after payment of federal income taxes, appellant retained cash in the amount of $368,186, through the years from 1913 to 1942. This total apparently represented the difference between appellant's income and the tax paid thereon for those years, as indicated by his tax returns or data based thereon. However, on cross examination, after deducting amounts expended for certain capital transactions, real estate purchases, and estimated personal living expenses for the period from 1913 to 1942, Kulbarsh estimated the available cash to be only $12,156. And eliminating the $225,000 item from the net worth estimate as of January 1, 19 43, he computed the total net worth as $186,268, which was $230,518 less than his estimate of appellant's net worth as of December 31, 19 43. In reply to an inquiry of Government counsel, he stated that, assuming that the excess of net worth on December 31, 19 43, over that of January 1, 19 43, was taxable income for 1943, there would be a tax due in excess of the amount indicated on appellant's tax return for that year.

[Use of Affidavits]

To refute the evidence of the meat peddlers who testified that they had paid overceiling prices for their meat either to appellant or his agents, appellant introduced in evidence the affidavits of five of them to the effect that they had paid only the amounts invoiced by Empire, and had never paid Empire, appellant or any other employees any additional sums of money, gratuities, or other consideration for the meat purchased by them from Empire. The secretary of the Empire Company testified that he was a notary public; that he knew each of the affiants personally and had acknowledged the signature of each and that each had signed in his presence. He stated that he had acknowledged about sixty of the affidavits, and that he distinctly remembered in each instance that he had told the affiant to read the instrument, sign it, and swear to it. However, three of the peddlers who testified to the overceiling prices stated that there had been no notary public present when they signed; two of these said they had never read the affidavits before.

Appellant contends that inasmuch as the Government did not have evidence of his receipt of income from black market sales of meat in excess of the $71,000 miscellaneous income reported by him, it was highly prejudicial for it to introduce the evidence. The Government made no attempt to show the exact amounts of unreported income on which it charged the evasion of tax. Nor was it necessary that it should do so. United States v. Johnson, 319 U. S. 503 [43-1 USTC ¶9470]. This case was based on the unexplained and unreported increase in appellant's net worth during the year 1943 as indicated by vast expenditures far in excess of his declared available resources, in conjunction with proofs of a possible source of income as indicated by the evidence of the group of dealers who testified to paying him sums of money based on amounts of meat purchased by them from the corporation of which he was the president and principal stockholder. Government witness Loyd testified that appellant, who did not take the stand, told him that the $71,000 "miscellaneous income" reported on his 1943 return as well as the money with which he made his large currency expenditures, was derived from "commissions," which he explained as "tips" paid to him for telling people where they could buy meat. This was all substantial evidence to go to the jury on the question of a source of the income on which he was accused of evading the tax. Appellant was not entitled to have the evidence suppressed on the ground that it was derived from an illegal source. Cf. Spies v. United States, 317 U. S. 492 [43-1 USTC ¶9243].

[Establishment of Net Worth]

Appellant contends that, "In a 'net worth case,' the starting point must be based upon a solid foundation and a Revenue Agent's statement of the defendant's oral admission or confession when uncorroborated is not sufficient to convict." We fully agree with this statement of the law. However, we find no deviation from it in this case. The actual starting point here was the net worth as established by appellant's books and records. From these Loyd drew up a statement of appellant's assets and liabilities as of January 1, and December 31, 19 42. According to his testimony, he showed these to appellant on at least two occasions and asked him if he had any other assets or liabilities, and appellant replied that those were all he had, and, upon specific inquiry as to whether he had any currency, cash on hand, besides an item of $2,375 entered on his books, he replied that the records were substantially correct as to that, and he had no other cash with the exception of a little money in his pocket. We cannot agree with appellant's designation of this as an "uncorroborated admission." In the first place, we think the Government was entitled to expect that books furnished for examination into a taxpayer's fiscal affairs would be correct, and a verification of their accuracy can scarcely be called an "uncorroborated admission."

We find further corroboration of the Government's estimate of appellant's net worth for the years in question in the evidence of appellant's own accountant, Kulbarsh. He testified that he examined data derived from appellant's tax records from 1913 to 1942. He found that during that twenty-nine year period, appellant had income over and above federal income taxes amounting to $368,186, or, as we compute it, an average of twelve or thirteen thousand dollars a year. He stated that there might have been additional income from nontaxable sources during that time, increasing the amount of appellant's income, and that he had ascertained that information from conversations with appellant. However, apart from this purely speculative, unsubstantiated statement, there was no evidence whatever that there actually was any such additional income. Hence we think that the testimony of Kulbarsh may be considered as additional evidence that appellant had no such resources as would account for the accumulation of the vast amount of currency which Hirsch testified he saw, and appellant told him amounted to $225,000. Under these circumstances we find the cases relied upon by appellant in support of his contention as to the "uncorroborated admission" inapplicable. ¹ We hold that there was ample evidence apart from appellant's extrajudicial admissions to furnish the starting point for establishing his net worth. See Warzower v. United States , 312 U. S. 342.

[Embezzlement Inapplicable]

Appellant further contends that, assuming that there was evidence of black market operations sufficient to sustain a charge of unreported income, such income must be attributed to the corporation which sold the meat, and not to himself. He relies upon the case, Commissioner v. Wilcox, 327 U. S. 404 [46-1 USTC ¶9188], involving the question whether embezzled money constitutes taxable income to the embezzler. There, a bookkeeper who retained moneys paid for services rendered by the corporation by whom he was employed, was convicted of embezzlement, and the Court held that he was not liable for income taxes on those embezzled funds. Here, there was no question but that the corporation received full payment for all meats sold by it, and the additional income to appellant resulted from the collection of what was in effect a premium for such sales by the corporation which he controlled as president and principal stockholder. We need not decide whether the corporation was entitled to recover those additional payments. However, even if it were shown that appellant collected as agent for the corporation, it would not necessarily follow that there would be no liability on his part for attempted evasion of the taxes due on such collections. See United States v. Currier Lumber Co., 70 Fed. Supp. 219 [47-1 USTC ¶9172]. Hence we find the Wilcox case no authority for holding appellant not liable for the tax evasion here charged.

We think there is ample evidence of record to sustain the Government's contention that appellant during the year 1943 made expenditures greatly in excess of his declared available resources, and that he had available for that year sources of income with which to make such expenditures, even though appellant disputed that evidence and introduced his own evidence to explain the facts otherwise. His mode of carrying on his business operations, obviously calculated to conceal their magnitude and prevent investigation thereof, amply justifies as inference of willful attempt to evade payment of tax in violation of section 145(b) as charged. Spies v. United States , 317 U. S. 492 [43-1 USTC ¶9243]; Gleckman v. United States, 80 Fed. (2d) 394 [35-2 USTC ¶9645]; Chadick v. United States, 77 Fed. (2d) 961 [35-2 USTC ¶9416].

JUDGMENT AFFIRMED.

MINTON, Circuit Judge, concurs in the result.

¹ Naftzger v. United States , 200 Fed. 494; Gulotta v. United States , 113 Fed. (2d) 683; Pines v. United States , 123 Fed. (2d) 604; Tabor v. United States , 152 Fed. (2d) 254; Yost v. United States , 157 Fed. (2d) 147.

 

 

[55-1 USTC ¶9507]Jacob Strauch, Appellant v. United States of America, Appellee Alex Strauch, Appellant v. United States of America, Appellee Harry Benjamin Sher, Appellant v. United States of America, Appellee

(CA-6), In the United States Court of Appeals for the Sixth Circuit, Nos. 11992, 11993, 11994, 223 F2d 377, June 13, 19 55

On remand from the Supreme Court of the United States.

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

Tax evasion: Criminal prosecution: Net worth method of proof: Reconsideration in light of Supreme Court cases: Reaffirmance.--The conviction for criminal evasion of income taxes having been remanded for reconsideration in the light of Supreme Court decisions on the issue of reconstruction of income under the net worth increase method, the District Court's judgment was again affirmed. The conviction in the instant case was also supported independently by other evidence.

Bernard J. Long, Washington, D. C. (John J. Hooker, Nashville , Tenn. , was with him on brief), for appellants. Marvin E. Frankel (H. Brian Holland, Ellis N. Slack, John H. Mitchell, Marvin E. Frankel, Special Assistant to the Attorney General, Richard B. Buhrman, Washington, D. C., Fred Elledge, Jr., United States Attorney, Nashville, Tenn., on brief) for appellee.

Before SIMONS, Chief Judge; ALLEN and MCALLISTER, Circuit Judges.

ALLEN, Circuit Judge:

The judgments in these consolidated cases, Strauch v. United States, 213 Fed. (2d) 805 [54-1 USTC ¶9416] [54-2 USTC ¶9452], were vacated by the Supreme Court of the United States in its order of January 10, 19 55 [55-1 USTC ¶9139], and remanded to this court for re-examination in light of the opinions of the United States Supreme Court in Holland v. United States, 348 U. S. 121 [54-2 USTC ¶9714]; Friedberg v. United States, 348 U. S. 142 [54-2 USTC ¶9713]; Smith v. United States, 348 U. S. 147 [54-2 USTC ¶9715], and United States v. Calderon, 348 U. S. 160 [54-2 USTC ¶9712].

Examination has been made of the record and contentions of counsel in light of the above decisions and in each case the court adheres to its original conclusion. While testimony was introduced under the net worth method against Jacob Strauch and under the bank deposit method as to all three defendants, ¹ in each case ample independent evidence was presented sustaining the convictions.

[The Facts]

Jacob Strauch was charged with evasion of income taxes in an indictment which contained three counts covering the taxable years 1944, 1945, and 1946. The jury found him guilty under all three counts and the separate sentences under each count were ordered to run concurrently. Alex Strauch and Harry Sher were each charged in an indictment containing two counts covering the taxable years of 1944 and 1945. Each defendant was found guilty under both counts and the separate sentences imposed under each count were ordered to run concurrently. If the conviction under any one count is valid as to each defendant, the sentence must be sustained.

During all the period involved Jacob Strauch conducted a wholesale jewelry business of his own and also was a member of the partnership of Strauch & Sher, the other two members being Alex Strauch and Harry Sher. Strauch and Sher conducted a wholesale jewelry business from 1943 to 1946. The government presented evidence to the effect that the partnership made profits of over $100,000 during this period and all three partners in a written statement executed December 12, 19 49, declared that the taxable income of the partnership during this period was over $90,000. During the entire period of the partnership it filed no return of partnership income. Jacob Strauch filed no return for 1944 showing income from the partnership, and filed no return whatever for 1945.

As to Count 1 in the indictment against Jacob Strauch, which covers the calendar year of 1944, the government showed by direct evidence taken from the partnership books that $19,859.80 was received by Jacob Strauch from the partnership in 1944. The balance of unreported income for this year, $2,674.02, was proved by the bank deposit method. For this year of 1944 Jacob Strauch reported income of $9,478.94.

[Evidence Under Count II]

Count II of the indictment against Jacob Strauch charges willful evasion of income tax in 1946, by willful failure to file income tax return for 1945. Jacob Strauch's net taxable income for the year 1945 was shown to be $49,018.91. Of this amount $14,008.93 was proved by direct evidence taken from the books of the partnership and some $800.00 by proof of Jacob Strauch's income from dividends and capital gains.

The balance of $34,159.98 was proved by reconstructing Jacob Strauch's gross income from his sole business on the bank deposit method allowing deductions for cost of goods sold and expenses as shown by Jacob Strauch's records, cancelled checks, and other evidence.

As to Count II of the indictment Jacob Strauch contends that since he filed no income tax return for 1945 he merely omitted an act required under the statute, namely, the filing of a return, and cannot rightly be found guilty of fraudulent evasion of income tax. However, ample evidence of affirmative, fraudulent acts was presented justifying the verdict as to Count II. Jacob Strauch made false statements to agents investigating the case, declaring that there were no books or records of the partnership, that these records were periodically destroyed. They were, however, in existence and formed the basis of the reconstruction of the partnership net income for the years involved of from $90,000 to $100,000. Jacob Strauch kept no books in his individual business, handling most of his transactions in cash. He was a partner in a firm which filed no return. He filed a declaration of estimated tax for 1945 in the amount of $1,214.97, although the correct liability was about $25,000.

[Evidence Under Count III]

As to the evidence under Count III the computation of Strauch's unreported income for 1946 was made up from an analysis of his bank deposits. He reported $16,922.27. The additional amount estimated was $18,078.09. Jacob Strauch told the investigator that the origin of his bank deposits was "receipts from the sale of jewelry" in the form of checks and cash going directly into the bank account or first put in his safe and then deposited in the bank. He stated that no money constituted non-business receipts such as gifts, insurance proceeds, or prior accumulations of money went into the bank account. The deposits during 1946 were made at regular intervals, never less than 5 and never more than 11 in one month. The government agent carefully eliminated from the estimate the proceeds of loans, of capital transactions, deposits representing income from interest and dividends, and amounts drawn from the partnership. Between 1939 and 1949 Jacob Strauch made loans at his bank totalling $8,000. In 1940 he filed a financial statement with the bank, listing a total net worth of $29,039. In 1942 he reported net income of $4,420.38 and in 1943 $5,218.36, yet in 1944 and 1945 his bank deposits were about $106,000 in excess of reported gross income. These circumstances constituted substantial independent evidence sustaining the government's estimate based upon bank deposits.

On November 7, 19 46, Jacob Strauch made a sworn statement that his net worth for the taxable year ended November 1, 19 46, was $113,043.99. The pattern of Strauch's accounts and his course of conduct during the period involved entitled the jury to take into consideration his admission as to net worth in connection with other evidence as to amounts of unreported income presented by the government. These circumstances corroborate the admissions of Jacob Strauch and his statements that his bank deposits reflected income. United States v. Calderon, supra, 168; Smith v. United States , supra, 158, 159.

[Taxpayers' Admissions]

The convictions of Alex Strauch and Harry Sher each involved charges of evasion of income tax with reference to the years 1944 and 1945, for which years no partnership return was ever made. The written statement heretofore referred to made by the partners December 12, 19 49, listed in detail the total receipts of partnership income for the taxable years together with the total expenses and costs of sales. This statement with its calculation of over $90,000 profit for the years 1943 to 1946 was corroborated in every essential by the books of the partnership. By defendants' written admission about 90% of the profits of the enterprise was realized in 1944 and 1945. The books which were made up ante litem motam fully corroborated the admissions. Warszower v. United States , 312 U. S. 342.

