Bank Records and Net Worth Increases 3 Page3

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The meaning of the term "substantial" as here used depends upon the facts, circumstances and conditions shown by the evidence in each particular case. Any amounts of unreported taxable income or tax, greater than sums relatively small under the particular circumstances pertaining thereto, are substantial. Any amounts of unreported taxable income or tax should be disregarded which reasonably may be accounted for as due to error, oversight or as reasonably considered inconsequential by a taxpayer.

The intent of defendant required for conviction is what the law calls "specific intent." Specific intent in this instance means more than a mere general intention to perform an act or omit performance of an act in violation of law or regulations made pursuant to law. Specific intent to evade income tax liability is not to be presumed or inferred merely from the filing of an incorrect or understated tax return. It means that the acts charged must have been done wilfully and purposely. A person who knowingly, wilfully and purposely either does an act which the law forbids or fails to do an act which the law requires, deliberately intending to violate the law with the intent to defraud, acts with a specific intent.

An act is done willfully if done voluntarily and purposely and with a specific intent to do that which the law forbids. Wilfulness implies bad faith and an evil motive. With regard to the offense charged in the four personal return counts of this indictment, wilfully means a specific and positive purpose and intent to evade a tax obligation known to be due.

An act is done knowingly if done voluntarily and purposely and not because of mistake, inadvertence or other innocent reasons.

It is not necessary for the Government to prove that the defendant actually knew that a particular act or failure to act is a violation of law. However, whether or not defendant acted or failed to act because ignorant of the law is a matter that may be considered in determining whether or not the accused acted or failed to act with specific intent, and thus knowingly and wilfully as charged.

If you find that the defendant's tax returns, for either 1950, 1951, 1952 or 1953, did not fully and correctly report defendant's income and the tax due thereon in such year or years, this fact standing alone will not warrant a conviction; conviction of defendant will only be warranted if you further find that the returns were filed in a willful and intentional attempt to evade and defeat the payment of income tax. The wilful attempt to evade and defeat the payment of income tax is an essential element as to each year in question which must be proved beyond a reasonable doubt just as any other fact in the case.

You cannot, of course, look into the defendant's mind to see what his intent was with respect of the tax returns in question. It would be difficult, if not impossible, to establish the intent or wilfulness of any individual by direct evidence. However, direct evidence of wilfulness and intent is not necessary, for they may be found and determined by a consideration of all the facts and circumstances disclosed by the evidence in the case. In your own affairs in life, ladies and gentlemen, you are constantly called upon to decide from the actions or omissions of other people what their intentions and purposes are, and in so doing you have probably discovered that in many instances what a person does or does not do speaks more clearly as to his intent and purposes than his spoken or written words.

Incorrect or understated income tax returns which are the result of a taxpayer's bona fide mistakes, negligence or carelessness, however great, or the incompetence, negligence, mistakes or wilful errors of persons whom the taxpayer in good faith relied on to prepare his returns, are not sufficient to support conviction in a criminal case. If the taxpayer acts without the wilful intent of evading tax, he is not guilty of the crime here charged even though his income and tax due thereon was understated on his tax returns. The taxpayer must have had actual knowledge of the existence of an obligation to pay a greater tax and wilfully attempted to evade or defeat such tax either by his preparation, authorization or ratification of filed tax returns which understated true income, or by withholding information from those preparing the returns, knowing that such withholding would result in an understatement in the returns of the taxpayer's income and tax due thereon.

If, after a consideration of all the evidence, you find beyond a reasonable doubt a specific intent on the part of the defendant to wilfully and knowingly attempt to evade taxes understated in the tax returns in question, then you should find him guilty. On the other hand, if you do not find such intent on the part of the defendant has been proved by the government beyond a reasonable doubt, then you should find him not guilty.

As indicated, any understatement of taxable income in the personal income tax return of the defendant and wife for any year, if you find that there was such understatement, shall not be considered by you in arriving at your verdict if you find that such understatement was the result of negligence, or disregard of the applicable rules and regulations, or the mistaken but honest belief in good faith that the union entity funds constituted loans, in each instance as distinguished from specific intent to defraud, which must be proved beyond a reasonable doubt.

[Avoidance v. Evasion]

You are instituted that under the law there is an important distinction between income tax avoidance and income tax evasion. Tax evasion is, in brief, the wilful and fraudulent failure to pay income taxes which are lawfully owing to the United States . Tax avoidance, on the other hand, is the practice of arranging one's affairs so as to incur the lowest possible tax liability. There is nothing whatever in the laws of the United States which is designed to discourage or prevent a taxpayer from using every legitimate device to minimize his tax liability. Tax avoidance, as distinguished from tax evasion, is therefore a lawful and legitimate practice.

If you find that defendant did not keep or provide for books and records recording his financial activities and transactions, such fact, in and of itself, will not sustain a finding of fraud or wilful attempt to evade taxes. However, if you find such a failure to keep or provide for books, it may be considered by you together with all of the other evidence in the case in determining whether the offenses charged have been proven beyond a reasonable doubt.

Evidence has been received during the trial concerning the loss or destruction of certain records of several persons and organizations, including the Western Conference of Teamsters, Joint Council Building Association, and records of certain banks. Such evidence was permitted for the purpose of laying the basis for the presentation of certain matters by oral testimony, and as a basis for allowing the use of the net worth method, which I will explain to you later. Therefore, you are instructed that the loss or destruction of any such records, in and of itself--that is, standing alone, shall not be considered as a fact adverse to the defendant.

[Taxable Income]

Income, as that term is used in the federal income tax laws, does not include all money and property that may come into the possession of a taxpayer or be applied to his use and benefit in a given tax year. Certain of such items of money or property are not taxed under the federal tax laws and therefore are designed "nontaxable." I will now define for you what constitutes taxable income, and, in so doing, I will also enumerate, as far as pertinent to this case, those receipts which are nontaxable. This definition is of basic importance in the case and I suggest you follow the definitions closely.

The federal income tax is levied on the net gains, profit and income, of whatever kind and in whatever form paid, derived from wages, salaries, or compensation for personal services, or from professions, vocations, trades, businesses, commerce, or sales or dealings in property, whether real or personal; also from interest, rent dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The tax is imposed on gains or income whether acquired in a lawful or in an unlawful manner. That the taxpayer's mode of receipt may be illegal. or that his freedom to dispose of a gain, may be assailable by someone with a better title to it, his no bearing on whether the gain is income under the tax laws. The law is that financial or monetary gain to a taxpayer, whether lawfully or unlawfully acquired, constitutes taxable income to the taxpayer in the year when the taxpayer has such control over it that, as a practical matter, he derives readily realizable economic value from it.

However, all money or property received by a taxpayer is not taxable income, within the meaning of the tax laws. The law provides that certain receipts of property or money do not constitute taxable gain or income within the meaning of the tax laws, and hence are nontaxable receipts. In so far as pertinent to this case, nontaxable receipts may be defined to include: The proceeds of loans, gifts or inheritances, money or property which represents a return of capital, and the nontaxable portion of capital gains. In this case the only nontaxable receipts claimed to have been received by the defendant in the indictment years and not credited to him by the Government in its computations presented in evidence are sums which defendant claims he borrowed from union entities.

[Borrowing v. Diversion of Union Funds]

In defining for you what constitutes taxable income, I want to point out that a critical issue in this case is whether certain funds, which had their source in union entities, and which were applied, or caused to be applied, to the personal use and benefit of defendant during the years covered by the indictments, were borrowed by defendant from the union entities and hence constitute loans; or, whether the funds were applied or caused to be applied by defendant to his personal use and benefit, under circumstances and conditions not amounting to loans as that term will be defined in a few moments. The defendant contends that these sums in effect were borrowed from the union entities, and that the Government failed to take such sums into account as liabilities in determining, by use of the net worth method, defendant's income and tax liability for the years in question. It is the Government's contention that the sums referred to in fact were not loans from the union entities to the defendant. The Government contends that defendant diverted these sums from the union entitles and applied them, or caused them to be applied, to his personal use and benefit under circumstances and conditions inconsistent with a loan, and that, in so doing, he realized taxable gain or income.

A loan, as that term is used in law and in these instructions occurs when a borrower receives a sum of money from a lender, pursuant to an agreement or understanding, between the parties, whereby the borrower promises to return a like amount of money to the lender at a future time. No promissory note or other written document executed by the parties, or either of them, is necessary to the creation of a loan. A loan may be either written or oral, express or implied. An express agreement, as that term is used in law, means that the agreement is specifically stated either in writing or orally. An implied agreement is one which need not be expressly stated by the parties, either in writing or orally, but which may arise from the conduct and relationship of the parties. In either instance, however, agreement or understanding of the parties, is essential to the existence of a loan.

Now, I want to emphasize that you must determine whether the union entity funds were or were not loans as of the time defendant applied them, or caused them to be applied, to his personal use and benefit during the indictment years, namely, 1950, 1951, 1952, and 1953.

As on all fact issues in the case, the Government has the burden of establishing its contentions in the particulars just mentioned beyond a reasonable doubt. It is for you to determine from all of the evidence whether it has done so.

As I have said, funds received as loans are not taxable income. Therefore, if you find that any sum or sums which the defendant received from the union entities were loans, then you are instructed that the defendant was not required, and was under no duty, to report in his income tax returns any funds so received as loans by him.

[Effect of Later Repayment]

On the other hand, (1) funds not received as loans or as any other nontaxable receipt as previously defined, but which (2) are actually received or applied or caused to be applied by a taxpayer to his personal economic use or benefit, are taxable income to the taxpayer (3) in the year in which as a practical matter he derives readily realizable economic value from them, and must be reported as such by the taxpayer. If each and all of the three factors just referred to are proven beyond a reasonable doubt, it is immaterial whether such receipt or application, of funds by the taxpayer, result from misappropriation, or otherwise be lawful or unlawful. The evidence pertaining to payment of certain sums of money to the union entities by defendant in 1954 and thereafter, may be considered for such bearing as you may find it has, on whether union funds were received by defendant, as loans, from the union entities in the indictment years 1950-53. However, if you find that said funds were not received as loans in the indictment years, the later return thereof, in whole or in part, by defendant, acting voluntarily or otherwise, should be disregarded since in such circumstances, the later payments to the union entities by the defendant, would be immaterial in determining whether defendant wilfully attempted to evade income taxes in the years 1950-53 as charged in the indictment. However, whether or not the defendant has returned, more or less, than the sums derived from the union entities during the indictment years is not relevant to any issue in the case and is not to be considered by you in any connection whatever.

Therefore, if you find that during any one or more of the four indictment years the defendant diverted and applied or caused to be applied to his personal use or benefit funds which had their source in union entities but which were not loans or other nontaxable receipts, then you are instructed that such sum or sums constitute taxable income to the defendant in the year or years in which he derived readily realizable economic value from such funds, and that the defendant was required by the law, and was under a duty, to report such sum or sums on his income tax returns for that year or years.

You may consider the evidence pertaining to the accord and satisfaction agreement and its amendments and of Mr. Beck's payments thereunder, as bearing upon the question of whether the union funds were received or used by the defendant as loans within the meaning of that terms as I have defined it for you. An accord and satisfaction agreement is a customary and proper way for parties to settle the amount of a debt which is in doubt. Also it is lawful and proper thereafter to amend such an agreement by the mutual consent of the parties thereto.

If you find that the defendant, by virtue of his position as an officer of any union organization involved herein, had authority to loan money to himself, and if you find that he did so, then you shall treat such sums as loans within the meaning of these instructions, whether or not such loans were expressed by means of promissory notes or other formal bookkeeping or accounting entries.

With regard to any property which you may find that the defendant received as a gift and subsequently sold, you are instructed that the proceeds of such a sale would be taxable income to the defendant only to the extent, if any, that the proceeds exceeded the cost basis of the property in the hands of the donor or last preceding owner.

Evidence has been admitted pertaining to the travel expenses of a trip which the defendant took to Europe in 1949 in the company of his wife and Mr. and Mrs. Raymond F. Leheney. This evidence, particularly that relating to the expenses of Mrs. Leheney, was not offered as, or included in the government's computation of defendant's taxable income for the indictment years, and you are not to be concerned with whether such expenses were taxable income to defendant or Mrs. Leheney in any year. The evidence referred to was offered solely for such bearing as you may find that it may have upon the essential issues pertaining to defendant's knowledge, good faith and intent, with respect to the charges on trial.

To establish the first element of the offense charged, namely, the receipt by defendant of unreported income upon which a substantial amount of tax was due and owing, the Government has presented evidence under two methods of proof applicable to this type of case. One is called the "net worth plus expenditures" method of proof and the other "specific item" method of proof. The Government is not limited to one or the other of these methods of proof, but may offer both. The receipt by the defendant of unreported income, therefore, can be established by either or both of these methods referred to. However, whichever method of proof is followed, the elements of the offense, as I have defined them for you previously remain the same.

The "specific item" method simply consists of offering evidence of particulir or specific amounts of taxable income received by defendant taxpayer during a part cular tax period, with evidence that the taxpayer did not include such amounts in his tax return for such period, together with evidence concerning defendant taxpayer's knowledge of the omission and his intent and wilfulness in attempting to evade payment of tax by the omission.

[Travel and Expense Money]

There has been evidence of the receipt by the defendant from union entities of specific amounts of travel and expense money about which I will now instruct you. This travel and expense money is in no way related to, and may be considered separate and apart from, the funds which the defendant contends he borrowed from union entities. Therefore, if you find that the defendant did receive loans from the union entities which the Government failed to take into account in determining his income under the net worth method for any of the years before you, and that the loans were sufficient in amount to account for substantially all of the alleged unreported income thus determined--in which event you should, of course, be obligated to reject the Government's net worth contentions for such year or years--you should go on to consider whether, in the particular year or years, the defendant had unreported income in a substantial amount from travel and expense allowances; and if so, whether he wilfully attempted to evade the payment of the tax thereon, as those terms are defined for you.

It is the Government's contention that during the years 1950, 1951, 1952 and 1953, the defendant received travel or expense allowances in amounts totaling seventy-six hundred odd dollars, eighty-three hundred odd dollars, sixty-seven hundred odd dollars, and twelve thousand odd dollars, respectively, which he did not report in his returns; that these sums were not in fact expended by the defendant for travel in connection with his business or employment; and that in failing to report these sums in his returns for the years in question, defendant wilfully attempted to defeat and evade the payment of the tax thereon.

Under the law applicable here, if a taxpayer receives a salary and, in addition, a daily allowance for travel or other expenses connected with his business or employment, the amount of any such allowance is includible in his gross income. However, the law allows a deduction from gross income for the amounts actually expended by a taxpayer for the ordinary and necessary expenses incurred by him in traveling in connection with his business or employment.

