Bank Records and Net Worth Increases
3 Page4
The
Government proceeded first by accepting the defendant's net worth
statement as of January 1, 1941 and then stating the defendant's net
worth as of the end of each calendar year through 1948. The defendant's
assets and liabilities as disclosed in these annual opening and closing
statements came from the records of the defendant's real estate agents,
his stock brokers and his bank; the source records of these amounts were
reliable and stated the property he then owned and his indebtedness.
There were, however, no records to establish the amount of cash on hand
listed among the assets, save only as appeared in the defendant's
statements of his net worth as of January 1, 1941 and December 31, 1948.
The Government, following recognized practice, calculated the difference
between the net assets of the defendant at the beginning and end of each
calendar year from 1941 through 1948. In this manner, it showed the
gradual annual increase in net worth for each year and accounted for the
total increase admitted by the defendant to be $81,956.76 (with the
adjustment for capital improvements). 13 These
annual net worth increases accrued almost entirely during 1943 through
1948 and were found in the increase in the equity in defendant's realty
holdings resulting from amortization and payment of mortgage liens and
in defendant's brokerage accounts because of cash payments made by him
into those accounts.
To
these annual net worth increases, the Government then, again following
accepted procedure, added the defendant's non-deductible expenditures
(being admitted personal living expenses) and in 1948, $7,500. for a
loan repaid and $6,080. for a remittance to
Italy
. 14 Continuing,
then, the Government credited the defendant with accounting for the
amount of income reported in his returns, the amount claimed in his
returns for depreciation on realty, and the non-taxable portion of
capital gains. 15
It
was the difference between this resultant figure of income accounted for
by the defendant and the sum of his net worth increases and other
non-deductible expenditures, which the Government sought to illustrate
by the schedule Ex. 67 as the amount which the defendant failed to
report and this was stated as follows:
Net Worth Less Total
Increase and nondeductible Income Accounted Difference being
expenditures for by defendant income unreported
1941 .......................... $ 3,457.57 $ 1,897.33 $ 1,560.24
1942 .......................... 2,203.09 688.14 1,514.95
1943 .......................... 2,386.18 844.60 879.08
1944 .......................... 9,198.99 3,403.51 520.48
1945 .......................... 17,116.70 3,808.39 7,508.97
1946 .......................... 32,368.71 14,415.13 17,953.58
1947 .......................... 21,570.42 12,592.33 8,978.09
1948 .......................... 30,048.00 22,842.99 7,205.11
We accept these calculations as far as they go; they are sufficiently
supported by data and admissions of the defendant; they do not, however,
present the complete picture.
The
evidence showed that prior to trial the defendant's accountant had
satisfied the examining agents that in the years 1946, 1947 and 1948 the
defendant had made errors in under-reporting his income from his realty
holdings--to the extent of $5,222.68 in 1946, $5,788.22 in 1947 and
$11,144.15 in 1948. These amounts, the Government conceded on trial to
have been erroneously not fraudulently unreported by the defendant. By
crediting these amounts, the income fraudulently not reported as claimed
by the Government and demonstrated by its schedule Ex. 67, was reduced
in 1946 from $17,953.58 to $12,730.90, in 1947 from $8,978.09 to
$3,189.87 and in 1948 from $7,205.11 to an over-declaration of income
(when viewed from the standpoint of fraud) of $3,909.04. It was the
failure of the Government to include these adjustments for these years
which made Ex. 69 necessary. Exhibit 67 did not present the figures as
they were known to the prosecution; it was erroneous in that it did not
take into account these realty income adjustments. Exhibit 67 was
confusing unless read with and interpreted by the computations shown in
Ex. 69.
[Failure
of Adjust]
It
is urged by the defendant on this appeal that the Government's failure
to make adjustments with respect to defendant's realty income for these
three years fundamentally and adversely to him affected the validity of
its calculations, resulting (a) in an entirely fictitious and inadequate
opening item of cash of $100. as of
December 31, 19
46 and (b) in an erroneous overstatement of at least $5,222.68 in the
Government's claimed "Increase in New [Net] Worth for 1947,"
and (c) in the erroneous creation of the item of alleged fraud in 1947
in the amount of $3,189.87.
To
determine the merits of the first contention the evidence presented
concerning cash payments by the defendant during the years 1941 through
1946 must be separately considered. Records of the defendant's realty
purchases showed that he had expended $9,095. in acquiring title to an
apartment building in 1943, $3,750. in 1944 and $25,000. in 1945 for a
like purpose, making his total cash expenditures for realty in these
years $37,845. Records of the defendant's brokerage accounts showed that
he made cash deposits in these accounts of $2,882. in 1944, $8,172.26 in
1945 and $24,202.11 in 1946--a total of $35,256.37. The grand total of
cash disbursements for realty and securities was $73,101.37 for these
years. There was no proof of cash expenditures in 1941 and 1942; the
evidence showed that the cash fund of the defendant, which he admitted
having on
January 1, 19
41, had been entirely disbursed prior to the prosecution year, 1947. In
fact, the Government proved that after full allowance for the cash on
hand on
January 1, 19
41, the defendant had expended an amount of income considerably greater
than that which he had accounted for in his returns or otherwise prior
to 1947.
Some
observations should be made as to the extent that the reality income
adjustments for 1946, 1947 and 1948 (or for any other year) would affect
the net worth calculations.
The
income for any year did not directly enter into the calculations of
defendant's assets and liabilities for either the beginning or the end
of the calendar year periods. The assets were the sum total of cash on
hand, the bank balances, the cost of realty and the cost of securities;
the liabilities were the mortgages on realty, and the indebtedness to
realty agents and stock-brokers--the difference was the defendant's net
worth. There was no direct evidence that the defendant possessed any
greater amount of cash on December 31, 1946 or on December 31, 1947 than
he stated he did on December 31, 1948, that is $100. Assuming, however,
that he did have the $5,222.68 realty adjusted income of 1946 on hand
and unexpended as cash on December 31, 1946, it would effect an increase
in net worth for the year 1946 from $118,581.34 to $123,804.02 since the
defendant's assets as of December 31, 1946 would be increased from
$541,499.75 to $546,722.43 occasioned by the increase of cash on hand
from $100. to $5,322.68. Assuming, also, that he had the $5,788.22
realty adjusted income of 1947 on hand and unexpended as cash on
December 31, 1947 it would effect an increase in net worth during 1947
(taking into account the assumed increase in cash of 1946) from
$136,901.76 to $147,912.66. This would operate to reveal an increase in
net worth for the calendar year 1947 of $24,108.64 instead of
$18,320.42, as claimed by the prosecution, and would not benefit the
defendant. An even larger increase in net worth in 1948 would result, if
we assume that the additional realty income of $11,144.15 in 1948 was
retained as cash and unexpended as in 1946 and 1947. Such assumptions
would simply demonstrate that the defendant had misstated the amount of
cash on hand on December 31, 1948, and that he in fact had at that time
a cash hoard not revealed of $22,255.05 instead of the $100. From these
assumptions it would also follow that the defendant's income for 1946,
1947 and 1948 was larger than that contended for by the prosecution. In
absence of proof to the contrary we have assumed that the amounts of
additional realty income were expended; this we have done by accepting
the defendant's own statement of net worth as of December 31, 1948
wherein he stated his amount of cash on hand to be $100., this being the
interpretation most favorable to him. The very plausible explanation
advanced by the Government on this appeal is that the defendant had
understated his living expenses as $2,750. for 1946, $3,250. for 1947
and $3,741. for 1948. The items of adjusted realty income for 1946, 1947
and 1948 do not affect the basic integrity of the Government's net worth
calculations, under this view, except to reduce the amount of
fraudulently unreported income as we have above noted.
[Prejudicial
Error]
Nevertheless,
the omission of these items, of which the Government had notice prior to
trial, from Ex. 67 entitled "Analysis of net worth increase and
computation of unreported income" served to make that exhibit
incomplete, inaccurate and misleading and the failure of the trial judge
to sustain objection to its admission in evidence operated to the
prejudice of the defendant. It was not an analysis of the net worth
increase or a computation of fraudulently unreported income which
conformed to the Government's evidence, and it did not fully state the
facts. This is especially so because the omission of these items in
effect forced a balance between the Government's calculations and the
defendant's statement of his net worth as of
December 31, 19
48. The Government contended that its calculations were corroborated by
this statement, but there was no agreement with the amount stated to be
cash on hand if these items of adjusted realty income remained
unexpended and they were not revealed or accounted for by schedule Ex.
67.
It
is also contended by the defendant that the Government knew or should
have known that adjustments were necessary with respect to the realty
income of 1943, 1944 and 1945 and that it failed to make these thus
affecting the validity of its net worth calculations. The very short
answer to this is that the evidence, including the realty agents'
reports, did not reveal any facts which would necessitate or support an
adjustment of defendant's realty income for these years.
We
recognize that in a net worth computation "the cogency of its proof
depends upon its effective negation of reasonable explanations by the
taxpayer inconsistent with guilt."
Holland
v.
United States
, p. 135. This in turn places the burden on the Government to
"track down relevant leads furnished by the taxpayer--leads
reasonably susceptible of being checked, which, if true, would establish
the taxpayer's innocence." (pp. 135-136).
In
the computation of the defendant's income for the years 1943, 1944 and
1945 no adjustment was made for unreported realty income. However, even
were such adjustments found to have been necessary and were they made,
they would not have affected the defendant's unassuming the amounts
involved not to have been expended, reported income for 1947 and would
have operated only to increase by an equal amount the cash the defendant
had on hand at the beginning and end of 1947. The realty agents
testified on the trial and the defendant neither inquired nor pointed
out the necessity or occasion for adjustment of reported realty income
for these years--1943, 1944 and 1945. It was not incumbent on the
Government to minutely examine each and every one of the statements of
the firms managing the real estate to determine what expenses were
charged to maintenance, when in fact they were capital expenditures, or
whether the defendant accurately carried over from these statements to
his returns the multitude of other expenditures made by his agents in
operating his property during the years 1943, 1944 and 1945. The
particulars as to those items lay with the defendant and his agents; the
defendant voluntarily disclosed them as to 1946, 1947 and 1948 and this
resulted in the adjustments discussed. It is but fair to assume that by
his silence as to them they would disclose nothing to his benefit; in
any event, the realty agents' statements in evidence do not disclose
information which would enable one to determine whether the expenses
incurred were deductible. Prima facie, it was sufficient for the
Government to establish, as it did, the net amount the defendant
received from his real estate agents after they had deducted the
operating costs. We find no substance in the point made that the
Government was obligated to negative any real estate income adjustments
which were entirely speculative and which, in any event, would not have
affected the 1947 income.
The
charge of the Court gave the jury but little guidance as to the
interpretation to be placed on the schedules which were introduced in
evidence by the Government. It explained none of the calculations shown.
The Court emphasized Ex. 67 without calling attention to Ex. 69 or
mentioning that the items of adjusted realty income for 1946, 1947 and
1948 were omitted from Ex. 67 or that these items should be credited to
the defendant in the computation of unreported income alleged by the
Government to have been fraudulently unreported for these three years.
The charge did not meet the requirements of a net worth prosecution.
[Jury
Instructions]
The
defendant contends that he was prejudiced by the refusal of the Court to
charge that "whether or not the jury finds or believes that the
defendant was guilty with respect to the years prior to 1947, if it
finds or believes that with respect to 1947 he did not wilfully
understate his income he should be acquitted." We do not agree; the
charge was adequate on this matter.
However,
the charge insofar as it concerned the weight which might be given to
the defendant's 1948 return on the issue of wilfulness with respect to
the 1947 return was misleading and erroneous. In the 1948 return, as we
have pointed out, the defendant under-reported his income but this, as
conceded by the Government, was not pursuant to a purpose or intent to
evade payment of income tax for 1948. In fact, as we have noted, from
the standpoint of fraud this constituted an overstatement of income to
the extent of $3,939.04. In its charge the Court first instructed the
jury:
"The
jury may consider likewise on the issue of wilfulness the correctness or
incorrectness of the returns filed by the defendant from 1941 to 1944,
1945, 1946, 1947 and 1948. In this connection, however, you will firmly
bear in mind that the defendant is not charged with having violated the
income tax law any year other than the year 1947."
At
the conclusion of the charge the defendant's counsel took exception (out
of the hearing of the jury) as follows:
"Mr.
Lorenz: Well, I except to the charge that anything with respect to 1948
may be considered in connection with intent in prior years."
After
some extended colloquy the court stated to the jury:
"The
Court: I made the following statement, members of the jury, which I
think bears correction: I said the jury may consider on the issue of
wilfulness the correctness or incorrectness of the return filed by the
defendant for 1941 to 1944, 1945, 1946 and 1948. Now you may strike that
from your minds as a definite correction and not consider that, but I
will substitute for that the following:
"The
jury may also consider on the issue of wilfulness, if it finds it to be
a fact, that the returns filed by the defendant from 1941 to 1944, were
false and fraudulent - - -
"Mr.
Hill: Excuse me, your Honor, I don't mean to interrupt your Honor, but I
think it is 1946.
"The
Court: What do you say?
"Mr.
Hill: I say I don't mean to interrupt your Honor, but I think it is 1941
to 1946.
"The
Court: Well, not the way this reads.
"Mr.
Hill: No, your Honor. That was written before your Honor's ruling with
respect to the other thing.
"The
Court: To 1946. That is correct. Further, the jury may consider on this
same issue, if it finds it to be a fact, if it finds it to be so, that
the 1948 return was false and fraudulent.
"And
that will complete my instructions to you."
In
view of the exceptions taken by the defendant to the charge as
originally given it was prejudicial to the defendant to ask the jury to
consider on the issue of wilful evasion in 1947 whether the 1948 return
was false and fraudulent when the Government had conceded on the trial
that it was not.
We
feel, too, that it was prejudicial to the defendant to have denied the
request to charge "what the amount of fraudulently claimed income
is in 1947." We feel that errors which might otherwise have been
disregarded as not affecting the substantial rights of the defendant,
here, because of the nature of the prosecution's proof and the exhibits
may not be overlooked.
The
judgment is Reversed and new trial ordered.
1
Count 1 of the indictment charged that on
March 15, 19
46 defendant attempted to evade income tax for the calendar year 1945,
and alleged that the defendant made a false and fraudulent income tax
return for that year wherein he stated that his net income was $3,808.39
and the tax due thereon $677.11 when he well knew that his net income
for that year in fact was $11,317.86 on which there was due income tax
of $2,408.22.
Count
2 of the indictment charged that on
March 15, 19
47 the defendant attempted to evade income tax for the calendar year
1946, and alleged that the defendant made a false and fraudulent tax
return for that year wherein he stated that his net income for the year
was $4,391 and the amount of tax due thereon $670.71, when he well knew
that his net income for the year in fact was $20,217.01 on which there
was due income tax of $5,830.79.
Count
3 of the indictment charged that on
March 15, 19
48 the defendant attempted to evade income tax for the calendar year
1947, and that the defendant made a false and fraudulent tax return for
that year wherein he stated that his net income for the year was
$4,293.33 and the amount of tax due thereon $650.24, when he well knew
that his net income for the year in fact was $14,118.70 on which there
was due income tax of $3,036.75.
2
The trial judge at first denied a motion for a directed verdict of
acquittal but under Rule 29 reserved the right to reconsider. He later
granted the motion for a directed verdict. Since the Government has
filed no appeal, the procedure adopted is of no import. We have before
us only the conviction on Count 3.
3
The defendant objected to the admission in evidence of many of these
statements, contending that they were given under a promise that there
would be no criminal prosecution. The trial was interrupted and a
separate hearing held on these objections out of the presence of the
jury. The objections were overruled. On this appeal, this ruling has not
been questioned by the defendant. We accept these statements as having
been voluntarily made.
11
The Assistant
United States
Attorney stated: "The 1948 net worth statement is the document
which the Government will use to corroborate its build up of the
taxpayer's net worth from 1941 forward. All we want to do is work
backward from the end of 1948 to the end of 1947 to prove that the
figure we arrive at, at the end of 1947, is correct. That is all."