The government agent testified that "some five" sets of books, single entry journals, which listed sales and expenditures of the partnership were used in calculating the net earnings of the partnership during the taxable years. No books recording capital accounts or distribution of profits were found. For 1945 there was a book marked "Diamond Book," and another book which covered watches, watch bands, etc. The book of expenditures covered both overhead and purchases. The records of purchases were given up to August 19, 19 46, and the records of sales were kept until November 7, 19 45. It was admitted that these books showed gross profits on each transaction except in occasional cases where no profit was made. Sher stated to the investigator that there was an oral agreement that the profits should be divided equally. He kept the books and both he and an expert accountant witness for defense testified to the effect that the books were accurate.

The unreported income of the three partners was estimated from the books as follows:

Partner                          1944               1945

Jacob Strauch ....         $19,859.80         $14,008.93

Alex Strauch .....          19,859.80          14,008.92

Harry Sher .......          17,033.10          11,390.30

The government arrived at its estimate of income from the partnership by totalling the entries for gross profits and subtracting all the allowable business expenses, for 1944 and 1945, the profit for these years being found to be $59,579.39 and $42,026.77, respectively. The estimate of the government was relatively close to the statement signed by the partners, which figured income for 1944 at $63,958.97, and for 1945 at $26,398.22. Jacob Strauch and Alex Strauch admitted that they had reported none of this partnership income and Sher reported only $2,326.69 in 1944 and $2,115.62 in 1945. That the partners actually received substantial amounts from the partnership was shown by three checks drawn January 9, 19 45, to "cash" cashed by the three partners individually, and totalling $30,000.

[Use of Inventories]

The contention that the evidence of unreported partnership income was not admissible because the government used defendants' accounting system instead of making inventories has no merit. Section 22(c) of the Internal Revenue Code of 1939, 26 U. S. C., Section 22(c), provides that, whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. Regulation 111, Section 29.22(c)-1 of the applicable regulations issued by the Commissioner states that, in order to reflect the net income correctly, inventories at the beginning and end of each taxable year are necessary in every case in which the production, purchase, or sale of merchandise is an income-producing factor.

Under this statute and regulation the Commissioner had a discretionary authority to require the taxpayer to take inventories. We are cited to no section of the statute nor to any regulation requiring the Commissioner to take an inventory and, as a practical matter, only the taxpayer can take an inventory. Here the taxpayer took no inventories. Defendants in effect contend that, because defendants failed in their duty to keep proper records, merely recording gross sales and expenses, the government cannot prove fraudulent evasion of income tax from defendants' own books and accounts. The purpose of inventories, as stated in Lucas v. Kansas City Structural Steel Co., 281 U. S. 261 [264] [2 USTC ¶520], 268, "is to assign to each period its profits and losses." In this case Justice Brandeis observed that whether in a particular business inventories are necessary for the determination of income is a question left by the statute to the judgment of the Commissioner. The Lucas case held that the taxpayer should have taken inventories. But here the books disclosed the gross profits on each sale which had a profit and disclosed instances where there was no profit. They also disclosed the complete expense of operation and thus assigned to each year its profits and losses. Under 26 U. S. C., Section 41, the method of accounting regularly employed in keeping the books of the taxpayer is to be the basis of the computation of the net income. This section was complied with in the computations herein.

We are cited to no decision in which a judgment for evasion of income tax was reversed because the taxpayer failed to file inventories, and the government in establishing income which was shown to have been received in substantial amounts employed taxpayers' own books, which correctly showed gross profits, made proper deductions for all expenses and revealed substantial unreported income.

We deem it unnecessary to discuss other questions previously raised before this court, given extensive consideration on application for rehearing, and not covered by the doctrine of the Holland , Friedberg, Smith, and Calderon cases.

[Conclusion]

The trial judge charged the jury at considerable length upon issues presented. Defendants' two special requests were allowed and, on being given the opportunity to make further requests at the conclusion of the charge, able counsel failed to take advantage of the opportunity. In view of the uncontradicted evidence of the books and other direct evidence supporting the verdict, we conclude that no prejudice resulted from the charge and that no reversible error is shown. We adhere to our conclusion originally announced that the verdicts of the jury are sustained by overwhelming evidence. The government proved by testimony independent of the statements used in evidence a consistent pattern of underreporting large amounts of income and of defendants' failure to include all of their income in their books and records. Holland v. United States, supra, 139. Independent evidence was shown of the likely source of unreported taxable income. Holland v. United States, supra, 138. The independent evidence fortified the truth of the admissions made. The tax returns and the failure to make returns corroborated the admissions. Smith v. United States, supra. The general history of defendants during the taxable years provided sufficient independent evidence of the crime of tax evasion to corroborate their written statements. United States v. Calderon, supra.

The judgments of the District Court are affirmed.

¹ In order to avoid confusion the defendants will be denominated by their individual names.

 

 

[54-2 USTC ¶9452]Jacob Strauch, Appellant v. United States, Appellee Alex Strauch Appellant v. United States of America, Appellee Harry Benjamin Sher, Appellant v. United States of America, Appellee

(CA-6), In the United States Court of Appeals for the Sixth Circuit, Nos. 11992, 11993, 11994, 213 F2d 805, June 17, 19 54

Criminal prosecution: Instructions to the jury.--In the criminal trial of taxpayers for willful evasion of taxes, the trial judge charged the jury with respect to penalties and instructed the jury that if the taxpayers were acquitted the government could not appeal. The majority of the Circuit Court found that the trial judge's instructions could not be construed as asking the jury to convict, in view of the overwhelming evidence of the taxpayers' guilt. Therefore the petition for a rehearing was denied. One dissenting opinion.

John J. Hooker, Nashville, Tenn. (Morris L. Strauch, Memphis, Tenn., William S. Miller, Jr., Little Rock, Ark., were with him on brief), for appellants. James L. Rob erts, Nashville , Tenn. (Fred Elledge, Jr., James M. Swiggart, Nashville , Tenn. , were on brief), for appellee.

Before ALLEN, Circuit Judge, and STARR and GOURLEY, District Judges.

Memorandum on Petition for Rehearing

ALLEN, Circuit Judge:

This case is before the court upon petition for rehearing. Appellants urge (1) that the court erred in not holding the Ecklund case, 159 Fed. (2d) 81 (C. A. 6) controlling, and (2) that the judgment should be reversed because of prejudicial error in the charge of the trial court. The question whether the statement of income filed voluntarily by the three appellants constituted an offer of compromise was fully considered in connection with the hearing and we adhere to our conclusion that Ecklund v. United States , supra, does not govern this controversy. Under this record the statement filed was not an offer of compromise and was admissible.

The question whether the District Court erred in charging upon the subject of the penalty provided under §145(b) of Title 26 U. S. C. for willful attempt to evade or defeat income taxes was not considered in the trial but was raised at the hearing by one of the members of this court. This portion of the charge was included in the general charge, was not excepted to by able counsel nor attacked by them either in brief or argument upon the hearing in this court. The majority of the court thinks that the charge, the pertinent portion of which is given in the margin, ¹ was not prejudicial. We think the statement by the court, "If your verdict is not guilty then that is the end of the case. The Government can't appeal from that verdict by the jury," was favorable to appellants and under the facts of this case it could not have induced a conviction. The three indictments set forth alleged income tax evasion for the taxable years, two of the appellants being charged with falsifying the income from a partnership of which all three appellants were members, and the third appellant being charged with failure to declare income from the partnership and also from an individual business which he owned. After the investigation of possible tax evasion began the three appellants voluntarily executed a statement setting forth material variations from the taxes reported by them in the taxable years and concerning these variations made the following statement:

"This statement executed by Harry B. Sher, Alex Strauch and Jacob Strauch this 12th day of December, 1949:

"Having re-examined, at the request of my counsel and auditors, the books and records of Strauch & Sher, a partnership, and having, pursuant to request, re-examined supporting memoranda with reference to sales and expenditures of the said partnership,

"It is the opinion and belief of the undersigned that a corrected statement of income of the said partnership is properly reflected in the exhibit hereto attached, entitled 'Restatement of Partnership Income,' and that taxable income of the undersigned should be appropriately computed as a result of the said restatement:

"Further, that the variations resulting from the totals reflecting in the said restatement from the income as reported by the individuals, or as set forth in explanatory comments heretofore submitted are attributable to error in maintenance of records and the classification of items of income and expense and are not attributable to intent on the part of the undersigned to defraud the government, or willfully, to evade the payment of any income taxes as and when due.

"This statement has been prepared at our request in conformance with information furnished by ourselves.

"/s/ HARRY B. SHER,

/s/ ALEX STRAUCH,

/s/ JACOB STRAUCH."

It was shown by this statement and the records of the partnership that all three appellants in the years 1944 to 1946, inclusive, received income on which they failed to pay a tax. The bank deposits of Jacob Strauch showed that he had received income in 1944, 1945 and 1946 from an individual jewelry business on which he did not pay a tax. The evidence upon these points was overwhelming. In the face of this evidence, much of it taken from appellants' own books of account, the jury found appellants guilty. We see nothing in the court's statement which can be construed as asking the jury to convict, and in addition we cannot conceive that under this record this portion of the court's instructions could have influenced the jury as to conviction. The lack of exception by experienced counsel and the total failure to argue at the hearing in this court the point now stressed strongly indicates that the error of the trial court, which is not to be commended, was not prejudicial. None of the cases relied upon are in point. In Lovely v. United States , 169 Fed. (2d) 386 (C. A. 4), serious error to the prejudice of the defendant was committed in the admission of testimony. Also the court in explaining that the sentence carried a life penalty stated that the defendant was eligible to parole after fifteen years. In Demetrce v. United States , 207 Fed. (2d) 892 (C. A. 5) [53-2 USTC ¶9646], the jury repeatedly reported that it was unable to agree upon a verdict and finally asked the judge to state what the punishment would be. The judge assured the jury that the maximum sentence would not be imposed. These cases afford no assistance in solving the problem presented here.

The majority of the court concludes that, as no prejudicial error existed in the conduct of the trial nor in the charge of the court, the petition for rehearing must be denied.

¹ "These indictments, ladies and gentlemen of the jury, were returned under Section 145(b) of Title 26 of the United States Code, which provides, so far as it pertains to these charges, that any person who wilfully attempts in any manner to evade or defeat any tax imposed by this chapter, or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and upon conviction thereof be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution.

"Now, as the Court has charged you, your duties as jurors consist of a fact-finding body, and when you have reached a verdict in the case, either guilty or not guilty, then your duties are at an end. If your verdict is not guilty then that is the end of the case. The Government can't appeal from that verdict by the jury. If your verdict is guilty, then of course it becomes the duty of the Court to pass sentence. You have nothing whatever to do with the fixing of any sentence in any case, but merely to hear the evidence in the case and determine from that evidence whether or not the charges are sustained, whether or not the defendant is guilty or not guilty.

"Now, as to the matter of the punishment provided by the statute, that means that the Court in passing sentence may fine the defendant any amount, according to the discretion of the Court, from one cent up to ten thousand dollars. There is not any definite amount fixed in the statute that the Court must fine the defendant. The statute says that 'Upon conviction thereof, the defendant may be fined not more than ten thousand dollars.' That means that the Court could fine him any amount from one cent to ten thousand dollars. 'Or imprisoned for not more than five years.' That means the Court could order him imprisoned for any length of time from one minute up to five years, according to the punishment that the Court might think is justified in this case. That does not mean that the Court has to impose a fine of ten thousand dollars or a sentence of five years, but leaves it to the discretion of the Court."

Dissenting Opinion

GOURLEY, District Judge:

In these criminal appeals from a jury verdict of guilty, I joined in a per curiam order affirming the judgments of the District Court since I believed substantial evidence existed to support the verdicts. I was also of the opinion, and continue to so believe, that no error existed in the record to which objection was made or exception taken. There was no basis to sustain any of the assignments of error presented by the defendants in their appeal.

Nevertheless, during the argument of the appeal, I noticed what I considered "plain error" in the charge of the trial judge which I believed affected substantial rights of the defendants.

The following portion of the District Judge's charge to the jury, in my judgment, poignantly poses the question of "plain error."

"These indictments, ladies and gentlemen of the jury, were returned under Section 145(b) of Title 26 of the United States Code, which provides, so far as it pertains to these charges, that any person who wilfully attempts in any manner to evade or defeat any tax imposed by this chapter, or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and upon conviction thereof be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution.

"Now, as the Court has charged you, your duties as jurors consist of a fact-finding body, and when you have reached a verdict in the case, either guilty or not guilty, then your duties are at an end. If your verdict is not guilty then that is the end of the case. The Government can't appeal from that verdict by the jury. If your verdict is guilty, then of course it becomes the duty of the Court to pass sentence. You have nothing whatever to do with the fixing of any sentence in any case, but merely to hear the evidence in the case and determine from that evidence whether or not the charges are sustained, whether or not the defendant is guilty or not guilty.

"Now, as to the matter of the punishment provided by the statute, that means that the Court in passing sentence may fine the defendant any amount, according to the discretion of the Court, from one cent up to ten thousand dollars. There is not any definite amount fixed in the statute that the Court must fine the defendant. The statute says that 'Upon conviction thereof, the defendant may be fined not more than ten thousand dollars.' That means that the Court could fine him any amount from one cent to ten thousand dollars. 'Or imprisoned for not more than five years.' That means the Court could order him imprisoned for any length of time from one minute up to five years, according to the punishment that the Court might think is justified in this case. That does not mean that the Court has to impose a fine of ten thousand dollars or a sentence of five years, but leaves it to the discretion of the Court." (Italics supplied.)

The question of plain or substantial error was not argued and counsel for the litigants were not prepared to enlighten the court on applicable principles of law.

Opportunity has now existed for an independent research and more reflected judgment to be made of the law, and I am now convinced that substantial or plain error does exist which materially affected the rights of the defendants.

I must, therefore, vacate my joinder in the per curiam order of affirmation and respectfully dissent to the judgment of my learned colleagues.

It is incumbent upon this court to take notice of substantial or plain error, whether or not such error was raised by counsel at time of trial or laid as an assignment of error in appeal.

The law provides an impenetrable cloak of protection about a defendant in a criminal proceeding which requires the court of appeals, in cases of serious criminal offenses to carefully check the record for error prejudicial to defendant, whether such error had been urged upon the court or not. Tatum v. United States , 3 Cir., 190 Fed. (2d) 612.