Therefore, if you find that the defendant received any travel or expense allowances during any of the years in question which sums were not in fact spent by him for such purposes, you are instructed that such sums constitute taxable income to the defendant and that the defendant was required by law and was under a duty to report such sums in his returns.

If you find further that such sums were substantial in amount for any year or years, as I have defined that term for you, and that the defendant knowingly and wilfully failed to report this income in his returns, you may find the defendant guilty without regard to the net worth proof.

In this connection you are instructed that if an employee is authorized to expend funds of his employer for any purpose which furthers, or is in good faith thought to further, the business or other activities of the employer, then the expenditure or use of such funds for such purposes by the employee does not constitute wilful tax evasion. Similarly, if an employee expends funds of his employer in the good faith belief that the expenditure is a proper business expense of the employer, but if under the law the use of the funds would constitute taxable income to the employee, such an expenditure under such circumstances could not support a charge of tax evasion for the reason that the element of wilfulness or intent to defraud would be lacking.

If the defendant, pursuant to his authority as an officer of any of the union organizations involved herein, used any money of any union organization or organizations, believing in good faith that the use of such money was or would be an ordinary and necessary expense of such union to further any legitimate union purpose or objective, then such amount or amounts must not be considered in arriving at your verdict, even though the defendant himself may have received some personal benefit from the use of such money.

THE COURT: Ladies and gentlemen, I think this is approximately midway of the charge, and I, therefore, will now call a break and give you an opportunity to relax a few moments, and we will have a break of fifteen minutes.

(Thereupon, at 10:22 o'clock, a.m., the jury withdrew from the courtroom.)

(Whereupon, the Court declared a short recess.)

(Thereupon, the Jury entered the courtroom at 10:45 o'clock a.m.)

[Net Worth Plus Expenditures Method]

THE COURT: In continuing with the charge, I will now instruct you concerning the net worth plus expenditures method of proof. Because of the subject matter this will require a somewhat extended statement, and you must pay particularly close and careful attention.

In simple terms, a person's net worth is the difference between his assets and his liabilities at any given date. In other words, it is the difference between what he owns and what he owes at that time. If a person has more assets at the end of a given year than he had at the beginning of the year, and if his liabilities remain the same throughout the year, obviously his net worth has increased in that year.

I should point out, however, that in determining the value of assets in a net worth computation, only their cost to the taxpayer is to be considered. Any increase or decrease in the value of an asset during any year in question must not be taken into account unless the loss or gain is actually realized in that year by a transfer or sale of the asset.

Under the net worth plus expenditures method of proof there is added to the increase in net worth for the year, if such be shown, the total of any nondeductible personal expenditures made by the taxpayer during that year.

Nondeductible expenditures are those made by a taxpayer but which he is not entitled to claim as deductions on his income tax return and which, because of their nature do not result in the acquisition of any assets, are not reflected in a person's net worth.

The reason for taking such expenditures into account is, no doubt, apparent to you. Practically every taxpayer, in addition to possibly acquiring assets or reducing his liabilities during a particular year, will spend part of his income or other receipts each year for such nondeductible personal items as living expenses, income taxes, gifts, and the like, which expenditures, of course, will not result in any increase in net worth. The total of these nondeductible expenditures for the year when added to the amount of the increase in net worth for that year should reflect the total of the money or property received in that year by the taxpayer.

From this total, as a further step under the net worth method, there is then subtracted any nontaxable funds, either money or property, received by the taxpayer during the year, except where such receipts, like the proceeds of loans, are reflected as a liability in the net worth computation.

The final figure, then, resulting from the several steps of the net worth method is offered by the government in a case of this kind as reflecting with substantial accuracy the taxpayer's correct taxable income for that year.

The theory of the net worth method of proof simply stated is this: If the government establishes a taxpayer's net worth at the beginning of a particular year with reasonable certainty and it then proves beyond a reasonable doubt that the taxpayer's net worth increased during that year, and that the amount of the net worth increase, plus any nondeductible personal expenditures for the year, is substantially greater than the taxpayer's reported income for the year, the inference may be drawn that the taxpayer received money or property in that year in excess of the amount of income reported by him in his tax return. In other words, that he had unreported receipts to the extent that the increase in his net worth plus any nondeductible personal expenditures exceeded his reported income for the year in question.

That, ladies and gentlemen, in brief is an explanation of the net worth plus expenditures method of proving unreported income and the theory behind it.

In this case the government has undertaken to prove the defendant's net worth at the beginning and at the end of each of the years before you; namely, 1950, 1951, 1952, and 1953, and by so doing to establish that defendant's net worth increased in each of the years. The defendant's net worth at the end of any given year is, of course, his net worth as of the beginning of the next succeeding year.

In this connection I want to point out that approximately one hundred asset and liability items included by the government in the net worth schedule have been stipulated; that is to say, agreed to by both the defendant and the government. As I have already instructed you, all facts stipulated by the parties are to be accepted by you as the facts.

The government has also undertaken to establish that during each of the years in question the defendant paid out money for such nondeductible personal items as living expenses, gifts, and income tax payments, which expenditures, if you find they were made, would not be reflected in his net worth. Again, I want to point out that certain of these nondeductible personal expenditures have been stipulated in Court Exhibit No. 3 and that you are obliged to accept the stipulated data as the facts. Also evidence has been admitted of other expenditures not covered by or included in the stipulation referred to.

The government contends that the defendant's net worth increased substantially during each of the years before you and that the amount of the net worth increase for each year when added to the total of the defendant's nondeductible personal expenditures for the same years represents the defendant's correct net income for each of the years in question. The government claims that these sums should have been reported by the defendant in his income tax returns, and that his failure to report them was due to a wilful attempt on his part to evade and defeat the payment of the tax thereon.

On the other hand, the defendant contends that certain sums, which had their source in union entities which were received, applied or caused to be applied to the personal use and benefit of defendant, were in effect borrowed from the union entities, and the defense further urges that the government failed to take such sums into account as liabilities in determining, by use of the net worth method, defendant's income and tax liability for the years in question.

In support of its net worth computation, the government has presented evidence which it contends establishes the receipt by defendant of specific amounts or items of unreported income. The government has also offered evidence in support of its net worth computation an analysis of the bank accounts of the defendant and his wife. This evidence is offered as showing that the defendant had a likely source of unreported income, and that the alleged unreported income determined under the net worth method is attributable to currently taxable income, rather than to nontaxable receipts.

It is for you to determine from this and all the other evidence in the case whether the government has met its burden of proving beyond a reasonable doubt the requirements of a net worth case as I have defined them to you.

There are certain requirements of law which the government must follow and meet in the use of the net worth method. In order to sustain its burden of proof in a net worth case, the government must satisfy you beyond a reasonable boubt as to each and all of the following requirements:

First, the government must establish the defendant's net worth at the beginning of each year under consideration with reasonable certainty, although not necessarily to a mathematical exactitude.

The reason for this requirement is no doubt apparent to you. Since the net worth method of proving unreported income involves a comparison of the defendant's beginning and ending net worth for each year in question, the result cannot be accurate unless the opening net worth--the starting point--for each year is substantially accurate.

You will readily appreciate that if the defendant had on hand at the beginning of a particular year substantial assets in cash or in any other form which were not included by the government in his opening net worth, then what would appear to be an increase in his net worth for the year, to the extent of the omitted assets, may be nothing more than the disclosure of money or property acquired by the defendant in prior years, or the result of a change in the form of assets owned by the defendant at the beginning of the year.

Therefore, in order to convict on the basis of the net worth proof for a particular year, you must be satisfied that the government has established the defendant's net worth at the beginning of the year with reasonable certainty, although as I have said, not necessarily to a mathematical exactit de.

However, where there are no unexplored relevant leads as to prior acquired assets, the Government is not required to refute all possible speculation that the defendant might have had assets at the beginning of a particular year which the investigation failed to disclose. Nor is it necessary for the Government to prove the exact cost of the assets owned by the defendant at the beginning of the year, or the exact or precise amount of his undeposited cash on hand, if any, at that time. Substantial accuracy and reasonable certainty are all the law requires.

Secondly, the Government must satisfy you that there was an increase in the defendant's net worth for the particular year, and that the amount of the net worth increase, when added to the nondeductible personal expenditures for the year, was substantially greater than the amount of income reported by the defendant for the year. This must be established beyond a reasonable doubt.

Thirdly, the Government must present evidence from which you may find beyond a reasonable doubt that a substantial part of any net worth increase plus expenditures which is in excess of reported income is attributable to taxable income, rather than to nontaxable receipts. To meet its burden in this respect, the Government must either prove that the defendant had a likely source of unreported income; or it must negative the possibility of the receipt by defendant of nontaxable funds which could account for the net worth increase and expenditures in excess of reported income, or it may do both; namely, to show a likely source and negative nontaxable income.

Finally, to complete proof of the offense charged, the Government must establish beyond a reasonable doubt that there was a wilful and knowing attempt on the part of the defendant, as those terms have been defined for you, to evade and defeat the payment of tax on the unreported income determined by use of the net worth method.

If you find that any one or more of these requirements has not been established beyond a reasonable doubt with respect to any year in question, then you must find that the Government's net worth contentions have not been sustained as to such year or years.

On the other hand, if you find that each of these requirements has been established beyond a reasonable doubt with respect to any year before you, then as to such year or years, you should find that the Government has sustained its net worth contentions.

Now, I want to point out to you that in a net worth case the Government has the burden of showing an investigation into the validity of any apparent or suggested relevant leads or plausible explanations concerning defendant's financial history and data relating to his net worth, which were reasonably susceptible of being verified, and, which, if true, would establish the defendant's innocence. The Government may not disregard such leads and explanations, if any, but must make a bona fide check and verification thereof to the extent that the circumstances reasonably permit.

Therefore, you should consider whether there were any such apparent or suggested relevant leads or explanations arising during the investigation or otherwise; and, if so, whether they were investigated by the Government, together with the results of any such investigation. I might add that a good deal of the evidence, which you have heard in this case, has had to do with that very subject. If you find that the Government has failed to run down any relevant leads which were reasonably susceptible of being checked, or that it has failed to effectively refute what seems to you plausible explanations, such failure must be taken into account by you in determining whether the Government has met its burden of proof under the net worth method.

On the other hand, if you are satisfied that the Government has exhausted with negative results such leads and explanations as were apparent or suggested during the investigation, then you may consider this as evidence bearing on the validity of the Government's contentions. However, you must bear in mind in this connection that the defendant is not required under any circumstances to prove his innocence, and that the burden rests with the Government to prove beyond a reasonable doubt every element of the offense charged.

That concludes the particular reference to net worth; although here, again, I remind you that all that is said in the instructions is to be taken as a whole and considered as the whole law of the case.

[Form 990]

The two Form 990 Counts of the indictments are brought under a section of the Internal Revenue Law of the United States which provides as follows:

"Any person who wilfully aids or assists in, or procures, counsels, or advises the preparation or presentation under the Internal Revenue Laws, of a false or fraudulent return, shall be guilty . . ." of the criminal offense with which the defendant is charged in these two Form 990 Counts.

Count 2 of the first indictment charges that the defendant did wilfully and knowingly aid, assist in, counsel, procure, and advise the preparation and presentation to the Collector of Internal Revenue at Tacoma a false and fraudulent United States annual return of Organization Exempt from Income Taxes called Form 990, for the calendar year 1950, of the Joint Council No. 28 Building Association, in said return it being reported that the Joint Council had expended some $16,700 odd for building payments and alterations, whereas the said defendant then and there well knew that the Joint Council had not expended said sum for this purpose, but in truth and in fact had expended a substantially lesser sum.

Count 5 of the second indictment makes the same charge as to the 990 return for 1952, it being alleged that the return falsely reported some $69,900 odd expended for building payments, alterations, new construction and building equipment, supplies, services and repairs. The precise amounts alleged appear in the indictments covering these two counts which you will have with you in the juryroom.

The essential elements of the offense charged in each of these two Form 990 counts are:

1. That the return was false or fraudulent in the particulars charged;

2. That the defendant knew that the return was false or fraudulent in such particulars, and

3. That the defendant, wilfully and knowingly, either aided or assisted, or counseled, or procured, or advised the preparation of presentation of the Form 990 tax return filed for Joint Council No. 28 Building Association for the tax year in question.

If you find the existence of each and all of these elements beyond a reasonable doubt as to either Form 990 count, 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 either count, you must find the defendant not guilty as to such count or counts.

An information return of the type here involved does not involve any liability for income taxes. With respect to these counts, therefore, you are not concerned with any question of what constitutes taxable income, but only with the three elements that I have just stated to you. The fact that the defendant did not sign either of the 990 returns in question, while not essential to the offense charged, is a factor to be considered in determining whether the essential elements of the offense have been proven beyond a reasonable doubt.

Each Form 990 count must be considered and determined separately, although the essential elements of the offense are the same as to both counts.

The gist of the offense charged in these two counts is the wilful participation in the manner charged in the preparing or presentation of a false or fraudulent tax return, Form 990 return, knowing the same to be false or fraudulent.

These charges also require proof of specific intent as that term previously has been defined in connection with the personal return counts. Therefore, defendant may not be found guilty of either Form 990 count unless the evidence proves beyond a reasonable doubt, not only that the defendant aided or assisted, or procured, or counseled or advised in the preparation or presentation of a false Form 990 return for the year in question, but also, that in doing so, defendant specifically intended the filing of a Form 990 return for the Joint Council Building Association which defendant knew to be false or fraudulent.

[Admissibility of Evidence]

During the trial, the court has admitted evidence pertaining to incidents, transactions and tax returns in years other than 1950 to 1953. In other words, both before and after what I have explained to you we call the indictment period. Such evidence can be considered only for the limited purpose and to the extent that it may relate to transactions and tax returns for the years charged in the indictment. You must strictly and absolutely confine your deliberations in this case to whether or not there was a wilful attempt on the part of the defendant to evade or defeat income tax for either of the calendar years 1950, 1951, 1952 or 1953, or whether the defendant wilfully and knowingly participated in the preparation and filing of a false or fraudulent 990 tax return for the years 1950 and 1952.

You are instructed that if a person who is not the payee of a check endorses the payee's name on the check with the payee's consent, either express or implied, such endorsement is not unlawful and does not constitute a criminal offense of any kind. If you find that the defendant in one or more instances so endorsed the name of another person, or that the defendant's name as payee was so endorsed by some third party, you are not to consider such facts in any way in your deliberations except as they relate in some way to the receipt by the defendant of taxable income.