(S. M. 205.)
12
Thus, concerning Ex. 73 which is described as a reconciliation of net
worth increases, the following colloquy took place on trial:
"The
Court: Well, let us be sensible. Is it a mass of figures?
"Mr.
Hill (Ass't U. S. Attorney): Yes, Your Honor, it is a mass of
figures."
Examination
of the exhibit shows this description to be entirely fitting. Exactly
why such a reconciliation was at all necessary is difficult to
understand. If the schedule of net worth increases (Ex. 67) had been
correctly prepared in the first instance, there would have been no need
for the reconciliation (Ex. 73). It was the admitted error in Ex. 67
which was "reconciled."
[55-1
USTC ¶9366]C. A. Dupree, Appellant v.
United States of America
, Appellee
(CA-5),
In the United States Court of Appeals for the Fifth Circuit, No. 14659,
220 F2d 748,
April 15, 19
55
Appeal from the United States District Court for the Western District of
Texas.
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]
Criminal prosecution for fraud: Proof under net worth method:
Rehearing.--On the Government's motion for rehearing on taxpayer's
acquittal on charges of criminal prosecution for fraud, it was held that
neither the adequacy of proof as to the starting available funds under
the net worth method nor the clarity of the trial court's charge to the
jury met the standard implicit in the pronouncement of the Supreme
Court. Rehearing denied.
John
D. Cofer and G. Hume Cofer, 905-9 Littlefield Bldg.,
Austin
,
Texas
, for appellant. C. F. Herring, United States Attorney, and Bradford F.
Miller, Assistant United States Attorney, Post Office Box 1701, San
Antonio 6, Texas, for appellee.
Before
HOLMES and TUTTLE, Circuit Judges, and ALLRED, District Judge.
On
Petition for Rehearing
PER
CURIAM:
We
have carefully considered the motion for rehearing filed by the
United States
. In the light of the teaching of Holland v. United States, 1 which was
not available to the Government when presenting this case or to the
trial court [55-1 USTC ¶9169] when considering the difficult issues
involved, "appellate courts should review the cases [of this
general type] 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." We are also told that
"the complexity of the problem is such that it cannot be met merely
by the application of general rules," and that "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."
We
do not believe this case either in the adequacy of proof as to the
starting available funds in January, 1946, or in the clarity of the
charge, meets the standards implicit in this pronouncement of the
Supreme Court.
The
motion for rehearing is, therefore, DENIED.
1
348
U. S.
121, 129 [54-2 USTC ¶9714].
[56-1
USTC ¶9473]Fred M. Ford, Appellant v.
United States of America
, Appellee
(CA-5),
In the United States Court of Appeals for the Fifth Circuit, No. 15672,
233 F2d 56,
April 19, 19
56
Appeal from the United States District Court for the Western District of
Texas.
[1939 Code Sec. 145(b)--substantially unchanged in 1954 Code Sec. 7201]
Criminal prosecution: Fraud: Appeal from jury verdict: Second
trial.--Taxpayer, a former chief of police, appealed from a
conviction and sentence following a second trial for filing fraudulent
returns for 1945-1947. In affirming the trial court's judgment, the
appellate court held that there was sufficient evidence of tax evasion
to support the trial court's denial of taxpayer's motion for acquittal,
the Government being required in criminal prosecutions to prove no more
than that the taxpayer failed to compute his income tax honestly. The
trial court did not err in admitting testimony about alleged
"pay-offs" through third parties to the taxpayer, testimony
about expenditures made by the taxpayer's wife, and testimony about
unsworn statements made by taxpayer to Government agents. The trial
court did not err in refusing to permit cross-examination of the local
mayor as to his views on prostitution and in refusing to permit
interrogation of the jury regarding a newspaper article about the
mayor's views. The indictment upon which taxpayer was convicted was not
void because the only witness who appeared before the Grand Jury was a
Government agent with no personal knowledge of the facts or because that
witness did not compute before the Grand Jury the amount of taxes, if
any, due by taxpayer.
Douglas
W. McGregor,
Houston
,
Tex.
, for appellant. Harman Parrott, Assistant United States Attorney, San
Antonio, Tex., Fred B. Ugast, Tax Division, Department of Justice,
Washington, D. C., for appellee.
Before
BORAH, TUTTLE and JONES, Circuit Judges.
JONES,
Circuit Judge:
An
indictment in three counts charged that appellant had wilfully and
knowingly attempted to evade and defeat a large part of the income tax
due and owing by him and his wife for the years 1945, 1946 and 1947 by
filing false and fraudulent returns on behalf of himself and his wife
wherein he reported income for a less sum than the true amount, and in
which he stated the tax for smaller amounts than he knew to be owing.
The counts were in substantially the same form. A separate count set
forth the amounts of income and tax for each of three years. The
indictment alleged violations of the portion of the Internal Revenue
Code of 1939 which provided that:
"*
* * any person who wilfully attempts in any manner to evade or defeat
any tax imposed by this chapter or the payment thereof, shall, in
addition to other penalties provided by law, be guilty of a felony and,
upon conviction thereof, be fined not more than $10,000, or imprisoned
for not more than five years, or both, together with costs of
prosecution." Internal Revenue Code of 1939, former 26 U. S. C. A.
§145(b); Internal Revenue Code of 1954, 26
U. S.
C. A. §7201.
This
is an appeal from a conviction and sentence following a second trial of
this case held at
Austin
,
Texas
. This Court reversed a conviction obtained at the first trial. Ford
v.
United States
, 5th Cir. 1954, 210 Fed. (2d) 313 [54-1 USTC ¶9233]. At the second
trial, as at the first, the Government relied upon the cash receipts and
expenditures method, sometimes called the net worth method, of
establishing unreported income. In the first appeal, as in the present
appeal, the appellant contended that the District Court should have
granted a motion for acquittal because of the insufficiency of the
evidence. After relating in some detail the evidence adduced at the
former trial it was held by this Court that the motion for acquittal was
properly denied. The evidence in the record now before us presents
proofs no less convincing, and without setting forth the evidentiary
facts, we hold, as we held before, that the motion for acquittal was
properly denied.
[Motion
for Acquittal]
The
appellant contends that error was committed in denying his motion for
acquittal because there had been no determination of his tax liability
by the Commissioner under §272 or §3612 of the Internal Revenue Code
of 1939. §272 of the Internal Revenue Code of 1939, former 26 U. S. C.
A., provides for the procedure in determining the correctness of a tax
deficiency proposed by the Commissioner of Internal Revenue, including
the issuance of the familiar ninety-day letter. §3612 authorizes the
Collector to make a return where no return or a false or fraudulent
return has been filed, and requires that the Commissioner [of Internal
Revenue] shall determine and assess all taxes, other than stamp taxes,
as to which returns are made pursuant to the section. Whatever bearing
the appellant's contention might have in a proceeding for the collection
of a tax, it has no application in a criminal prosecution for attempting
to evade and defeat a tax by filing false and fraudulent returns. As
this Court has heretofore said:
"A
prosecution for income tax evasion is not an effort by the Government to
compute income tax at all. It is an effort by the Government to prove
that the taxpayer failed to compute it honestly. There is nothing in
this Section [Former 26 U. S. C. A. §41] nor in any other applicable
statute that restricts the Government in the method of proving this fact
if it exists." Dupree v.
United States
, 5th Cir. 1955, 218 Fed. (2d) 781 [55-1 USTC ¶9169].
[Pay-Off]
At
the first trial of this case, Margaret Lera testified as a witness for
the Government. She testified as a witness for the Government at the
second trial. On the first trial this witness testified to the making of
pay-offs to the police department of
Galveston
. There was no testimony in the first trial that the appellant received
any of the moneys. We held, on the former appeal, that the admission of
the testimony of this witness was erroneous and highly prejudicial. For
this error, and another which we need not here mention, a new trial was
granted. At the second trial the witness testified that she sent pay-off
money to the appellant during the years 1945, 1946 and 1947 by
detectives. Being interrogated about conversations between the appellant
and herself during these years, she stated that she had asked appellant
if the detectives had been delivering what she had been sending, and
quoted his reply as being "Yes, that everything was all
right". This, we think, was enough to meet to objection which was
found to be error on the former appeal. It was shown that Mrs. Lera had
made a settlement after the first conviction of the appellant of her own
income tax liability. On cross-examination she told of being interviewed
by Government agents about a month before the trial, being furnished
with a transcript of the questions and answers comprising the interview,
and of burning the transcript of the testimony during the
noon
recess of the day she testified. The owing and settlement of income
taxes, the discussion with Government agents regarding some matter,
possibly the Ford case, and the destruction of the transcript of
the interview are not matters which would exclude Mrs. Lera's testimony.
The
District Court admitted testimony as to expenditures made by appellant's
wife and error is assigned because such testimony was received. There
was evidence that such funds as Mrs. Ford had and spent were received
from the appellant. The court declined to give a charge to the jury,
requested by appellant, that it should give no consideration to
purchases of Mrs. Ford in determining the taxable income of the
appellant. We need not discuss these questions as they are disposed of
in the former appeal. Ford v. United States, supra. See Lloyd
v.
United States
, 5th Cir. 1955, 226 Fed. (2d) 9 [55-2 USTC ¶9665].
Relying
chiefly upon Calderon v. United States, 9th Cir. 1953, 207 Fed.
2d 377, the appellant urges that the unsworn statements made by
appellant to Government agents were inadmissible because, he says, the
corpus delicti had not been established. The agents testified that
appellant had said, in response to questions, that he kept cash in a
chifforobe drawer in the amount of two or three thousand dollars in 1945
and 1947. Again he said, that in 1944, prior to the tax years involved,
he had $12,000 in cash in the chifforobe drawer. Where the net worth
doctrine is relied upon in a criminal prosecution of a tax evasion case,
the taxpayer's opening net worth cannot be established by his
uncorroborated extra-judicial statement. Smith v. United States,
348
U. S.
147, 75 S. Ct. 194, 99 L. Ed. 192 [54-2 USTC ¶9715]; United States
v. Calderon, 348
U. S.
160, 75 S. Ct. 186, 99 L. Ed. 202 [54-2 USTC ¶9712]. In the case before
us the Government did not rely upon but rather rejected the statements
of the appellant Ford as to the cash in the drawer. When the
extra-judicial statements are disbelieved and are not relied upon by the
Government it can hardly be error on its part that it produced no
corroborative evidence.
[Validity
of Indictment]
The
appellant urges that the indictment upon which he was convicted was void
because the only witness who appeared before the Grand Jury was a
Government agent who had no personal knowledge of the facts, that his
testimony was based upon hearsay and hence incompetent. The Supreme
Court of the
United States
has considered the question and given an answer adverse to appellant's
contention. In the causa celebre of Frank Costello a conviction
was had of income tax evasion upon proof of increases of net worth. The
only witnesses before the Grand Jury which returned the indictment were,
Government agents who had no firsthand knowledge. The Supreme Court, in
a opinion rendered
March 5, 19
56, held the indictment valid and said:
"In
Holt v. United States, 218
U. S.
245, this Court had to decide whether an indictment should be quashed
because supported in part by incompetent evidence. Aside from the
incompetent evidence 'there was very little evidence against the
accused.' The Court refused to hold that such an indictment should be
quashed, pointing out that 'The abuses of criminal practice would be
enhanced if indictments could be upset on such a ground.' 218
U. S.
, at 248. The same thing is true where as here all the evidence before
the grand jury was in the nature of 'hearsay.' If indictments were to be
held open to challenge on the ground that there was inadequate or
incompetent evidence before the grand jury, the resulting delay would be
great indeed. The result of such a rule would be that before trial on
the merits a defendant could always insist on a kind of preliminary
trial to determine the competency and adequacy of the evidence before
the grand jury. This is not required by the Fifth Amendment. An
indictment returned by a legally constituted and unbiased grand jury,
like an information drawer by the prosecutor, if valid on its face, is
enough to call for trial of the charge on the merits. The Fifth
Amendment requires nothing more.
"Petitioner
urges that this Court should exercise its power to supervise the
admin
istration of justice in federal courts and establish a rule permitting
defendants to challenge indictments on the ground that they are not
supported by adequate or competent evidence. No persuasive reasons are
advanced for establishing such a rule. It would run counter to the whole
history of the grand jury institution, in which laymen conduct their
inquiries unfettered by technical rules. Neither justice nor the concept
of a fair trial requires such a change. In a trial on the merits,
defendants are entitled to a strict observance of all the rules designed
to bring about a fair verdict. Defendants are not entitled, however, to
a rule which would result in interminable delay but add nothing to the
assurance of a fair trial." Costello v. United States, 350
U. S.
847, 76 S. Ct. 406, -- L. Ed. --, 24 L. W. 4128 [56-1 USTC ¶9321].
The
appellant also contends that because the only witness before the Grand
Jury did not compute taxes there could not have been any evidence before
the Grand Jury from which an indictment could have been found as to the
amount of tax, if any, due by appellant. To this there are two answers;
first, there was no indictment sought or returned with respect to the
amount of appellant's unpaid tax; and second, the holding in Costello,
supra, is contra to the position we are asked to take.
[Cross Examination]
The
Government introduced as one of its witnesses, George Roy Clough, the
Mayor of Galveston at the time of the trial, who testified that the
reputation of appellant for being a peaceable and law-abiding citizen
during the years in question was bad. On cross-examination questions
were asked and answers elicited showing or tending to show the bias of
the witness against the appellant. Counsel for the appellant then
proposed to show by the witness that as a candidate for Mayor he had
advocated open houses of prostitution. The court sustained objections to
this line of questioning. Claiming this was error, the appellant tries
to come within the rule announced in Alford v. United States, 282
U. S. 687, 51 S. Ct. 218, 75 L. Ed. 624. The trial court had, in the Alford
case, declined to permit counsel for the defendant to show that a
Government witness was, at the time of the trial, in custody of Federal
authorities. The Supreme Court reversed saying that
"Cross-examination of a witness is a matter of right", and
that:
"Its
purposes, among others, are that the witness may be identified with his
community so that independent testimony may be sought and offered of his
reputation for veracity in his own neighborhood [citing cases] that the
jury may interpret his testimony in the light reflected upon it by
knowledge of his environment [citing cases]; and that facts may be
brought out tending to discredit the witness by showing that his
testimony in chief was untrue or biased [citing cases].
"*
* * Prejudice ensues from a denial of the opportunity to place the
witness in his proper setting and put the weight of his testimony and
his credibility to a test, without which the jury cannot fairly appraise
them." Alford v.
United States
, 282
U. S.
687, 75 L. Ed. 624, 51
S. Ct.
218.
The
extent of the scope of cross-examination is largely within the
discretion of the trial court and its ruling will not be reversed absent
an abuse of discretion. A wide latitude is allowed in order to show
hostility, bias, prejudice, or interest, or to discredit the knowledge
or veracity of the witness. Wharton's Criminal Evidence, 12th ed. Vol.
III, p. 266, et seq. §871 et seq.; Glasser v.
United States
, 315
U. S.
60, 62
S. Ct.
470, 86 L. Ed. 680. The views of the witness as to the desirability of
open houses of prostitution would not tend to show any bias of the
witness against the appellant or that the witness was unworthy of
belief. The rejected testimony was not relevant and was properly
excluded.
[Interrogation
of Jury]
At
the beginning of the trial the court instructed the jury in these words:
"Gentlemen
of the Jury, during the trial of this case you will be permitted to
separate, but you must not discuss the facts of this case with anyone,
nor permit anyone to discuss the facts in your presence or hearing.
Don't read any stories in the newspapers about the case".
While
in
Austin
waiting to be called as a witness in this case, Mayor Clough was
interviewed by a newspaper reporter. The press report of this interview
quoted the
Galveston
mayor as saying that he had the greatest admiration for the lowest
prostitute when compared to his contempt for city officials who accept
her money for permission to operate. The newspaper item gave other views
of the Mayor about prostitution, gambling and liquor. This story
appeaaring in the morning of the last day of the trial (the verdict was
returned the following morning), was headlined `I Believe: Live and Let
Live.'