Undoubtedly, as a matter of admin istrative policy, to avoid any unnecessary appeals and new trials, it is important that errors, which inevitably will occur from time to time in extemporaneous charges of the most competent judges, be pointed out immediately by trial counsel with a view to their correction then and there. That policy is enforced in many cases by refusal to review for defects in a charge not challenged at the trial. Indeed, the silence of counsel often suggests that errors seem trivial at that time. But where, particularly in a criminal case, several errors appear, which in the aggregate contain the potential of substantial damage to the accused, the policy of sound and time saving trial admin istration which would penalize failure to point out error below may have to yield to more important considerations of making sure that the accused has been treated fairly. United States v. Cumberland , 3 Cir., 200 Fed. (2d) 609; Miller v. Commonwealth of Ky. , 6 Cir., 40 Fed. (2d) 820; Morris v. United States , 9 Cir., 156 Fed. (2d) 525; United States v. Raub, 7 Cir., 177 Fed. (2d) 312 [49-2 USTC ¶9422]; Logan v. United States, 5 Cir., 192 Fed. (2d) 388; Wyche v. United States , CCA D. C., 193 Fed. (2d) 703; Apodaca v. United States , 10 Cir., 188 Fed. (2d) 932; Rose v. United States , 10 Cir., 128 Fed. (2d) 622 [42-2 USTC ¶9500]; Remmer v. United States, 9 Cir., 205 Fed. (2d) 277 [53-1 USTC ¶9421].

Thus, the question is resolved as to whether the error committed was of so fundamental a nature that the court of appeals should exercise the power provided by Rule 52(b) of the Federal Rules of Criminal Procedure, 18 U. S. C. A.

I believe the error below is "plain" within the meaning of the rule, and that it affects "substantial rights." I can perceive nothing more substantial than to have the members of the jury, in their deliberation, consider the fact that if a verdict of not guilty is returned, no right to appeal exists on the part of the Government, and to further consider the nature or extent of the punishment that the trial court could impose in the event of a verdict of guilty.

Criminal jurisprudence has long recognized error and inherent danger to a fair trial when a jury is charged on the subject of punishment, and certainly, even more grievous error and peril to the impartial admin istration of justice would exist when reference is made to the Government's inability to appeal from a verdict of not guilty. Ryan v. United States , 8 Cir., 99 Fed. (2d) 864; Demetree v. United States , 5 Cir., 207 Fed. (2d) 892 [53-2 USTC ¶9646]; 23 C. J. S. §1290(b) page 869; Housel and Walser, 2nd Ed., Defending and Prosecuting Federal Criminal Cases.

When instructions have been made to a jury which should not be made, it is a question of judgment whether what was said was so prejudicial as to justify a reversal where the evidence is sufficient to support the conviction.

I cannot conceive that the instructions made by the trial judge were not considered with some weight in the determination of the guilt or innocence of the defendant.

The admin istration of criminal justice in this democracy should not be subjected to the remotest hazard that a person be deprived of his liberty on any thoughts or ideas that do not relate directly to the facts as presented to establish a defendant's guilt.

I therefore, respectfully dissent from the judgment of my distinguished colleagues and believe that a new trial should be awarded and the proceeding remanded to the District Court.

Since the formulation of the within dissent, defendants have made application to the court for rehearing and for the reasons herein stated, I believe rehearing should be granted.

 

 

 

[54-1 USTC ¶9416]Jacob Strauch, Appellant v. United States of America, Appellee Alex Strauch, Appellant v. United States of America, Appellee Harry Benjamin Sher, Appellant v. United States of America, Appellee

(CA-6), In the United States Court of Appeals for the Sixth Circuit, Nos. 11992, 11993, 11994, 213 F2d 805, April 21, 19 54

Criminal prosecution: Willful attempt to evade tax.--There were no grounds for a reversal of the conviction by the lower court. The net worth figures introduced by the Government were relevant, no proposition to compromise their possible civil income tax liability was made by appellants, the Restatement of Partnership Income admitted variations between the Restatement and the income declared in the returns, no exception was taken to the charge of the court, and the verdict was supported by substantial evidence.

John J. Hooker, Nashville, Tenn., Morris L. Strauch, Memphis, Tenn., Wm. S. Miller, Jr., Little Rock, Ark., for appellants. Fred Elledge, James L. Rob erts, Nashville , Tenn. , for appellee.

Before ALLEN, Circuit Judge, and STARR and GOURLEY, District Judges.

Order

ALLEN, Circuit Judge:

This case came on to be heard on the record and briefs and oral argument of counsel;

And it appearing that in these cases, consolidated for trial by agreement of counsel, each case charging violations of 26 U. S. C. §145(b), appellant Jacob Strauch was indicted for wilfully and knowingly attempting to evade income taxes for the years 1944, 1945 and 1946, and appellants Alex Strauch and Harry Benjamin Sher were indicted for wilfully and knowingly attempting to evade income taxes for the years 1944 and 1945;

And it appearing that the jury found each appellant guilty as charged in the various indictments;

And it appearing that the net worth figures introduced by the government bearing on the charge against Jacob Strauch were relevant and corroborated the government's contention that income not reported by appellant Jacob Strauch was received in the taxable years;

And it appearing that appellants made no proposition to compromise their possible civil income tax liability and that Ecklund v. United States, 159 Fed. (2d) 81 (C. A. 6) does not control;

And it appearing that the Restatement of Partnership Income executed by all appellants, prepared for appellants at their own request, admitted that substantial variations existed between the Restatement and the income declared by appellants as partners in their tax returns for the years involved;

And no exception being taken to the charge of the court, the verdict being supported by substantial evidence and no reversible error existing in the record;

IT IS ORDERED that the judgments be and they hereby are affirmed.

 

[50-2 USTC ¶9499]Benjamin S. Bell, Appellant v. United States of America , Appellee

(CA-4), In the United States Court of Appeals for the Fourth Circuit, No. 6121, 185 F2d 302, November 8, 19 50

Appeal from the United States District Court for the District of Maryland, at Baltimore.

False and fraudulent returns: Conviction based upon estimates of net worth: Admissions.--Estimates of taxpayer's net income based upon calculations of his net worth at the beginning and at the end of each of thue taxable years in question and upon admissions by the taxpayer were sufficient to sustain a conviction for making false and fraudulent returns where it appeared that taxpayer kept no records of his income from his individual business other than his bank deposit book, and where it further appeared that the books of a corporation, of which he was also sole owner, were inadequate to explain the transactions between the corporation and the individual business.

G. C. A. Anderson and George L. Hart, Jr., (Anderson & Barnes on brief) for Appellant, and Norman P. Ramsey, Assistant U. S. Attorney, (Bernard J. Flynn, U. S. Attorney, on brief) for Appellee.

Before PARKER, SOPER and DOBIE, Circuit Judges.

SOPER, Circuit Judge:

Benjamin Bell was indicted in three counts under Section 145(b) of the Internal Revenue Code, 26 U. S. C. A. §145(b), for attempting to defeat and evade a large part of the income and victory tax owing by him to the United States for the years 1943, 1944 and 1945 by filing false and fraudulent returns for each year wherein he knowingly understated his net income and the amount of the tax. It was charged that for the year 1943 he reported a net income of $11,135.39 and a tax of $2,912.28 whereas his income was $69,836.83 and his tax $41,125.84; and for the year 1944 he reported a net income of $13,887.71 and a tax of $3,378.96 whereas the income was $41,115.81 and the tax $18,771.73; and for the year 1945 he reported a net income of $18,667.14 and a tax of $5,593.57 whereas the income was $25,203.85 and the tax $8,940.28.

He was tried and convicted in a jury trial in the District Court and sentenced to a fine of $10,000 and imprisonment for six months on the first count; $5,000 and six months imprisonment on the second count; and $2,500 and six months imprisonment on the third count, the sentences of imprisonment to run concurrently and the fines to be cumulative.

[Estimates of Net Worth]

The government's case consisted in part of estimates of the net income of the defendant in the taxable years based upon calculations of his net worth at the beginning and end of each year derived from available records, and also the statements of the defendant to the revenue agents who investigated the case. The defendant offered no evidence whatsoever on his own behalf and bases his appeal mainly on the grounds (1) that a conviction of tax evasion may not be based on a mere increase in net worth and therefore the court erred in refusing the defendant's motion for a directed verdict of not guilty; and (2) that the net worth statements for the years in question were erroneously admitted in evidence over the objection of the defendant because (a) they were replete with errors; (b) because the agent in preparing them ignored the records of the defendant and the records of a corporation controlled by the defendant, which purported to show his income; and (c) because the court made numerous errors in restricting the scope of the cross examination of the government's agent, and in the charge to the jury.

[Inadequate Records of Income]

Since the defendant offered no witnesses on his behalf, although he employed accountants who kept the books of the corporation and an auditor who conferred with the revenue agents, the following resume of the facts is necessarily based upon the evidence produced by the United States . Bell was an auctioneer. He had carried on the business since 1933 at 722 13th St., N. W. , Washington , D. C., through a corporation called Washington Art Galleries and Auction Rooms, of which he was the virtual owner. He was also the sole owner in his personal capacity of an auction business for used furniture, which was carried on in Alexandria , Va. , under the name of Mt. Vernon Galleries. The business at this location was closed and removed to the 13th Street store of the corporation in Washington in November, 1942. During the years 1943 to 1945 under investigation, Bell continued to use the name of the Mt. Vernon Galleries to denominate his personal business in his personal income tax return and reported the net income therefrom in addition to the salary and dividends which he drew from the corporation. Bell kept no books of account or records of the income of his individual business except his bank deposit book, in which some descriptive entries were made, his personal check book and certain cancelled checks; but the corporation kept books which included a cash book, a journal and a ledger; and the ledger contained separate accounts which purported to show transactions between the corporation and Bell, and between the corporation and the Mt. Vernon Galleries respectively. There were, however, no records except in a minority of instances to support the entries on the books of the corporation. There were only 50 or 60 invoices during the period 1943 to 1945 covering the consignment of goods for sale and the commissions paid thereon, which varied in amount from time to time; and except for certain cancelled checks there were no other documents or cash register tapes to support the entries in the books, Moreover, the entries in the books, except those in the cash book, were not made daily; but the entries in the journal and ledger were made some time during the year from the cash book, check books and other data. ¹

An investigation of the income tax liabilities of the defendant during the years in question was instituted in March, 1946 by Charles H. Knight, a special internal revenue agent, who interviewed the defendant and learned from him some things in respect to the nature of his business and his investments. His business records were made available to the agent. Knight had been connected with the Bureau of Internal Revenue in the statistical section of the Corporation Tax Division since 1938, had secured a degree in accountancy and had been working on books and accounts in income tax matters since 1940. He concluded from his investigation that the corporate books and other data submitted to him by the defendant did not reveal the taxable income of the defendant because the corporate books were kept on a fiscal year basis whereas Bell's income was reported on the calendar year basis and especially because of the deficiencies of the corporate records in support of the entries on the corporate books above described.

[Examination of All Records]

These inadequacies led the agent to prepare a net worth statement to ascertain Bell 's true income for the years in question. The defendant not only conducted an auction business but also dealt in securities and in real estate. Accordingly, the agent made an extended examination of real estate records, bank records, stockbrokers' records, Treasury Department records, Insurance Company records, mortgage and lending institution records, in order to ascertain the defendant's assets and liabilities. From this data he prepared a net worth statement showing the total assets of the defendant, including cash in bank, ² United States bonds, stock, real estate, loans receivable, life insurance and other investments amounting to a total of $129,991.17, and liabilities consisting of mortgages on real estate and reserve for depreciation in the aggregate sum of $47,722.20, or a net worth on December 31, 19 42 of $82,218.97.

A copy of this statement was made available to Bell 's accountant. Bell made no claim at the time that he possessed other assets than those shown on the statement and he offered no evidence at the trial to contradict this statement of his net worth at the beginning of the period under examination.

By resort to similar records, the agent found Bell 's net worth at the end of 1943, 1944 and 1945 to be $141,208.48, $175,950.06 and $201,482.78 respectively; and by subtracting the net worth of the preceding year the increases in net worth during the taxable years were found to be $58,989.51, $34,741.58 and $25,532.72 respectively.

In order to find the taxable income for these years, the disbursements of the taxpayer for living expenses, taxes, insurance premiums and miscellaneous expenses were added and the allowable deductions from income and the non-taxable long term gains were subtracted so that the taxable net income for the years in question was found to be $69,836.83, $40,615.81 and $24,703.85 respectively.

[Increases in Net Worth Due to Real Estate Holdings]

In order to make certain that the increases in net worth during these years constituted earnings of the taxpayer, Bell was questioned by the agent as to gifts or inheritances which he might have received. He told the agent at his first interview that he had received no gifts or inheritances. Six months later at a second interview he told the agent that his mother customarily gave his wife $4,000 on their wedding anniversaries and a like amount to each of the three children on their respective birthdays during the years in question. However, in his income tax returns Bell claimed his mother, his wife and his three children as dependents. At the trial of the case no testimony was offered and no records were produced by the defendant as to these gifts.

The statement prepared by the agent showed that the greatest increase in net worth during the period under examination was in real estate. At the end of 1942 Bell owned real estate in the sum of $77,546.57. This item was increased to $138,761.20 at the end of 1943, $147,887.24 at the end of 1944, and $219,220.91 at the end of 1945. The testimony as to the source of the funds with which Bell increased his real estate holdings has an important bearing upon the sufficiency of the proof to take the case to the jury. In 1943 Bell purchased real estate in Atlantic City for the sum of $45,038.76 and paid for it with two checks on his personal bank account in the aggregate sum of $5,188.76 and one check for $39,850 on the bank account of his corporation which sum Bell had deposited to the corporation's credit. When asked as to the source of this money Bell told the agent that he had gotten it in the form of a loan from his mother who paid it to him in cash. No check or promissory note or other record evidence of the loan was shown to the agent or produced at the trial. Bell told the agents that no interest on the loan had been paid and he continued to list his mother as a dependent in his tax returns for 1944 and 1945.

In 1943 the property No. 9707 Georgetown Road in Washington was purchased in the name of Bell 's wife for $16,175.87 with funds taken from her account, and the title was taken in her name. The money, however, was deposited in her account by Bell . She was listed in his tax returns as a dependent and filed no tax return herself. In 1944 the adjoining property was acquired under similar circumstances for $9,126.04 and placed in the name of Mrs. Bell.