[Returns Proposed By Others]

The duty to file income tax returns if personal to each particular taxpayer. Bona fide mistakes in tax returns should not be treated as evidence of fraud, but no person who is able to read and write and who signs and files a tax return is permitted to escape the responsibility of at least good faith as to the correctness of the statements in the return which he signs and files, whether the return was prepared by him personally or by somebody else for him. If the evidence shows beyond a reasonable doubt that the taxpayer intended to conceal known tax liabilities from the Internal Revenue Service of the Government, then, of course, such taxpayer was not acting in good faith.

You are instructed that in law no person may escape responsibility for the knowledge of facts actually known to him merely through a disclaimer of such knowledge by saying, "I have no knowledge of such facts." A taxpayer, charged by law with the personal duty of filing a tax return, cannot sign, file or authorize the filing of a return which he, in fact, knows is false and then escape responsibility for the falsity of the return which he sponsored with such knowledge simply because the return was prepared by some other person.

If a taxpayer submits information to another, as his agent, an employee, bookkeeper, accountant, or lawyer, for example, to be used by such other person in the preparation of the tax returns of the taxpayer, and at the time the taxpayer submits such information he knows that the information is false, incomplete or otherwise inadequate and that the information he supplies will render the resulting tax returns false, then the taxpayer cannot disclaim knowledge and responsibility for the resulting false returns on the theory that the returns were not personally prepared or filed by him. This is not to say that a taxpayer is chargeable with the errors, whether wilful or negligent, of his employees or advisers. When a taxpayer supplies or furnishes a bookkeeper or accountant or other agents all necessary information, or access thereto, which information is correct and complete to the best of the taxpayer's knowledge and belief, and the taxpayer, in reliance upon the skill, knowledge, ability and competence of the bookkeeper or accountant, files a tax return prepared by such person, then if the return proves to be inaccurate the taxpayer is not guilty of fraud, unless he knew the return to be false and authorized its filing with knowledge of its falseness and with the intent to evade taxes. In the present case, if you find that errors or misrepresentations in bookkeeping or in reporting of financial matters were made by Mr. Verschueren, or by any other agent or assistant of the defendant, you shall not consider such matters in your deliberations unless the evidence has convinced you beyond a reasonable doubt that the defendant knew of such acts and intentionally concurred in or permitted them.

However, a taxpayer is not entitled to rely on the taxable income computed by a bookkeeper, accountant or other agent if the taxpayer in fact knew the computation was false or if the taxpayer knowingly and intentionally withheld or permitted to be withheld from the bookkeeper, accountant or other agent information from which the taxpayer's income could have been correctly computed.

[Expert Testimony]

In this case certain persons qualified as "experts" in tax accounting and in handwriting identification and testified as such. When a person is called as an expert witness in a particular field of technical knowledge or learning, and is allowed to express opinions, those opinions are for the aid and assistance of the jury, but not for the purpose of invading its functions. The testimony of an "expert witness," in so far as it is based on his personal observations of particular facts and conditions, is to be considered by you as that of any other witness. However, the opinions of experts based on hypothetical assumptions of fact do not tend to prove the facts upon which they are based. The facts must be found by the jury from the basic evidence itself and not from assumptions of the expert witnesses or from schedules, summaries or computations based thereon. The jury is not bound to find according to expert testimony, but such testimony should be considered by you in connection with all the other evidence in the case. The responsibility to decide all facts rests upon the jury, and it is your duty to evaluate and appraise the testimony of witnesses who express opinions, precisely as you would evaluate and appraise the testimony of a witness who testifies to facts purportedly within his personal knowledge. It is for you, the jury, in the light of all the curcumstances disclosed during the progress of the trial, to place that weight upon, and give that credit and value to, the testimony of each witness, whether an expert or otherwise, which you conscientiously believe, in the exercise of sound judgment and good sense, it is fairly entitled to receive at your hands.

Certain exhibits have been admitted in evidence which are variously referred to as schedules, summaries or computations. You will recall that earlier in the trial I gave you instructions about the nature and the use to be made of that type of exhibit. Exhibits of this nature are permitted where they involve summary, allocation or computation of data appearing in voluminous books, records or documents admitted in evidence. Strictly speaking, these exhibits in themselves are not evidence but are admitted as purporting to summarize and otherwise deal with data referred to in other exhibits and evidence admitted in the case. The schedules, summaries and computations are admitted in evidence only for your assistance and convenience in considering the basic evidence which they purport to reflect. But you are reminded that it is the books, records and documents themselves which are evidence, and the schedules are admitted only to assist you in considering such evidence. For this purpose you are entitled to consider them, giving them such weight and value as may be warranted by your finding of the facts shown by the basic evidence dealt with by the schedules, summaries and computations.

Your verdict must be based entirely and exclusively upon the evidence presented and received during the course of the trial, regardless of whether the evidence was given by witnesses called by the Government or by the defendant, on either direct or cross-examination, and you must not discuss or consider anything but such evidence. The statements of attorneys in the case made during the trial and in their arguments are not evidence nor proof of any fact in issue and should be disregarded by you unless the statements are based on evidence as you find it to be and are in accord with your own recollection of what the evidence is, and with your own judgment as to the credibility and significance of the evidence, and as to anything that has been said during the argument, or otherwise, by any counsel in the case, you must remember always that that is not evidence, but it is your duty to determine what the evidence is and what the facts are to be derived therefrom.

You are the sole and exclusive judges of the facts in this case, and of the credibility of the witnesses, and of the weight and value to be given to their testimony. Witnesses are presumed to speak the truth but the presumption may be overcome as to any witness by the evidence in the case and all reasonable inferences drawn therefrom. In determining the weight and credit you should give to a witness and the weight and value you should attach to his or her testimony, you may take into consideration the conduct and appearance of the witness on the stand; the interest of the witness, if any, in the result of the trial; the motive actuating the witness in testifying; the witness' relationship to, or feeling for or against the defendant; the probability or the improbability of the witness' statements; the opportunity the witness had to observe or be informed as to the matters respecting which such witness gives testimony; and, of course, very importantly, your appraisal of the inclination of the witness to speak truthfully or otherwise as to the matters within the knowledge of such witness.

All of these matters being taken into account, together with all other facts and circumstances shown by the evidence, it is your province, ladies and gentlemen of the jury, to give to the testimony of each witness such value, credibility and weight as you deem proper.

In finding the facts, you are not bound to find according to the greater number of witnesses who may testify one way or another as to any particular fact, or on either side of the case. It is your appraisal of the credibility, weight and probative value of the testimony, regardless of the number of witnesses, which must be controlling in your determination of facts.

Inconsistencies or discrepancies in the testimony of a witness, or between the testimony of different witnesses, may or may not cause the jury to discredit such testimony. Two or more persons witnessing an incident or a transaction may see or hear it differently in the first place and remember it more or less accurately afterwards. Innocent misrecollection, like failure of recollection, is not an uncommon experience. In weighing the effect of a discrepancy, consider whether it pertains to a matter of importance or an unimportant detail, and whether the discrepancy results from innocent error or wilful falsehood.

A witness may be discredited or impeached by contradictory evidence; or by evidence that at another time the witness has made statements inconsistent with the witness' present testimony. If you believe any witness has been impeached and thus discredited, it is your exclusive province to give the testimony of that witness such credibility, if any, as you may think it deserves.

If, upon the consideration of all the evidence, you conclude that any witness has wilfully sworn falsely as to any material matter involved in the trial, you may reject or treat as untrue the whole or any part of such witness' testimony except in so far as it may be corroborated by other credible testimony in the case.

You are instructed with regard to the drawing of inferences from evidence admitted in the case that you may draw an inference from a circumstance, but only if the circumstance itself has been proved by the evidence beyond a reasonable doubt. You may not draw a second inference from any inference so drawn. In other words, you may not pile inference upon inference, but may draw an inference only from a fact or circumstance which you find to have been established by the evidence beyond a reasonable doubt.

Under the Constitution of the United States no defendant accused of a criminal offense is required to testify at his own trial. A defendant in a criminal case has the right to insist that the Government establish his guilt of the offense or offenses charged in the indictment by evidence that convinces the jury of guilt beyond a reasonable doubt. A defendant in a criminal case does not have to disprove anything, and does not have to produce any witnesses. The burden is always on the Government to prove the accusations made in the indictment beyond a reasonable doubt; therefore, you cannot and must not draw any inference adverse to the defendant by reason of the fact that such defendant did not testify in his own behalf.

If anything to the contrary of this statement just made, even in any remote way has been suggested to you by reason of: The presentation of the evidence, the evidence itself, the absence of evidence, the argument of counsel, the Court's instructions or in any other manner whatsoever, you are now instructed most emphatically to wholly and entirely dismiss such thought from your minds. Under no circumstances whatever is a defendant obliged to testify, and no mention, or consideration of any kind, is to be made in your deliberations, to the fact that defendant has not testified in this case.

Undoubtedly you have noted that the following persons referred to in various transactions and incidents covered by the evidence have not appeared as witnesses in the case: Dave Beck, Jr., Norman Gessert, Loretta Gessert, Fred Verschueren, Sr., Nathan Shefferman, Shelton Shefferman.

The fact that none of these persons testified as a witness in the case was not a matter which was in the control of either the Government or the defendant. Therefore, I instruct you and wish to emphasize that you are not to draw any inference in any particular whatever, either favorable or unfavorable, as to either the Government or as to the defendant by reason of the fact that such persons did not testify.

You must not give any special weight to the testimony of the Bureau of Internal Revenue employees merely because they are employees of the Government charged with certain responsibilities under the tax laws. The weight, value, and credibility of the testimony of these witnesses should be determined in the same manner as that of any other witness, in accordance with instructions I have just given you.

The Court has admitted the testimony of a number of accountants, some of whom are employed by what is known as the "Intelligence" or "Fraud Investigation" sections of the Internal Revenue Service. You are in no way to emphasize the testimony of such accountants by reason of the titles of the sections of the Internal Revenue Service by which they are employed or consider such titles as being of any significance whatever in this case. In evaluating the testimony of an accountant, you should consider his professional qualifications, adherence to professional standards of ethics, past experience and attainments, together with your appraisal of his credibility and the care, thoroughness and accuracy of his work with such material and data as was available to him.

At an early stage in the trial I instructed you with regard to the making of objections by counsel and to the holding of side-bar conferences between counsel and the Court. At this time it is appropriate that I again mention these matters briefly. It is the duty of attorneys to object to questions asked by opposing counsel when they feel that such objections are appropriate and necessary, and you are in no way to consider in your deliberations the frequency or nature of the objections made by counsel for either side. Furthermore, you are not to consider or be influenced by any personal like or dislike you may have formed during the trial for any of the counsel on either side.

At many points in the trial conferences have been held between counsel and the Court in the courtroom but out of the hearing of the jury. This method has been employed for the purpose of sparing the jury the burden of making frequent exits from and re-entries into the courtroom to permit counsel and the Court to discuss legal matters which could not properly be discussed within the hearing of the jury. Such conferences are entirely proper and are not to be construed as indicating that any matter whatever is being improperly withheld from the jury by either the Government or the defense or by the Court.

At various times throughout the trial, the Court has ordered stricken answers or remarks made by certain witnesses, and also certain other items of evidence or purported evidence have been stricken. You are instructed that any testimony, document or other matter which the Court has ordered to be stricken is not to be considered by you in any way in your deliberations, since such matters do not constitute evidence in the case and can have no bearing upon the questions to be determined by uou.

[Senate Committee Hearings]

At times during the course of the trial, witnesses have made reference of some kind to a United States Senate Committee and possibly to other hearings and proceedings. You are instructed to disregard such reference entirely. As the Court mentioned to you near the beginning of the trial, the Senate Committee and its activities had and have no bearing whatever upon this case. The same is true concerning any other hearing or proceeding which may have been mentioned during the trial or which may otherwise have come to your attention. You must not under any circumstances consider or be influenced by any facts or circumstances, or purported facts or circumstances, of which by chance you may have acquired some intimation or information from sources other than evidence admitted here in this courtroom during trial of the case.

You may not find the defendant guilty merely because you may believe or may find the defendant has committee some other or different offense or some act of misconduct not charged in the indictment. Such matters are not before this court and your consideration must be limited to the alleged offenses here charged, and you are not to consider or speculate concerning any other offense, federal or state, which you, or any of you, believe may be involved.

By the giving of this instruction the Court does not mean to suggest that any other such offense was in fact involved.

[Burden of Proof]

The burden of proving every fact material and necessary to a conviction by competent evidence beyond a reasonable doubt is on the Government and does not at any time or under any circumstances shift from the Government. It is not sufficient for the Government to prove any material fact either by guess or speculation, or conjecture, suspicion, or by a preponderance of the evidence, or only to the extent that the evidence pertaining to such fact is evenly balanced, or uncertain, or is as consistent with guilt as with innocence.

The law does not impose upon a defendant the duty of producing evidence on any issue and a defendant has the right to rely upon a failure of the prosecution to establish beyond a reasonable doubt any essential element of the offense charged, if such failure in fact be found by the jury, as to any particular count or counts.

On the other hand, it is not necessary that the Government should prove such facts absolutely in such manner as to leave no room for any doubt whatever. Very few things in the whole domain in human knowledge and experience are susceptible of absolute proof. We can have a moral certainty or a reasonable certainty, which may vary in degree, according to circumstances, but rarely an absolute certainty.

The expression "reasonable doubt" means in law just what the words imply--namely, a doubt founded upon some good reason. It must not arise from a merciful disposition, or a kindly sympathetic feeling, or a desire to avoid performing a disagreeable duty. If a reasonable doubt arises, it must be either from the evidence produced or from the lack of evidence. It must not be a mere whim, or a vague, conjectural doubt or misgiving founded upon mere possibilities. It must be a substantial doubt such as would make an honest, sensible, and fairminded person hesitate to act in a serious and important matter wherein ascertainment of truth was conscientiously being sought.

[Jury's Duties]

You must use your common sense as men and women of experience possessing some knowledge of worldly affairs, and if, after examining carefully all the facts and circumstances shown by the evidence in the case, you can say and feel that you have a settled and abiding conviction of the guilt of a defendant as to any count or counts, then you are satisfied of such defendant's guilt beyond a reasonable doubt as to such count or counts. If you do not have such conviction as to any count or counts, or if on consideration of all of the evidence as to any count or counts you are left with the conclusion that a finding of innocence may be drawn as reasonably as a finding of guilt, or vice versa, then you must acquit such defendant as to any such count or counts.

The verdict must represent the considered individual judgment and conviction of each juror. In order to return a verdict it is necessary that each and all of the twelve jurors agree thereto. Your verdict must be unanimous on each count.

It is your duty, as jurors, to consult with one another and to deliberate with a view to reaching an agreement, if you can do so without violence to individual judgment. Each of you must decide the case for yourself, but do so only after an impartial consideration of the evidence with your fellow jurors. In the course of your deliberations, do not hesitate to re-examine your own views and change your opinion if honestly convinced it is erroneous. But do not surrender your honest conviction as to the weight or effect of evidence solely because of the opinions of your fellow jurors or for the mere purpose of returning a verdict.