Galveston
's George R. Clough. Galveston Haven-Clough Promises Prostitutes
Home." The appellant's counsel made a motion to interrogate the
jury as to whether they had read the article for the stated purpose of
determining whether any of the jury may have been prejudiced by the
article. The Court overruled the motion and its action is specified by
the appellant as an error. The published article was a rather
sensational report of a rather extended interview, but the only portions
which could be said to have any direct influence upon the mind of a
juror were the statement that the witness Clough had the greatest
admiration for the lowest prostitute when compared to his own contempt
for city officials who accept money for permission to operate, and his
reference to unscrupulous politicians and pay-offs as the curse of
America. The rest of the article related to the Mayor's views regarding
the toleration of prostitution. In urging that the District Court erred,
the appellant quotes from American Jurisprudence as follows:
"It
is improper for jurors to read newspaper accounts of the progress of a
trial or relating to the case on trial. But a new trial should not be
granted by a trial court because thereof unless the facts are such that
it cannot determine with reasonable certainty whether the result was
effected. Nor is a verdict vitiated by the finding of a newspaper in the
jury room where the jury had no knowledge of its contents." 53 Am.
Jur. 644, Trial §895.
In
the pocket supplement to the above-cited volume the editors have made an
addition to the foregoing text in these words:
"It
is within the discretion of the trial court as to whether, after
impanelment, during a criminal trial, the jurors may be interrogated or
polled as to whether they have read newspaper articles pertaining to the
alleged crime or the trial." 1955 Cum. Supp. Vol. 53, Am. Jur. p.
40. See annotation 15 A. L. R. 2d 1152.
This
Court, considering a similar question, in a case where the Government
had been permitted to impeach its own witness and the press reported
upon the impeachment and the subsequent arrest of the witness for
perjury, said:
"On
the day following impeachment of the witness Diaz, appellant presented
to the court a written motion for a mistrial, to which was attached the
front page of an
El Paso
morning newspaper containing an account of the arrest of Diaz for
perjury in denying receipt of the stolen property from appellant.
Appellant orally informed the court that similar accounts had been
broadcast over the
El Paso
radio stations. The court overruled this motion, and denied a request by
appellant that the jurors be interrogated relative to their knowledge of
the radio and newspaper reports in connection with the case, and further
instructed them, in case such reports had already reached the jury, that
they should not be considered for any purpose." Apodac v.
United States
, 5th Cir. 1953, 200 Fed. (2d) 775.
The
appellant does not complain that no further instruction was given the
jury, and of course would not be heard in the making of such a complaint
as no instruction was requested. The refusal to permit interrogation of
the jury regarding the newspaper article was not error.
Other
questions raised are without merit and do not require discussion. The
judgment before us on appeal is affirmed.
[54-1
USTC ¶9233]Fred M. Ford, Appellant, v.
United States of America
, Appellee
(CA-5),
In the United States Court of Appeals for the Fifth Circuit, No. 14466,
210 F2d 313,
February 12, 19
54
Appeal from the United States District Court for the Western District of
Texas.
Criminal evasion of taxes: Reconstruction of income by cash receipts
and expenditures method: Procedure.--A directed verdict of acquittal
was properly denied in a trial for criminal evasion of income taxes
where funds traced by Internal Revenue agents as available for
expenditure during the taxable years 1945, 1946 and 1947 totaled
$23,600, while expenditures for the same period were shown to have
exceeded $57,900. However, the court committed prejudicial error in
admitting evidence of payoffs made to the police, with which taxpayer,
chief of police, was not shown to have been connected, and in denying
taxpayer's attorney the right to elicit testimony on cross-examination
as to receipt of income in 1944 so as to show resources available at the
beginning of 1945.
William
E. Stone,
Galveston
,
Tex.
, Douglas W. McGregor,
Houston
,
Tex.
, for appellant. Charles F. Herring, United States Attorney, Thomas E.
James, Assistant United States Attorney, Austin, Tex., for appellee.
Before
HUTCHESON, Chief Judge, and HOLMES and RIVES, Circuit Judges.
RIVES,
Circuit Judge:
Appellant,
defendant below, was charged in a three count indictment with violating
Section 145(b) of Title 26, United States Code. 1 Each count
charged that the defendant did willfully and knowingly attempt to defeat
and evade a large part of the income tax due and owing by him and his
wife by filing and causing to be filed a false and fraudulent joint
income tax return on their behalf. The three counts covered the income
taxes for the calendar years 1945, 1946 and 1947, respectively, and
charged the following discrepancies: for 1945, income returned
$3,600.00, actual net income $6,321.83, tax returned $220.00, tax due
$784.00; for 1946, income returned $3,700.00, actual net income
$6,086.04, tax returned $66.00, tax due $464.00; for 1947, income
returned $1,507.10, actual net income $29,988.26, tax returned none, tax
due $7,476.75.
The
jury found the defendant guilty on all three counts of the indictment,
and the Court imposed a single sentence of imprisonment for a term of
four years. This appeal followed.
It
is first insisted that the Court erred in denying defendant's motion for
a directed verdict of acquittal because of the alleged insufficiency of
the evidence. It is of course clear that the offense punishable under
the statute, Section 145(b) of Title 26, United States Code (footnote 1,
supra), relates not only to the defendant's own income tax, but
also to that due and owing by others, including the tax on the joint or
community income of himself and his wife. See United States v.
Johnson, 319
U. S.
503, 518 [43-1 USTC ¶9470]; O'Brien v. United States, 7th Cir.,
51 Fed. (2d) 193, 197 [1931 CCH ¶9474]; Levin v. United States,
9th Cir., 5 Fed. (2d) 598, 603.
[Reconstruction
of Income]
The
Government's case was presented by the cash receipts and expenditures
method of proving unreported income (see United States v. Johnson,
319
U. S.
503, 517 [43-1 USTC ¶9470]; United States v.
Caserta
, 3rd Cir., 199 Fed. (2d) 905, 907 [52-2 USTC ¶9540]), a variation
of the net worth and disbursement method employed in such recent cases
decided by this Court as Pollock v. United States, 5th Cir., 202
Fed. (2d) 281 [53-1 USTC ¶9229]; Wardlaw v. United States, 5th
Cir., 203 Fed. (2d) 884 [53-1 USTC ¶9335]; Montgomery v. United
States, 5th Cir., 203 Fed. (2d) 887 [53-1 USTC ¶9336]; and Sasser
v. United States, 5th Cir., No. 14,448, decided December 9, 1953,
m/s [54-1 USTC ¶9118]. One of the most difficult matters of proof in
such cases is to establish a satisfactory starting point at the
beginning of the first of the tax periods included in the indictment,
that is, as applied to the present case, to negative the existence on
January 1, 1945, of resources available to the defendant and his wife
from which the excessive expenditures might have come. The Government
then has the further burden in such cases of proving that there were no
gifts, devices, or other nontaxable income which could have been used
for the expenditures, and of proving large cash expenditures within each
of the tax years considerably exceeding the taxpayer's accumulated cash
resources plus reported income and which expenditures could not be
otherwise accounted for than by finding that the taxpayer had received
more taxable income than had been reported, and had willfully and
knowingly filed or caused to be filed a false and fraudulent income tax
return. Proving the receipt of taxable income from increase of net worth
or from expenditures or from a combination of the two is really the use
of circumstantial evidence which must be sufficient to exclude in the
minds of the jury every reasonable hypothesis other than guilt of the
defendant. Pollock v. United States, supra; Remmer v. United States,
9th Cir., 205 Fed. (2d) 277, 281 288 [53-1 USTC ¶9421].
The
Government introduced some forty witnesses who testified without
contradiction as to the expenditures during the years covered by the
indictment, and showed the total cash expenditures for 1945 to be
$6,287.55, for 1946, $6,148.58, and for 1947, $45,487.67, or an
aggregate for the three years of $57,923.80. 2 The total
income returned during the same three years was only $8,807.10, leaving
an excess in expenditures of $49,016.70 (exclusive of the items
mentioned in footnote 2, supra) which necessarily came either
from prior accumulations, from nontaxable receipts, or from taxable
income.
[Sources
of Income]
To
show how much of the expenditures could have been made from prior
accumulations and from nontaxable receipts, the Special Agents of the
Bureau of Internal Revenue made a thorough investigation, and also
interrogated the defendant with his consent on several different
occasions. All of the banks in
Galveston
were contacted to ascertain whether the defendant, his wife, or any of
his children had since the year 1925 maintained a checking account, a
savings account or a safety deposit box. No checking account or safety
deposit box was discovered, and the defendant stated to the agents that
he had never maintained a checking account anywhere and had never had a
safety deposit box. He had had two small savings accounts, one showing a
balance on
January 1, 19
45 of $1.73, and the other a balance of $193.50 on that date. He had
made some small loans which had been paid in some instances and renewed
in others.
The
County court records were checked for the ownership of property and for
sales of real estate. The defendant owned the home purchased in 1929 for
$2,000.00. He was asked by the agents whether or not he owned any other
real property and he said that he did not. He was also asked if all of
the property that he owned was in his name or in his wife's name, and
whether or not it had been recorded, and he replied in the affirmative.
The
probate court records were checked for any inheritances of the defendant
or his wife and none were found. The defendant told the agents that he
had never received any inheritance and that "as far as he
knew" his wife had not. The various insurance agencies in
Galveston
were checked as to life insurance policies with negative results
confirmed by the defendant, and the same was true as to stockbroker's
accounts in
Galveston
and in
Houston
. The defendant told the agents that he had never received any gifts of
money, and that his wife had not received any "as far as he
knew".
The
defendant told the agents that his wife was not employed during the
years 1945, 1946, or 1947, and in fact had not been employed since the
year 1925. The defendant was appointed as a patrolman in the Police
Department of Galveston,
Texas
on
May 27, 19
25, and continued in the police department until
May 22, 19
47. His salary remained at $120.00 per month from the time of his
appointment through 1932; from that time through January of 1940 he
received $135.00 per month; during 1940 and a part of 1941 he received
$200.00 per month; in August of 1941 he became Chief of Police and began
receiving $300.00 per month which continued until the latter part of
1946; and from then until his services were terminated on
May 22, 19
47 he received $320.00 per month.
The
defendant admitted to the agents the existence and operation in
Galveston
of several gambling houses and of several houses of prostitution, but
denied that he had ever received "pay-offs" from any of them.
He told the agents that he did not gamble until he got off the police
force, but after he got off the police force that he did gamble and that
he had won money and had a net gambling gain of about $1,000.00 in the
year 1947. Excluding any gains from gambling or other illegal pursuits,
the agents were able to trace funds available for expenditures as
follows: for 1945 $3,664.07, for 1946 $3,713.53, for 1947 $16,230.52, or
a total of $23,608.12, leaving unaccounted for at least $34,315.68 spent
during the three years.
These
figures did not take into account $12,000.00 which the defendant told
the agents he had in 1944 in a chifforobe drawer because the agents said
that he made conflicting statements, that he had also said that "he
had two or three thousand dollars in 1947," and that he also had
two "or three thousand dollars in 1945, and therefore there was no
gain or loss, and therefore it has no bearing on the computation at
all." The defendant's claim that he had on hand $12,000.00 in 1944
was before the jury for its consideration, and the agents explained why
they omitted the alleged cash on hand in computing the funds available
for expenditure. See Brodella v.
United States
, 6th Cir., 184 Fed. (2d) 823 [50-2 USTC ¶9477].
The
appellant strongly insists that there was not sufficient evidence as to
the income of his wife, her net worth, inheritances, and receipt of
gifts or bequests. As has been stated, none such were revealed by the
agents' investigations, the wife had been continuously unemployed and
the defendant told the agents that she had received no gifts or
inheritances "as far as he knew". Neither the defendant nor
his wife took the stand and the only witnesses offered in his behalf
were three character witnesses. The district court charged the jury that
the failure of the defendant to testify in his own behalf must not be
considered as any evidence of his guilt. 3 As to the
testimony of the wife, however, the rule is different. The wife is now a
competent witness in behalf of her husband, Funk v. United States,
290
U. S.
371, though ordinarily not against him, see Pereira v. United States,
346 U. S. . . ., decided February 1, 1954. "The rule even in
criminal cases is that if a party has it peculiarly within his power to
produce witnesses whose testimony would elucidate the transaction, the
fact that he does not do it creates the presumption that the testimony,
if produced, would be unfavorable." Graves v.
United States
, 150
U. S.
118, 121. See, also, Billeci v. United States, D. C. Cir., 184
Fed. (2d) 394, 398; 20 Am. Jur., Evidence, Sec. 187; 2 Wigmore on
Evidence, 3rd ed., Sec. 290, p. 176; Sec. 285, pp. 165, 166.
We
think that the evidence was sufficient for the jury's consideration and
that the Court properly denied the defendant's motion for a directed
verdict of acquittal.
[Wife's
Expenditures]
The
appellant next insists that the Court erred in admitting in evidence
purchases made by the wife of defendant as evidence of expenditures and
in refusing defendant's request to charge that "no such purchases
shall be considered for the determination of taxable income to the
defendant, Fred M. Ford." The argument is that the admission in
evidence of her purchases made the wife a witness against her husband.
That argument is no more sound than would be the contention that the
admission of defendant's own expenditures made him a witness against
himself. Evidence of expenditures, whether by the husband or by the
wife, was simply evidence of acts, circumstantial evidence tending to
show the receipt of income. Where there is a joint property interest
between the husband and the wife, or where the wife acted, for the
matter in hand, as agent of the husband, her acts are admissible against
him as against any other principal or owner, the reason being well
expressed by Professor Wigmore, "for not only is the privilege
against a wife's testimony not violated (since the person here has a
double capacity), but otherwise the husband could always shield himself
from liability whenever he chose to make his wife an agent to transact
busines." 3 Wigmore on Evidence (3rd. ed.), Sec. 2232, pp. 236,
237.
[Receipt
of Payoffs]
The
appellant next insists that the Court erred in admitting the testimony
of Margaret Lera, who had operated a house of prostitution in
Galveston
since 1941. Over the defendant's objection, she testified that in 1943
she left $100.00 in cash "at the defendant's office", that
starting the latter part of 1945 and continuing through May of 1947 she
made regular payoffs "to the police department" of $100.00 per
month. The nearest she came to connecting the defendant with the payoffs
was by a conversation in 1949 when she testified that defendant
requested her aid in a political campaign on the ground as stated by him
that "he had been good to me through the years." The defendant
moved that her entire testimony be stricken as having no probative
value. There was no sufficient proof that the defendant received the
payoffs or any part of them, and a conclusion to that effect cannot be
permitted to be based upon mere conjecture or suspicion. We have
previously had occasion to comment on the necessity for safeguarding a
defendant against the prejudice and danger inherent in this type of
testimony. Montgomery v. United States, supra, at p. 891. The
Government insists that the testimony was relevant on the question of
willful intent and to show a possible source of income, citing United
States v. Skidmore, 7th Cir., 123 Fed. (2d) 604, 608 [41-2 USTC ¶9716];
Tinkoff v. United States, 7th Cir., 86 Fed. (2d) 868 [37-1 USTC
¶9057]; and United States v. Sullivan, 2d Cir., 98 Fed. (2d) 79
[38-2 USTC ¶9429]. None of those cases would justify the admission in
evidence of this vague kind of testimony to point the finger of
suspicion at the defendant as the perpetrator of a different criminal
offense and one involving moral turpitude.
The
evidence sufficiently disclosed that in the defendant's office of Chief
of Police he had opportunities of receiving income from graft, payoffs,
or other illegal sources. There can, of course, be no presumption that
the defendant was guilty of such gross misconduct as to be the recipient
of such ill gotten gains. The presumption is to the contrary. It was
nevertheless within the jury's province to say whether that presumption
had been overcome, or to infer that the defendant had some other source
of income, from the testimony that the expenditures so far exceeded the
available resources disclosed by the evidence, and from the evidence
that such expenditures could not be accounted for by accumulated assets
or by nontaxable receipts. But to undertake to aid the jury in this
function by the admission of testimony of this woman as to payoffs with
which the defendant was not shown to be connected was both erroneous and
highly prejudicial.