In 1945 Bell sold the Atlantic City property for $75,000 and bought a building at 1808 Adams Mill Road in Washington for $100,622.43, paying the difference from his personal and corporate bank accounts. In 1945 he purchased a one-third interest in the property No. 7101 Georgetown Road for the sum of $15,750. The net worth statements show no reduction of the other assets or increase of liabilities sufficient to cover the increase in the taxpayer's real estate.

[Admissibility of Evidence of Net Worth]

The defendant makes the contentions that the evidence of net worth was inaccurate and lacking in probative force, and was therefore inadmissible, and that the prejudicial statements of the defendant should not have been taken into consideration because a conviction of crime cannot be sustained by extra judicial admissions alone without independent proof of the corpus delicti. It is said in the first place that the foundation statement at the beginning of the period on December 31, 19 42 was inaccurate because it did not take into account currency in the hands of Bell and his wife at the end of 1942, the amount due him by the corporation on December 31, 19 42, or debts due him at the end of the year; and also failed to include a liquidating dividend of $3,708.49 received by him during the year, and a credit of $3,021.72 due him by his stockbroker at the end of the year.

An examination of the record indicates that the probative force of the evidence relating to the net worth of the taxpayer at the beginning of the period under examination is not undermined by these criticisms. The amount of currency undeposited and in the hands of the defendant and his wife on December 31, 19 42 was small, according to Bell 's statement, and could not be determined when the investigation started in 1946. The charge that the amount due Bell by the corporation was stated as of October 31, 19 42 instead of December 31, 19 42, springs from the fact that the earlier date was the end of the corporation's tax year. This circumstance, however, tended to benefit rather than injure the defendant because the books showed that the amount of this item was decreased by debits in the defendant's account in the subsequent two months. The evidence shows clearly that Bell was asked whether he owed any money and the net worth contained a statement of all the liabilities which the agent could discover. With respect to the two other debit and credit items it is sufficient to say that the evidence shows that they did not relate to the year 1942. In short, these criticisms of the basic opening statement, considered separately or together, furnish no ground for its exclusion from the jury. The agent testified that he had found no evidence or intimation of other assets which he failed to include and his statement was furnished to the defendant's accountant and was not challenged.

It is further contended that the net worth statements at the end of the years 1943, 1944 and 1945 are so replete with errors that no verdict could be based upon them. All of these alleged defects have been examined and found to be insufficient to justify the exclusion of the statements from the jury. It is sufficient to say in this opinion that in each instance there is evidence to support the government's figures, or the inaccuracies are too insignificant to materially affect the final result.

These is no substance to the defendant's contention that the net worth statement is so incredible as to be inadmissible because it discloses profits that could not possibly have been earned upon the small inventory of $8,650 shown on the corporation's books. The profits on an auction business are made for the most part on the sale of goods of other persons and not upon the profit to the auctioneer. If the defendant had kept invoices of the goods consigned to him for sale, and records of the commissions on the sales which, according to his statement, varied from 18 per cent to all that the traffic would bear, an accurate account of these profits from his auction business could have been made, but no such records were available.

Bearing this evidence in mind and the complete failure of the defendant to controvert it, and having regard for the rule that evidence must be taken in the light most favorable to the government in considering its sufficiency, ³ we have no doubt that the submission of the case on the comparison of the taxpayer's net worth at the beginning and end of the tax years was justified, and that the evidence was sufficient to support a verdict of guilty. An estimate of the taxpayer's net worth as the means of determining his income is resorted to in the absence of accurate records which it is his duty under the statute to make and to preserve, and by its very nature it is an approximation; but it has been held in this and other jurisdictions to be an appropriate method to support a criminal prosecution under the statute, ⁴ and the absence of proof of the exact amounts of unreported income is not fatal if there is substantial evidence tending to prove the defendant's guilt beyond a reasonable doubt.

The defendant, pointing out that the government's case against him consists of the net worth statements and his own admissions, contends that the case must fall on the ground that the net worth statements are insufficient in themselves to prove his guilt and that in the absence of proof of the corpus delicti, a conviction of crime may not be based solely on the confessions or admissions of the defendant. This argument assumes that the net worth statements in themselves furnish no substantial evidence whatsoever of the corpus delicti in this case; but is not true, as we have seen. Moreover, the rule does not require that the corpus delicti be completely shown by evidence aliunde defendant's confessions, but admits the confessions where other substantial evidence of the crime is shown, and thereupon both the statements of the defendant and the independent evidence must be taken into consideration by the jury in determining whether guilt is proven beyond a reasonable doubt. In Daeche v. U. S. , 2 Cir., 250 Fed. 566, 571, cited with approval in Warszower v. U. S., 312 U. S. 342, 345, it was said:

"* * * The corroboration must touch the corpus delicti in the sense of the injury against whose occurrence the law is directed; in this case, an agreement to attack or set upon a vessel. Whether it must be enough to establish the fact independently and without the confession is not quite settled. Not only does this seem to have been supposed in some cases, but that the jury must be satisfied beyond a reasonable doubt of the corpus delicti without using the confessions, before they may consider the confessions at all. * * * But such is not the more general rule, which we are free to follow, and under which any corroborating circumstances will serve which in the judge's opinion go to fortify the truth of the confession. Independently they need not establish the truth of the corpus delicti at all, neither beyond a reasonable doubt nor by a preponderance of proof."

See also, Yost v. U. S., 4 Cir., 157 Fed. (2d) 147, 150; Forte v. U. S. , C. A. D. C., 94 Fed. (2d) 236.

[Substantiating Evidence]

In this case there is substantial evidence outside of Bell 's statements to indicate his guilt. It consists of the increase in his net worth during the taxable years, the absence of personal records or books of account, and the inadequacy of the corporate records to show fully either its transactions or those of the defendant; and this body of testimony derives support from the defendant's failure to offset or explain the discrepancy through his employees either during the agent's investigation or the trial in court. It is true that the burden of proof resting upon the government does not shift during the progress of a criminal case but when in the trial of charges of income tax evasion discrepancies between the taxpayer's returns and his actual income are indicated by the government's proof, the failure of the defendant to offer explanation in any form may be considered by the jury in finding its verdict. In Rossi v. U. S., 289 U. S. 89, 91, the court said:

"The general principal, and we think the correct one, underlying the foregoing decisions is that it is not incumbent on the prosecution to adduce positive evidence to support a negative averment the truth of which is fairly indicated by established circumstances and which if untrue could be readily disproved by the production of documents or other evidence probably within the defendant's possession or control."

See also, Jelaza v. U. S., 4 Cir., 179 Fed. (2d) 202 [50-1 USTC ¶9149] U. S. v. Hornstein, 7 Cir., 176 Fed. (2d) 217, 220 [49-2 USTC ¶9326]; Bradford v. U. S., 5 Cir., 130 Fed. (2d) 630.

In addition, when we come to determine the sufficiency of the evidence for the submission of the case to the jury, we must take into consideration defendant's statement that his mother, who was dependent on him for support, furnished him with $39,850 in cash in 1943 to enable him to buy the Atlantic City property.

[Net Worth Theory]

The defendant relies principally upon Bryan v. U. S., 5 Cir., 175 Fed. (2d) 223 [49-1 USTC ¶9272, 9322], and U. S. v. Fenwick, 7 Cir., 177 Fed. (2d) 488 [49-2 USTC ¶9448], in both of which it was held that evidence based on the net worth theory was insufficient to support a conviction of attempting fraudulently to evade the income tax, since the government's case did not exclude the reasonable possibility that the defendant had other assets at the beginning of the period than those shown by the government's statement; and the court directed a verdict saying that the evidence, being circumstantial, must exclude every reasonable hypothesis except that of the defendant's guilt. But we cannot follow these decisions since it is obvious that they are based upon their particular facts and they do not relieve us from the duty of appraising the sufficiency of the evidence in the case before us. That responsibility does not include a finding as to whether the defendant is guilty beyond a reasonable doubt. When a motion for a directed verdict of acquittal is made in a criminal case, the sole duty of the trial judge is to determine whether there is substantial evidence which, taken in the light most favorable to the United States, tends to show that the defendant is guilty beyond a reasonable doubt. The possibility that a jury may have a reasonable doubt upon the evidence as to the guilt of the defendant is not the criterion which determines the action of the trial judge. The decision on that question is for the jury to make and the rule is the same whether the evidence is direct or circumstantial. Curley v. U. S. , C. A. D. C., 160 Fed. (2d) 229; Abrams v. U. S., 250 U. S., 616, 619; Pierce v. U. S., 252 U. S. 239, 251; Yoffe v. U. S., 1 Cir., 153 Fed. (2d) 570, 573 [46-1 USTC ¶9171]; Rob erts v. U. S., 5 Cir., 151 Fed. (2d) 664; U. S. v. Manton, 2 Cir., 107 Fed. (2d) 834, 849. In Curley v. U. S. the court said: (p. 232)

"The true rule, therefore, is that a trial judge, in passing upon a motion for a directed verdict of acquittal, must determine whether upon the evidence, giving full play to the right of the jury to determine credibility, weigh the evidence, and draw justifiable inferences of fact, a reasonable mind might fairly conclude guilt beyond a reasonable doubt."

[Scope of Cross Examination]

The defendant further contends that the District Judge made numerous errors in ruling upon the admissibility of testimony. Most of these rulings occurred during the examination of the government's agent, when the defendant, having made no opening statement of his case to the jury and having obviously decided to offer no evidence on his own behalf, endeavored to prove his case through cross examination of the witnesses and was not allowed, in a number of instances, to go outside the scope of the direct examination. The net worth statement was objected to as inadmissible because all of the persons who cooperated in setting it up were not presented to the court; but the supporting evidence for the items in the account were before the jury and the agent verified the statement as an accurate summary of the figures. Other questions related to such matters as what the agent found in the defendant's safe deposit box, what the bank deposit book and certain check books and stubs showed as to the defendant's income, the contents of an unanswered letter written by the defendant to the agent, &c. &c.

Questions of this kind must necessarily be left largely to the wise discretion of the trial judge especially in a case involving many factual details that may be easily confused or obscured in the minds of the jury. Of course it is the duty of the judge in a criminal case to allow full and free examination of the government's witnesses in order that all relevant facts may be disclosed; but in the federal courts for over a hundred years the rule has been that the scope of cross examination is limited to subject matter referred to during the examination in chief; and if a party wishes to examine a witness regarding other matters, he must do so by making the witness his own and by calling him as such in the subsequent progress of the trial. Phila. & Trenton R. R. Co. v. Stimpson, 14 Pet. (39 U. S. ) 448, 461; Moyer v. Aetna Life Ins. Co., 3 Cir., 126 Fed. (2d) 141, 143; Kincade v. Mikles, 8 Cir., 144 Fed. (2d) 784, 787; Wigmore on Evidence, (3rd Ed), §§ 1885-1888. See, Hider v. Gelback, 4 Cir., 135 Fed. (2d) 693, 695. This rule has been the subject of some attack; and an attempt was made by Advisory Committee when formulating the Rules of Civil Procedure in 1936 and 1937 to change the rule to allow cross examination upon all the material and pertinent issues of the action. The Supreme Court in rejecting these proposals and in adopting Rule 43(b) of the Federal Rules of Civil Procedure, (26 U. S. C. A. Rule 43(b), as it now stands) indicate that "the historic limitation upon the scope of cross examination to the subject matter of the direct examination is still to be enforced in the federal courts." Moyer v. Aetna Life Ins. Co., 3 Cir., 126 F. 2d 141, 143; Wigmore on Evidence (3rd Ed.) §1888. Nothing to the contrary appears in the Federal Rules of Criminal Procedure. ⁵

Our examination of the record in this case shows that the District Judge allowed much latitude in the cross examination of the government's witnesses as to matters covered by direct testimony, and it was only when the questions were improper as to form, or when they touched upon subjects not brought out in direct examination or not within the purview of the witness' knowledge that they were ruled out. At the same time the defendant was reminded that he would have ample opportunity to offer any evidence which he deemed favorable to him as part of his defense. We find that the defendant was not impeded in making his defense and that there was no error in the rulings of the trial judge upon the evidence. A similar ruling was made under like circumstances in U. S. v. Hornstein, 7 Cir., 176 Fed. (2d) 217, 220 [49-2 USTC ¶9326].

The defendant further contends that the judge's charge contained certain factual inaccuracies which were detrimental to his case. It is objected that the judge attributed to the revenue agent statements as to the inadequacy of the books more sweeping than the agent actually made; but the charge was not misleading in this respect when considered in relation to the whole and in connection with the judge's warning to the jury that they should determine for themselves whether the agent's rejection of the books was made upon a reasonable basis. Other charges of inaccuracy relate to matters not called to the attention of the judge before the jury retired to consider its verdict. We are satisfied from our examination that they were not misleading, especially as the jury were told at the outset that the comments of the judge upon the evidence were advisory only and should be given only such attention as the jury might think that they deserved.

We find no error, and the judgment of the District Court is therefore.

Affirmed.

¹ The entries in the cash book showed only disbursements and were quite informal and devoid of explanation. Typical of the entries is the following:

Jan. 2, 19
43         Johnson ....         $ 50.00

                     Elizata ....          125.00

                     Rent .......          652.30

                     Guest ......           12.50

                                          $839.80

 

² The item of cash in banks included monies in the name of the wife and children, since it appeared from the defendant's statement that they had no independent source of income.

³ United States v. Manton, 2 Cir., 107 Fed. (2d) 834, 839; Jelaza v. U. S., 4 Cir., 179 Fed. (2d) 202, 204 [50-1 USTC ¶9149].

⁴ Jelaza v. U. S., 4 Cir., 179 Fed. (2d) 202, 204 [50-1 USTC ¶9149]; U. S. v. Chapman, 7 Cir., 168 Fed. (2d) 997 [48-1 USTC ¶9312]; Bryan v. U. S., 5 Cir., 175 Fed. (id) 223 [49-1 USTC ¶9272, 9322]; U. S. v. Fenwick, 7 Cir., 177 Fed. (2d) 488 [49-2 USTC ¶9448]; U. S. v. Johnson, 319 U. S. 503, 517 [43-1 USTC ¶9470].

⁵ Rule 26 of the Federal Rules of Criminal Procedure, 18 U. S. C. A. Rule 26, states as follows: "* * * The admissibility of evidence and the competency and privileges of witnesses shall be governed, except when an act of Congress or these rules otherwise provide, by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience."