There is no fixed method of procedure for you to follow during your deliberations. However, you should proceed in such a way as to give every juror an equal opportunity with every other juror to express his or her views and in such a way as will tend to produce the most intelligent result possible.

The attitude of jurors at the outset of their deliberations is important. It is seldom helpful for a juror, upon entering the juryroom, to announce an emphatic opinion on the case or a determination to stand for a certain verdict. When a juror does that at the outset, individual pride may become involved, and the juror may later hesitate to recede from an announced position even when shown it is incorrect. You are not partisans. You are the judges of the facts. Your sole interest is to ascertain the truth from the evidence in the case. You will make a worthwhile contribution to the admin istration of justice when you agree upon and return a verdict based upon the evidence in the case and the law applicable thereto.

When you retire to the juryroom to deliberate, it will be your duty first to select one of your number to act as a Foreman, who will speak for the jury when called upon to do so by the Court, and the Foreman will sign your verdict when it has been agreed to.

No verdict can be returned in this case except by the unanimous finding of all twelve, as I have stated. The form of the verdict in each case, there being two indictments and therefore two separate filed cases, has been prepared for your use. It is a simple form which I think you will have no difficulty in following as to each of the counts in question.

In the first numbered cause, 16515, the verdict reads: "We, the jury impaneled in the above-entitled cause, do find the Defendant David D. Beck is"--and then there is a blank line followed by the words "as charged in Count One of the indictment herein, and is"--with a blank line--"as charged in Count Two of the indictment herein. Dated, Tacoma , Washington , this blank day of February, 1959", with a signature line for the Foreman.

If you find the defendant guilty as to any particular one of the several counts referred to in each form of verdict, you will fill in the word "guilty" in the blank space. If you find the defendant not guilty as to any one or more of the courts referred to in the verdict, you will fill in the two words "not guilty" in the space provided.

When you have agreed upon your verdict and it has been prepared, it will be signed by your Foreman, and you will then return and present it in to Court.

In order that you may be fully informed as to the allegations of the indictment as I have mentioned them previously, you will have the portion of the indictment referring to the present trial with you in the juryroom throughout your deliberations, and also you will have with you in the juryroom the exhibits that have been offered and received in evidence in this case. For your convenience in handling the number of exhibits, the file cabinets in which they are contained, consecutively numbered, are in the cabinets, and that will be brought to the juryroon in that form so that you will have that convenience in handling this large number of papers.

Now, as I said at the outset, you must not single out or overemphasize any particular thing that I have said, or any particular phase in the instructions that I have given you, but you must consider the instructions as a whole, applicable as the whole law of the case.

And now, ladies and gentlemen, in conclusion, let me remind you that each of you has taken a solemn oath that you will well and truly try this case and a true verdict render upon the evidence as given in the trial and upon the law as given you by the Court. You have nothing whatever to do with whether or not punishment be inflicted, or the nature or extent thereof in case a violation of law be found. The fact that punishment may follow a conviction cannot be considered by you in any way, excepting only insofar as it may tend to make you careful about your proper functions in reaching a verdict. Neither must you allow yourselves in the least, or in any manner whatever, to be moved by sympathy or considerations of that kind on the one hand, or be influenced by prejudice or bias or considerations of that kind on the other. That is beneath your dignity as citizens and as jurors under the oath that you have taken in this trial.

The question of guilt or innocence is a question of fact; not a question of sympathy or considerations of that kind, or prejudice, or bias on the other hand, or what the punishment shall be or might be. If, as a matter of fact, from the evidence and under the law the defendant is guilty, no amount of sympathy or considerations of that kind make him innocent. On the other hand, if the defendant is innocent, no amount of bias or prejudice or considerations of that kind will make him guilty. Regardless of what the penalty might be, regardless of any feeling of sympathy on the one hand, or prejudice on the other, each defendant, whoever he might be, upon the evidence and the law and on that basis only, is to be found either guilty or not guilty as to each count charged. What the true verdict is as shown by the evidence and under the instructions of the Court now become the questions that you must answer by your verdict.

Let the Bailiffs be sworn.

[Verdict in No. 16515]

We, the jury empanelled in the above-entitled cause, find the defendant, DAVID D. BECK, is Guilty as charged in Count I of the Indictment herein; is Guilty as charged in Count II of the Indictment herein.

[Verdict in No. 16526]

We, the jury empanelled in the above-entitled cause, find the defendant, DAVID D. BECK, is Guilty as charged in Count I of the Indictment herein; is Guilty as charged in Count II of the Indictment herein; is Guilty as charged in Count III of the Indictment herein; is Guilty as charged in Count V of the Indictment herein.

 

 

[56-2 USTC ¶9971] United States of America v. Harry L. Donovan

U. S. District Court, East. Dist. Va., Richmond Div., Criminal No. 5985, 142 FSupp 703, 6/6/56

[1939 Code Sec. 145(b)--substantially unchanged in 1954 Code Sec. 7201]

Crimes: Willful failure to pay tax: Net worth increase: Operation of (numbers) gave of chance.--A verdict of guilty against taxpayer upon an indictment charging him with filing false returns in which he allegedly understated his income with intent to defraud the government of the tax due on such unreported income, was not sustained. The court held that due to the failure of the government to show with reasonable certainty a likely source to which an increase in net worth might be attributable as currently taxable income, the case should not have been submitted to the jury. Taxpayer was a dealer in illicit whiskey, the operator of a numbers game in which pick-up men were employed, and engaged in some farming, horse breeding and racing occupations. The government called as witnesses some of the pick-up men who corroborated the books and records, and it improperly contended that unreported income was received from the numbers business in some manner to which it could not point.

Edwin J. Slipek, Assistant United States Attorney for Government. Alexander W. Neal, Jr., W. Gibson Harris, for defendant.

Opinion of The Court Sustaining Defendant's Motion for Judgment of Acquittal

HUTCHESON, District Judge, THE COURT:

I have felt, Gentlemen, that in this case I would not undertake to write an opinion, but that I should briefly point out the reasoning which has led me to the conclusion which I have reached.

The indictment charges the defendant with filing false income tax returns for certain years in which, it is alleged, he understated the amounts of his income for the purpose, or with the intent to defraud the United States of the tax due on such unreported income.

In undertaking to support the charges, the Government has employed what has become known as the net worth method of proof. This method has been utilized with increasing frequency in recent years and the applicable principles have given the courts concern. The method was fully discussed during the trial and no useful purpose would be served by a repetition at this time.

The hearing before the jury consumed eight days and the record contains more than nine hundred pages.

[Verdict of Guilty]

At the conclusion of the Government's evidence, the defendant filed a motion for a judgment of acquittal, which was renewed at the conclusion of all the evidence. Decision was reserved until after verdict. The jury returned a verdict of guilty and the motion was again renewed and is now before me for disposition.

I shall not undertake to review the evidence in detail, but there are certain facts and principles of law to which I should refer.

[Net Worth Method]

As the result of the large number of net worth cases being brought to its attention, the Supreme Court granted certiorari in the case of Holland v. United States, which was decided on December 6, 19 54. [54-2 USTC ¶9714]. In its opinion, the Court discussed at length the principles involved in the trial of cases of this kind. The opinion in the Holland case has been carefully considered by a number of the lower courts since it was rendered.

In the Holland case, the Court in discussing the method, after remarking that it was assumed in view of its widespread use, that the Government deemed it useful in enforcement of the criminal sanctions of the income tax laws, stated:

"* * * careful study indicates that it is so fraught with danger for the innocent that the courts must closely scrutinize its use."

It was pointed out that it "was a potent weapon in establishing taxable income from undisclosed sources when all other efforts failed."

Summarizing, the Court used the following language:

"While we cannot say that these pitfalls inherent in the net worth method foreclose its use, they do require the exercise of great care and restraint. The complexity of the problem is such that it cannot be met merely by the application of general rules. Trial courts should approach these cases in the full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute. Charges should be especially clear, including, in addition to the formal instructions, a summary of the nature of the net worth method, the assumptions on which it rests, and the inferences available both for and against the accused. Appellate courts should review the cases, bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation."

From a study of the Holland case and cases subsequently decided, it appears that there are certain essential requirements which must be met by the proof when resort is had to establishing a fraudulent understatement of income by evidence showing an increase in the known value of the net worth of the assets of the taxpayer.

[Requirements of Proof]

Without mentioning others not here involved, so far as this case is concerned there are two bases, or foundation pillars, which must be established with reasonable certainty:

1. An increase in the known net worth value of the assets of the taxpayer during the period under consideration. Such an increase, standing alone, is insufficient to support a charge that it represents currently taxable income. There must be established:

2. A likely source from which the jury can reasonably find that the net worth increase is attributable to currently taxable income.

Evidence in support of these two factual requirements is necessary to justify the submission of the case to the jury.

[Whiskey Dealer]

Turning to this case, prior to some time in the early 1930's, the defendant was a dealer in illicit whiskey. Thereafter, until the enactment by Congress of what has been referred to as the "Gambling Stamp Law," he was the operator of a clearing house game of chance known as the numbers game in the city of Richmond .

It should be unnecessary to point out that he is here to answer only the charges contained in the indictment, which relate to alleged fraudulent efforts to evade the payment of income taxes. However, numerous references to his occupation were made during the course of the trial and it will be necessary to discuss his activities in the numbers game to clearly understand the issues now to be decided.

As is usually the case, there was conflicting evidence concerning the establishment with reasonable certainty of an opening net worth to serve as a starting point for the calculation of future increases.

The Government introduced testimony regarding statements allegedly made by the taxpayer in 1936 and in 1941 in relation to investigations then being conducted and a statement said to have been made in 1946 concerning the value of his assets. While the Court in the Holland case made reference to reliance by the prosecution on statements of the taxpayer made to investigating agents to establish vital links in the Government's proof, it gave expression to an opinion that "* * * when a revenue agent confronts the taxpayer with an apparent deficiency, the latter may be more concerned with a quick settlement than an honest search for the truth."

I shall pass this point, as I regard it unnecessary under the facts of this case to determine the sufficiency of this evidence to convict under the principles stated in the Holland case. In that connection, I point out that there was both direct and circumstantial evidence which the jury might have accepted tending to show a failure to establish a proper beginning net worth.

Turning to the second factual requirement, a somewhat more detailed discussion of the evidence is necessary.

A review of many cases decided since the Holland case shows a sharp distinction from this case as regards records of the taxpayer. Judge Hand, in the Costello case, pointed out in his statement of facts the requirements in a clear and succinct manner, and the difference between the facts of that case and this case is clearly evident.

[Operation of Numbers Game]

Beginning in the mid-1930's, the taxpayer employed a reputable, well known firm of certified public accountants to audit his books and records and to file his tax returns. These books and records covered the clearing house operations as well as some farming and horse breeding and racing occupations. The controversy centers around the operation of the game of chance. Slight reference was made to the other activities, which appear to have resulted in large losses. The accountants set up a system of bookkeeping under which the receipts or "take" of each pick-up man was tabulated. A memorandum of such tabulations was furnished each pick-up man daily and at the end of the week he was supplied a summary of the play or take for which he was accountable and upon which his compensation was based, as well as a statement of the "hits," or winning numbers distributable among his clientele. At the end of the year, each pick-up man was given a Treasury form reflecting his total income from the business and required by the taxpayer to go to the certified public accounting firm to have his tax return prepared and then to file the return and pay the tax indicated. The pick-up men constituted the link between the taxpayer and the writers. They were reflected on the books of the taxpayer by key symbols and so identifiable.

There were forty-one so engaged. The agents interviewed fourteen. The Government called only some of them as witnesses, and did not call others summoned. No explanation was offered for not interviewing the remaining twenty-seven or for failing to call the others in attendance. However, they were called to testify by the defense.

Each testified that the daily, weekly, and annual compilations furnished them were accurate.

The adding machine tapes reflecting the weekly computations, used in making entries of receipts in the books of the taxpayer, were filed as exhibits. The daily computations had been destroyed.

An experienced and reputable auditor engaged by the taxpayer testified that in his opinion the weekly settlements with the pick-up men, represented by the tape, were an adequate and sufficient check to insure the accuracy of the receipts.

There was no proof advanced by the prosecution in support of its contention that the books and records did not properly reflect the income received from the business of the taxpayer and, in effect, it conceded that no other likely source of income was shown.

Since the pick-up men called as witnesses by the Government corroborated the books and records, the language of the Holland case becomes pertinent. I read from page 135:

"When the Government rests its case solely upon the approximations and circumstantial inferences of a net worth computation, the cogency of its proof depends upon its effective negation of reasonable explanations by the taxpayer inconsistent with guilt. Such refutation might fail when the Government does not track down relevant leads furnished by the taxpayer--leads reasonably susceptible of being checked, which, if true, would establish the taxpayer's innocence. When the Government fails to shown an investigation into the validity of such leads, the trial judge may consider them as true and the Government's case insufficient to go to the jury. This should aid in forestalling unjust prosecutions, and have the practical advantage of eliminating the dilemma, especially serious in this type of case, of the accused's being forced by the risk of an adverse verdict to come forward to substantiate leads which he had previously furnished the Government. It is a procedure entirely consistent with the position long espoused by the Government, that its duty is not to convict but to see that justice is done."

[Contention of Government]

This is especially true when the testimony of the auditor as to the adequacy of records is considered along with the failure of the Government to impeach their correctness except by undertaking to invoke a presumption of falseness because of the occupation of the taxpayer. In this connection, reference should be made to the fact that over a period of approximately twenty years, the annual returns of the taxpayer have been carefully scrutinized by the Treasury Department in a search for fraud, resulting in approval of the agents conducting the search. The contention of the Government is that unreported income was received and that it was received from the numbers business in some manner to which the Government could not point.

This contention is precisely the same one considered by the United States Court of Appeals (First Circuit) in the case of Thomas v. Commissioner of Revenue, decided on April 12, 19 56 [56-1 USTC ¶9449]. That it was a civil case in which the degree of proof required varied from this case, makes the interpretation by that court of the Holland case particularly significant. There the Court said:

"Respondent further contends that in any event the requirement has been met because the taxpayer's corporation is a possible source of taxable income which could account for the net worth increases. We think this argument assumes the very fact to be proved. There must be some independent showing that the corporation might be the source of the unreported income, not merely a negative inference arising from the prior assumption that the increases were taxable and therefore must derive from the corporation since no other taxable source is apparent.

"In United States v. Johnson, 319 U. S. 503 [43-1 USTC ¶9470], the taxpayer concealed his ownership in various enterprises which were possible sources of the unreported income. In the Holland case the business was proved to be capable of producing much more income than was reported and in an amount sufficient to account for net worth increases.