[Cross-Examination]
Lastly,
the appellant insists that the Court erred in unduly restricting the
cross-examination of the special agent of the Bureau of Internal Revenue
upon whose testimony the Government relied to establish the resources
available to the defendant and his wife as of
January 1, 19
45. Upon such cross-examination, the following questions were asked and
rulings made:
"Q.
And is that the only report that has been written on this case?
"A.
What do you mean?
"Q.
Well, is that the only report that has been written on this
investigation?
"MR.
JAMES: Your Honor, I am going to object to that question, because I do
not see the materiality about how many reports have been written on it.
"THE
COURT: Suppose that you come up here, Mr. McGregor.
"(Whereupon
counsel for the defendant and counsel for the government have a
conference with the court at the bench, outside of the hearing of the
jury and the reporter).
"(After
the conference at the bench, the following proceedings were had in open
court:)
"THE
COURT: That objection is sustained.
"MR.
McGREGOR: Maybe your Honor had better hear the next question that I am
going to ask him because it will follow right along, if you don't want
to handle it that way.
"THE
COURT: All right. Bring your book up, Mr. Sanders (the reporter).
"(Thereupon
at the bench outside of the hearing of the jury the following
proceedings were had).
"MR.
McGREGOR: I intend to ask this witness if he does not know of his own
knowledge that notice of a deficiency was issued in the year of 1944
asserting additional income in the amount of $27,600, or asserting a
total income in the amount of $27,600, and the purpose of the offering
of such proof would be to show cash funds available for expenditures
outlined in the proof here, where there is an absence of any evidence of
the receipt of cash funds in the bill f particulars, as furnished.
"THE
COURT: Is that objected to?
"MR.
HERRING: Yes, sir.
"THE
COURT: Objection sustained.
"MR.
McGREGOR: Beg pardon?
"THE
COURT: Objection sustained.
"MR.
McGREGOR: What was the objection?
"MR.
HERRING: We object because the court has excluded any evidence going to
expenditures in years prior to this matter.
"MR.
McGREGOR: You mean you--
"THE
COURT: There is no necessity to argue anything, gentlemen; I have
already sustained the objection. Any further questions?
"MR.
McGREGOR: Well, not that I think of now; I will get around to some
others later. Note our exception."
We
think that the testimony sought to be elicited was relevant for the
purpose stated by defendant's counsel, "to show cash funds
available for expenditures". Receipt of income in 1944 might go to
establish resources available at the beginning of 1945, and to rebut the
inferences to be drawn from the witness' direct testimony. Clearly, we
think the defendant's right of cross-examination of this witness was
improperly restricted, if not summarily denied. See Johnson v. United
States, 318
U. S.
189, 196 [43-1 USTC ¶9288]; Alford v. United States, 282
U. S.
687, 692.
For
the erroneous rulings upon the evidence which we have discussed, the
judgment must be reversed and the cause remanded for a new trial.
Reversed
and remanded.
1
"Section 145. Penalties
"(b)
Failure to collect and pay over tax, or attempt to defeat or evade tax.
Any person required under this chapter to collect, account for, and pay
over any tax imposed by this chapter, who willfully fails to collect or
truthfully account for and pay over such tax, and any person who
willfully attempts in any manner to evade or defeat any tax imposed by
this chapter or the payment thereof, shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, be fined not more than $10,000, or imprisoned for not more than
five years, or both, together with the costs of prosecution."
2
And that sum does not include such expenditures as were made for
groceries, gasoline and drugs for a family of five people, those items
not being covered by the witnesses produced.
3
As being in accord with Section 3481 of Title 18, United States Code,
see Bruno v. United States, 308
U. S.
287. Compare however, the possible contrary indications in Barrow v.
United States, 5th Cir., 171 Fed. (2d) 286 [49-1 USTC ¶9112]; Guzik
v. United States, 7th Cir., 54 Fed. (2d) 618 [1931 CCH ¶9681]; United
States v. Zimmerman, 7th Cir., 108 Fed. (2d) 370 [40-1 USTC ¶9102];
Malone v. United States, 7th Cir., 94 Fed. (2d) 281 [38-1 USTC ¶9032];
United States v. Hornstein, 7th Cir., 176 Fed. (2d) 217 [49-2
USTC ¶9326]; Bell v. United States, 4th Cir., 185 Fed. (2d) 302
[50-2 USTC ¶9499]; Rossi, et al. v.
United States
, 289
U. S.
89; and the dissent in Bryan v. United States, 175 Fed. (2d) 223,
227, 228, 229 [49-1 USTC ¶9322].
[56-1
USTC ¶9492]Leo J. McKenna, Appellant v.
United States of America
, Appellee
(CA-8),
In the United States Court of Appeals for the Eighth Circuit, No.
15,201, 232 F2d 431,
April 26, 19
56
Appeal from the United States District Court for the District of
Minnesota.
[1939 Code Sec. 41--substantially similar to 1954 Code Sec. 446; 1939
Code Sec. 145(b)--substantially similar to 1954 Code Sec. 7201]
Criminal prosecution: Attempt to evade tax: Proof under net worth and
bank deposit methods: Errors at trial.--Taxpayer was tried and
convicted under 1939 Code Sec. 145(b) for wilfully filing a false and
fraudulent income tax return for 1947. The following assignments of
alleged errors in the trial were overruled: (1) that the trial court
improperly denied taxpayer's motion for a continuance, (2) that the
Government was not compelled to supply certain information on taxpayer's
motion for a bill of particulars, (3) that the Government improperly
made its proof on the accrual method of accounting, instead of the cash
method, (4) that the Government improperly introduced proof based on the
net worth method as well as the bank deposit method, notwithstanding
that counsel for the Government announced its dependence on the accrual
method, (5) that there was no proof that the alleged wrongful acts of
taxpayer were "wilful," (6) that cross-examination by
taxpayer's counsel was unduly limited, (7) that the Court erred on the
admissibility of evidence, and (8) that the Court erred in in refusing
certain requested instructions to the jury.
A.
E. Sheridan for appellant. Alex Dim, Assistant United States Attorney
(George E. MacKinnon, United States Attorney, was with him on the
brief), for appellee.
Before
GARDNER, Chief Judge, and JOHNSEN and VOGEL, Circuit Judges.
GARDNER,
Chief Judge:
Appellant
was charged, tried and convicted on Count I of an indictment containing
two counts, each count charging a violation of Section 145(b), Title 26
U. S. C., in that he wilfully and knowingly attempted to defeat and
evade a large part of the income tax due and owing by him to the United
States of America by filing and causing to be filed with the Collector
of Internal Revenue for the District of Minnesota, a false and
fraudulent income tax return. The indictment involved the calendar years
1947 and 1948 and the counts are substantially identical except as to
the year covered and the amount of alleged income and income tax
involved. Appellant was acquitted on Count II of the indictment covering
the year 1948. We shall hereinafter refer to appellant as defendant.
[The
Facts]
At
and for some years prior to the year 1947 defendant was and had been
engaged in business as a new and used car dealer and as a new and used
farm implement dealer at
Caledonia
,
Minnesota
. For the calendar year 1947 defendant in his income tax return reported
his net income as $8,585.36 and his income tax as reported for that year
was $1,316.32. He reported his total receipts from the sale of new and
used cars and farm machinery for the year 1947 as $90,927.08 and he
reported that his inventory on
January 1, 19
47 was $4,716.00 and that his inventory at the close of the year 1947
was $5,150.00. He reported his wife as a dependent and she did not make
a separate return. At the time of the trial defendant claimed that he
had reported his income for the year 1947 on the cash basis but it was
the contention of the government that he was reporting on the accrual
basis and that the accrual basis was the appropriate method of reporting
and calculating his gross and net income under Regulations 111, Section
29.41-2. His books and records as kept by him were incomplete and
inadequate to clearly reflect his income and in these circumstances the
government accountants calculated his income for the year 1947 on the
accrual basis and found that to be $44,653.27. They also, for the
alleged purpose of corroboration, calculated his net income for the year
1947 on the net worth basis to be $31,934.78. The government accountants
also calculated defendant's net income for the year involved on the bank
deposit basis to be $23,855.95.
In
making sales defendant used a machine called a "whiz ticket
machine" which makes duplicate tickets at the same time which are
sort of sales slips. For the years 1947 and 1948 there were over six
thousand of such "whiz tickets". When the government
accountants first interviewed defendant in 1949 and questioned him
concerning his records he told them that everything was in the whiz
tickets and the cancelled checks and that everything in the whiz tickets
was a reflection of what was happening and that they would be able to
get their information from those particular records. He told them,
"You can get it all from the whiz tickets and the cancelled checks,
it's all there". Relying on defendant's statements the accountants
prepared Government's Exhibit 171 which was a transcription of the whiz
tickets for the year 1947. Although the government accounts asked all
his books and records defendant failed to disclose to them certain books
and records which were produced by defendant for the first time at the
trial of the case. Defendant as a witness in his own behalf admitted
that he had not properly reported his gross receipts from the sale of
new and used automobiles and new and used farm machinery for the year
1947 on his income tax return, and his wife testified that the bank
account usually reflected the total of the sales from the whiz tickets.
The government accountants were not supplied with the ledger sheets for
the years 1947 and 1948 although they asked for all defendant's records.
The government accountants in calculating defendant's income on the
accrual basis relied upon his statement that the so-called whiz tickets
reflected everything that was happening and that they could get a record
of all his financial transaction from the whiz tickets and cancelled
checks. It was disclosed during the trial, however, that a large number
of the whiz tickets were in effect duplicates arising from the fact that
a whiz ticket was issued at the time of sale and a whiz ticket involving
the same transaction was issued at the time of payment if the sale were
not a cash one. These duplications amounted in the aggregate to
$24,813.20 so that the net income of the defendant as calculated on the
accrual basis for 1947 was shown as $19,840.07. The evidence will be
further developed during the course of this opinion.
Defendant
was given a preliminary hearing
January 29, 19
54, at which time he was bound over to the grand jury and on
February 20, 19
54 the grand jury returned the indictment under which he was tried. On
March 16, 19
54 he filed motion for bill of particulars, to which the government
responded by furnishing certain information demanded, and the court
denied the motion as to all other demands not supplied by the government
in response to his motion. Thereafter and on
May 13, 19
54, he filed motion for continuance which was supported by affidavit.
This motion was denied and the case was called for trial
May 27, 19
54. The trial continued for nineteen days. At the close of all the
testimony defendant interposed a motion for acquittal which was denied
and thereupon in due course the case was submitted to the jury on
instructions to which no exceptions were saved by defendant, and the
jury after due deliberation returned its verdict acquitting defendant on
Count II of the indictment and finding him guilty as charged on Count I
of the indictment. Thereafter and before entry of judgment defendant
moved for judgment of acquittal notwithstanding the verdict or in the
alternative for a new trial on the grounds set out in his motion for
judgment of acquittal interposed at the close of all the evidence. This
motion was in due course denied and the court entered judgment [55-1
USTC ¶9273] pursuant to the jury's verdict sentencing defendant to
imprisonment for two and one-half years and to pay a fine of $5,000.
From the judgment and sentence thus entered defendant prosecutes this
appeal prodigally charging innumerable alleged errors.
[Opinion]
It
will not be possible to consider in detail all of these alleged errors.
While we have laboriously gone through this entire record and considered
each charge of error we shall attempt as far as possible to group the
questions presented and limit or discussion to such points as impress us
as being substantial.
As
has been observed, defendant filed a motion for a bill of particulars
and also a motion for continuance. On consideration of the motion for
bill of particulars the government furnished a substantial part of the
information demanded and the court in its order passing on the motion
said:
"(1)
Counsel for the Government has stated in open court that the Government
is relying in this case on the accrual method of accounting rather than
on the cash method;
"(2)
The Government has disclosed in open court that its theory in this case
is based on defendant's understatement of adjusted gross income
resulting in understatement of taxable net income. The Government has
advised the Court and counsel for the defendant that it intends to
corroborate such theory by the bank deposit method and net worth method;
"(3)
The Government has filed a receipt given by the defendant which
discloses that all papers, books and documents heretofore obtained by
Agents of the Internal Revenue Service from defendant were returned to
the defendant;
"(4)
Counsel for the Government advised the Court that for the year 1947 the
recapitulation of 1947 sales tickets, the so-called 'whiz tickets', have
been delivered to counsel for defendant, as well as a summary of
disbursements for that year. Counsel for the Government advises that it
will deliver to counsel for defendant a recapitulation of the 1948 sales
tickets, the so-called 'whiz tickets' as well as a summary of
disbursements for 1948;
"(5)
In all other respects defendant's motions are herewith denied."
The
motion was addressed to the sound judicial discretion of the court and
its ruling should not be reversed in the absence of an abuse of that
discretion. Ray v.
United States
, 8 Cir., 197 Fed. (2d) 268. There was in our opinion no abuse of
discretion in denying the motion, nor do we think its denial was
prejudicial to defendant. The motion for continuance was likewise
addressed to the discretion of the trial court and a careful
consideration of the record convinces us that there was no abuse of
discretion in denying the motion. Mellor v.
United States
, 8 Cir., 160 Fed. (2d) 757; Braatelien v.
United States
, 8 Cir., 147 Fed. (2d) 888.
[Motion
for Acquittal]
It
is strenuously urged that the court erred in denying defendant's motion
for judgment of acquittal interposed by him at the close of all the
evidence. In considering this contention we must view the evidence in a
light most favorable to the prevailing party and we must assume that all
conflicts in the evidence were resolved by the jury in favor of the
government. The government being the prevailing party was entitled to
all such favorable inferences as might reasonably be drawn from the
facts proven and if when so considered reasonable minds might reach
different conclusions then the case presented questions of fact to be
decided by the jury, rather than questions of law to be determined by
the court. Myres v.
United States
, 8 Cir., 174 Fed. (2d) 329 [49-1 USTC ¶9275]; Brinegar v.
Green, 8 Cir., 117 Fed. (2d) 316; Gunning v. Cooley, 281
U. S.
90; Finnegan v.
United States
, 8 Cir., 204 Fed. (2d) 105. Defendant was charged by the indictment
with wilfully and knowingly attempting to defeat and evade a large part
of the income tax due and owing by him to the United States of America
for the calendar year 1947, in violation of Section 145(b), Title 26 U.
S. C. It was incumbent upon the government, in effect, to make proof
that the defendant had attempted to evade a substantial part of his tax.
It was not incumbent upon the government to prove with mathematical
certainty the amount of the income tax due, nor was it incumbent upon
the government to proceed to make its proof of the charge as laid in the
indictment by any particular formula or method. It was not possible from
the books and records kept by defendant to determine the exact amount of
his income, and for that reason the government had to resort to some
other means of proving the fact as charged in the indictment, to-wit,
that the defendant had attempted to defeat and evade a large part of his
income tax due for the year 1947. Section 41, Title 26 U. S. C., after
providing that the net income shall be computed upon the basis of the
taxpayer's annual accounting period in accordance with the method of
accounting regularly employed by him in keeping his books, also provides
that:
"*
* * if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the
opinion of the Commissioner does clearly reflect the income."
Treasury
Regulation 111, Section 29.22(c)(1) provides:
"In
order to reflect the net income correctly, inventories at the beginning
and end of each taxable year are necessary in every case in which the
production, purchase, or sale of merchandise is an income-producing
factor."
Treasury
Regulation 111, Section 29.41-1, provides as follows:
"*
* * If the taxpayer does not regularly employ a method of accounting
which clearly reflects his income, the computation shall be made in such
manner as in the opinion of the Commissioner clearly reflects it."
Treasury
Regulation 111, Section 29.41-2, provides:
"*
* * For instance, in any case in which it is necessary to use an
inventory, no method of accounting in regard to purchases and sales will
correctly reflect income except an accrual method."
[Government's
Methods of Proof]
It
stands without dispute that the defendant's method of accounting
regularly employed by him in keeping his books and records did not
clearly reflect his income. While it was claimed that he made his income
tax return on a cash basis, his books, so far as disclosed, were not
kept upon that basis and his tax return did not disclose on its face
that it was made on the cash basis. In fact, his tax return reported the
opening and closing inventories for the year 1947, indicating that the
report was on the accrual rather than the cash basis. Aluminum
Castings Co. v. Routzahn, 282
U. S.
92; Clark v.