 

 

[50-1 USTC ¶9149]Jacob S. Jelaza, Appellant v. United States of America , Appellee

(CA-4), In the United States Court of Appeals for the Fourth Circuit, No. 5973, 179 F2d 202, January 4, 19 50

Appeal from the United States District Court for the Eastern District of Virginia, at Norfolk. Criminal.

Penalties for tax evasion: Explanation of unreported income.--The evidence was sufficient to sustain a conviction for income tax evasion, where taxpayer's explanation of the discrepancies between expenditures, bank deposits and increase in net worth, on the one hand, and the amount of income reported on his tax returns, on the other, was contradictory and evasive. Evidence that a loan had been repaid to taxpayer and that his mother-in-law had made gifts to him in substantial sums was unsatisfactory.

Russell T. Bradford and Tazewell Taylor for appellant, and John P. Harper, Assistant U. S. Attorney, (George R. Humrickhouse , U. S. Attorney, on brief) for appellee.

Before PARKER, SOPER and DOBIE, Circuit Judges.

DOBIE, Circuit Judge:

Jacob Jelaza was indicted for violations of the Internal Revenue Laws of the United States , 26 U. S. C. A. §145(b). The first count of the indictment charged that for the year 1943 Jelaza reported a net income of $13,383.15 and paid a tax thereon of $4,385.93, whereas his actual net income for that year was $35,766.85, on which there was a tax due the Government of $16,149.92. The second count of the indictment charged that the appellant reported a net income for the year of 1944 of $15,024.45, and paid a tax thereon of $4,046.24, whereas for that year his actual net income was $51,460.90, on which amount he owned the Government an income tax of $27,585.68. Jelaza entered a plea of not guilty and waived a trial by jury. The District Court of the United States for the Eastern District of Virginia found the appellant guilty on both counts and suspended the imposition of sentence for a period of five years upon condition that the appellant be of uniform good behavior, not violate any of the laws of the United States or the State of Virginia, and that he pay a fine of $10,000.00 on the first count of the indictment and a fine of $10,000 on the second count of the indictment within one year as directed by the Probation Officer. Jelaza has appealed. The only question before us is whether there was sufficient evidence to sustain the District Court's finding of guilt.

[Reconstruction of Income]

The Government introduced testimony which, it claimed, showed that, by using three methods commonly employed in computing income in cases of this kind, Jelaza's income for the two years in question was:

"Method of Computation                       Net Income

                                           1943                1944

Expenditures Method ........         $35,766.85          $51,460.90

Bank Deposits Plus Cash

Expenditures ...............          36,221.83           59,704.12

Increases in Net Worth

Method .....................          39,401.22         55,617.13"

These methods have, in many cases, been approved by the courts, and the Government is not required, in order to support a conviction here, to prove with mathematical certainty the precise amount of unreported, taxable income. Halle v. Commissioner, 175 Fed. (2d) 500 [49-1 USTC ¶9295]; Stinnett v. United States, 173 Fed. (2d) 129 [49-1 USTC ¶9217]; Gleckman v. United States, 80 Fed. (2d) 394 [35-2 USTC ¶9645].

In these (and other similar) cases, the courts have been careful to point out that findings of fraud have been sustained if, but only if, the taxpayer has offered no explanation, or no adequate explanation, of the discrepancies between (on the one hand) expenditures and/or bank deposits and/or increases in net worth and (on the other hand) the amount of income reported by the taxpayer.

Thus, in the Stinnett case, supra, our Court (173 Fed. (2d) at pages 129, 130) mentioned:

"A gross discrepancy between bank deposits and gross receipts, without any adequate explanation by the taxpayer * * * Stinnett could offer no adequate explanation of these gross discrepancies." (Italics supplied.)

In Halle v. Commissioner, supra, Circuit Judge Dobie (speaking for the Second Circuit) said (175 Fed. (2d) at page 503):

"Against this background, taxpayer and his wife introduced little or no genuine evidence to explain the large sums of money deposited in the bank and brokerage accounts."

[Explanation of Unreported Income]

In the case before us, the taxpayer did offer an explanation of the alleged unreported income (which we shall discuss later) as being gifts from Mrs. Tish, the mother of taxpayer's wife, and the taxpayer testified that his father had repaid to taxpayer a loan of $6,000.

Unquestionably a very important figure in this case is Mrs. Tish. She lived with the Jelaza's, after she sold her store. Mrs. Jelaza was her only child, the apple of her eye, in whom she reposed the utmost confidence. The Government contends that Mrs. Tish's financial resources could not have been large enough for her to have made the gifts in question to Mrs. Jelaza, that these gifts were not in fact made and that taxpayer, under the guise of these gifts, is concealing, and failing to report, what was actually income taxable to him. Mrs. Tish was illiterate, without the ability to read and write. She kept practically no records and was addicted to such strange practices as keeping substantial sums of money hidden in various places in her little store. Yet she displayed no little business acumen in the conduct of her second-hand clothing business.

Voluminous testimony was introduced on both sides as to the extent of the resources of Mrs. Tish. According to the Government, the resources available to Mrs. Tish up through the taxable years before us according to her own testimony, did not exceed $79,000; the taxpayer introduced evidence to show that these resources exceeded $102,000. The Government claims that the expenditures made by Mrs. Jelaza out of her monther's assets totalled over $103,000; taxpayer claims that these items should be just over $93,000.

No useful purpose would be served, and it would unduly prolong this opinion, were we to attempt a detailed analysis of the extensive evidence in this case. It seems crystal clear that bonds and real estate were purchased, to both of which title was taken in the joint names of Mr. and Mrs. Jelaza, and there were other expenditures by the taxpayer, which were utterly impossible had the taxpayer's resources been limited to the income that he reported. This discrepancy is filled, according to taxpayer, by gifts made by Mrs. Tish to Mrs. Jelaza, which inured to the economic benefit of the taxpayer, and the payment by taxpayer's father of the land of $6,000.

The Government naturally attacked the testimony of the Jelaza's and Mrs. Tish. As to Mrs. Tish, it was shown that she failed to file returns for, and pay, State taxes on her personal property, also any gift taxes on the gifts to her daughter. Mrs. Tish filed no federal income tax return prior to 1941. Many discrepancies appear in the computations and calculations offered by the taxpayer as to the resources of Mrs. Tish, and the testimony submitted by the taxpayer in this connection is evasive and not conclusive. There is an inherent improbability that Mrs. Tish could have realized, and saved, such large sums of money as those claimed, from operation of a small second-hand clothing store.

Other indications that the Jelaza evidence was, in many respects, contradictory and evasive, may readily be found in this voluminous record. For example, in April, 1945, the appellant admitted that he had in the Tish safe deposit box 1943 bonds in the sum of $18,112.50, and he told the Government agent that these were all the bonds that he had. Subsequently the agent got information to the contrary from Chicago , and when he taxed the appellant with it, the latter admitted that he had an additional amount of bonds issued in 1944 in the sum of $17,400. Again, when Jelaza and his wife and the agent went to the box, the wife attempted to slip $1,000 cash found in an envelope in the box into her pocketbook, stating that she did not know what the envelope contained. Later she admitted that she did know that it contained $1,000.

Then, there is the uncertain testimony of Jelaza concerning the sum of $6,000 which he claims he received from his father in repayment of a loan which he made his father in 1927 or 1928. No note or other record of this indebtedness was produced, nor was any record shown of the payment of the loan and there was testimony indicating that before his death in 1945, the father was in an improverished condition and left no estate for admin istration after his death.

The existence of large sums of money in cash not deposited in the bank but kept in a safe deposit box is a highly suspicious circumstance. It cannot here be explained satisfactorily as the result of the eccentricity of an ignorant old woman, because the evidence is undisputed that Mrs. Jelaza, who worked in her husband's store, had entire charge of her mother's affairs and complete access to the cash and securities, while the taxpayer was an interested party, closely concerned with all these transactions. And the circumstances surrounding these deposits and withdrawals varied quite widely from commonly accepted business practices.

A stronger case against the taxpayer would undoubtedly have been made had the Government proved the precise source of income not reported by the taxpayer; though such a showing is not essential for conviction. The Government did attempt such a showing by proof of the gross receipts from the taxpayer's business and evidence as to the precentage of profit from businesses similar to that conducted by the taxpayer. On the other hand, on behalf of the taxpayer, evidence of a Government agent was introduced to show that the books of taxpayer were, on their face, apparently as well kept as the average of books kept by others in a similar business; an employee of taxpayer testified that, to the best of his knowledge, the sale price of all goods sold by taxpayer were clearly marked and that all sales were run through the cash register, while the Chairman of the local Ration Board testified that, during the tax years in question, no reports or complaints were ever made that taxpayer charged more than the ceiling price for goods which he sold.

The big question in this case is whether the explanation offered by the taxpayer of the large sums of money which he expended was so unsatisfactory that the Court below was justified in rejecting it. This, to a large extent, depends upon the credibility of the witnesses who testified in this case. And questions of credibility are for the Trial Judge who saw and heard the witnesses, not for the Appellate Court. Obviously, the Trial Judge did not believe the explanation by the taxpayer of excess income not mirrored in his tax return. Accordingly, we must here accept the Trial Judge's conclusion and his verdict based upon that conclusion.

No provision is made in the Federal Rules of Criminal Procedure for reviewing the sufficiency of the evidence to sustain a conviction in any different manner where the trial is had by a judge than where it is by a jury. The case comes to us, therefore, under the rule that the evidence is to be considered in the light most favorable to the Government and that we may reverse only if we can say that there is no substantial evidence to support the verdict. We cannot say that there was no substantial evidence to support the verdict. The judgment of the District Court must, therefore, be affirmed.

Affirmed.

 

 

[56-2 USTC ¶9992] United States of America v. Harold John Adonis

U. S. District Court, Dist. N. J., Criminal No. 373-52, 146 FSupp 56, 10/18/56

[1939 Code Sec. 145(a), (b)--similar to 1954 Code Secs. 7201-7203; 1939 Code Sec. 3616(a)--similar to 1954 Code Sec. 7207]

Criminal tax evasion: Felony v. misdemeanor: Conviction with greater penalty.--Taxpayer was properly sentenced for fraud under 1939 Code Sec. 145(b), rather than under 1939 Code Sec. 3616(a), which calls for a lesser penalty. Taxpayer's motion to vacate and correct that part of a sentence against him in U. S. v. Adonis, 55-1 USTC ¶9310, 221 F. 2d 717, was denied.

Raymond Del Tufo, Jr., United States Attorney, Wilfred W. Hollander, Assistant United States Attorney, for plaintiff. Milton, McNulty & Augelli, Joseph Keane, for defendant.

Memorandum Opinion

MODARELLI, District Judge:

This is a motion under 28 U. S. C. §2255 and Rule 35, Fed. Rules Crim. Proc., to correct a sentence. Harold John Adonis attacks this court's sentence of five-years imprisonment imposed upon him on April 2, 19 54, following a jury verdict of guilty of criminal income tax evasion in violation of §145(b) of the Internal Revenue Code, 26 U. S. C. The specific charge of the indictment in the usual form was that for the calendar year 1948 Adonis filed a false and fraudulent income tax return for himself and his wife "in violation of Section 145(b) Internal Revenue Code; 26 USC Section 145(b)." An appeal followed which was unsuccessful. United States v. Adonis, 221 Fed. (2d) 717 [55-1 USTC ¶9310]. He began serving his sentence on April 22, 19 55.

[Defendant's Claim]

The sole question presented by this motion is defendant's claim that he was improperly sentenced under 26 U. S. C. §145(b) ¹ rather than under 26 U. S. C. §3616(a). ² He asks for an order vacating and correcting the sentence.

A recent Supreme Court decision has encouraged challenges as to the validity of sentences because of the assumed overlapping of §§ 145(b) and 3616(a). In Berra v. United States, 351 U. S. 131 (1956) [56-1 USTC ¶9480], the Court held that it is not for the jury to decide whether it would apply §3616(a) rather than §145(b). But the Court noted at pages 133-4 that "No motions addressed to the validity of the indictment, judgment of conviction or sentence under §145(b) were made before, during, or after trial * * *;" and at page 135: "Whatever other questions might have been raised as to the validity of petitioner's conviction and sentences, because of the assumed overlapping of §§ 145(b) and 3616(a), were questions of law for the court. No such questions are presented here." ³ The Court of Appeals, however, in affirming Berra's conviction, held that §3616(a) did not apply to income tax returns and that any instruction to the jury relating to that section would have been irrelevant under the evidence. Berra v. United States , 221 Fed. (2d) 590, 598 (CA-8 1955) [55-1 USTC ¶9382]. ⁴ In the Supreme Court, however, both parties agreed "* * * that §3616(a) was applicable to income tax returns, and we shall assume, arguendo, the correctness of that interpretation of the statute."

Consistent with its position in the Berra case, here, the United States assumes that §3616(a) does apply to income tax returns. It argues, however, that Adonis was properly indicted, convicted, and sentenced under §145(b) for two reasons: (1) Where a single act violates more than one statute, the United States may elect to prosecute under either, especially when one section requires an element of proof not required by the other section. ⁵ (2) If there is a conflict between the two sections, §145(b) prevails. ⁶

[Recent Decisions]

There are two unreported decisions in addition to United States v. Cincotta, supra, wherein the same or an analogous question was presented as here. In the United States District Court for this District, Judge Hartshorne found--after an exhaustive history of both sections involved--"Since §145(b) clearly applies to income taxes and §3616(a) and its forerunners could not have applied to income taxes--there being no income tax law--when §3616(a) was reenacted, Congress could not have intended that it be applied to income taxes which were already covered by §145(b)." Judge McGohey in the United States District Court for the Southern District of New York, in the case of United States v. Costello, held "The defendant does not contend that the latter section [§3616(a)] repealed the former [§145(b)]. His contention is that since both sections cover precisely the same ground, 'the specific offense of filing a false return with intent to evade taxes, under Sec. 3616(a) prevails over the general denunciation of attempting to evade taxes denounced by Sec. 145(b)' and therefore a sentence greater than one year and $1,000 fine on each count is illegal.

"The motion is denied on the authority of United States v. Moran in which the Court of Appeals for this Circuit rejected a similar contention."

Both of these unreported decisions were filed in 1956.

[Conclusion]

There is ample decisional law to support the conclusion that §145(b) is a legal basis for prosecution of income tax evasions by means of filing a false and fraudulent income tax return. I shall cite only the United States Supreme Court case, Holland v. United States, 348 U. S. 121 (1954) [54-2 USTC ¶9714].