"No such showing has been made in the instant case. The books of the corporation are admittedly consistent. Of course, this does not prove they are honest, but in the absence of some independent evidence to the contrary, we believe that respondent has not indicated a likely source of taxable income. There can be no presumption that the books of the corporation are wrong, for any such approach would render entirely nugatory this particular safeguard against abuses of the net worth method."

The language of that case is peculiarly applicable to the facts of the case now before the Court. To sustain the verdict in this case would establish a principle to the effect that a showing by the Government of an increase in the known value of the net worth of the assets of a taxpayer, alone, is sufficient to place upon him the burden of proving that none of it represents unreported currently taxable income. This the courts have declined to do. To follow such a course to a logical conclusion would lead to a situation in which a showing that a taxpayer had spent more than he reported as income in a given period would place upon him the burden of proving that the excess was not taxable income.

It is my considered opinion that due to the failure of the prosecution to show with reasonable certainty a likely source to which the increase in net worth may be attributable as currently taxable income, the case should not have been submitted to the jury for its consideration. Accordingly, the motion of the defendant for a judgment of acquittal is granted and the Clerk is directed to enter judgment on the records.

 

 

[56-2 USTC ¶9714]United States of America V. Frank Rully, aka Frank Rulli

U. S. District Court, Dist. Conn., Criminal No. 9158, 143 FSupp 283, 6/7/56, Amending earlier opinion, 56-1 USTC ¶9533

[1939 Code Secs. 41, 145(b)--similar to 1954 Code Secs. 446, 7202]

Criminal prosecution: Fraud: Net worth method: Earlier finding of guilty set aside.--The taxpayer, a professional gambler, garbage collector, and pig raiser, was convicted of fraud for tax year 1949 in an earlier opinion, 56-1 USTC ¶9533. In reviewing the case on motions to amend the findings, the court concluded that it had incorrectly found that taxpayer's unrepaid borrowings in 1949 were not in excess of $10,000 and that he had unreported income of $8,000. Finding that the government had not met its burden of proof, the court set aside the earlier finding of guilty and ordered a judgment of acquittal. The court also amended its findings to show that taxpayer had at least $2,000 cash on hand at the end of 1949. It made an additional finding of a decrease in taxpayer's wife's net worth in 1949.

Simon S. Cohen, United States Attorney, Hartford , Conn. , for plaintiff. Boris I. Bitker, John M. Chapnick, and Ellsworth B. Foote, New Haven , Conn. , for defendant.

Memorandum of Decision on Motion for New Trial, Motion in Arrest of Judgment and Motion to Amend Findings

SMITH, District Judge:

Defendant, a professional gambler, garbarge collector and pig raiser, convicted on trial to the Court of attempted income tax evasion in his joint return for 1949, moves in arrest of judgment or for new trial, and to amend the findings. The government also moves to amend the findings.

[Motions to Amend Findings]

The motion of defendant to amend finding 7 is denied. It was testified, so far as the Court recalls, that the sole receipts from the sale of swine were those reflected therein.

The defendant's motion to amend findings 13, 16 and 35 is denied. The inference appears justified in the absence of any contrary leads, and in the light of the testimony as to Mrs. Rully's activities at the farm, that other income of Mrs. Rully than from her identified investments not only was not proved, but did not exist. While the payments for the dinners may have been handled by Mrs. Rully to some extent, Larry's testimony that the profit was defendant's seemed credible, and is bolstered by defendant's statements to Kreger that he kept a record of his picnic income on a calendar. As to the Ford cars, it was the Court's recollection that the original Ford purchase was with defendant's funds. If so, the inference would be justified that the first Ford and those obtained by successive trade-ins were defendant's. The effect on the tax year in question is in any case not substantial.

The motion to amend findings 22 and 25 is denied. Although it may be that some of the payments on the house were delivered by Mrs. Rully to the contractor, and although title to the land was in her name and the family unit was expected to occupy it, the arrangements throughout were in charge of defendant and the obligation to pay and the payments his.

Both sides seek amendment of finding 38, the government seeking to eliminate the starting cash on hand item, the reference to unrepaid borrowings during the year, and the finding of no cash on hand at the end of the year, the defendant to eliminate reference to starting and closing cash or increase the starting cash figure and to increase the unrepaid borrowings figure. Defendant also seeks amendment of finding 39 to increase the amount of the borrowing in 1949, and seeks a finding of decrease in Mrs. Rully's net worth in accordance with the stipulation. The $17,000 figure for opening cash on hand is supported not only by defendant's statement given in 1950 of cash on hand in that amount in 1945, but by the corroborative evidence of the loan application of March 1949 contemplating a cash down payment of $15,000, and by the use of $16,000 cash and resort to the bank account for the balance at the time of the escrow agreement in May 1949.

The figure of 0 for cash on hand at the close of the year is not justifiable. Defendant was obviously low on cash because of his calling on various resources to raise cash by arrangements which were completed shortly thereafter. But he would hardly have made cash payment for the furniture if it completely denuded him of cash. The finding may be amended to show at least $2,000 cash on hand at the end of the year.

The requested additional finding of a decrease in Mrs. Rully's net worth in 1949 by $2257.82 may be made.

[Net Worth Increase]

Defendant's increase in net worth since the purchase of the farm in 1942 up to January 1, 19 50 shows quite plainly that he did substantially understate income in his tax returns at some time in the intervening years. There may be civil liabilities for those years, especially since the investigation was underway as early as January 1950. This criminal prosecution, however, has to do only with the return for the calendar year 1949. In view of the apparent understatement over the period, the suspicion must be strong that the pattern was followed in the 1949 return. However, we may not convict on suspicion, and review of the evidence on these motions leads the Court to question whether there is sufficient evidence to base the amount found in findings 38 and 39 as to defendant's borrowings not repaid by the end of the year. Defendant claimed as early as January 1950 that such borrowings had been made. There is secondary evidence that he repaid some in early 1950. The witnesses, as is not surprising in view of defendant's main occupation, are often most untrustworthy. If the burden of proof of the amount of the borrowing was on the defendant, he has not sustained it. Yet the evidence of his borrowings and attempted borrowings in 1949 and 1950 is persuasive that some substantial amount was borrowed from a source other than a lending institution in late 1949 and repaid from the proved sources of funds in early 1950.

[Burden of Proof]

The review of the findings points up the most troublesome problems in a net worth case where the amounts involved are relatively small. Questions regarding the burden of proof are raised by defendant relating to the Conforte loan, the capital gains deduction and Mrs. Rully's net worth decrease and interest income, and Mrs. Rully's resources. The ultimate burden is upon the government. Where there is evidence produced by the government of the nature of Mrs. Rully's activities, and her financial history, it is open to the trier to infer that no other sources of funds through her existed in the tax year in question in the absence of leads furnished by the taxpayer. The net worth decrease of Mrs. Rully is established by the stipulation. Her approximate interest income may be calculated from the evidence. As to the claimed capital gains deduction, there was some testimony that 65% of the swine sold were brood animals. This the Court did not credit. In the face of the failure of defendant to list any in his return and of the lack of any evidence as to his intent that they should be used for breeding purposes rather than for meat animals, the Court would not be justified in finding that any appreciable percentage, let alone 65% were animals on which defendant was entitled to capital gains treatment. The crucial question of the burden of proof on two major items, basic to the finding of guilt remains.

The opening cash on hand and the Conforte loan present squarely the question of how far the defendant must go, in spite of the Fifth Amendment, to establish the nature and amount of non-taxable receipts during the year, as to which he has furnished leads to explain the net worth bulge in that year. He has in this case furnished such leads of which on checking, the government found some secondary evidence, but which evidence the government seeks to discredit by evidence of need for funds by defendant near the opening date, and lack of resources in the alleged lender at the time of the claimed loan. Defendant contends that having shown the possible source, the burden is still on the government to establish the amount. It need not do so, of course, to a mathematical certainty. Where, as here, the government has established the bulge, the trier may weigh all the evidence about the available source to which leads were given, and find the facts established by such evidence. If the government chooses to ignore a genuine lead, the trier cannot find that no sufficient funds came from that source. If the government follows up the lead and is unable to establish that a sufficient amount did or did not come from that source, it must at least show that it was not within the range of reasonable probability that sufficient funds came from that source to account for the apparent understatement of income. Cf. U. S. v. Costello, 2 Cir., 221 Fed. (2d) 668, 673 [55-1 USTC ¶9342]. The Court found that it had not borne the burden on the issue of opening cash on hand, but had borne it on the insufficiency of amount of the claimed loan.

[Unrepaid Borrowings]

The Court's finding that the government has borne the burden here depends on the sufficiency of the underlying evidence from which it inferred that the amount of loans from other gamblers, not repaid in 1949 was approximately $10,000. Review of the evidence fails to support that finding as sufficiently well founded. We may distrust the evidence which was produced regarding the Conforte loan, but it is not open to dispute that Rully had been seeking bank loans to meet the house construction payments in 1949, as well as seeking money from other sources, and that he did obtain cash from some place when the bank loans were not forthcoming in 1949, and did manage to raise money from bank and other sources and from the family investments in early 1950 which could have gone to repay loans made in 1949. The amount of loans outstanding could have been higher than $10,000 and if it were as much as $8500 higher it would have wiped out the proved understatement entirely. The government has not shown that it was not within the range of reasonable probability that loans were obtained from other gamblers and that the amount was that large, in view of the testimony of the scale of the gambling activity of Conforte and defendant, and the evidence of defendant's transactions of late 1949 and early 1950. In the absence of such a showing, the findings are based on estimates without sufficient basis in the proof to establish guilt beyond a reasonable doubt. Review of the case on these motions to amend the findings leads the Court to the conclusion that it was incorrect in finding that it was established with sufficient certainty that no loans substantially in excess of $10,000 made in 1949 were outstanding at the close of the year. There remains a suspicion that gambling income in 1949 was higher than the amount reported in the guise of farm and picnic income, but this is not enough for conviction of attempted evasion of taxes for 1949, the only year in question in this case.

[Findings Set Aside]

The findings of the amount of unreported income and unrepaid borrowings in 1949 are set aside.

The finding of guilty is set aside and a judgment of acquittal ordered.

 

 

[49-2 USTC ¶9448]The United States of America , Plaintiff-Appellee v. Hillen J. Fenwick, Defendant-Appellant

(CA-7), United States Court of Appeals for the Seventh Circuit, No. 9895, 177 F2d 488, November 4, 19 49

Appeal from the District Court of the United States for the Southern District of Indiana, Indianapolis Division.

Additions to tax in case of deficiency: Evidence: Fraud: Net worth increase.--Where the government offered no direct testimony of unreported income items or of any undisclosed source of income to establish basic net worth, but relied solely on the circumstances of increased net worth and expenditures in excess of reported income to establish a case of income tax evasion, held, that the government had not proved beyond reasonable doubt that fraud had actually been committed, irrespective of taxpayer's implied admissions out of court. Reversing an unreported decision of the District Court.

B. Howard Caughran , United States Attorney, Indianapolis , Indiana , for the Plaintiff. Marion J. Rice and Bert C. Cheatham of Evansville, Indiana, George C. Forrey, III, Edward B. Raub, Jr., Jacob S. White, Indianapolis, Indiana, Floyd E. Thompson, Attorneys for the Defendant.

Before MAJOR, Chief Judge, KERNER and LINDLEY, Circuit Judges.

[Appeal from a Conviction of Fraud]

LINDLEY, Circuit Judge:

Defendant appeals from a judgment upon a verdict of a jury finding him guilty of wilfully attempting to defeat and evade a part of the income and victory tax due from him for the years 1943 and 1944.

Count 1 of the indictment charged that defendant, for 1943, made a false and fraudulent return in that he reported an income tax net income for the calendar year, of $4,940.88, a victory tax net income of $6,040.94 and income and victory tax due of $907.50, whereas each of said incomes for the calendar year was $10,709.04, upon which he owed a total tax of $2,737.62. Count 2 charged that he falsely and fraudulently stated that his net income for 1944 was $5,677.58 and the tax due thereon $1,171.50, whereas his net income for the year was $22,198.87, upon which he owed a tax of $8,486.94.

[Contentions of Parties]

Upon appeal, defendant contends that the evidence was insufficient to establish his guilt, in that there was no proof of undisclosed source of income or of unreported taxable income from disclosed sources and no proof of defendant's net worth in 1943 and, therefore, no basis for establishment of increased net worth or expenditures in excess of reported income and, further, that, under the facts of the case, the increased net worth and expenditures method of proof is not properly applicable. The government insists that it has proved that defendant wilfully evaded payment of tax in each year by evidence that in each year defendant's net worth increased in an amount greater than his reported income and by evidence of expenditures in excess, as it says, of defendant's disclosed incomes.

[No Evidence that Income Was Erroneously Stated]

The tax return for each year was prepared by a deputy collector in accord with information supplied by defendant. At the trial, the government offered no evidence that the income reported was erroneously stated; nor did it question any of the deductions made by defendant. On the contrary, it relied entirely upon what it contends is sufficient evidence to establish an increase in net worth during each of these years in excess of the tax reported and expenditures in excess of reported income.

In such a situation we must keep in mind that the conviction can not stand unless there is proof of the corpus delecti, existence of which can not be presumed or established by an extrajudicial admission. The government must, by competent evidence, prove beyond reasonable doubt that the crime charged has actually been committed. Pines v. United States , Cir. 8, 123 Fed. (2d) 825, 829; Forte v. United States , CA-DC, 94 Fed. (2d) 236, 243; Gordnier v. United States , Cir. 9, 261 Fed. 910, 912; United States v. Chapman, 168 Fed. (2d) 997 at 1001 [48-1 USTC ¶9312]. In the latter case we said: "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 his statement of the law." In other words to justify the conviction, there must be proof beyond reasonable doubt and exclusive of any express or implied extrajudicial admission by defendant, that defendant evaded some income tax. Gleckman v. United States , Cir. 8, 80 Fed. (2d) 394, 399 [35-2 USTC ¶9645]; United States v. Miro, Cir. 2, 60 Fed. (2d) 58, 61 [1932 CCH ¶9396]; O'Brien v. United States, Cir. 7, 51 Fed. (2d) 193, 196 [1931 CCH ¶9474]. Inasmuch as there is no direct proof that defendant received income which he did not report, we must test the validity of his conviction by the rules enunciated in the cases cited to determine whether there is such proof of increase in net worth, irrespective of defendant's implied admissions out of court, as to justify a finding of guilt. Such proof, circumstantial in character, in view of the principles announced, must be such as will exclude every reasonable hypothesis except that of guilt. Evidence of mere probability of guilt, of course, is not sufficient. Whether the proof meets these requirements necessitates some discussion of the evidence.