United States
, 8 Cir., 211 Fed. (2d) 100 [54-1 USTC ¶9291]. In these
circumstances the government chose to make proof on the accrual method
of accounting as provided in Treasury Regulation 111, Section 29.41-2,
above quoted, and defendant was so advised. The government made its
proof on that basis and the evidence produced by the government
indicated that defendant had understated his net income by $11,254.71.
Not only did it produce this proof but it then introduced proof based on
the net worth method of accounting and this proof indicated that
defendant had understated his income for the year 1947 in the amount of
$23,349.42. To meet defendant's claim that he was reporting and keeping
his records on a cash basis the government introduced evidence based on
the bank deposit method and this proof indicated that defendant had
understated his income for 1947 in the amount of $15,270.59. It is urged
that the government was not entitled to submit proof in support of the
net worth method of accounting, nor on the bank deposit method, because
in response to defendant's demand for bill of particulars it had
announced that it would seek to make proof on the accrual method of
accounting and that it had not proven the charge laid in the indictment
on that basis. When the exhibit prepared by the government accountants
on the accrual basis was, during the trial, purged of all duplicate
items it showed a shortage in the defendant's report of net income of
$11,254.71. The trial court in passing upon this contention, among other
things, said:
"Under
defendant's Exhibit Z-179, giving credit for duplications and other
credits in the amount of $24,813.20, that would still reduce the net
income on an accrual basis to $19,840.07. The understatement of net
income would still be $11,254.71. This, in the Court's opinion, is a
substantial understatement of net income on which a substantial tax was
due and owing for the calendar year 1947."
It
is, however, urged that there was no proof that the defendant in making
his tax return acted wilfully and with wrongful intent. These are
questions not generally susceptible of direct proof but may be inferred
from the facts and circumstances attending the act and one may be
presumed to intend the necessary and natural consequences of his acts. Myres
v. United States, supra; Cleo Syrup Corporation v. Coca-Cola Co., 8
Cir., 139 Fed. (2d) 416. Whether or not the wrongful acts of the
defendant were wilfull and with wrongful intent were questions of fact
to be determined by the jury on the entire record. They were presented
to the jury by instructions to which no exceptions have been saved and
we think the undisputed evidence abundantly sustains the jury's verdict
on the question of intent. On this phase of the case we conclude that
the evidence warranted the jury's verdict of guilty on Count I of the
indictment.
[Limited
Cross-Examination]
But
it is urged that defendant did not have a fair trial because the court
limited counsel in his cross-examination of one of the government's
accountants. The alleged limitation of the right of cross-examination of
this witness occurred after he had been under cross-examination for two
or three days. He was being examined on exhibits which had not been
received in evidence and the testimony was not for the purpose of laying
a foundation for the reception of the exhibits, and, hence, was
improper. Barnett v. Terminal R. Ass'n of
St. Louis
, 8 Cir., 228 Fed. (2d) 756. The immediate occasion for the ruling
was after the witness had been re-examined by counsel for the government
and further cross-examination was sought by counsel for the defendant.
Replying to the statement relative to the propriety of further
cross-examination the court said:
"*
* * There is no further cross-examination required on that score because
the witness has been thoroughly cross-examined on every phase of that
question, as I remember it."
The
scope of cross-examination is a matter within the discretion of the
trial court and in the absence of an abuse of that discretion the ruling
of the court will not be reversed. Myres v. United States, supra.
In the instant case, as has been observed, the cross-examination was
exhaustive and time-consuming. We do not think any prejudice resulted to
the defendant because of the limitation placed on the cross-examination
of this witness.
The
contention that the defendant's wife's property was used in calculating
his income is entitled only to passing notice. There was no contention
before the lower court that the wife had any interest in defendant's
property or that they were partners, and defendant's return for the year
1947 specifically treated his wife as a dependent and his wife made no
separate return of income. The question is here raised for the first
time and is wholly without merit.
There
are some general charges with refence to errors in the court's rulings
on the admissibility of evidence. In presenting this contention
defendant wholly disregards Rule 11(b)(3) of this court and it is not
the province of the court to search the record for error.
Over
defendant's objection the witness Edward M. Wegner, a former bookkeeper
for defendant, was permitted to testify with reference to certain
statements in the nature of inquiries relative to the possibilities of
evading income taxes by keeping a double set of books. The testimony was
admissible on the question of defendant's intent and wilfullness. It is
likewise urged that there was error in admitting in evidence tax returns
made by defendant for years prior to those directly involved. They were
all admissible and we have so held on numerous occasions. Leeby v.
United States
, 8 Cir., 192 Fed. (2d) 331 [51-2 USTC ¶9497]; Hanson v. United
States, 8 Cir., 186 Fed. (2d) 61 [51-1 USTC ¶9118]; Kampmeyer v.
United States, 8 Cir., 227 Fed. (2d) 313.
[Refused
Instructions to Jury]
It
is contended that the court erred in refusing certain requested
instructions. However, at the close of the instructions as given counsel
for the respective parties were asked if there were any exceptions, to
which counsel for defendant replied, "We have none, your
Honor". Rule 30 of the Federal Rules of Criminal Procedure
provides:
"*
* * No party may assign as error any portion of the charge or omission
therefrom unless he objects thereto before the jury retires to consider
its verdict, stating distinctly the matter to which he objects and the
grounds of his objection."
Furthermore,
defendant cannot just generally state the refusal to give all of his
requested thirteen instructions as error unless he distinctly points out
the matter and grounds of his objection and this he has not done. Banks
v.
United States
, 8 Cir., 223 Fed. (2d) 884 [55-2 USTC ¶9532]; Mitchell v.
United States, 8 Cir., 208 Fed. (2d) 854 [54-1 USTC ¶9150]. A study
of the instructions as given convinces us that all the material issues
were properly submitted to the jury by these instructions and there was
no prejudice in refusing to give the instructions as requested by
defendant.
It
is finally argued that the court erred in submitting form of verdict
because the jury was required to write the word "not" before
the word "guilty" in a space provided for that purpose in the
event they found defendant not guilty in any count of the indictment.
The jury was fully instructed with reference to the form of verdict and
advised that if they found defendant not guilty the word "not"
should be written into the blank space before the word
"guilty". In passing it is worthy of note that the jury
manifestly understood the instruction, as the word "not" was
inserted before the word "guilty" as to Count II of the
indictment. There was no error in submitting the form of verdict. Hines
v.
United States
, 10 Cir., 131 Fed. (2d) 971.
We
have carefully considered all other contentions of the defendant and
think they are without merit. Convinced as we are that the defendant had
a fair and impartial trial, at which he was represented by able counsel,
the judgment appealed from is affirmed.
[54-1
USTC ¶9254]Milton H. Olender, Appellant, v.
United States of America
, Appellee
(CA-9),
In the United States Court of Appeals for the Ninth Circuit, No. 13,658,
210 F2d 795,
February 15, 19
54
Appeal from the United States District Court for the Northern District
of California, Southern Division.
Criminal penalties for tax fraud: Prejudicial errors in admission of
evidence and jury instructions.--In a prosecution for tax fraud in
which the government sought to establish under the net
worth-expenditures theory that taxpayer received substantial amounts of
income which he failed to report, it was prejudicial error to admit in
evidence a file prepared by officials of the County Welfare Department
containing reports on taxpayer's financial status in connection with old
age benefits paid to his mother-in-law. The documents were hearsay and
their admission gravely damaged taxpayer's credibility in the eyes of
the jury. Such error, together with erroneous admission of other
evidence and misleading instructions to the jury, required reversal of
taxpayer's conviction.
Leo
R. Friedman,
San Francisco
,
Calif.
, for appellant. H. Brian Holland, Assistant Attorney General, S. Walter
Shine, Special Assistant to Attorney General, Ellis N. Slack, Chief,
Appellate Section, Department of Justice, David L. Luce, Joseph M.
Howard, Special Assistants to Attorney General, Washington, D. C., Lloyd
H. Burke, United States Attorney,
Rob
ert J. Drewes, Assistant United States Attorney, San Francisco, Calif.,
for appellee.
Before
STEPHENS, HEALY and BONE, Circuit Judges.
BONE,
Circuit Judge:
Appellant
stands convicted on all counts of a four-count indictment charging him
with wilfully attempting to defeat and evade federal income taxes by
filing false and fraudulent income tax returns on behalf of himself and
his wife for the taxable years 1945 and 1946 in violation of 26 U. S. C.
A. §145(b). Appellant was sentenced to three years' imprisonment and a
fine of $10,000 on each of the counts 1, 2 and 3, the sentences to run
concurrently, and to pay an additional fine of $10,000 on count 4.
During
the taxable years involved appellant was the sole owner and operator of
the "Army and Navy Store" in
Oakland
,
California
, which sold servicemen's uniforms and other merchandise at retail.
Appellant employed a part-time bookkeeper but supervised the maintenance
of the books himself. The books were admittedly incomplete, and the
government therefore relied upon the familiar net worth-expenditures
method to prove that appellant and his wife received taxable income in
1945 and 1946 which they failed to report. This method of proof requires
the government to show the net worth of the taxpayer as of the beginning
and the end of the taxable year and the non-deductible expenditures made
by him that year. If the increase in his net worth plus his
non-deductible expenditures exceed his reported income for the year, and
such excess is not attributable to gifts, devises, loans or other
non-taxable receipts, then the conclusion may be drawn that the taxpayer
realized income which he failed to report. McFee v.
United States
, 9 Cir., 206 Fed. (2d) 872 [53-2 USTC ¶9549]; Papadakis v.
United States, 9 Cir., 273 Fed. (2d) 1024.
Appellant
presents 11 specifications of error. In the first five specifications he
challenges the sufficiency of the evidence on all counts. Specifications
6 through 10 deal with questions as to the admissibility of certain
government evidence, and in specification 11 appellant attacks an
instruction given the jury by the trial court.
The
Evidence
The
government claims to have established, under the net worth-expenditures
theory, that appellant and his wife realized taxable income which they
failed to report in the amounts shown in the following table (the
figures including the income of both appellant and his wife, who
reported their income on a community property basis):
Year Net Income Reported Unreported
1945 .... $88,052.77 $41,067.61 $46,985.16
1946 .... $48,856.23 $23,514.62 $25,341.61
The
defense attempted to show that the net worth of appellant and his wife
as of
December 31, 19
44, was higher than that stated by the government in its computation of
unreported income, that the increase in their net worth for the two
years was less, and that a part of this increase did not represent
taxable income. The defense evidence, if believed, established that
appellant and his wife received only a negligible amount of unreported
income in 1945 and that they over-reported their income for 1946.
Most
of the facts on which the government based its calculations were
stipulated. The more than 1400 pages of record and the stacks of
exhibits deal with about eight issues of fact, of which only three, the
parties agree, were of critical importance. The three critical issues
were these: (1) Did appellant have $50,000 or $72,000 in his safe
deposit box on
December 31, 19
44 (the starting date for determining the income of appellant and his
wife for the years 1945 and 1946 under the net worth-expenditures
theory)? (2) Did appellant's Army and Navy Store have on hand $20,550 in
sailor suits from the Goodman Sales Agency on
December 31, 19
44, as appellant claimed? (3) Were certain government bonds in the
amount of $20,000, purchased in 1945, the property of appellant's mother
and acquired with her funds, as appellant contended?
We
have carefully studied the record. It would serve no good purpose to
discuss the evidence in detail. On two minor issues defects in the
government's case were established. On the second of the three major
issues stated above, involving the so-called "Goodman
Transaction," the theory of the defense was corroborated in part,
but only in part, by Lewis Leavy, a government witness. On the third of
the critical issues, relating to the $20,000 in government bonds,
Charles Ringo, appellant's accountant and a government witness,
testified that in May of 1948 he saw the $20,000 in bonds in appellant's
safe deposit box and that they were earmarked as belonging to
appeallant's mother. This was after the investigation of appellant's tax
matters had been commenced, however, and it was conceded that appellant
reported the interest on the bonds as income of himself and his wife in
1947.
There
is substantial evidence in the record to sustain the conclusion that
appellant and his wife realized very sizable amounts of income in 1945
and 1946 which they failed to report. With the exceptions noted above,
the defense had to rely almost wholly upon the uncorroborated testimony
of appellant to refute the government's case. Bearing in mind that the
credibility of the witnesses was a question for the jury, that the
evidence must be viewed in the light most favorable to the government,
and that it was not necessary for the government to prove with
mathematical certainty any precise amount of unreported income, we think
the evidence was sufficient to sustain the verdict on all counts, even
if we disregard that evidence which, as will be pointed out shortly, was
erroneously admitted in evidence. Papadakis v. United States, supra;
McFee v. United States, supra; Gendelman v. United States, 9 Cir.,
191 Fed. (2d) 993 [51-2 USTC ¶9474]; Rollinger v.
United States
, 8 Cir., 208 Fed. (2d) 109 [53-2 USTC ¶9647].
Admissibility
of Evidence
Government
Exhibit 55.
Appellant testified that in 1945 his mother-in-law, Mrs. Laura J. Foote,
made a gift to him of $2,500. His sister-in-law, Ella Widrin, testified
that on Mrs. Foote's death in 1945 she gave $575 which she had been
holding for Mrs. Foote to appellant to use for Mrs. Foote's funeral
expenses or as appellant saw fit. If believed, this evidence established
that the government overstated the taxable income of appellant and his
wife for the year 1945 by the amount of the money appellant received
from Mrs. Foote and Ella Widrin.
In
rebuttal the government called as a witness Donald A. Jensen, Director
of the Fresno County Department of Public Welfare. Jensen identified a
group of papers as the file of Laura J. Foote from the official files of
the Fresno County Public Welfare Department. This file related to old
age security benefits paid to Mrs. Foote in the years 1939-1942. The
file contained the following documents:
(1)
Four forms filled out and signed by Mrs. Foote during the period
1940-1942. Two of these forms were affidavits. Summarizing the contents
of the four documents, they contained, inter alia, statements by Mrs.
Foote that no change had occurred in her property holdings after 1939,
at which time she had, according to another form in the file, only
$152.09 in personal property; that she had no personal property in
excess of $500; that she had no real property; and that by
June 17, 19
42, she had disposed of her $150 worth of personal property.
(2)
Six reports of investigators for the Welfare Department containing,
inter alia, the same information as that appearing in the forms filled
out by Mrs. Foote summarized above.
(3)
An affidavit by Betty Olender, appellant's wife, as a "responsible
relative" of Mrs. Foote, stating that she (Betty Olender) and her
husband did not own their own home; that she (Mrs. Olender) had no cash
on hand, no bank deposits, no postal savings, no funds in a safe deposit
box, and no negotiable securities; that her personal property consisted
of a $100 automobile; and that the earnings of her spouse (appellant)
were "$150." This affidavit was dated
May 23, 19
39.
(4)
Five reports from banks, four stating that Mrs. Foote had no deposits
and one stating that she had a joint deposit with Mrs. Betty Olender of
$152.09.
The
government offered this file, first, to show that Mrs. Foote had no
money to give appellant in 1945 and, second, to impeach, by means of
Betty Olender's affidavit, appellant's testimony that his father had
made gifts of $5,000 a year to appellant and his wife jointly in the
years 1930 to 1940.
[Waiver
of Objections to Evidence]
In
the court below the defense objected to the admission of the entire (Ex.
55) file in evidence on the ground that it was irrelevant and hearsay.
The first of these grounds has been abandoned. On this appeal the
hearsay objection is reasserted and two additional contentions are made.
First, appellant argues that the file should have been excluded because
it is made confidential by a statute of the State of
California
. Deering's
California
Codes, Welfare and Institutions, §118. Appellant did not invoke this
statute in the court below. By failing to do so he waived any objection
based upon the confidentiality of the file and cannot now raise the
question on appeal.