I conclude, therefore, that the defendant was properly tried, convicted, and sentenced under §145(b) of the Internal Revenue Code of 1939.

Motion denied.

An order may be submitted in conformity with the opinion herein expressed.

¹ "§145. Penalties.

"(b) Failure to collect and pay over tax, or attempt to defeat or evade tax. Any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution."

² "§3616. Penalties.

"Whenever any person--

"(a) False returns. Delivers or discloses to the collector or deputy any false or fraudulent list, return, account, or statement with intent to defeat or evade the valuation, enumeration, or assessment intended to be made * * * he shall be fined not exceeding $1,000, or be imprisoned not exceeding one year, or both, at the discretion of the court, with costs of prosecution."

³ Mr. Justice Black in a dissenting opinion, in which Mr. Justice Douglas joined at p. 137, said:

"Apparently the Court means by this [The majority's position that since in the lower courts Berra had not properly challenged his sentence under the felony statute, no such question was before the court.] to leave open to petitioner the opportunity to challenge his sentence by a motion to correct it under 28 U. S. C. §2255. Of course I agree that a motion under that section would be appropriate, but I think petitioner is entitled to have it settled now."

⁴ In so holding, the Court of Appeals followed its earlier decision in Dillon v. United States, 218 Fed. (2d) 97, 101-103 (CA-8 1955) [55-1 USTC ¶9131]. In addition to the two decisions by the Court of Appeals for the 8th Circuit, there is United States v. Cincotta, Criminal No. 31842, D. C. N. D. N. Y., opinion filed June 6, 19 56. It was a motion to dismiss the indictment "* * * upon the ground that each count charges the defendant with a felony under Sec. 145(b) * * * alleging identical facts which constitute only a misdemeanor as set forth in Title 26 U. S. C. A. Sec. 3616(a)." In denying the motion the court relied on its interpretation of the Supreme Court's Berra opinion as not "* * * requiring relief to the defendant at this time." The court also decided to follow the decisions holding 3616(a) inapplicable to income tax.

⁵ United States v. Gilliland, 312 U. S. 86 (1940) is cited as a "complete answer" to Adonis' contention. Rosenberg v. United States, 346 U. S. 273, 294 (1952) is also cited. United States v. Beacon Brass Co., 344 U. S. 43 (1952) [52-2 USTC ¶9528].

⁶ United States v. Tynen, 11 Wall 88 (1870), and United States v. Yuginovich, 256 U. S. 450 (1921) are cited for the proposition that "Where, as here, a statute is passed subsequent to one already enacted, the later enacted statute controls and the older statute must give way." United States v. James J. Moran, -- Fed. (2d) -- (CA-2), decided August 15, 19 56 [56-2 USTC ¶9836].

 

 

[55-1 USTC ¶9310] United States of America v. Harold John Adonis, Appellant

(CA-3), In the United States Court of Appeals for the Third Circuit, No. 11,358, 221 F2d 717, March 28, 19 55

Appeal from the United States District Court for the District of New Jersey.

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

Criminal tax evasion: Expenditures in excess of available funds: Sufficiency of proof: Instructions.--The evidence was sufficient to support the conviction of tax evasion under 1939 Code Sec. 145(b), where the Government employed the net worth-expenditures method in proving unreported income for 1948. The record showed (1) that no additional income was derived from sources of reported income, that is, taxpayer's salary and income from two other sources, (2) that his calculated net worth at the end of 1947 was $3,342.85, (3) that he spent $44,627.61 in 1948 in the building and furnishing of a home, (4) that upon reasonable inquiry by the Government no creditable evidence of substantial nontaxable receipts of income in 1948 could be discovered, (5) that the large receipts and expenditures concerned occurrences in 1948 and did not represent acquisitions of any earlier year, and (6) that taxpayer offered no evidence but stood on his contention that the Government's proof was inadequate in law and in fact. The Court's instructions to the jury were held proper.

Joseph Keane, 40 Journal Square, Jersey City 6, N. J., for appellant, Frederick B. Lacey, Assistant United States Attorney, U. S. Court House, Newark 1, N. J., for appellee.

Before GOODRICH, KALODNER and HASTIE, Circuit Judges.

Opinion of the Court

HASTIE, Circuit Judge:

A jury has found the appellant, Harold Adonis, guilty of criminal income tax evasion in violation of Section 145(b) of the Internal Revenue Code, 26 U. S. C. 145(b). The specific charge of the indictment is that for the calendar year 1948 Adonis filed a false and fraudulent income tax return for himself and his wife. The defense offered no evidence but stood on its contention that the government's proof was inadequate in law and in fact.

The most difficult matter on this appeal is one of the problems characteristic of tax evasion cases in which the net worth-expenditure method of proof is employed. To make the present issue clear, we will first state those elements of the government's case which were quite adequately proved and then inquire what more, if anything, had to be evidenced to complete a showing sufficient for jury consideration.

[The Facts]

First, it was shown, consistent with appellant's 1948 tax return, that he was a salaried employee of the State of New Jersey and that he received small additional compensation from two other sources. His total 1948 income as reported for tax purposes was $7304.77. It is conceded that no additional income was derived from the reported sources.

Second, there was a showing of the appellant's expenditures in 1948. About $4000 of routine living expense was proved. In addition it was shown that appellant bought a parcel of land in March, 1948 and, during the ensuing months, built and furnished a home on the site, paying for this enterprise during the taxable year amounts aggregating $44,627.61. The evidence of the payment of this much money in 1948 for land, building and furnishings was clear, precise and uncontroverted.

Third, the government put in evidence the details of an elaborate investigation by its agents into the life and financial history of the appellant through December 31, 19 47 for the purpose of determining what assets were available to him at the beginning of the taxable year. This investigation resulted in a calculation of the appellant's net worth on December 31, 19 47 as $3,342.85. This conclusion was consistent with a history of small salaried jobs, very modest living, very small bank accounts and such exigency that as recently as 1946 appellant's wife found it expedient to leave her baby in the custody of an aunt while she accepted employment at a salary of $30 per week.

Fourth, the government proved a diligent search for loans, inheritances, gifts and any other potential sources of non-taxable receipts in 1948 which might have supplied the large sums expended by appellant on his home building project. In this connection, although appellant elected to stay away from the investigators who sought to interrogate him about his 1948 income, the investigation covered all appellant had said or was reported to have said from time to time to other people in explanation of his ability to finance a very expensive 1948 project, so out of line with his apparent circumstances. This line of evidence was such as to warrant a conclusion by a jury that all reasonable inquiry had been made without discovery of any credible evidence of substantial non-taxable receipts during 1948.

[Issues Defined]

This brings us to the area of controversy. What more than the case already outlined had to be shown as a matter of law, and what more was shown in fact, to justify submitting to the jury the question whether the large excess of appellant's 1948 expenditure over the aggregate of his year-beginning net worth and reported 1948 income represented unreported 1948 taxable income?

In the first three paragraphs of the opinion of this court in U. S. v. Caserta, 1952, 199 Fed. (2d) 905, 906 [52-2 USTC ¶9540], Judge Goodrich discussed cases relevant to this question and concluded that, absent countervailing evidence, nothing more than such proof as has been outlined above need be shown to make it a jury question whether proven expenditures substantially greater than disclosed income and financial resources included unreported current income. However, we can not rest there because, in a series of cases decided December 6, 19 54, the Supreme Court has given us new authoritative guidance which has significance for this problem. Holland v. United States, 348 U. S. 121 [54-2 USTC ¶9714]; Friedberg v. United States, 348 U. S. 142 [54-2 USTC ¶9713]; Smith v. United States, 348 U. S. 147 [54-2 USTC ¶9715]; United States v. Calderon, 348 U. S. 160 [54-2 USTC ¶9712]. The appellant properly urges that for present purposes the most important pronouncement in these very recent decisions is the following language of the Holland case:

"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 . . .; here the disclosed business of the petitioners was proven to be capable of producing much more income than was reported and in a quantity sufficient to account for the net worth increases." 348 U. S. at 138.

The Court seems to be saying that such proof as we already have described in the present case, standing alone, is not enough. It is deemed unfair to draw a decisive inference against the taxpayer solely from the fruitlessness of the government's search for a source of the large sum of money actually spent, even though on the evidence it seems clear that the taxpayer must have obtained new funds from somewhere during the taxable year. It may not be assumed merely from the government's inability to find any source of non-taxable receipts that the funds acquired during the taxable year are taxable income. However, under the doctrine of the Holland case, "proof of a likely source", without evidence of how much that source yielded, is sufficient additional evidence to justify the inference the government seeks to create.

But the Court does not say that such proof of a likely source is the only additional evidence which will suffice to establish the government's case in a situation of this kind. And we do not believe that the Court intended such an implication. For, in logic, other items of proof may have equal or greater probative value as circumstantial indication that the newly available funds were taxable income.

[Other Supporting Proof]

We believe the additional evidence in this case had such probative value. The government undertook to convince the jury, first, that the appellant had made considered statements identifying particular sources from which he claimed to have obtained specific large non-taxable sums during 1948 and, second, that he clearly had not received any such sums from those sources. It is argued that if the jurors were convinced that the taxpayer had thus wilfully fabricated an account of current non-taxable receipts to explain his 1948 affluence they might reasonably infer that such conduct was an effort to conceal the fact and real sources of taxable gain in that year. It is this ligical inference from the taxpayer's own wilful misrepresentation upon which the government relies here to supply the evidentiary requirement which on other situations is filled by an inference from an affirmative showing of some likely source of income. ¹ Accordingly, we analyze the evidence to see whether there was a clear and impressive showing that the appellant wilfully misrepresented the source from which he obtained large amounts of money in 1948.

The cornerstone of this proof was undisputed evidence of testimony given by the appellant himself in a judicial proceeding in Holland in 1951. The nature of this proceeding was not identified, but only because the appellant took the position that this information might prejudice his case in the view of the jury. It was shown that in the Dutch proceeding the appellant was asked the source of the large sum which he expended for a home in 1948. He stated that the money for the land was supplied by his mother as a contribution. He said that the construction of the house cost about $38,000 of which $11,000 was obtained from a friend named Lambrew and evidenced by a mortgage, $21,000 was obtained from another friend, a Mrs. Navarro, and $1,700 represented his own savings available in 1948. He also spoke of $4,000 of savings in 1949, but that item is not relevant to the present controversy over 1948 taxes.

[Misrepresentations]

The government then offered a large amount of testimony calculated to convince the jury that this entire accounting was a wilful fabrication. As to appellant's mother, a widow, it was shown that she died at the age of 79 in February 1948, about a month before appellant began negotiations for the purchase of a home site. For several years this elderly lady had lived first with a son, other than appellant, and, at the time of her death, with a daughter. It was also shown that in her advanced age she was supported by the child with whom she lived, and made no contribution to household expenses. Inquiry addressed to the members of her family, other than appellant, showed that they knew of no income or substantial savings under her control. She reported no gifts for tax purposes and left no estate. On such evidence it is difficult to see how the jury could have avoided the conclusion that the appellant was guilty of a deliberate falsehood in naming his mother as the source of the $5,000 with which he purchased a home site.

The evidence concerning the alleged loan of $11,000 by Lambrew was even clearer. A mortgage purporting to secure construction advances of $11,000 was executed by appellant in favor of Lambrew and duly recorded in 1948. But witnesses, including both Lambrew's attorney and appellant's attorney, testified that the mortgage had been executed in contemplation of advances which never were made, and that it was later released without ever having secured any indebtedness.

The account of the Navarro transaction was a strange one which need not be detailed here. It will suffice to say that this was a story of a woman, employed as a salaried clerk both before and after the alleged transaction, bringing $21,000 in currency upon her person from South America in June 1948, and delivering the money to appellant in a taxicab in return for a signed but unwitnessed agreement in which he undertook that she should have a half interest in his home then under construction. When asked in 1952 to produce the original paper in order that the age of the writing might be tested, she stated that it had disappeared, although counsel for appellant had been able to produce a photostatic copy. There was even testimony which created serious doubt whether the defendant had known Mrs. Navarro before 1950.

In all, we think a strong case was made that the appellant's itemizing of these supposed sources of non-taxable receipts was a calculated misrepresentation designed to conceal current income.

We have not mentioned the additional fact that the prosecution did make some effort to show affirmatively a taxable source of 1948 income. One witness testified that he met appellant in 1950, at a time when the witness was interested in the possibility of utilizing appellant's services in a business venture. At that time appellant explained that he was a state employee with very good governmental connections and that "he was a lobbyist or go-between for the pinball operators and the government." If this evidence had been connected with the year 1948 is would have supplied a significant indication of a likely source of unreported 1948 income. But we think that this unamplified statement of what the appellant was doing in 1950 is too far removed in time from the taxable year to provide any substantial support for an inference that he received income from that source in 1948. Therefore, the case against the appellant must stand or fall on the adequacy of the proof of a calculated misrepresentation of source, as outlined above, to complete a legally acceptable circumstantial showing that the expenditures in question were derived from taxable income.

[Source During Taxable Year]

A second matter urged on this appeal is also the subject of comment in the Holland case. There, and in the companion Calderon case, Mr. Justice Clark alludes to the necessity of showing that the unreported earnings occurred in the tax year which the charge specifies. See Holland v. United States, 348 U. S. 121, 129 [54-2 USTC ¶9714]; United States v. Calderon, 348 U. S. 160, 168 [54-2 USTC ¶9712]. Appellant here says that neither the charge nor the evidence was clear enough on this point to permit the conviction to stand. We think he is mistaken.

The government made a strong showing of the taxpayer's very small net worth at the end of 1947. All of his discoverable assets at the beginning of the taxable year added to his admitted earnings during that year amounted to only about 25% of what he actually spent in 1948. Thus, the inference is clear and strong that for him some source of funds was very productive in 1948. It is also relevant that appellant himself in explaining his 1948 affluence attributed it to financial transactions in that year. This is not a case of large transactions and receipts spread over a number of years. All of the evidence of large receipts and large expenditures concerns occurrences in 1948. If we are correct in our view that the evidence sufficiently indicates that appellant's 1948 expenditure included unreported income, there was ample basis for concluding that this gain was realized in that year, and no indication that it might represent acquisitions of any earlier year.