[The Facts]

From 1919 to 1947 defendant owned and operated a drugstore in Evansville , Indiana , and acquired from time to time pieces of real estate in the same city and a farm in an adjoining county. During 1943 and 1944, as well as for sometime previously thereto, he owned a number of coin-operated music boxes and amusement machines, which he placed in various restaurants and taverns for operation, the tenant and the owner dividing the net proceeds from the machines equally. His store, real estate and automatic machines afforded, according to the evidence, his only sources of income. Apparently he was a careless man, in so far as keeping records was concerned, as he kept no formal books of account but only invoices, memoranda, bills and checks. It was from such basic material and his own statements that the tax returns for 1943 and 1944 were prepared by the deputy collector. His return for 1943 showed that he had gross receipts of $55,280.21 and, after undisputed deductions, a net taxable income of $6,198.44 and a tax of $1,010.39 (including the unforgiven portion of 1942), which was paid. As we have indicated, there is no proof that any of the information furnished or any of the amounts reported was inaccurate or false. In fact the record is devoid of any direct evidence that defendant had any taxable income that he did not report.

Upon the theory that his worth had increased in each of the years, the government assumed that defendant's net worth on January 1, 19 43 was $50,829.06. An experienced auditor in the employment of the government testified that this net worth, at the end of 1943, was $62,200.80. He assumed that the increase, $11,371.74, was taxable income received by defendant in 1943. His computation fixed defendant's net worth at the end of 1944 at $85,989.67, resulting in an increase in net worth of $22,228.87, which the witness said was taxable income received by defendant in 1944. Upon the hypothesis that these computations were correct, a technical advisor of the Revenue Department computed defendant's tax for 1943 at $2,538.83 of which he had paid $1,010.39 and, in 1944, at $8,504.64 of which he had paid $1,171.50.

The weakness of the government's position, stressed by defendant, is the uncertainty of the propriety of the finding of defendant's net worth at the beginning of 1943. Of course, before the increased net worth method of proof is effective, the net worth of the taxpayer at the beginning of the tax year must be clearly and accurately established by competent evidence. Bryan v. United States , Cir. 5, 175 Fed. (2d) 223 [49-1 USTC ¶9322]; United States v. Chapman, Cir. 7, 168 Fed. (2d) 997, 1001 [48-1 USTC ¶9312]; United States v. Skidmore, Cir. 7, 123 Fed. (2d) 604, 608 [41-2 USTC ¶9716]. By this rule we must test the sufficiency of the evidence offered by the government to establish defendant's net worth at the beginning of 1943.

[Insufficient Evidence Offered to Establish Taxpayer's Net Worth]

The agent of the Revenue Department testified that he examined defendant's cancelled checks, bank statements and miscellaneous memoranda covering 1943 and 1944 and from them secured the information upon which he based his computation. He admitted that he found no discrepancy in the amounts received by defendants as income and the amounts returned. The government offered no direct testimony of unreported income items or of any undisclosed source of income.

The parties seem to be in no disagreement as to valuation of certain property owned by defendant, but there is no proof that the property admittedly owned by him at the beginning of 1943 constituted all assets he had at that date. There is no proof that he had not accumulated cash, or assets of other character over the 25 years during which he had been engaged in business. The agent testified that defendant said that he received no gifts by inheritance in the five years 1940 to 1944 inclusive, and that he had no bank account, stocks or bonds or securities except those submitted. But defendant did tell the agent that he had been in business for 25 years and that in the five year period mentioned, he owned United States Savings bonds which he had cashed. There is no proof as to the amount of bonds defendant owned at the end of 1942, or of when they were cashed or whether they were cashed in 1943 and 1944. The agent testified that defendant had certain corporate stock but the prosecution offered no proof as to the amount owned by defendant in 1942 or whether any part or all of it was sold in 1943 or in 1944. The agent further testified that defendant said he had a $10,000 life insurance policy, but there is no proof of its value at the end of 1942 or as to whether it was surrendered or cashed in 1943 and 1944. The agent said on cross-examination that he had made no inquiry of defendant as to whether he had cash on hand accumulated from earnings from his business in the years prior thereto. When counsel for defendant objected that the agent merely assumed that the assets he had enumerated were the defendant's only assets at the beginning of 1943, the United States Attorney remarked that there might have been other assets. In other words, the evidence falls far short of proof that the property which the government agents assumed constituted all of defendant's net worth at the beginning of 1943, was in fact all of the property then owned by him. And, in determining net worth and expenditures, the government took no account of unquestioned deductions for depreciation and depletion, amounting, in 1943, to $7,255.63 and, in 1944 to $9,389.44 and accumulated over the years to $34,464.41. These deductions, though authorized by law, were in their essence money which defendant might legitimately and advantageously have expended for new assets of other character, thus increasing his net worth from a legitimate source.

As we have said, when the government relies upon the circumstances of increased net worth and expenditures in excess of reported income to establish income tax evasion it must produce evidence that excludes all possible available sources of taxable income from which the increased net worth and the excess expenditures could have been derived. Thus in Bryan v. United States , Cir. 5, 175 Fed. (2d) 223 [49-1 USTC ¶9322], the court said: "The net worth-expenditures method of establishing net income, sought to be applied in this case, is effective only if the computations of net worth at the beginning and at the end of the questioned periods can reasonably be accepted as accurate. Since * * * no claim of evasion is based upon the deductions from gross income reported by the defendant, and since there is no evidence that the gross expenditures by the defendant in any year were made entirely from gross income of the business operations in such year, it was essential for the government to present evidence that excluded, or tended to exclude, all other available sources from which the additional funds expended could have been derived. If the defendant correctly reported his gross income, then a very substantial part of the expenditures was obliged to have been made from funds other than such current income and from sources not covered by the returns or the records of the defendant or included by the government's computation of net worth. * * * the Government must rely almost entirely upon circumstantial evidence, that is to say, upon the circumstance of the expenditure of considerably more money in the years in question than the defendant took in. * * * The evidence, being circumstantial, must exclude every reasonable hypothesis other than the guilt of the defendant. * * * the case should not have been submitted to the jury, since it did not exclude the hypothesis that the funds used in making some of the expenditures might have been from sources other than current business income." This is in accord with the decision of this court in United States v. Chapman, Cir. 7, 168 Fed. (2d) 997, 1001 [48-1 USTC ¶9312].

[Conclusion]

Remembering that the government has the burden of proof in a criminal case, that the burden never shifts to defendant, that circumstantial evidence must be of such character as to exclude every reasonable hypothesis except that of guilt, it necessarily follows that, when the government relies upon circumstances of increased net worth and expenditures in excess of reported income to establish income tax evasion, the basic net worth must be established. The defendant is not compelled to take the witness stand; he is not compelled to make proof that he is innocent, but he must be proved guilty by the evidence beyond all reasonable doubt, and where there is uncertainty as to whether all the assets of defendant are included in the government's computation of net worth, it follows that its computations can not be relied on. Essential proof of no other assets is the cornerstone of the evidence of the government; that cornerstone being faulty, the whole edifice is so weakened as to be undependable as proof of guilt beyond all reasonable doubt.

The judgment is Reversed.

 

 

[64-2 USTC ¶9873] United States of America , Plaintiff-Appellee v. John Burton Moody, etc., Defendant-Appellant

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 15713, 339 F2d 161, 11/27/64, Reversing and remanding an unreported district court decision

[1954 Code Sec. 7203]

Criminal penalties: Evasion of tax: Evidence.--A conviction for willful evasion of income taxes based on a bank deposits computation was reversed. The trial court was found to have erred in refusing to allow the defendant to present evidence as to his tax liability by means of a net worth computation, thereby establishing as a defense that he owed no additional taxes and so was not attempting to evade a tax.

Thomas L. Rob inson, United States Attorney, Odell Horton, Jr., Assistant United States Attorney, Federal Office Bldg., Memphis, Tenn., Louis F. Oberdorfer, Assistant Attorney General, Tax Division, Department of Justice, Washington, D. C. 20530, for plaintiff-appellee. Fred Elledge, Jr., 513 Stahlman Bldg., Nashville, Tenn., William K. Moody, Falls Bldg., Memphis, Tenn., for defendant-appellant.

Before WEICK, Chief Judge, EDWARDS, Circuit Judge, and PRETTYMAN, Senior Circuit Judge. ^*

PRETTYMAN, Senior Circuit Judge:

Appellant was convicted on four counts of an indictment charging him with willful evasion of income taxes. The sentence was imprisonment for a term of five years on each count, to run concurrently, and a fine of $10,000.

[Trial Court Action]

The Government claimed that the books upon which the returns were based did not include many items of cash receipts of income. Therefore the Government presented its evidence by a bank deposits computation. The Government claimed that in the four years 1956, 1957, 1958 and 1959 the defendant had willfully understated his income by a total of $23,429.73 and that he evaded taxes in a total amount of $6,547.45. The taxpayer-defendant countered with a claim that a correct computation of his income, including permissible deductions and excluding all non-income receipts, would show that he owed no tax in addition to what he had paid on his returns. The trial court ruled that such evidence could not be received except to negate willfulness; that the court was not concerned with the taxes which might be due on a re-audit of the returns. The court refused to instruct the jury, as requested by the defendant, to the effect that, if they (the jurors) entertained a reasonable doubt as to whether the defendant owed an additional amount of tax, they must acquit.

[Erroneous Trial Court Rulings]

These rulings of the trial court were erroneous. It is necessary for the Government to prove in a case such as this that a tax is due, i. e., that there was an attempt to evade a tax. ¹ Correlatively, a taxpayer-defendant has a right to establish as a defense that he owed no tax in addition to what he had paid on his returns, and so was not attempting to evade a tax. The judgment of conviction must therefore be reversed.

Taxpayer-defendant's proffered proof consisted in part of a purported net worth study covering the four years involved. The trial court took the view that this case was a bank deposits case and that a net worth computation was irrelevant and therefore inadmissible, except for the purpose of showing lack of willfulness. But the terms "bank deposits case" and "net worth case" are not descriptive of the case itself. The case itself is a willful tax evasion case. The two quoted terms are descriptive of methods of computation. Either can be used by either the Government or the taxpayer as a means of computing income. The use of one method of computation by one party does not foreclose the use of another method by the other party. The trial judge was in error in his view in this respect.

The trial court correctly held that the facts reflected in charts presented by an expert witness must appear in, and be established as facts by, evidence in the record. If a chart, or other study, by an expert is not based upon facts appearing as such in the record, it is not admissible. The charts here in question were admitted for the purpose of showing lack of willfulness. The question whether they were adequately supported is not before us. We hold merely that the limitation upon the use to which they might be put by the jury was error.

Reversed and remanded for a new trial.

^* Sitting by designation from the District of Columbia Circuit.

¹ United States v. Schenck [42-1 USTC ¶9363], 126 F. 2d 702 (2d Cir. 1942), cert. denied, 316 U. S. 705 (1942); Elwert v. United States [56-1 USTC ¶9423], 231 F. 2d 928 (9th Cir. 1956); Holt v. United States [59-2 USTC ¶9771], 272 F. 2d 272 (9th Cir. 1959); United States v. Augustine [51-1 USTC ¶9310], 189 F. 2d 587 (3d Cir. 1951); Jones v. United States [60-2 USTC ¶9722], 282 F. 2d 745 (4th Cir. 1960), cert. denied, 365 U. S. 842 (1961).

 

 

[81-1 USTC ¶9416] United States of America , Plaintiff-Appellee v. Steven Dwoskin, Defendant-Appellant.

(CA-5), U. S. Court of Appeals, 5th Circuit, Unit B, No. 80-5140, 644 F2d 418, 5/4/81 , Affirming unreported District Court decision

[Code Secs. 7201 and 7203]

Willful evasion of tax: Conviction: Net worth method of proof.--The taxpayer's conviction for tax evasion was affirmed. The government established a prima facie case and the taxpayer offered no evidence at trial. The taxpayer's opening net worth was established with reasonable certainty.

Atlee W. Wampler, United States Attorney, Miami, Fla. 33130, M. Carr Ferguson, Assistant Attorney General, Gilbert E. Andrews, Rob ert E. Lindsay, George L. Hasting, Jr., Department of Justice, Washington, D. C. 20530, for plaintiff-appellee. E. David Rosen, 19 W. Flagler Street , Miami , Fla. 33130 , for defendant-appellant.

Before HILL, KRAVITCH and HATCHETT, Circuit Judges.

HILL, Circuit Judge:

Stephen Dwoskin appeals from a jury conviction for two counts of income tax evasion for the years 1972 and 1973. 26 U. S. C. §7201. Evidence produced at trial showed that the appellant's taxable income in 1972 was $75,843.46 as opposed to the $12,728.12 he reported. In 1973 appellant's income was $44,809.50, in contrast to the $5,674.00 he reported. Record, Vol. V, at 595-596. Affording appellant the benefit of income averaging, the government's expert concluded that the appellant's correct tax liability for 1972 was $18,173 as opposed to the $2,278 which appellant reported, and $13,525 in 1973, in contrast to the $928 appellant reported. Record, Vol. V, at 622-24. These calculations were based on evidence which indicated that appellant's net worth increased from $89,705.50 at the end of 1971 to $176,910.78 by the end of 1972, and to $252,349.13 by December 31, 1973 . Record, Vol. V, at 584.

To establish a §7201 violation, the government must prove (1) an additional tax was due and owing, (2) an attempt to evade or defeat such taxes, and (3) willfulness. Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 351, 85 S. Ct. 1004, 1110, 13 L. Ed. 2d 882 (1965). Because a violation of §7201 is a criminal offense, the government must prove each element of the crime beyond a reasonable doubt. In this case, the government sought to carry its burden by using the net worth method of proof.

I. The Net Worth Method

The basic premise of the net worth method is that most increases in net worth are attributable to taxable income and, as the Supreme Court put it, "when this is not true the taxpayer is in a position to explain the discrepancy." Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 126, 75 S. Ct. 127, 130, 99 L. Ed. 150 (1954). The government offers evidence of the taxpayer's net worth at the end of the tax year in question, subtracting from this figure his net worth at the beginning of the year, and adding to the difference his non-deductible expenditures. The result is ostensibly the taxable income for the year. If this figure substantially exceeds the taxable income reported on the return, the jury is asked to infer that the return was willfully falsified by the defendant. See 348 U. S. at 125, 75 S. Ct. at 130; United States v. Schafer [78-2 USTC ¶9717], 580 F. 2d 774, 777 (5th Cir. 1978); Duke, Prosecutions for Attempts to Evade Income Tax; A Discordant View of a Procedural Hybrid, 76 Yale L. J. 1, 10-34 (1966).