Appellant
next contends that the affidavit of Mrs. Olender (in government Ex. 55)
should have been excluded under the rule that a wife cannot testify
against her husband. It is generally held that this rule extends to
extra-judicial statements of a wife, such as the affidavit of Mrs.
Olender in the instant case, as well as to the testimony of the wife in
Court. 8 Wigmore on Evidence §§ 2232, 2233 (3rd Ed.). Appellant
contends that the objection should be noticed by us even though not made
in the trial court, since the rule disqualifies the wife from testifying
against her husband, and there can be no waiver of an absolute
disqualification or disability.
Appellant
is mistaken. The rule, now almost extinct, that a husband or wife is
disqualified as a witness applied only in cases where a husband or wife
sought to testify in behalf of his or her spouse. See Cohen v.
United States
, 9 Cir., 214 Fed. 23, 29; 2 Wigmore on Evidence §§ 601, 602 (3rd
Ed.). That rule was abolished in the federal courts in 1933 by the case
of Funk v. United States, 290
U. S.
371. What remains is the rule that a husband or wife cannot be compelled
to testify against his or her spouse and cannot be permitted to
do so unless the other spouse consents. 8 Wigmore on Evidence §2241
(3rd Ed.). This rule is one of privilege, and the privilege may be
waived. Cohen v.
United States
, supra, 214 Fed. at 29; United States v. Lavy, 3 Cir., 153
Fed. (2d) 995;
United States
v. Mitchell, 2 Cir., 137 Fed. (2d) 1006, 1007-8; 8 Wigmore on
Evidence §2242 (3rd Ed.). The privilege was waived in the instant case
by the failure of either appellant or his wife to invoke it in the trial
court. Cohen v. United States, supra; United States v. Levy, supra;
8 Wigmore on Evidence §2242 (3rd Ed.).
[Admissibility
of Official Documents]
There
remains the interesting question whether the file (Ex. 55) should have
been excluded as hearsay. The file was introduced and received in
evidence under the official documents exception to the hearsay rule.
This exception to the hearsay rule was recognized at common law. See Hedrick
v. Hughes, 82 U. S. 123; Evanston v. Gunn, 99 U. S. 660; Vanadium
Corp. of America v. Fidelity & Deposit Co. of Maryland, 2 Cir.,
159 Fed. (2d) 105, 109; 5 Wigmore on Evidence §1638 (3rd Ed.). For
official documents of the United States Government the exception is now
provided for in 28 U. S. C. A. §1733, which is made applicable to
criminal cases by Rule 27, Fed. Rules Crim. Proc., 28
U. S.
C. A. As has been pointed out, however, this statute deals primarily
with the method of proof of official documents and is of no aid in
determining what kinds of official documents are admissible. Vanadium
Corp. of America v. Fidelity & Deposit Co. of
Maryland
, supra, 159 Fed. (2d) at 109;
United States
v. Grayson, 2 Cir., 166 Fed. (2d) 863, 869. Such questions must
be worked out in accordance with the principles of the common law
"as they may be interpreted by the courts of the
United States
in the light of reason and experience." Rule 26, Fed. Rules Crim.
Proc., 28
U. S.
C. A. For purpose of applying the rule no exception has been recognized
between documents of federal, state and county governments. See Hedrick
v. Hughes, supra; Sandy White v.
United States
, 164
U. S.
100; E. K. Hardison Seed Co. v. Jones, 6 Cir., 149 Fed. (2d) 252;
Franklin v. Skelly Oil Co., 10 Cir., 141 Fed. (2d) 568; Gilbert
v. Gulf Oil Corp., 4 Cir., 175 Fed. (2d) 705; Rollins v. Board of
Commissioners, 8 Cir., 90 Fed. 575.
Generally
stated, the rule is that all documents prepared by public officials
pursuant to a duty imposed by law or required by the nature of their
offices are admissible as proof of the facts stated therein. See Greenbaum
v.
United States
, 9 Cir., 80 Fed. (2d) 113, 126. The reason of the rule is that it
would be burdensome and inconvenient to call public officials to appear
in the myriad cases in which their testimony might be required in a
court of law, and that records and reports prepared by such officials in
the course of their duties are generally trustworthy. Wong Wing Foo
v. McGrath, 9 Cir., 196 Fed. (2d) 120; 5 Wigmore on Evidence §§
1631, 1632 (3rd Ed.).
Since
the official documents are a substitute for the personal appearance of
the official in court, it is generally held that such documents, to be
admissible, must concern matters to which the official could testify if
he were called to the witness stand. Vanadium Corp. of America v.
Fidelity & Deposit Co. of
Maryland
, supra, 159 Fed. (2d) at 109; 5 Wigmore on Evidence §1635 (3rd
Ed.). Thus, this circuit and most of the other circuits which have
passed on the question have held that the facts stated in the document
must have been within the personal knowledge and observation of the
recording official or his subordinates, and that reports based upon
general investigations and upon information gleaned second hand from
random sources must be excluded. Greenbaum v.
United States
, 9 Cir., supra, 80 Fed. (2d) at 126; Vanadium Corp. of
America v. Fidelity & Deposit Co. of Maryland, 2 Cir., supra;
United States v. Grayson, 2 Cir., supra; Gilbert v. Gulf Oil
Corp., 4 Cir., 175 Fed. (2d) 705; Long v.
United States
, 4 Cir., 59 Fed. (2d) 602; Gilmore v.
United States
, 5 Cir., 93 Fed. (2d) 774; Connecticut Mutual Life Ins. Co. v.
Lanahan, 6 Cir., 112 Fed. (2d) 375; Third Nat. Bank & Trust
Co. v.
United States
, 6 Cir., 53 Fed. (2d) 599; cf.
Franklin
v. Skelly Oil Co., 10 Cir., 141 Fed. (2d) 568; United States
v. Int. Harvester Co., 274 U. S. 693, 703; see also 5 Wigmore on
Evidence §1635 (3rd Ed.). 1
The
documents in Government Exhibit 55 may be divided into two groups. The
first group consists of the documents prepared by persons and firms
outside the public agency concerned--the statements and affidavits of
Mrs. Foote, Mrs. Olender and the five banks. The second group consists
of the records and reports prepared by investigators and officials of
the Fresno County Public Welfare Department.
The
documents in the first group were clearly outside the official documents
rule. They were not prepared by public officials pursuant to the duties
of their offices. They were simply statements of private individuals and
firms to the Welfare Department in aid of an investigation of Mrs.
Foote's financial needs. We were confronted with a similar problem in
the recent case of Wong Wing Foo v. McGrath, supra. In that case
the government sought to introduce sworn testimony given by a witness
before a Board of Special Inquiry of the Immigration Department on the
ground that the transcript of the proceeding was a part of the
"official records" of a government agency. After a discussion
of the policy of the official documents rule, we held that the recorded
testimony did not come within it, since it was not a statement by a
public official pursuant to the duties of his office. That case is
controlling here. Since the recorded testimony of an individual before a
quasi-judicial tribunal is not admissible, then a fortiori the
assorted forms, reports and affidavits of private individuals and firms
here in issue, given in the course of an informal
admin
istrative inquiry into a person's finances, are not.
The
second group of documents in the file--those prepared by investigators
and officials of the Welfare Department--were indeed
"official" and prepared pursuant to duty imposed by law. See
Deering's
California
Codes, Welfare and Institutions, §2180, et seq. But these
documents did not concern matters within the personal knowledge and
observation of the recording officials or their subordinates. They were
based upon the forms and affidavits of firms and individuals outside the
Welfare Department which we above held were inadmissible. Thus the
records and reports prepared by the officials of the Welfare Department
also fall outside the official documents exception to the hearsay rule.
The instant case demonstrates the reason for limiting the exception to
official records based upon the personal knowledge of the recording
official or his subordinates. For if the statements of the private firms
and individuals to the Welfare Department are themselves inadmissible,
it would be most anomalous to hold that the investigators' repetitions
of those statements may be admitted. Multiple hearsay can hardly have a
higher standing than single hearsay.
The
issues to which Government Exhibit 55 related were not of vital
importance in the case. The amount of the funds allegedly received from
Mrs. Foote was small compared with the total unreported income which the
government evidence tended to prove. And appellant's testimony that he
and his wife received large gifts from his father in the years 1930-1940
seems to be irrelevant, for the defense and the government seem to have
been agreed as to the net worth of appellant and his wife as of the end
of the year 1941. How appellant and his wife accumulated their assets
prior to that time was immaterial. But the file was of considerable
significance on the question of the credibility of appellant. If the
jury took this impressive array of official-looking documents at face
value, then they must have believed that appellant was a liar. Again and
again the prosecutor referred to this file in attacking the credibility
of appellant in his closing argument to the jury.
[Receipt
of Gifts of Money]
Testimony
of Whiteside.
Appellant testified that he received six gifts of money from his mother,
Mrs. Mollie Olender, during his lifetime, including a gift of $3000 in
1945. He testified that his mother had withdrawn money from her accounts
in one of two named banks or, possibly, from some other source to make
these gifts, and he specified the dates of the gifts.
On
rebuttal the government called as a witness R. L. McNab,
"pro-assistant cashier" of the Bank of America in
Fresno
, one of the two banks named by appellant in which his mother had
deposits. From the records of this bank McNab testified that there was
withdrawals from the account of appellant's mother on five of the six
dates on which, according to appellant's testimony, he received gifts
from his mother. The amounts of the withdrawals were the same as the
amounts of the gifts which appellant testified he received. McNab traced
each withdrawal to a redeposit of the withdrawn amount into another
account of appellant's mother, or into the account of appellant's sister
in the same bank. The government also called Melbourne C. Whiteside, an
Internal Revenue Agent who testified that he checked the accounts into
which the money withdrawn by appellant's mother had been redeposited;
that there were minor withdrawals and one withdrawal of $1000 from one
of these accounts prior to the end of the year 1946, and that there were
no other withdrawals from these accounts prior to that time. This
evidence tended to refute appellant's testimony that he received the six
gifts of money from his mother on the dates he specified. Following the
testimony of Whiteside, summarized above, the prosecutor examined
Whiteside as follows:
"Q.
* * * will you state whether you did anything else except checking the
bank records? A. Yes, we did.
"Q.
Will you state whether or not you discussed with anyone this matter? A.
Yes.
"Q.
With whom did you discuss this matter?
"A.
With Mrs. Mollie Olender.
"Q.
And about what month was that discussion held?
"A.
We talked to her on two occasions, on November 17 and
November 18, 19
48.
"Q.
Now, Mr. Whiteside, as a result of your checking the bank records in
Fresno here in evidence and as a result of your discussions with Mrs.
Mollie Olender, I will ask you whether or not, for the purposes of your
report, you made a determination as to whether the six items represent
gifts which were made by Milton Olender--strike that--which were made by
Mrs. Mollie Olender to her son Milton?
"Mr.
Hagerty [Defense Counsel]: Well, if your Honor please, again we will
enter an objection. The question is both leading and suggestive. It also
is again calling for the conclusion and opinion of the witness, and
partially based on hearsay.
"The
Court: Overruled.
"A.
Yes, we made a determination on that.
"Q.
What was that determination?
"Mr.
Hagerty: We enter the same objection, your Honor.
"The
Court: Overruled.
"A.
Our determination was that the gifts were not in fact made."
The
defense objection should have been sustained. Whiteside's answer was a
conclusion based in part, and in principal part, upon out-of-court
conversations with appellant's mother. It was an indirect but very
effective means of getting the effect of the extra-judicial statements
of appellant's mother before the jury. The error was probably not of
great consequence, for the government, by use of the bank records, had
already done a pretty good job of discrediting appellant's testimony as
to the gifts received from his mother. A little room for doubt was left,
however, for appellant had testified that the gifts to him may have come
from some source other than his mother's bank accounts. By getting in
Whiteside's "opinion" based upon conversations with
appellant's mother, the government sought, and very likely succeeded, in
removing this doubt.
[Evidence
of Cash in Safe Deposit Box]
Government
Exhibit 45.
As indicated above, one of the three critical issues of fact in the case
was whether appellant had $50,000 in cash in his safe deposit box as of
December 31, 19
44, as the government contended, or $72,000, as appellant claimed. To
support its view on this question the government relied solely upon two
purported "work papers" of appellant's accountant, Charles
Ringo, who had been engaged by appellant early in 1948 to prepare a net
worth statement for him. The first of these papers was Government
Exhibit 26. According to Ringo, this paper was prepared by him on the
basis of estimates furnished by appellant of the items comprising the
net worth of appellant and his wife as of the ends of certain years. The
paper contained an express notation that there was $50,000 in
appellant's safe deposit box as of
December 31, 19
44. Ringo testified, however, that the paper was by no means the result
of a final and complete study of appellant's finances.
It
was agreed between the parties that appellant had $75,000 in cash in his
safe deposit box as of
December 31, 19
41, that there was more than $70,000 in the box in May of 1944, and that
the cash in the box was exhausted, or nearly so, by the end of the year
1946. To buttress its claim that there was only $50,000 in the box at
the end of the year 1944 the government introduced in evidence
Government Exhibit 45, another purported "work paper" of
Ringo. Entries under "Item 19" of this paper indicated the
amounts and dates of withdrawals from appellant's safe deposit box in
the years 1943-1946. Considered along with the agreed facts as to the
cash in the box as of the end of the year 1941, May of 1944, and the end
of the year 1946, Item 19 of this exhibit tended to show that there must
have been $50,000 in the box at the end of the year 1944. To meet this
evidence the defense introduced in evidence what amounted to an
accountant's summary or schedule of deposits and withdrawals from the
deposit box in the years 1944-1946, based largely upon appellant's
testimony. If believed, this exhibit established that there must have
been about $72,000 in the box at the end of the year 1944.
As
the above discussion indicates, Government Exhibit 45 was of some
importance in the case. This exhibit was received in evidence under the
following circumstances. When Whiteside, the Internal Revenue Agent, was
being cross-examined by the defense during the government's case in
chief, he testified that in determining appellant's cash on hand as of
December 31, 19
44, he had had recourse to work papers of Ringo containing answers of
appellant in his own handwriting to questions propounded by Ringo; that
these papers showed how the cash in appellant's safe deposit box had
been disposed of and stated that there was $50,000 in the box at the end
of the year 1944. Whiteside testified that he got this information
through Ringo, and not from appellant himself.
On
redirect examination of Whiteside the government offered Exhibit 45 in
evidence as the work paper to which Whiteside had referred. It was
offered for the limited purpose of showing the critical "Item
19" which appeared therein. Whiteside identified Exhibit 45 as a
photostatic copy of one of the work papers of Ringo which Ringo had
loaned him and which he had returned. The defense objected to admission
of the document on the ground that the document had not been properly
identified. Government counsel then asserted that the testimony of
Ringo, an earlier government witness, had established that Ringo had
asked appellant a number of questions to which appellant had given
answers, that Whiteside's testimony had identified Exhibit 45 as
containing such questions and answers, and that Ringo's testimony had
established that the document was in appellant's own handwriting. The
defense again objected that the document had never been properly
identified. The court, apparently on the understanding that the paper
was in appellant's handwriting, received it is evidence, limited for
evidentiary purposes to Item 19 thereof.
Ringo
had never identified any document as being in appellant's handwriting,
nor had he referred to any specific document, except Government Exhibit
26, as containing information furnished him by appellant. Moreover, when
appellant was on the stand later in the trial, he testified that,
although he believed Exhibit 45 was one of the lists of questions
submitted to him by Ringo, the handwriting was not his except for some
irrelevant notations in the left-hand margin, and that the figures
appearing in the critical Item 19 had no meaning to him.
Still
later, during the government's case in rebuttal, Whiteside corroborated
appellant's testimony that the pertinent portions of Exhibit 45 were not
in appellant's handwriting, when he testified that both Exhibits 26 and
45 were "work papers wherein Mr. Ringo has written in his
own hand certain legends." An inexpert examination by us of
Exhibits 26 and 45 would indicate that, as Whiteside testified, both are
in the same handwriting, and it is undisputed that Exhibit 26 was in the
handwriting of Ringo.