In his instructions to the jury the trial judge stated that appellant was charged with reporting the 1948 income of himself and his wife in a certain small amount knowing "that their joint net income for said calendar year was the sum of $42,410.72". He later called to the jury's attention that "the prosecution year in this indictment is 1948". He spoke of the efforts of the government "to find all possible sources of income that this defendant had during the period in question". He cautioned the jury "that evidence of spending money is not in itself evidence of having taxable income in the year in which the money was spent." The entire charge and the posture of the evidence considered, we think the court made it clear to the jury that appellant could be convicted only if they found that he had 1948 income which he wilfully failed to report.

We have considered all other contentions of the appellant. In our judgment they reveal no basis for setting aside this conviction.

The judgment will be affirmed.

¹ It is to be noted that this is not a situation in which the government relies upon an admission, which may require corroboration. The statement of the defendant is proved as a relavant fact. Independent evidence of its falsity is then introduced to show the significance of the statement.

 

 

[50-1 USTC ¶9320] United States of America v. Eugene Vassallo, Appellant

(CA-3), In the United States Court of Appeals for the Third Circuit, No. 10,102, 181 F2d 1006, May 11, 19 50

Appeal from the United States District Court for the District of Delaware.

Penalties: Evidence: Willful attempt to evade or defeat tax.--Evidence that taxpayer knowingly filed returns for himself and a corporation of which he was the sole owner without reporting substantial items of income, established by the Government through a net worth basis and the "sources and application of funds" method, was sufficient to support a finding of guilty under six counts of an information charging a willful attempt to evade and defeat the income tax.

Francis A. Reardon, Assistant United States Attorney, Wilmington 99 , Delaware , for appellee. Stewart Lynch, Equitable Building , Wilmington 7, Delaware , for appellant.

Before MARIS, KALODNER and HASTIE, Circuit Judges.

Opinion of the Court

PER CURIAM:

The appellant was convicted under six counts of an information charging him with violations of Section 145(b) of the Internal Revenue Code. The defendant waived a jury trial and his case was accordingly tried by a judge of the district court without a jury. The trial judge made special findings in addition to a general finding of guilty.

On this appeal the appellant urges that the evidence was insufficient to sustain his conviction and that the special findings made by the trial judge were inadequate and not in accordance with Criminal Procedure Rule 23(c). We have carefully considered the appellant's contention in this regard but find them so wholly lacking in merit as to require no extended discussion. It is enough to say that the evidence was quite sufficient to support the trial judge's special findings and that those special findings are adequate and fully support the general finding of guilty on each of the six counts in question which the trial judge made.

The judgment of the district court will be affirmed.

 

 

[54-2 USTC ¶9712] United States of America , Petitioner v. Edward B. Calderon

In the Supreme Court of the United States , No. 25. October Term, 1954, 348 US 160, 75 SCt 186, December 6, 19 54

On Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit.

[1939 Code Secs. 41 and 145--similar to 1954 Secs. 446 and 7201]

Evasion of income taxes: Proof of fraud: Net worth increase inapplicable: Circumstantial evidence.--Taxpayer, an operator of a legitimate coin-machine business, was convicted of wilful attempts to evade and defeat his own and his wife's income taxes for the period 1946 through 1949. Conviction was based on the Government's computation of net worth increases for these years, but the Ninth Circuit reversed because proof of beginning cash was inadequate. The Supreme Court agreed that the evidence was flimsy in this respect but, in the circumstances, recourse could be had to independent evidence tending to establish the crime directly, without recourse to the net worth method. Such evidence established the fact that taxpayer's receipts from operations of his business were tabulated from many receipt books, some of which were numbered and some of which were not. Such a system placed taxpayer in the position of one who kept no books at all and of receiving unrecorded amounts of income. Thus, even though there may have been an "error" as to cash on hand at the starting point for opening net worth, the remainder of the net worth computation established a deficiency on which a conviction for fraud could be based. Accordingly, the Supreme Court sustained the conviction on the principle that "an inference of tax evasion could be based on the fact that taxpayer's visible assets greatly increased at a time when he was receiving unrecorded amounts of taxable income."

Simon E. Sobeloff, Solicitor General, H. Brian Holland, Assistant Attorney General, Marvin E. Frankel, Ellis N. Slack, David L. Luce, Joseph M. Howard, Fred G. Folsom, Dickenson Thatcher, Special Assistants to the Attorney General, for petitioner. Norman Herring, 111 E. Broadway, Tucson, Ariz., Joseph W. Burns, 30 Rockefeller Plaza, New York, N. Y., Fulton, Walter & Halley, of counsel, 30 Rockefeller Plaza, New York, N. Y., for respondent.

CLARK, Justice:

The issue in this case is similar to the question presented in Smith v. United States ante, p. -- [54-2 USTC ¶9715], decided this day, on the corroboration of respondent's extrajudicial statements concerning his "opening net worth." The admissibility of these statements is not questioned.

Respondent, an operator of a legitimate coin-machine business, was tried and convicted on four counts charging him with willful attempts to evade and defeat his own and his wife's income taxes for the years 1946 through 1949. The Government's case rested primarily on a net worth computation, which showed net worth increases and nondeductible expenditures of $62,993.47 for the prosecution period; during these same four years respondent declared only $16,775.14 income. It was stipulated that the computation was correct except as to the items "cash on hand" and "cash in bank." Respondent's bank balances were proved by introducing the bank records, and, with some minor adjustments, the Government's net worth computation was amply verified in this respect. As to "cash on hand," particularly the amount credited to the taxpayer as of the beginning of the prosecution period, respondent contends that the only evidence tending to substantiate the Government's figures is the uncorroborated admissions of the accused. He argues that lacking independent evidence of the corpus delicti, the conviction cannot stand. The Court of Appeals agreed and reversed the judgment of conviction, observing that, absent a starting item such as cash on hand, "the remainder of the statement proves nothing." 207 Fed. (2d) 377 [53-2 USTC ¶9579]. We granted the Government's petition for certiorari. 347 U. S. 1008.

The Government credited the respondent with $500 cash on hand at the starting point. One of the Government agents testified that the $500 figure was an approximation based on respondent's oral answer to a request that he estimate his year-end balances of cash on hand. According to the agent's notes, respondent replied that he had "approximately $500.00 in cash in his pocket. He believes that because it is his habit to carry about that much money in his pocket at all times." It was admitted that the taxpayer might have had more than this amount on hand at certain times, since he had frequently made deposits in his bank accounts in sums of $1,000 and $2,000. It appears that the agent did not inquire into how much money respondent had in his safe or his business, as opposed to the funds in his pocket, maintaining that he was justified in treating the taxpayer's statement regarding the $500 as covering his total cash on hand. Respondent contended that this figure failed to embrace a substantial sum in currency in his safe at the starting date. Both the Government and the respondent adduced a number of circumstances in support of their respective positions, and in interpreting the meaning of respondent's statement the jury could readily have found the Government's circumstantial proof more persuasive. In our view, it could have concluded from the evidence that respondent's statement as to the $500 referred to his total cash on hand at the starting point.

Respondent also signed a written statement admitting to the same opening cash on hand. This document contained the over-all net worth computation relied on by the Government at the trial. The Government's evidence tended to show that it had been signed by the respondent after the usual warning and after he and the agents had worked over the statement, item by item, for some eight hours. Though admitting that both he and his accountant had read the statement, the respondent sought to prove that he had not understood the net worth computation as a whole or the individual item of "cash on hand"; that before signing the statement he had asked his accountant whether it was correct, intending to rely on the latter's judgment; and that the accountant, in giving defendant the go-ahead, had merely approved the method employed in compiling the statement without passing on the accuracy of the particular figures. Again it was for the jury to consider all these circumstances in determining the weight to be given the signed statement; we cannot say that the document should have been rejected as a matter of law.

But all these factors are relevant in determining whether the independent evidence provided adequate corroboration. As in Smith v. United States, the circumstances surrounding defendant's admissions cast some doubt on their reliability. The statements were made by a taxpayer anxious to cooperate with the Government in the hope of limiting civil liability and avoiding criminal prosecution. The oral statement, with its "in the pocket" terminology, is certainly not clear. And the Government's own witness, the respondent's accountant, testified that he had not verified the particular figures in the written statement when it was referred to him by respondent. Under these circumstances, the trial judge and reviewing courts should exercise great care in determining whether the statements of the accused were corroborated. The reviewing courts, however, can seek corroborative evidence in the proof of both parties where, as in this case, the defendant introduces evidence in his own behalf after his motion for acquittal has been overruled. Cf. Bogk v. Gassert, 149 U. S. 17. ¹

Unlike Smith, there is not sufficient evidence here of the taxpayer's financial history to substantiate directly the opening net worth. Proof that the taxpayer was impoverished by the depression, that he was working for his meals and $8 a week in 1935, is too remote, absent proof of the taxpayer's financial circumstances in the intervening years. The respondent entered the coin-machine business in a modest way in 1935; he discontinued his low-paying job in 1939; and, except for a short period during the war, he devoted his entire efforts to his coin-machine business until 1945, when he began to operate a café as well. The only evidence of defendant's fortunes between 1935 and 1946, the first prosecution year, consists of his tax returns for 1944 and 1945 and some meager evidence with regard to his tax returns for 1941, 1942 and 1943. The latter apparently was obtained from the respondent, and, standing uncorroborated, cannot serve to corroborate respondent's other admissions. The 1944 and 1945 returns show net taxable income of $4,162 and $7,328 respectively, with gross receipts from the coin machines of $9,266 and $10,302. This sketchy background can hardly give rise to an inference that defendant had no more cash at the starting date than the Government gave him credit for.

Accordingly, we must search for independent evidence which will tend to establish the crime directly, without resort to the net worth method. There are several evidentiary strands which merit inspection, the first of which is very similar to one employed in Smith. We held there that an inference of tax evasion could be based on the fact that the taxpayer's visible assets greatly increased at a time when he was receiving unrecorded amounts of taxable income. In Smith v. United States, the taxpayer kept no records. Here the records were shown to be incomplete. Receipts from the coin machines were tabulated from a number of receipt books covering various locations. The receipt books were not numbered; the taxpayer was unsure of how many machines he had in operation; and there was considerable concern about receipt books being lost or misplaced. The loss of one receipt book would make a difference of from $1,000 to $1,500 in income. Eventually, on the advice of his accountant, respondent began to number the books. ² But, even after this safeguard was employed, unnumbered books continued to appear--and then disappear; two were lost, and subsequently recovered, in a period of three or four months. A system of recording receipts which rests on so unfirm a foundation hardly places the respondent in a very different class--for this purpose--than the taxpayer who keeps no books at all. Both are receiving unrecorded amounts of income.

The increase in respondent's visible assets is considerably less than the increase presented in the Smith case. There the increment over a four-year period amounted to more than $196,000; the taxpayer's declared income was less than $17,000; and his average personal living expenses were $3,500 a year. In this case, also over a four-year span, the figures are: increase in visible assets (excluding the cash item), $47,594; declared income, $16,775; living expenses, $3,000 yearly (plus some $1,900 in other nondeductible expenditures). The increase, though less than in Smith, is far from insubstantial. While reporting income only $4,775 in excess of his living expenses, the taxpayer increased his bank balances by over $16,000; added $1,000 to his holdings of United States Savings Bonds; increased his investments in land and buildings by over $9,000; and poured some $22,000 net additional capital into his business. These increments, when considered in the light of respondent's receipt of unrecorded amounts of taxable income, are sufficiently at variance with his reported income to support an inference of tax evasion. The inference is buttressed in this case by the peculiar relation between the reported gains from respondent's coin-machine business and his investments in new equipment. In three of the four prosecution years the respondent spondent reported a net loss on his coinmachine operation, and in the fourth a net gain of only $1,330. During the same period he made gross investments in new equipment totaling $37,555. The jury could readily find defendant's investment policy inconsistent with his claimed losses. Furthermore, although respondent contends that the war years market the peak of his business activity and that his apparent postwar increases came from profits accumulated during that period, it was not until 1947, the middle of the prosecution period, that his business became sufficiently large to require the full time of his accountant. We hold that the financial history of respondent and his business during the prosecution years provides sufficient independent evidence of the crime of tax evasion to corroborate his statements concerning cash on hand.

Even more conclusive corroboration, however, is respondent's testimony at the trial that he had $16,000 or $17,000 cash on hand at the starting point. This conflicted, with the statements being corroborated ($500) and respondent's testimony at a prior trial ($2,000 to $9,000), but for the purpose of independently establishing the crime charged the jury could accept this testimony. Respondent further testified that he had $3,000 or $4,000 in cash at the end of the prosecution period. Taken together with the remainder of the net worth statement, which was stipulated or independently established, this testimony establishes a deficiency in reported income of more than $30,000. ³ There could hardly be more conclusive independent evidence of the crime.

But one problem remains. The $17,000 hoard of cash could have absorbed the computed income deficiency for one or more of the prosecution years, ⁴ and respondent was convicted on all four counts. It might be argued that independent evidence showing a $30,000 deficiency is not enough--that there must be evidence that this sum resulted in a deficiency for each of the years here in issue. There is no merit in this contention. In the first place, this evidence is merely corroborating respondent's cash-on-hand admissions and need not comply with the niceties of the annual accounting concept. While the evidence as a whole must show a deficiency for each of the prosecution years, the corroborative evidence suffices if it shows a substantial deficiency for the over-all prosecution period. Independent evidence that respondent understated his income by $30,000 in the same four-year period for which respondent's extrajudicial admissions tended to show a $46,000 deficiency is adequate corroboration. It provides substantial evidence that the crime or crimes of tax evasion have been committed; the corroboration rule requires no more. Second, there is evidence in this case which tends to negate the possibility that the alleged $17,000 hoard could have absorbed the deficiency for any of the prosecution years. This money supposedly went toward the purchase of equipment in 1946 and early 1947. Almost $16,000 in equipment was purchased in 1946; this accounts for nearly all of the cash hoard and still leaves a deficiency in 1946 of over $5,000 in unreported income. ⁵ The funds which remain are insufficient to absorb the income deficiencies of any subsequent prosecution years. ⁶

As we said, the circumstances surrounding respondent's admissions create considerable doubt as to their reliability. We have therefore examined the independent evidence with great care to insure that the accused will not be convicted on the basis of a false admission alone. Although the evidence was insufficient to corroborate the opening net worth directly, we find the independent proof of tax evasion entirely adequate. Accordingly, the decision of the Court of Appeals setting aside the conviction is Reversed.

DOUGLAS, Justice, dissents.