The appellant offered no evidence at trial. On appeal he argues that the government's evidence was insufficient to fulfill several requisites of a net worth case. Specifically, he contends that the government failed to establish his opening net worth with reasonable certainty and that it failed to exclude non-taxable sources of income as the basis for his net worth increases. Appellant largely attributes these failures to inadequate investigation.

A motion for acquittal must be granted "when the evidence is such that a reasonably minded jury must have a reasonable doubt as to the existence of any element of the crime." United States v. Slone, 601 F. 2d 800, 803 (5th Cir. 1979); United States v. Pinner [77-2 USTC ¶9706], 561 F. 2d 1203, 1207 (5th Cir. 1977). In evaluating a claim of insufficient evidence according to this standard, we must consider the evidence in the light most favorable to the government, Glasser v. United States, 315 U. S. 60, 80, 62 S. Ct. 457, 469, 86 L. Ed. 680 (1942), resolving reasonable inferences and credibility choices in support of the jury's verdict, United States v. Henderson, 588 F. 2d 157, 161 (5th Cir. 1979); United States v. Juarez, 566 F. 2d 511, 513 (5th Cir. 1978); United States v. Prout, 526 F. 2d 380, 384 (5th Cir.), cert. denied, 429 U. S. 840, 97 S. Ct. 114, 50 L. Ed. 2d 109 (1976).

To prove its case, the government relied upon circumstantial evidence. Since circumstantial evidence is to be treated no differently than direct evidence, Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 140, 75 S. Ct. 127, 137, 99 L. Ed. 150 (1954), the test for judging the sufficiency of the evidence is the same whether the evidence is direct or circumstantial, United States v. Bright, 550 F. 2d 240, 242 (5th Cir. 1977); United States v. Gomez-Rajos, 507 F. 2d 1213, 1221 (5th Cir.), cert. denied, 423 U. S. 826, 96 S. Ct. 41, 46 L. Ed. 2d 42 (1975).

We are mindful of the Supreme Court's admonition that the net worth method of proof is "fraught with danger for the innocent . . .." 348 U. S. at 125, 75 S. Ct. at 130. ¹ However, after a careful review of the record we are convinced that the protections established by Holland have not been violated and that the evidence is sufficient to convict.

II. Establishing A Definite Opening Net Worth

"An essential condition in cases of this type is the establishment, with reasonable certainty, of an opening net worth, to serve as a starting point from which to calculate future increases in the taxpayer's assets." Holland v. United States , 348 U. S. at 132, 75 S. Ct. at 133. Appellant's opening net worth was established as of December 31, 1971 . Record, Vol. II, at 117. Appellant challenges the "reasonable certainty" of this figure in several respects.

A. Cash on Hand and Unrestricted in Banks. Appellant's opening net worth was based on a financial statement signed by him and submitted to the Commercial Bank of Kendall for a loan on May 29, 1970 . Record, Vol. II, at 117-118. Appellant argues that he was incorrectly credited with a total of only $9,000 for cash on hand and cash unrestricted in banks, when the proper figure was $19,000, the amount he had listed on this May 29, 1970 financial statement. Appellant's Brief, at 4-6, 23. The record shows, however, that the $19,000 figure listed by the appellant consisted of $8,000 in the appellant's personal bank account and of $11,000 in an account owned by the appellant's children, of which the appellant was trustee. Record, Vol. II, at 130. There is no evidence that the appellant used the funds in his children's account. Indeed, the record indicates the account not only existed but also had a higher balance subsequent to the prosecution years. Record, Vol. II, at 131.

The record does show that on several occasions the appellant borrowed money from Dade Federal Savings and Loan where he maintained his children's savings account. The loans were made against the children's account. Id. at 205. However, the appellant was given credit in the net worth computations for these and his other bank loans. Id. at 75-77.

The government's $9,000 opening unrestricted cash figure consisted of $8,000 from appellant's bank account plus a $1,000 allowance for cash which appellant claimed to have on hand. Id. at 63. Based on the above analysis we find the government's figure is "reasonably certain."

B. Assets Connected with Auto Electric Supply Business. Appellant argues that the government's opening net worth statement did not properly credit him for assets connected with the operation of his auto electric supply business. Appellant again makes reference to his May 29, 1970 financial statement in developing this argument. Specifically, he contends that he should have been credited with a $14,000 asset entitled "Accounts and Loans Receivable" and a $65,000 asset simply entitled "Business." Appellant's Brief, at 6. Both assets were listed by the appellant on his May 29, 1970 , financial statement.

Again, however, appellant's contentions do not reflect the whole story. Appellant had been engaged in the auto electric supply business since 1962 and on through the prosecution years, 1972 and 1973. Record, Vol. II, at 62. Prior to May of 1971, appellant actually owned two businesses, Auto Electric Service and Auto Electric Suppliers. Record, Vol. II, at 158. In May 1971, appellant incorporated these businesses as one entity, Auto Electric Suppliers, Inc. Id. at 158, 159. Thus, the appellant's electric supply business assets were effectively subsumed by the new corporate entity.

The $65,000 figure represents the appellant's estimate of the fair market value of his business ² prior to incorporation. The government's opening net worth figure valued the appellant's recently formed corporation, which was comprised of his previous businesses, at $15,026.67. Record, Vol. II, at 149. This figure reflects the corporation's cost basis to the defendant, rather than its fair market value. Id. at 156. Indeed, the $15,026.67 figure is taken "from Mr. Dwoskin's books and records concerning [his] corporation ration as the amount that was transferred to the corporation upon the institution of that corporation." Id. at 149. The appellant was not prejudiced by the use of this cost basis figure as it was used throughout the net worth analysis. Furthermore, the appellant's personal tax returns and those of his corporation show that the appellant still owned the corporation subsequent to the prosecution years and that he did not receive any non-taxable distributions from the corporation which would explain his net worth bulge.

Appellant also challenges the investigating IRS agent's "assumption" that Auto Electric Service went out of business after Auto Electric Suppliers, Inc. was formed. Appellant's Brief, at 8. This contention is based on the appellant's alleged receipt of a $4,000 check from Auto Electric Service on March 1972--well after the formation of Auto Electric Suppliers, Inc. However, the record is clear that this check was not admitted into evidence because it could not be identified. Record, Vol. II, at 166-167. We can not consider "evidence" which is not in the record.

Finally, appellant alleges that the government failed to investigate two other business entities of the appellant, South Miami Generator and Economy Generator. Appellant's Brief, at 8. The investigating IRS agent conceded that during the early part of his investigation he was unaware of these assets. Record, Vol. II, at 179-180. However, the government called two witnesses at trial who adequately explained appellant's interest in these assets. Record, Vol. III, at 331-337 (Gasparini) and Record Vol. IV, at 460-465 (Viggiani). These assets were fully accounted for in the final net worth computations.

Appellant relies on Merritt v. United States [64-1 USTC ¶9226], 327 F. 2d 820 (5th Cir. 1964). Unlike Merritt, we find no evidence that the government failed to track down relevant leads. 327 F. 2d at 823. See Holland v. United States , 348 U. S. at 135-136, 75 S. Ct. at 135-136. In sum, we conclude that the government established appellant's opening net worth with the reasonable certainty required by Holland .

III. Net Worth Increases Must be Attributable to Taxable Income

"[R]equisite to the use of the net worth method is evidence supporting the inference that the defendant's net worth increases are attributable to currently taxable income." 348 U. S. at 137, 75 S. Ct. at 136. Under the Supreme Court's decisions, the government can satisfy this burden in one of two ways. It can show that there is a likely taxable source of the unreported income, Holland v. United States, 348 U. S. at 138, 75 S. Ct. at 136, or it can negate all possible nontaxable sources of that income. Id. at 137, 75 S. Ct. at 136, United States v. Massei [58-1 USTC ¶9326], 355 U. S. 595, 78 S. Ct. 495, 2 L. Ed. 2d 517 (1958).

The central thrust of appellant's case, both at trial and on appeal, is that appellant's net worth increases resulted from non-taxable income in the form of loans received from his various partners during the course of their real estate dealings. See Appellant's Brief, at 8-17; Record, Vol. V, at 744-45. Appellant provided this theory to the government. The government has a burden to "track down . . . leads reasonably susceptible of being checked which, if true, would establish the taxpayer's innocence." Holland v. United States , 348 U. S. at 135-136, 75 S. Ct. at 135-136. To resolve whether or not the government carried this burden by negating appellant's "loan theory" we must examine the appellant's business relationship with his partners. ³

Beginning in 1970 and through the prosecution years, the appellant made numerous investments in real estate, rental property, and thoroughbred race horses. Record, Vol. II, at 62. Many of these investments were made in a group with four other individuals called the South Dade Investment Group. Record, Vol. III, at 239-40. This group dealt on an extremely informal basis. Often a partner would not contribute his full share of the purchase price at the time of purchase. At such times, one partner would temporarily advance the share of the non-contributing partners. The difference was made up within a short period of time, usually at the time of another purchase. Record, Vol. II, at 79. No documentation of these "loans" was kept. Id.

In order to unravel this recordless, comingling of funds the investigating IRS agent conducted an extensive investigation. He examined both public and bank records to document the purchases made by the appellant and his partners. Furthermore, he interviewed many of the individuals with whom the appellant had dealt, including all members of the South Dade Investment Group. Record, Vol. II, at 65-66.

The investigating agent found no documentation for the loans. He also discovered that any such informal loans were regularly settled within 30 to 60 days. Record, Vol. II, at 79-80. Hence, the effect of these loans was cancelled out within the year. Consequently, they were not included in the net worth computations. This conclusion was supported by five different financial statements which the appellant filed with banks in May of 1970, April of 1972, April of 1973, November of 1973, and November of 1974. Government Exhibits 28-30, 35, 37. None of these statements listed any loans from his partners as a liability.

The appellant challenges the government's "simplistic and mathematical approach" to interpreting these loans. Appellant's Brief, at 11-17. He asserts that the government incorrectly assumed that the appellant paid his full percentage shares for the various properties his financial statements, his tax returns, and certain real estate closings indicated that he owned.

The essence of appellant's argument is that his financial affairs must be reduced to an absolute certainty before he can be convicted. To adopt such a position would be to abolish the net worth method. Apparently the appellant would require the IRS to document every transaction among the investing partnership of which he was a member--even though the partnership itself kept no records. The government is not required to perform the impossible. See United States v. Hiett [78-2 USTC ¶9754], 581 F. 2d 1199, 1201 (5th Cir. 1978). Indeed, the net worth situation was created to deal with situations "about as difficult to untie as the proverbial Gordian Knot." United States v. Schafer [78-2 USTC ¶9717], 580 F. 2d 774, 778 (5th Cir. 1978). It should be needless to say that if the appellant's financial dealings could be precisely determined use of the net worth method would be unnecessary.

We find that the results of the government's extensive investigation made out a prima facie case. "Once the Government has established its case, the defendant remains quiet at his peril." Holland v. United States, 348 U. S. at 139, 75 S. Ct. at 137, United States v. Penosi, [72-1 USTC ¶9103], 452 F. 2d 217, 220 (5th Cir. 1971). ⁴

Finally, appellant asserts that the government's manner of proof was defective. He argues that a net worth case may not be supported by an investigating agent's "unqualified assertions based on his extrajudicial investigation that the numerous loans and advances had no effect upon the year-end balances." Appellant's Brief, at 27. Contending that this issue has not been addressed in our circuit, appellant relies on United States v. Morse [74-1 USTC ¶9228], 491 F. 2d 149 (1st Cir. 1974). In relevant part Morse held that if the government has "independent documentation to corroborate the agent's testimony it must be introduced to eliminate the hearsay aspect of [the agent's] testimony." Id. at 154-155.

In Morse, tangible, documentary evidence (liability ledger cards) could have been introduced to corroborate the agent's testimony. Id. at 154. Here, in contrast, no documentary evidence of appellant's loans existed. Accordingly, it was necessary for the investigating agent to testify to the non-existence of any documentation. Morse explicity supports the admission of such testimony: "To be sure, the court must rely on mere assertion when the agent testifies that he could find no evidence of other non-income items, but then, of course, no better evidence would exist." Id. at 154, n. 8. It is not improper for an agent to testify that his investigation failed to uncover cources of nontaxable income. United States v. Penosi [72-1 USTC ¶9103] 452 F. 2d 217, 219 (5th Cir. 1971).

Furthermore, in this case the government introduced the documentary evidence that it had. Specifically, it introduced five financial statements by the appellant, none of which listed loans from partners as a liability.

Appellant also suggests that it was error for the government not to call all of the defendant's partners as witnesses in order to develop the "loan" theory. Morse does not support "the proposition that the government must introduce those items which it does not believe entitle the taxpayer to a reduction in the alleged understatement of his taxes." United States v. Lawhon [74-2 USTC ¶9634], 499 F. 2d 352, 356-357 (5th Cir. 1974), cert. denied, 419 U. S. 1121, 95 S. Ct. 804, 42 L. Ed. 2d 820 (1975). The government concluded that the testimony available from the partners would not substantiate the defendant's loan theory. Appellee's Brief, at 35. The government is not required to present their case as well as defendant's rebuttal.

The burden of proof was not impermissibly shifted in this case. The government established a prima facie case and the defendant remained silent at his own peril. Holland v. United States , 348 U. S. at 138-139, 75 S. Ct. at 136-137. We find the appellant's argument regarding the agent's failure to make us of the grand jury testimony to be without merit.

The government proved its case. Accordingly, appellant's conviction is

AFFIRMED.

¹ "The net worth method, it seems, has evolved from the final volley to the first shot in the government's battle for revenue, and its use in the ordinary income bracket cases greatly increases the chance for error." Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 126-127, 75 S. Ct. 122, 130-31, 99 L. Ed. 150 (1954).

² The record is not clear as to which non-corporate entity "Business" refers to.

³ The government also introduced evidence of two potential taxable sources of income which could have accounted for appellant's net worth increases. First, appellant's auto electric supply business could have generated undisclosed income. Acceptance of this theory is buttressed by the testimony of appellant's accountant that the appellant was willing to manipulate his financial statements to achieve a desired result. Record, Vol. IV, at 425-427. Second, the evidence showed that the appellant made profits on several real estate ventures which he failed to report on his tax returns. E.g., Record, Vol. IV, at 428-434.

⁴ Appellant suggests various leads and techniques which he contends would have improved the government's investigation. See Appellant's Brief, at 10-18. Of course, had these leads been provided during the investigative process the government would have had an obligation to pursue them to the extent that they were relevant and reasonably susceptible of being checked. See Holland v. United States , 348 U. S. at 135-136, 75 S. Ct. at 135-136. However, the government is not required to assume "the role of a conjurer." United States v. Hiett, 581 F. 2d at 1201. Rather, its burden is to establish a prima facie case which it did here. Having done this, it is the defendant's burden to rebut. See 348 U. S. at 138-139, 75 S. Ct. at 136-137. Needless to say, the defendant can not begin his rebuttal on appeal as he seeks to do here.