Finally,
the defense also offered, and the court received, Exhibit 45 in evidence
for the limited purpose of showing "Item 20" appearing
therein, which related to an entirely different issue. This offer came
after Seth Root, another Internal Revenue Agent, had testified that he
(Root) had furnished Ringo the information shown in Item 20 on the basis
of certain data obtained by the Internal Revenue Agents in the course of
their investigation. Root testified that Item 20 was in Ringo's
handwriting. The purpose of the defense in offering this item of Exhibit
45 in evidence was apparently to show that the government had knowledge
of the facts stated therein.
From
the confusing pattern outlined above the following may be fairly said:
(1) No one ever testified that the pertinent portions of Exhibit 45 were
in appellant's handwriting; the testimony of appellant, Whiteside and
Root were to the contrary; (2) Ringo never identified the document or
referred to it in any manner; (3) Whiteside testified that Ringo told
him that Exhibit 45 was a work paper of Ringo based upon information
given him by appellant; (4) Appellant testified that the document
appeared to be one of the lists of questions submitted to him by Ringo,
but the entries in the critical Item 19 had no meaning to him; (5) Some
of the information in Exhibit 45 was furnished by Root, an Internal
Revenue Agent.
We
think the defense objection to Exhibit 45 should have been sustained.
Whiteside's testimony as to the nature of the document was pure hearsay,
based solely upon extrajudicial statements to him by Ringo. It was never
identified or referred to by Ringo, although Ringo had been on the stand
as a government witness. Assuming that appellant's testimony
sufficiently identified the document as one of Ringo's work papers,
still there was no competent evidence as to the source of the
information appearing in Item 19 of the document. For all that appears,
the information in the exhibit might all have been given Ringo by
Internal Revenue Agents. We think Exhibit 45 should have been excluded
because of a failure to properly identify it.
[Privileged
Communications]
The
Ringo Testimony.
Charles R. Ringo was engaged by appellant early in the year 1948 to
prepare a net worth statement for appellant after the investigation by
the Internal Revenue Bureau of appellant's tax matters had been
commenced and Bureau Agents had requested such a statement. Ringo also
prepared appellant's tax returns for the years 1947 and 1948. Ringo was
both a certified public accountant and an attorney qualified to practice
law in the State of
California
.
The
government called Ringo as a witness. The defense objected to Ringo's
testimony concerning communications made to him by appellant on the
basis of the attorney-client privilege. The trial court overruled the
objection and ruled that Ringo could testify as to "accounting
matters." Appellant attacks this ruling on the ground that it is
impossible to segregate the functions of an attorney-accountant, engaged
to perform a single integrated task, into "accounting matters"
and "legal matters." We do not pass upon this argument, for
the trial court later explained the basis of his ruling as follows:
"* * * in the instant case there is no evidence at all that the
gentleman, Mr. Ringo, at any time functioned as a lawyer, or in fact the
defendant employed him as a lawyer. He was employed as an accountant
solely and simply." The trial court referred in this connection to
a previous decision in which he had stated the rule as follows: "If
* * * a lawyer undertakes to translate his activities into those of an
accountant * * * it would seem elementary that the transactions in
question would not be clothed with the privilege." United States
v. Chin Lim Mow, D. C., N. D. Cal., S. D., 12 F. R. D. 433, 434.
We
think the ruling of the trial court was correct. The attorney-client
privilege is limited to communications made in the course of seeking legal
advice from a professional legal adviser in his capacity as such,
8 Wigmore on Evidence §2294. Thus, communications to an attorney in the
course of seeking business rather than legal advice are not privileged, United
States v. Vehicular Parking, D. C., D. Del., 52 Fed. Supp. 751; nor
are communciations to an attorney who acts simply as a scrivener of
deeds, or who simply deposits money in a bank for his client. Pollock
v.
United States
, 5 Cir., 202 Fed. (2d) 281 [53-1 USTC ¶9229]. Coming a bit closer
to the instant case, the privilege has been held inapplicable to
communications to one who was both an attorney and accountant where made
solely to enable the practitioner to audit the client's books, In re
Fisher, D. C., S. D. N. Y., 51 Fed. (2d) 424; or to simply prepare a
federal income tax return. Clayton v. Canida, Civ. App. Tex., 223
S. W. (2d) 264; see also
United States
v. Chin Lim Mow, supra.
In
the light of these authorities, we think the communications sought to be
excluded in the instant case were outside the scope of the privilege. So
far as the record shows, the only purpose for which Ringo was hired was
the preparation of appellant's net worth statement and his tax returns.
All of his activities appear to have been incidental to those tasks. It
is significant that appellant, on the advice of a friend, went to an accounting
firm to secure the services of Ringo, who was a member of the firm,
and that the moment a question arose as to whether certain information
should or should not go into the net worth statement appellant and Ringo
went to Monroe Friedman, appellant's attorney, to seek legal
advice on the matter. When asked why he wanted a lawyer to prepare the
net worth statement, appellant testified that there were many items
which concerned his mother, who was old and in bad health, and that he
did not want those items disclosed. But this, if believed, establishes
only that appellant desired an accountant he could trust. It did not
make the transaction one in which appellant sought legal advice from a
lawyer in his capacity as such, as the rule requires. In sum, the
record does not support the conclusion that Ringo was hired as an
attorney but indicates instead that he was engaged simply as an
accountant to prepare a financial statement and income tax returns, and
to do nothing more.
At
the outset of Ringo's testimony and after he had stated that appellant
told him that he wanted an attorney who was an accountant to prepare his
net worth statement, counsel for the defense, on voir dire, asked Ringo
this question: "And at this time the relationship of attorney and
client was set up?" The government objected on the ground that the
question called for the opinion and conclusion of Ringo, and the court
sustained the objection. Appellant contends that this was error. We
think not. Had Ringo answered "yes" to the question it would
have meant little, for the answer would merely have been Ringo's legal
conclusion on a question which had ultimately to be decided by the court
on the basis of all the pertinent facts. The court might properly have
taken the opinion of Ringo on this question but we do not think it was
obliged to do so.
The
Court's Instructions
Appellant
contends that the court below erred in giving the following instruction
to the jury:
"You
are further instructed that when in the trial on charges of income tax
evasion discrepancies between the defendant's return and his actual
income are indicated by the government's proof, the failure of the
defendant to offer explanation in any form may be considered by you in
arriving at your verdict."
The
government points to appellante court opinions using language similar to
that appearing in the challenged instruction.
Bell
v.
United States
, 4 Cir., 185 Fed. (2d) 302, 309 [50-2 USTC ¶9499], cert. denied
340
U. S.
930; Jelaza v.
United States
, 4 Cir., 179 Fed. (2d) 202 [50-1 USTC ¶9149]; Stinnett v.
United States, 4 Cir., 173 Fed. (2d) 129 [49-1 USTC ¶9217]. In the
cited cases the language was used (by way of argument) in discussing the
sufficiency of the evidence to support the verdict, and for that purpose
it may have been appropriate. However, we think it was an improper
instruction to give to the jury.
The
net worth-expenditures theory of proof was explained to the jury in
other instructions. The court also thoroughly instructed that the burden
was upon the government to prove the crime charged beyond a reasonable
doubt. These instructions properly presented the issues to the jury. The
challenged instruction was unnecessary and very possibly misleading. By
the instruction the court told the jury that if discrepancies between
actual and reported income were "indicated" by the
government's proof, it could consider the defendant's failure to explain
such discrepancies in arriving at its verdict. But to properly reach a
verdict of guilty the jury had to infer from the proof
"indicating" discrepancies that appellant did in fact
realize income which he failed to report and, further, that appellant
thereby wilfully attempted to evade taxes. The vice of the instruction
in issue is that it tended to divert attention from the question whether
the government evidence established these facts beyond a reasonable
doubt, to the presence or absence or nature of the defendant's
"explanation." On the basis of this instruction the jury might
have discounted great weaknesses in the government's case because of the
silence of the defense. While the words of the instruction did not in
terms shift the burden of proof to the defendant, they might well have
had that effect in the minds of the jurors. In these net
worth-expenditures cases, based as they are upon an elaborate scheme of
circumstantial evidence, it is particularly important to keep the jury's
attention riveted upon the ultimate question whether the government has
sustained its burden of proving the crime charged beyond a reasonable
doubt. See Demetree v.
United States
, 5 Cir., 207 Fed. (2d) 892 [53-2 USTC ¶9646]; Lurding v. United
States, 6 Cir., 179 Fed. (2d) 419, 422 [50-1 USTC ¶9159].
The
challenged instruction is in some ways similar to that given in Bihn
v. United States, 328
U. S.
633, 637. That case involved a prosecution for conspiracy to steal
ration coupons. The defense was that persons other than the defendant
could have stolen the coupons. The trial judge instructed fully that the
burden was upon the government to prove the crime charged, beyond a
reasonable doubt, but he also instructed: "Who would have a motive
to steal them? Did she [the defendant] take these stamps? You have a
right to consider that. * * * Did she steal them? Who did if she didn't?
You are to decide that." The Supreme Court held that the giving of
the instruction was reversible error, saying "* * * to put the
matter another way, the instruction may be read as telling the jurors
that, if petitioner by her testimony had not convinced them that some
one else had stolen the ration coupons, she must have done so." 328
U. S.
at 637.
Similarly,
the instruction here in question might be read as telling the jurors
that, if appellant had not come forward with convincing explanations of
discrepancies "indicated" by the government's proof, then they
might from that circumstance find him guilty. The challenged
instruction, considered as a part of the lower court's charge as a
whole, would not, in itself, be sufficiently prejudicial to require a
reversal, but it must be considered along with the other errors
committed at the trial.
Were
the Errors Prejudicial?
The
final question is whether the errors committed in the course of the
lengthy trial below can be said to be "harmless" under Rule
52(a), Fed. Rules of Crim. Proc., or whether they are such as to require
reversal. The case of Kotteakos v. United States, 328
U. S.
750, teaches that "it is not the appellate court's function to
determine guilt or innocence. * * * Nor is it to speculate upon probable
reconviction and decide according to how the speculation comes out. * *
* It is rather what effect the error had or reasonably may be taken to
have had upon the jury's decision. The crucial thing is the impact of
the thing done wrong on the minds of other men, not on one's own, in the
total setting. * * * If, when all is said and done, the conviction is
sure that the error did not influence the jury, or had but very slight
effect, that verdict and the judgment should stand, except perhaps where
the departure is from a constitutional norm or a specific command of
Congress. * * * But if one cannot say, with fair assurance, after
pondering all that happened without stripping the erroneous action from
the whole, that the judgment was not substantially swayed by the error,
it is impossible to conclude that substantial rights were not affected.
The inquiry cannot be merely whether there was enough to support the
result, apart from the phase affected by the error. It is rather, even
so, whether the error itself had substantial influence. If so, or if one
is left in grave doubt, the conviction cannot stand." 328
U. S.
at 763-5.
Applying
these principles here, we think the errors committed require a reversal.
This was by no means an open and shut case for the government. The
critical issues of fact were close and hotly contested. On the cold
record there is little to choose between the government and defense
versions of the facts on these issues. Inconsistencies and occasional
confusion developed on both sides of the controversy as details of
complex financial transactions of appellant multiplied. The jury was
left with the difficult decision of which version of the facts to
accept. And since the defense case rested primarily upon the testimony
of appellant, it was his credibility which was principally at issue. The
trial judge correctly remarked in colloquy with counsel that "the
beginning and the ending of the case is the credibility of the
defendant." The prosecutor told the jury the same thing in effect
in his closing argument, and devoted most of his efforts to convincing
the jury that appellant was unworthy of belief.
It
is impossible to estimate the damage done appellant's credibility in the
eyes of the jury by the admission of Government Exhibit 55--the old age
security file of Mrs. Foote. There was other evidence of inconsistent
statements on the part of appellant. Some of these were such as might be
expected from an honest witness attempting to reconstruct complex
financial transactions which occurred many years prior to trial. In one
or two instances apparent self-contradictions by appellant were of a
more significant character, but none were more glaring than those
established by Government Exhibit 55, if the documents in that exhibit
were believed. Exhibit 45, which was erroneously admitted, was of
considerable importance on a critical issue in the case. These errors
and the other instance of evidence erroneously admitted, considered
along with the possibly misleading instruction to the jury, might have
been enough to tip the scales against appellant in a case as close as
this.
The
judgment is reversed. The cause is remanded with directions to grant a
new trial.
1
Apparently to the contrary are Hunter v. Derby Foods, 2 Cir., 110
Fed. (2d) 970: E. K. Hardison Seed Co. v. Jones, 6 Cir., 149 Fed.
(2d) 252; Moran v. Pittsburgh-Des Moines Steel Co., 3 Cir., 183
Fed. (2d) 467; see also American Law Institute Model Code of Evidence,
Rule 515, 516. We notice that the Hunter case, supra, is
seemingly inconsistent with the later Vanadium Corporation and Grayson
cases, cited in the text of our opinion, which were also decided by the
Second Circuit. And the E. K. Hardison case, supra, is
seemingly inconsistent with the earlier Connecticut Mutual case,
cited in the text of our opinion, also from the Sixth Circuit. The
opinion in the E. K. Hardison case would indicate that the
documents there involved were in fact prepared by officials having first
hand knowledge of the facts stated therein, and it may thus be
harmonized with the Connecticut Mutual case.
[86-1
USTC ¶9113]
United States of America
, Plaintiff-Appellee v. Johnson C.S.
Chu
, Defendant-Appellant
(CA-7),
U.S.
Court of Appeals, 7th Circuit, No. 84-2623, 12/9/85, 779 F2d 356,
Affirming unreported District Court decision
[Code
Sec. 7201 ]
Crimes: Willful attempt to evade tax: Net worth method of
reconstructing income: Constitutional defenses.--The conviction of a
doctor for willful tax evasion was affirmed. Although unsubstantiated
indications of additional assets remained, the doctor's opening net
worth was determined with reasonable certainty. The determination of his
cash on hand was also reasonably established through reliance on the
informed representations by the doctor and his wife of their cash on
hand. Also, sufficient evidence was presented to permit the jury to
conclude that the government had negated all possible sources of
non-taxable income and had established that unreported sales of
unaccounted-for Phendimetrazine tablets provided a likely source of
unreported taxable income. In addition, statements made by the doctor to
IRS agents without counsel present were properly admitted because the
doctor was not under indictment for tax evasion at the time of the
statements and made them voluntarily. Also, comments by the U.S.
Attorney in his closing argument concerning the missing Phendimetrazine
were material and proper and did not claim that the doctor was engaged
in uncharged criminal conduct.
R.
Lawrence Steele, Jr., United States Attorney, Jerome Frese, Assistant
United States Attorney, South Bend, Ind. 46601, for plaintiff-appellee.
Charles A. Asher, 508 J.M.S. Bldg.,
South Bend
,
Ind.
46601
, for defendant-appellant.
Before
COFFEY, FLAUM, Circuit Judges, and GIBSON, Senior Circuit
Judge. *
COFFEY,
Circuit Judge
EI:
The defendant, Johnson C.S. Chu, appeals his convictions on two counts
of income tax evasion for the years 1977 and 1978 in violation of 26
U.S.C. §7201 . We affirm.
I.
Dr.
Johnson C.S. Chu, M.D. ("Chu") and Dr. Sylvia Cheng Chu, M.D.
("Cheng"), his wife, immigrated to the
United States
from mainland
China
in 1948. Following their arrival, Chu and Cheng both engaged in the
practice of medicine, doing psychiatric work in state hospitals,
initially in
West Virginia
, and since 1956, at
Logansport
State
Hospital
in
Logansport
,
Indiana
. In addition to their psychiatric practice at the state hospitals, Chu
and Cheng also engaged in the general practice of medicine at their own
clinic, the
Southeastern
Medical
Center
in
Walton
,
Indiana
. In September 1978, agents from the Drug Enforcement Administration
(DEA) obtained a search warrant and searched a cottage on the
Logansport
State
Hospital
grounds used by
Chu
and Cheng, "looking for records related to distribution and receipt
of controlled substances." As a result of the search, DEA
Compliance Inspector Joel Fries discovered $21,873 in cash found in
three sealed envelopes in a safe on the premises and seized the
envelopes and cash along with records of controlled substance purchases.