¹ By introducing evidence, the defendant waives his objections to the denial of his motion to acquit. Lii v. United States , 198 Fed. (2d) 109; Leeby v. United States , 192 Fed. (2d) 331 [51-2 USTC ¶9497]; Gaunt v. United States , 184 Fed. (2d) 284; Mosca v. United States , 174 Fed. (2d) 448; Hall v. United States , 168 Fed. (2d) 161. His proof may lay the foundation for otherwise inadmissible evidence in the Government's initial presentation, Ladrey v. United States, 155 Fed. (2d) 417, or provide corroboration for essential elements of the Government's case, United States v. Goldstein, 168 Fed. (2d) 666; Ercoli v. United States , 131 Fed. (2d) 354.

² It is not clear from the record whether this numbering began during or after the prosecution period. Compare R. 130-131 with R. 177-178.

³ The Government's net worth computation, based on $500 cash on hand at the outset and $1,971.50 on hand at the conclusion of the prosecution period, yields a four-year net worth increase (with expenditures) of $62,993-$46,218 in excess of declared income. Eliminating the cash items from the net worth statement, the deficiency is reduced by $1,471--to $44,747. If the defendant's testimony is accepted, of $17,000 cash on hand at the beginning and $3,000 at the end, the deficiency must be reduced by another $14,000, leaving $30,747.

⁴ The computed deficiency for 1947 was $7,393, and for 1948, $3,284.

⁵ The computed deficiency for 1946 was $21,019.

⁶ See notes 3 and 4. The computed deficiency for 1949 was $14,523.

 

 

[59-2 USTC ¶9486]United States of America, Plaintiff v. David D. Beck, also known as Dave Beck, Defendant United States of America, Plaintiff v. David D. Beck, also known as Dave Beck; Nathan W. Shefferman; Shelton Shefferman; Norman J. Gessert; Warren David Beck, also known as Dave Beck, Jr., and Fred Verschueren, Sr., Defendants

U. S. District Court, West. Dist. Wash. , So. Div., Nos. 16515, 16526, 2/19/59

[1939 Code Secs. 145(a) and 3793(b)--similar to 1954 Code Secs. 7201 and 7206(3)]

Wilful evasion of income tax: Filing of false information returns.--The jury found the defendant guilty on all counts of an indictment charging wilful evasion of income taxes for the years 1950-1953 and the preparation of false Forms 990--information return of exempt organization. The Commissioner had determined substantial omissions of income by use of the net worth-expenditures method, treating union funds used by the defendant for his own purposes as taxable income rather than loans, although after the taxable years some restitution was made. The Forms 990 showed amounts used for buildings and construction in excess of amounts actually expended for those purposes. In some cases, they were not signed by the defendant.

Charles P. Moriarty, United States Attorney, 1020 United States Courthouse, Seattle, Wash., John S. Obenour, Assistant United States Attorney, United States Courthouse, Tacoma, Wash., Kinsey T. James and John J. McGarvey, both of Department of Justice, Washington, D. C., for plaintiff. Charles S. Burdell of Ferguson & Burdell, 1012 Northern Life Tower, and William L. Dwyer, 1207 Hoge Building, all of Seattle, Wash., for defendant David D. Beck.

BOLDT, District Judge:

We now come to the next to the last phase of the trial, the last being, of course, your deliberations and determination of verdict. What now follows is sometimes referred to as the Charge and sometimes as the Instructions of the Court. In either case, it is the same part of the trial; namely a statement to the jury by the judge of the applicable principles of law that are to be followed in considering the verdict, and in determining whether or not the verdict should be the one way or the other.

[Criminal Case]

You have in mind, of course, that this is a criminal case, not a civil proceedings. The fact that civil liability, if any, has not been determined or satisfied should not be considered by the jury as in any manner whatever bearing on the ultimate facts in the present case. There are many factors both of fact and law pertaining to that matter, as to which you are wholly uninformed, and for that reason if no other, it would be entirely improper for you to give any thought whatever to that subject.

[Wilful Attempt to Evade Taxes]

The only offenses under consideration are those named in the indictment; namely, the wilful attempt to evade income taxes in 1950, '51, '52 and '53, as charged in the counts pertaining to the personal tax returns of the Defendant Beck and wife, and the wilful participation in the preparation and presentation of Form 990 returns for the Joint Council Building Association in 1950 and 1952 as charged in the counts pertaining to the Form 990 returns.

Those are the sole and only matters that you now ultimately must determine. You must understand and clearly keep in mind that these charges relating to the particular years I have specified are the sole and only offenses upon which the defendant is being tried in this case.

Heretofore, both at the time that you were qualified to serve as jurors in this Court and again at the beginning of this particular trial, I called your attention to the fact that under our system of admin istering justice, in those cases wherein a jury participates in the trial, it is the function of the jury to find and determine facts, and in that field, the jury are the final and ultimate and absolute authority.

On the other hand, it is the responsibility of the Judge to determine and state to the jury the law, and when that has been done, it becomes the duty of the jury to follow the law as the Judge states it to whatever result that may bring, and without any regard whatsoever to the personal inclinations of any particular juror as to the wisdom or unwisdom, or the desirability or undesirability of the law in question.

In this respect your duty is as mine, to follow and apply the law wherever that may lead.

In this court as in Federal Courts generally, the Judge is free to make comment upon the evidence if he see fit, and to suggest to the jury, if he think it appropriate, a summary of the evidence, or even to suggest to the jury what the evidence indicates, but even if a Judge does that, the jury are not obliged to follow the suggestions of the Judge. Indeed, the jury are always obliged to follow their own intelligence, conscience and judgment about what the facts of the case may be, even though it be necessary to disagree with suggestions made by the Judge.

In this particular case, I see no occasion either now nor have I seen any throughout the trial for the Judge to make any comment about the evidence or the facts to be derived from the evidence. In my judgment, the controlling facts applicable to this case can as readily and properly be drawn by the jury as by the Judge. Indeed, I think more so. The combined experience in life that you twelve people who will ultimately sit in deliberation on this case have, exceeds anything that any single individual, however learned or experienced he might be, could possibly have, and I am well satisfied that the intelligence, alertness and attentiveness with which the jury has followed this evidence makes it unnecessary for me to make any summary of the evidence or to comment in any way upon it.

Now, then, if it has appeared to you that at any time during the trial or in the giving of these instructions that I have made comment about the evidence or have suggested in some way or other what the facts of the case are, I want to assure you that it has been unintentional, and you have misinterpreted my actions or words, because I do not in any remote way wish you to be influenced by anything than I may have said or done in arriving at your conclusion about what the controlling facts in the case are.

In this Court the instructions or charge is given orally as I am giving it to you now. It is given only once. You will not receive any transcript or booklet or pamphlet containing the charge. You must hear the law now as I give it to you this morning. Follow it closely, and be prepared to apply it. This places a heavy responsibility upon me, ladies and gentlemen, to do the utmost within my capacity to state the law and these instructions understandably and clearly, and it places an equal responsibility upon you to listen closely and intelligently in order that you may understand the law applicable to the case.

In general, I personally try to make the instructions as brief as the subject matter of a particular case will permit. In this particular type of case it is difficult, if not impossible, to make the instructions very brief. I must cover a great variety of subjects, some of which require some little telling, and for that reason, the instructions may be more extended that otherwise might be desirable.

In view of that, I intend to take a short break about midway in order to give you an opportunity to relax for a few moments and come back prepared to again listen closely and attentively to the charge.

At the outset, I want to admonish you that the instructions are to be considered as a whole. Each part or phase of the instructions is to be considered and applied together with all other parts and phases of the instructions. In other words, you must not pick out some particular instruction or some particular thing I say and overemphasize it and apply it without considering and keeping in mind all of the other instructions given you as the whole law of the case. It is quite important that you understand that the charge as now given is to be treated as a whole, and everything covered therein is to be considered in applying the law as a whole.

In the present case, the evidence has covered a wide range and variety of subjects and details. Any or all of these, however, ultimately are important only as you may find they bear upon the following ultimate questions of fact to be determined by the jury as to the personal return counts:

[Income Tax Return]

1. Was there a greater tax due from the defendant and wife for the tax year in question than was shown on the defendant's tax return for that year?

2. Did the defendant know that there was a greater tax due than was shown on the income tax return in question?

3. Did the defendant wilfully attempt to evade tax known to be due by preparing, authorizing or ratifying a signed income tax return which understated the tax due for the tax year of the return?

Those are the three ultimate questions to be considered with respect of the personal return counts.

[Form 990]

As to the Form 990 counts, the ultimate questions are:

1. Was the return false or fraudulent in the particulars charged?

2. Did the defendant know that the return was false in the particulars charged?

3. Did the defendant willfully and knowingly participate in the manner charged in the preparation or presentation of the return?

Those are the three ultimate questions of fact to be determined with respect of the 990 counts.

Ladies and gentlemen, the forgoing are the ultimate and basic facts to be determined by the jury from the evidence. Further and more detailed instructions will now be given to the jury concerning the principles of law by which the jury must be guided in determining all pertinent facts in the case and in reaching a verdict as to each of the counts on trial.

[Beck's Personal Income Tax Return]

The counts of the two indictments now on trial charge the defendant, Dave Beck, with six separate and distinct criminal violations of the Federal income tax laws. Four of these charge that in each of the years 1950, 1951, 1952 and 1953 the defendant, willfully and knowingly, attempted to evade and defeat a substantial portion of his personal Federal income tax, by filing false and fraudulent tax returns for himself and his wife in each of the years referred to. These counts and the charges contained therein, which will be more fully explained in a few minutes hereafter in these instructions will be referred to as the "personal return counts." Whenever I use that term, "personal return counts," I will be referring to the four counts which relate to the personal income tax returns of the defendant and his wife for the years referred to.

[Form 990 Information Return]

The other two counts on trial charge the defendant Dave Beck with aiding, abetting, counseling, assisting and procuring the preparation and presentation of a false and fraudulent Form 990 return, which is an information return, for each of the years 1950 and 1952 for Joint Council No. 28 Building Association. Filing of a Form 990 return by Joint Council No. 28 Building Association in each of the years referred to was required by law. Hereafter in explaining and dealing with these two counts and the charges contained therein I will refer to them as the "Form 990 counts."

To all of these charges the defendant has entered a plea of not guilty, which places upon the Government the burden of proving beyond a reasonable doubt every fact essential to conviction of the offense charged in each count of the indictment.

[Presumptions]

The defendant is presumed to be innocent of the offenses charged. This presumption attaches to and continues with the defendant throughout all stages of the trial, is applicable to your consideration of every fact issue in the case, and continues throughout all stages of your deliberations, and until such time as you find, if you should so find, that the presumption has been met and overcome by the evidence in the case beyond a reasonable doubt.

This defendant, as all other persons charged with criminal offenses, is entitled to the presumption of innocence as a part of the law of the land, and, unless the presumption is overcome by the evidence in the case beyond a reasonable doubt, as to every element of the case necessary for conviction, the defendant must be acquitted.

The fact that the Grand Jury heretofore has returned indictments charging the defendant, as I have just stated to you, is no evidence whatever of his guilt, and must not in the slightest be so considered by you. An indictment is merely the formal instrumentality or machinery provided by the law for bringing a person to trial. Guilt can in no way be presumed to arise because of the indictment; guilt must be provided by competent evidence beyond a reasonable doubt. Therefore, in determinating your verdict in this case, you must give no consideration whatever to the fact that the defendant has been indicted by a Grand Jury.

[Personal Income Tax]

The four personal return counts are brought under a section of the Internal Revenue Law of the United States which provides as follows:

"Any person who attempts in any manner to evade or defeat any tax imposed by the laws of the United States or the payment thereof" is guilty of the criminal offense with which the defendant is charged in each of the personal return counts.

Count 1 of the indictment in Cause No. 16515 charges the defendant with willfully and knowingly attempting to evade and defeat a substantial amount of income tax which was due and owing by him and his wife to the United States for the Calendar year 1950 by filing and causing to be filed with the Collector of Internal Revenue at Tacoma a false and fraudulent income tax return when he then and there well knew that his taxable income and tax due thereon was substantially greater than that reported. Count 1 of the indictment in Cause No. 16526 makes the same charge as above except that the charge relates to the income tax of the defendant for the year 1951. Likewise, Counts 2 and 3 of the second indictment are the same except that they refer to the tax years 1952 and 1953 respectively. I will not detail the exact amounts of alleged taxable income and tax specified by each of the "personal return" counts as these figures appear in the indictments which you will have with you in the juryroom.

The word "attempt" as used in the law I have read to you, on which the personal return counts are based, involves two essentials:

1. An intent to evade or defeat income tax, and

2. Some act by the taxpayer in furtherance of such intent.

There must exist a union or joint operation of act with intent, and both act and the intent to evade tax must be proven beyond a reasonable doubt.

An attempt to evade tax contemplates that the defendant who is charged with such attempt had knowledge that he had tax liability for a tax year in question which was required by law to be reported on his tax return for that year, and that he wilfully attempted and specifically intended to evade and defeat such tax liability, or a substantial portion thereof, by filing or causing to be filed a tax return which did not report tax liability on taxable income which he knew he had received during the particular year in question, and which he knew should be included in such return.

The three essential elements of the offense charged in each of the personal return counts of the indictment are:

1. That there was owing to the United States income tax in an amount substantially greater than was shown on the tax return referred to; and

2. That the defendant knew there was substantially more income tax owing than was shown on the return referred to; and

3. That the defendant filed, authorized or ratified the filing of such return in a willful attempt and with the specific intent to evade or defeat such income tax which the defendant knew he owed for the tax year in question.

If you find the existence of each and all of these elements beyond a reasonable doubt as to any count or counts, then you must find the defendant guilty as to such count or counts. On the other hand, if you have a reasonable doubt as to the existence of any one or more of these elements as to any count or counts, then it will be equally your duty to find the defendant not guilty as to such count or counts.

Each count of the indictments, whether it be a personal return count or a Form 990 count, must be considered and determined separately although the essential elements of the offense charged are the same as to each of the personal return counts, and, likewise as to each of the Form 990 counts, to which I will more specifically allude a little later in the charge.

[Government's Burden of Proof]

The Government is not obliged to prove, as to each particular count, an attempted evasion of the entire amount of tax liability as alleged in the indictment, but it is sufficient for the Government to prove beyond a reasonable doubt as to each particular count that the defendant attempted to evade a substantial amount of his tax liability for the particular year in question. In this connection, it is not necessary that the precise and exact amount of unreported taxable income, or tax liability thereon, as charged or to the extent originally charged in the indictments, be proved with mathematical certainty, but it is sufficient if such items be proved to have existed in substantial amounts.