 

 

[79-1 USTC ¶9341] United States of America , Plaintiff-Appellee v. Gary E. Hallman, Defendant-Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 78-1385, 594 F2d 198, 3/28/79 , Affirming unreported District Court decision

[Code Sec. 7201]

Crimes: Attempt to evade or defeat tax: Evidence: Net-worth method.--The Court of Appeal affirmed the taxpayer's conviction for tax evasion in the District Court. Various objections to the valuation of the taxpayer's assets by the net-worth method were raised and dismissed. Because there was no evidence that the taxpayer's wife had significant earnings or gave the taxpayer gifts or loans, none of the assets attributed to him by the net-worth method were spousal assets. An admission by the taxpayer in a financial statement was adequate evidence of his opening net worth. Crediting the taxpayer with two stocks as assets at the beginning of the net-worth period did not materially alter the computation of increase under the net-worth method.

Mark O. Heaney, Assistant United States Attorney, Los Angeles , California 90012 , for plaintiff-appellee. Bruce I. Hochman, Hochman, Salkin & DeRoy, 9100 Wilshire Blvd., Beverly Hills, California 90212, for defendant-appellant.

Before WALLACE and ANDERSON, Circuit Judges, and INGRAM, ^* District Judge.

PER CURIAM:

Gary E. Hallman, hereinafter called appellant, appeals from his conviction after trial by court of violation of Title 26, U. S. C. §7201, income tax evasion.

Reversal is urged on the basis that the Government failed to meet its burden of proof in establishing adequately appellant's opening net worth for each of the years in question. Specifically, appellant contends that the Government's proof was deficient in three areas:

(1) There was a failure to consider and investigate the opening net worth of appellant's wife in establishing appellant's net worth;

(2) There was an insufficient investigation in making the computation of cash on hand in establishing the opening net worth figure;

(3) There was an insufficient investigation in making the determination with respect to appellant's securities or the proceeds of the sale thereof in establishing the opening net worth figure.

We affirm the conviction.

In contending that the Government's determination of opening net worth is defective because it failed to take into account the net worth of his wife, appellant relies upon United States v. Meriwether [71-1 USTC ¶9390], 440 F. 2d 753 (5th Cir. 1971). That case holds that the Government must, in establishing its net worth theory, show with reasonable certainty a definite opening net worth of the joint income of the taxpayer and his spouse. The Government contends, correctly we believe, that it had no obligation to prove the spousal net worth because of the absence of any evidence that Mrs. Hallman had significant earnings, and because a stipulation of fact entered into between the parties expressly provided that appellant received no gifts, loans, inheritances or any other kind of nontaxable receipts during the calendar years 1969, 1970 and 1971. In addition, appellant furnished no "leads" to the Government explanatory of the source of any assets possessed by him.

Thus, the issue here presented is whether the Government must establish the net worth of the spouse of the taxpayer as a part of its prima facie case, or whether the Government's duty to investigate spousal assets arises under its obligation to negate reasonable explanations or leads furnished by the taxpayer. This court's decision in Talik v. United States [65-1 USTC ¶9163], 340 F. 2d 138 (9th Cir. 1965) and United States v. Chikata, 427 F. 2d 385 (9th Cir. 1970) appear to support the latter interpretation. In the latter case, the court found that no claim had ever been asserted that spousal assets in any way contributed to the net worth of the taxpayer, and that it was not error to fail to instruct the jury to consider the spousal net worth as well as taxpayer's net worth. In the former case, the court indicated that a substantive question in a joint return case is whether a summation based on the net worth theory took account of spousal assets at the beginning of the taxable years for which the joint returns in issue were filed. The court then concluded that the existence of spousal assets is the proper subject of a lead, and that without such a lead the Government could not be required to negate every possible source of non-taxable income. Thus, the trend of decision in this Circuit supports the conclusion that proof of spousal net worth is not a part of the Government's prima facie case, but rather falls under its obligation to negate explanations and leads. Notwithstanding appellant's novel argument based on Lenske v. United States [67-2 USTC ¶9631], 383 F. 2d 20 (9th Cir. 1967), we do not agree that the possibility of a new wife bringing substantial assets to a marriage is itself per se a lead, of equal dignity to one furnished by the taxpayer.

In short, we feel that evidence of the receipt of no funds from non-taxable sources as reflected in the stipulation of facts, no evidence of substantial earnings on the part of the spouse, and no leads do not require the Government, in the words of Talik, "[to] hypothesiz[e] them (spousal assets) out of nothing."

Appellant also contends that the Government's proof of opening net worth was deficient because its proof of no cash on hand at the times in question was based upon a purported uncorroborated admission contained in a financial statement filed by appellant with a bank at a time prior to the investigation conducted by the Internal Revenue Service. In that statement, appellant made no express representation that he had no cash on hand, but rather left blank the spaces provided for revealing that information. We agree with the Government's contention that the corroboration rule applies only to confessions or admissions made in the course of the commission of the offense or in the course of investigation. Smith v. United States, 348 U. S. 147, 75 S. Ct. 194, 99 L. Ed. 192 (1954); United States v. Bianco [76-1 USTC ¶9351], 534 F. 2d 501 (2nd Cir. 1976), cert. denied, 429 U. S. 822, 97 S. Ct. 73, 50 L. Ed. 2d 84 (1976); Fowler v. United States [65-2 USTC ¶9723], 352 F. 2d 100 (8th Cir. 1965), cert. denied, 383 U. S. 907, 86 S. Ct. 887, 15 L. Ed. 2d 663 (1966).

In addition to the bank statement, there was other evidence of financial difficulties, loan renewals and overdrawn checking accounts which constitute a totality of circumstances consistent with the position of the Government.

Appellant contends finally that the Government did not conduct an investigation adequate to support its determination that appellant owned no securities at the net worth starting point. The evidence was that all of appellant's prestarting point securities had been disposed of except two stocks which could not be traced. The Government with commendable candor concedes that appellant should have been credited with the ownership of those two stocks, but convincingly demonstrates that their inclusion as assets as of the opening date would not have materially altered the net worth computation.

Finding no material deficiency in the Government's method of proof or in its underlying investigation, we affirm.

^* The Honorable William A. Ingram, United States District Judge for the Northern District of California, sitting by designation.

 

 

[55-2 USTC ¶9592] United States of America , Appellee v. Joseph B. Altruda, Appellant

(CA-2), In the United States Court of Appeals for the Second Circuit, No. 321. October Term, 1954, Docket No. 23462, 224 F2d 935, August 2, 19 55

Defendant appeals from a judgment rendered upon a verdict of a jury convicting him, under Sec. 145(b), Title 26 U. S. C., of a knowing and wilful attempt to evade payment of income tax for the year 1947.

[1939 Code Sec. 41--similar to 1954 Code Sec. 446(b); 1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]

Criminal prosecution: Reconstruction of income: Net worth method: Sufficiency and admissibility of evidence: Instructions to jury: Proof of fraud.--The defendant, a doctor, was convicted of a wilful attempt to evade payment of tax for the year 1947. Basing its case on the net worth reconstruction of income method, the government traced records of defendant's income and expenditures in securities, real estate, and his practice from 1941 through 1948. The conviction was reversed by the Court of Appeals on three grounds: (1) net worth adjustments of sums in excess of $5,000 for each of the years 1946-1948 were not properly presented in evidence by the prosecution, even though it was conceded by all parties that these amounts were not fraudulently unreported; (2) the schedules submitted by the prosecution, in failing to reflect these adjustments, served only to confuse and prejudice the jury; and (3) the court in formulating certain of its jury instructions did so in such a way as to adversely affect defendant's case. Accordingly, the conviction was reversed and a new trial ordered.

J. Edward Lumbard , United States Attorney for the Southern District of New York ( Rob ert M. Pennoyer, Assistant United States Attorney, of counsel), for appellee. Lorenz, Finn & Giardino , New York , N. Y. (Joseph Lorenz, of counsel), for appellant.

Before CHASE and MEDINA , Circuit Judges, and RYAN, District Judge.

RYAN, District Judge:

The defendant appeals from a judgment of conviction and sentence imposed following a jury verdict of guilty on Count 3 of a three-count indictment, ¹ filed on November 25, 19 53, which count charged a wilful and knowing attempt to evade payment of income tax due for the calendar year 1947, in violation of Sec. 145(b), Title 26 U. S. C.

The trial judge, at the close of the presentation of the evidence dismissed Count 1, ² charging attempted evasion for 1945 and Count 2 charging attempted evasion for 1946 on the ground that the applicable six-year statute of limitations had run. (Sec. 3748, 26 U. S. C.)

The defendant was sentenced to five months imprisonment and fined $2,000; he was released on bail pending determination on this appeal. Because we have concluded that the judgment of conviction must be reversed and a new trial ordered, we deem it necessary to discuss the trial record at length.

The prosecution was conducted on the net worth expenditure theory and was predicated entirely on statements, data, information and other evidence secured from "leads" voluntarily furnished by the defendant to Internal Revenue investigating and auditing agents. ³

The principal source of defendant's income through 1948 was from the practice of his profession as a doctor; however, from 1943 on, he had additional income from the ownership and operation of three parcels of realty in New York City which he acquired in 1943, 1944 and 1945, and he had further income during the years 1943 through 1948 from the purchase, ownership and sale of stocks and bonds which he carried in accounts with two brokerage firms.

When first interviewed in June, 1947 by an examining agent in connection with an office audit of his 1945 return, the defendant stated that the cash funds he had used for the purchase of the realty and securities had come from an inheritance and from life savings accumulated over a period of twenty-three years. In July, 1947 he brought the agent a statement ⁴ which was intended to reveal the source and extent of these savings and the annual accretions. It covered three separate years--1928, 1932 and 1939--and showed average earnings, estimated cash receipts, bank deposits and living and operating expenditures and approximate savings per annum. He then also exhibited to the agent statements of his brokerage accounts and of a bank account for 1945. In 1948, upon request for additional information he submitted his current bank statements. There were later assigned to this agent the office audits of the defendant's returns for the years 1943 through 1948. Following this, and in April, 1949, the agent requested further data; he next met with the defendant at the office of an accountant engaged by the defendant and such records as were claimed to be available were shown to him. The defendant had not kept books of account and his records of treatments of patients, he explained, either had been long since destroyed by a small fire in the basement of his home or rendered illegible by water damage resulting from a flood in the basement. The defendant's accountant prepared and sent to the agent by mail on July 9, 1949 a number of statements. Among these were a statement of the defendant's assets and liabilities reflecting his net worth as of January 1, 1941; ⁵ a similar statement of net worth as of December 31, 1948; ⁶ a schedule of defendant's living and office expenses for the period January 1, 1925 to January 1, 1941; ⁷ a like schedule for the period January 1, 1941 to December 31, 1948; ⁸ and an historical statement by the defendant dated May, 1949. ⁹

To establish a prima facie case under the net worth theory the Government was required to prove the worth of the defendant on January 1, 19 47. This the Supreme Court has called "an essential condition." ¹⁰

[Opening Net Worth]

It was the signed statement of the defendant listing his assets and liabilities as of January 1, 19 41 which was used by the Government to prove an opening net worth as of that date made up of $59,875. cash on hand, $12.10 bank balance and $7,785., the surrender value of a life insurance policy, totaling in all $67,672.10. The Government, then, with data furnished by the defendant and information it had gathered sought to prove the defendant's net worth at the year end 1941 and each year end through the indictment year--1947--and the succeeding year--1948. The Government sought to reconcile the closing figures of these calculations with the statement furnished by the defendant of his net worth as of December 31, 19 48, and this reconciliation the Government contended was corrobative of the accuracy of its computations for the years 1941 through 1948. ¹¹

The defendant's net worth statement as of December 31, 19 48 listed cash on hand--$100.; bank balance--$8.90; stocks and bonds (at cost)--$52,049.28 (the market value was given as $28,399.88); realty (at cost)--$499,630. (although depreciation had been charged off in the amount of $37,186.69); total assets of $551,788.18 and liabilities of mortgages on realty $399,143.69 and debits on brokerage accounts of $9,081.29; total liabilities $408,224.98, reflecting a net worth of $143,563.20. Bearing in mind that the defendant admitted a net worth of $67,672.10 as of January 1, 19 41, he did not dispute that from that date to December 31, 19 48 --a period of eight years--his net worth increased $75,891.10. The Government in its calculations increased the assets of the defendant by crediting him with capital improvements to his realty holdings of $561.61 in 1947 and $5,504.05 in 1948, totaling $6,065.66, thus increasing his net worth as of December 31, 19 48 from $143,563.20 to $149,628.86. It was not disputed by the defendant that these capital improvements in the amount stated were made. The burden was on the Government to establish what portion of this increase in net worth accrued during the prosecution year--1947.

The evidence, accepting the Government's calculations, shows the defendant to have been convicted of an attempt to evade payment of income tax due for the year 1947 on income totaling $3,189.87--consisting of fraudulently unreported income from his practice of $2,063.87 and from his dividends of $1,126. At the same time the Government's calculations show that when computed from the standpoint of fraud, the defendant overstated his income for 1948 to the extent of $3,393.04, being an overstatement of income from his practice of $4,490.62 and an omission of income from dividends of $247.69 and from capital gains on sale of stock of $303.89.

The computations of the Government were based on acceptance of the defendant's statement that on January 1, 19 41 he did in fact possess no larger a cash fund than $59,875. Although it was contended by the Government on trial that the defendant then possessed no such fund, the validity of the Government's net worth calculations must be tested with reliance on the defendant's net worth statement of January 1, 19 41.

[Inadequacy of Schedules]

The several "accounting schedules" introduced in evidence by the Government presented "a mass of figures." ¹² It would take a jury of mathematicians to ascertain the facts out of the confusion created by these schedules; and the only justification for their admission in evidence is that they were intended to assist the jury in understanding and considering the evidence. They hardly served this purpose. Of these Government prepared schedules, particularly Exs. 67, 68, 69 and 73, the observation of the Supreme Court in the Holland case is especially apposite--"bare figures have a way of acquiring an existence of their own, independent of the evidence which gave rise to them" (p. 128).

The Government sought to demonstrate by these schedules that the evidence established that, assuming the defendant had on January 1, 19 41 a cash fund of $59,875. and other assets totaling $67,672.10, he nevertheless had insufficient assets to make the expenditures he made in 1945, 1946, 1947 1948, and that the deficiencies in those years must have come from unreported income. In sum, it was the contention of the Government that the evidence established and the schedules showed that the annual increases in net worth were unaccounted for from assets of the defendant on hand at the beginning of each year and from reported income, and that the difference came from unreported current income.