In September or October 1978, the DEA informed in Internal Revenue
Service (IRS) of the seizure of the currency. The IRS believed the
information received from the DEA warranted a criminal investigation and
initially assigned agent James P. Hinkle to investigate Drs. Chu and
Cheng. Before commencing his investigation, Hinkle ascertained whether
the DEA was intending to seek an indictment of the Doctors on the
controlled substance charges pursuant to a Department of Justice policy
to avoid "dual prosecution" of individuals. In early 1979 a
federal grand jury in the Northern District of Indiana indicted Chu and
Cheng on five counts of improper distribution of controlled substances
and improper record keeping in violation of 21 U.S.C. §§841(a)(1),
843(a)(4) and 18 U.S.C. §2
. In July 1979, the United States District Court for the
Northern District of Indiana dismissed without prejudice all counts of
the indictment against Chu and Cheng as being "vague and ambiguous
[and suffering] from duplicity." Shortly thereafter, DEA Inspector
Fries informed Agent Hinkle of the IRS that "the charges had been
dropped."
Hinkle
activated the IRS investigation of Chu and Cheng, telephoned Chu, and
arranged to meet Chu and his wife at the
Southeastern
Medical
Center
in
Walton
,
Indiana
, on
September 12, 1979
. On that date Agent Hinkle and IRS Agent Stephen Platt met with
Chu
and Cheng. Hinkle identifed himself as "a Special Agent for the
[IRS] assigned to the Criminal Investigation Division," and
informed
Chu
and Cheng that he "had been assigned the investigation of their
federal tax liability." Before asking any questions, Hinkle recited
the following statement from a card given by the IRS to its agents:
"As
a Special Agent one of my functions is to investigate the possibility of
criminal violations of the Internal Revenue laws and related offenses.
In connection with my investigation of tax liability I would like to ask
you some questions. However, first I advise you that under the Fifth
Amendment to the Constitution of the
United States
I cannot compel you to answer any questions or to submit any information
if such answers or information might tend to incriminate you in any
manner. I also advise you anything which you say and any documents you
submit may be used against you in any criminal proceeding which may be
undertaken. I advise you further that you may, if you wish, seek the
assistance of an attorney before responding."
Hinkle
then asked
Chu
and Cheng individually if they understood their rights; both answered,
"Yes." Hinkle then asked each of them individually whether
they wished to continue the interview, and after
Chu
and Cheng discussed among themselves in Hinkle's presence the
advisability of obtaining a lawyer, they told Hinkle they wished to
continue with the interview without the presence of a lawyer.
Hinkle
began questioning
Chu
and Cheng about their financial affairs. The defendants advised Hinkle
that none of the loans they previously made to friends or relatives were
currently outstanding, that they had not borrowed any money against life
insurance policies, that they had not borrowed any money from
individuals, and that any loans they received were reflected on their
tax returns. The defendants discussed their purchases of stocks and
bonds, gave Hinkle the name of their stockbroker in
Indianapolis
, and disclosed their real estate purchases, including the location and
purchase price. Hinkle then asked the defendants about their "cash
on hand", explaining that by that term he meant "currency and
coins which they had on their person or at any other location or being
held by anyone for them. . . . I expressly told them I was not referring
to bank accounts." The defendants told Hinkle that "they had
never had a practice of accumulating large sums of currency except for
some money which had been obtained from them by the [DEA]."
According to the defendants, the $21,000 seized by the DEA
"represented money which they had received from loans and also from
the sale of a house in
China
."
Chu
estimated that the most cash he had on hand at the end of the years 1975
through 1978 was between $150 and $200, and Cheng estimated that she had
between $200 and $300 cash on hand at the end of the same four years.
On
at least eight subsequent occasions through August 1980, Agent Hinkle,
and later IRS Agent William Schroer, the agent to whom the investigation
was later reassigned, met with the defendants and discussed their
financial affairs. The agents examined and inventoried the contents of
the defendants' safety deposit boxes, microfilmed documents, made a list
of the defendants' savings bonds, collected records regarding the
patients' accounts at the
Southeastern
Medical
Center
, and obtained their bank records.
The
defendants eventually retained counsel, and on
July 29, 1982
the defendants' attorneys provided Agents Hinkle and Schroer with
letters written in Chinese, dated in 1979, 1980 and 1981, allegedly
referring to the existence of loan transactions between the defendants
and other family members. Agent Hinkle requested that the defendants
provide the originals of the letters in order that a lab analysis might
be conducted to determine the authenticity of the letters. The originals
were never delivered. The IRS translated the copies of the letters, and
inquired of the State Department whether any information in the letters
could be investigated in mainland
China
. Agent Hinkle testified that after his superiors contacted the State
Department, they informed him that the leads in the letters could not be
investigated in mainland
China
and further that the IRS was unable to obtain any other pertinent
information on the leads. The government requested production of the
original letters, as well as any documentation the defendants might have
in support of their purported family loan transactions. Neither the
original letters nor any documentation has been produced.
After
the thorough investigation of Agents Hinkle and Schroer, Chu and Cheng
were indicted and tried in the Northern District of Indiana on two
counts of evading federal income taxes in violation of 21 U.S.C. §7201 . 1 At the
conclusion of the defendants' joint trial, the jury returned guilty
verdicts against each of the defendants on both counts. The court
sentenced each of the defendents to two years of imprisonment, suspended
their sentences, placed each one of them on probation, and fined them
$20,000 individually. The defendants appealed. On appeal, Chu 2 contends: 1)
that the evidence was insufficient to prove him guilty of willful tax
evasion; 2) that the trial court erred in admitting certain statements
made by the defendants to IRS agents; and 3) that he was denied a fair
trial by the suggestion in the government's closing argument that the
defendants engaged in uncharged criminal conduct.
II.
In
reviewing
Chu
's claims regarding the sufficiency of the evidence supporting his
conviction, we must determine "whether, after reviewing the
evidence in the light most favorable to the government, any
rational trier of fact could have found the essential elements of the
crime beyond a reasonable doubt." Jackson v. Virginia, 443
U.S.
307, 319 (1979) (emphasis in original); United States v. Welsh,
721 F.2d 1142, 1145 (7th Cir. 1983);
United States
v. Moya, 721 F.2d 606, 610 (7th Cir. 1983), cert. denied,
104 S.Ct. 1312 (1984). In the case before us, the government prosecuted
the defendants employing the net worth method of proving willful tax
evasion.
"In
a typical net worth prosecution, the Government, having concluded that
the taxpayer's records are inadequate as a basis for determining income
tax liability, attempts to establish an 'opening net worth' or total net
value of the taxpayer's assets at the beginning of a given year. It then
proves increases in the taxpayer's net worth for each succeeding year
during the period under examination and calculates the difference
between the adjusted net values of the taxpayer's assets at the
beginning and end of each of the years involved. The taxpayer's
nondeductable expenditures, including living expenses, are added to
these increases, and if the resulting figure for any year is
substantially greater than the taxable income reported by the taxpayer
for that year, the government claims the excess represents unreported
taxable income."
Holland
v.
United States
, 348
U.S.
121, 125 (1954).
A.
Opening Net Worth.
"[A]n 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
, 348
U.S.
at 132.
Chu
asserts that the government "totally failed to prove a reasonably
certain opening net worth" in two respects. Initially,
Chu
states that there was no evidence introduced to establish that the
assets listed in the government's summary for
December 31, 1976
were a complete listing of all of the defendants' assets. According to
Chu
, the only evidence regarding opening net worth presented by the
government was the testimony of the government's summary witness, IRS
Agent
Rob
in Zeldin. 3
Chu
contends that Zeldin's testimony revealed that the government's opening
net worth statement did not include all of the assets in their
(defendants') possession on
December 31, 1976
:
"Q.
Now, Mr. Zeldin, you have a figure for Series E savings bonds listed
here on your assets computation. Isn't it, in fact, true there are more
Series E savings bonds than you listed here? . . . Isn't true that they
had considerably more savings bonds than [$43,875]?
A.
Based upon what is in evidence that is the amount that they have [sic].
Q.
Yes, but don't you for a fact show they had more savings bonds than
that?
A.
There are indications that they have [sic]."
On
the basis of this testimony,
Chu
suggests the government has failed in its burden of establishing the
taxpayer's opening net worth.
Chu
relies on Merritt v. United States [64-1
USTC ¶9226 ], 327 F.2d 820 (5th Cir. 1964), where the court
held that "the failure to include in the opening net worth all
assets known by the government to have been held by the taxpayer during
the period in question was error."
Id.
at 823. In Merritt, the government's summary witness testified as
follows:
"Q.
. . . As a matter of fact don't you know that as a matter of fact this
taxpayer owned assets and had assets that you didn't even take into
account in this case? . . .
A.
He has some other assets, yes, sir.
Q.
And this doesn't include all those assets does it?
A.
No sir. . . . I know there are other assets of the taxpayer."
327
F.2d at 821. In addition, the taxpayer in Merritt testified and
confirmed the agent's testimony regarding the existence of other assets.
327 F.2d at 823. In the case at bar, the summary witness,
Rob
in Zeldin, testified that "there are indications that they
have [more savings bonds]." Thus, Zeldin, unlike the summary
witness in Merritt, was not certain of the fact that the
defendants had additional assets which were not included in the
government's summary. The record fails to disclose any evidence as to
what the "indications" of other assets were. The defendants
did introduce evidence of certain stock splits, which had the effect of
increasing their opening net worth, and the government's summary witness
considered the additional $759 from the stock splits and revised and
increased the amount of the defendants' opening net worth. From our
examination of the record, we have been unable to discover any evidence
to substantiate the defendants' inference that they possessed any
additional savings bonds that were not included in the government's
summary of assets. In contrast with Merritt, where there was
clear corroborative evidence of additional assets not included in the
defendant's opening net worth, in the case at bar the record contains
only unsubstantiated inferences of additional assets.
Second,
Chu
argues that the government failed to establish the defendants' opening
cash on hand with reasonable certainty. According to
Chu
, the government failed to advise the defendants of the net worth
prosecution, and thus the defendants did not have notice of the need to
disclose a full itemization of their assets. Further, Chu argues that
the government knew of the defendants' tendency to keep cash on hand
because of the $21,000 seized from the cottage at the Logansport State
Hospital and the government was well aware of the fact that Chu's
statement that he never had a practice of keeping "much cash on
hand" except at the time of the DEA seizure was inaccurate.
Chu
submits that the government accepted the defendants' low estimate of
cash on hand without corroborating the amount of cash on hand on
December 31, 1976
, and without clarifying the taxpayers' confusion regarding the term
"cash on hand." With respect to his "confusion",
Chu
makes much of the fact that he is an immigrant, "speaking a
language wholly unrelated to English," and consequently did not
understand the term "cash on hand." The government
convincingly established to the contrary that "cash on hand"
was adequately explained to Chu, that he understood the term, and that
the government did not rely only on Chu's own statements, but also
established the defendants' habit of putting money to work rather than
allowing cash to sit idle without earning interest.
"Cash
on hand in a net worth calculation is only one of several and varied
financial assets and is of no greater significance, aside from its
liquidity, than other assets." United States v. Goldstein [82-2 USTC ¶9507 ],
685 F.2d 179, 181 (7th Cir. 1982). "While the source and existence
of cash-on-hand need not be proved with mathematical exactitude, the
amount must be established with reasonable certainty." United
States v. Terrell [85-1
USTC ¶9249 ], 754 F.2d 1139, 1146 (5th Cir.), cert.
denied, 105 S.Ct. 3505 (1985).
In
the case at bar, Agent Hinkle testified:
"I
explained to them by [cash on hand] I meant currency and coins they had
on their person or at any other location or being held by anyone for
them. And I expressly told them I was not referring to bank accounts.
[The defendants] then told me they never had a practice of accumulating
large sums of currency except for some money which had been obtained
from them by the [DEA]. Mr. Chu estimated that the most cash on hand
that he would have had at the end of the years 1975, 1976, 1977, 1978
was between $150 and $200. [Cheng] said the maximum amount that she
would have had . . . at the end of the same four years was between $200
and $300."
Agent
Hinkle, while reading from his investigative reports, recited his
perception of the defendants' answers to his questions regarding
"cash on hand":
"Mr.
Chu stated that his amount of cash on hand never substantially changed
and that he never accumulated any large amount. . . . Mrs. Chu stated
that her amount of cash on hand never substantially changed and that she
never accumulated any large amount except for the money seized by the
[DEA]. . . . Mr. Chu stated that they have a safety deposit box at the
National Bank in
Logansport
. Mrs. Chu stated that only stocks, deeds, and other documents have been
kept in that safety deposit box. Both Mr. and Mrs. Chu stated that
currency had never been kept in that safety deposit box. . . . Both Mr.
and Mrs. Chu stated that during the year 1975-1978 currency was not kept
any place other than on his/her person."
The
testimony at trial further revealed that Chu and Cheng had been
practicing medicine in the United States since 1948, some thirty years
at the time of the IRS investigation, and their medical practice
demanded that they be able to consult, confer with, and understand their
patients, in particular those patients who had mental or emotional
problems. The defendants' son testified that English was the primary
language spoken in their home and Agent Hinkle testified that the
defendants conversed with him in English and failed to express any
difficulty in understanding his questions and their replies to his
questions gave no indication of any problem. The defendants' presence in
the United States for thirty years at the time of the investigation, the
requirement of their medical practice that they be able to understand
and communicate effectively with their patients, the use of English in
their home, and their conversations with Agent Hinkle in English
demonstrate that the defendants could clearly understand and communicate
in the English language. In addition,
Chu
and Cheng had significant investments in stocks and bonds, jewelry,
foreign investments, real estate, and in a medical partnership. The
extent and variety of the defendants' investments combined with their
obvious understanding of the English language suggests that the
defendants had more than sufficient knowledge of both the English
language as well as of financial affairs so that they would not be
confused by the term "cash on hand." The defendants failed to
offer any evidence other than their own self-serving argument that they
had any difficulty conversing in or understanding the same English
language they had used for some 30 years. Thus, the record displays
ample evidence in support of the conclusion that when Hinkle asked the
defendants how much "cash on hand" they possessed, they knew
precisely what Hinkle was referring to.
United
States v. Meriwether
[71-1 USTC ¶9390 ],
440 F.2d 753 (5th Cir. 1971), cert. denied, 417 U.S. 948 (1974),
which Chu cites for the proposition that the defendants' admission
concerning cash on hand must be corroborated with independent evidence,
is contradicted by two later cases also from the Fifth Circuit. For
example, in United States v. Normile [79-1
USTC ¶9151 ], 587 F.2d 784 (5th Cir. 1979), the court
stated:
"With
respect to cash on hand in currency the government had no way of
determining this save by interrogating the taxpayer. He freely and
voluntarily told Agent Black that he kept no more than $100 in cash
because he did not feel safe having larger amounts around. It was not
necessary for the government to seek to corroborate the taxpayer's
statement; indeed the inherent secrecy of the cash horde makes it
impossible for any but the keeper to know even of its existence, let
alone the amount."
Id.
at 786. In United States v. Terrell [85-1
USTC ¶9249 ], 754 F.2d 1139 (5th Cir. 1985), the court
reaffirmed Normile, stating "The corroboration requirement
does not necessarily extend to admissions relating to cash on
hand."
Id.
at 1147.
In
spite of the fact that the government was not required to corroborate
with independent evidence the defendants' admission regarding the amount
of cash on hand during the given period, it established the same with a
presentation of evidence of the defendants' investment program. The
record reflects that the defendants were very knowledgeable in the field
of investments, with Agent Schroer testifying that the defendants had a
pattern of investing in banks, stocks and bonds, jewelry, real estate,
and a medical partnership, convincingly establishing that the defendants
knew when, where, and how to invest to their own benefit rather than
allow cash to sit idle. See United States v. Scott, 660 F.2d 1145
[81-2 USTC ¶9663 ],
1160 (7th Cir. 1981), cert. denied, 455 U.S. 907 (1982) (From the
evidence of the defendant's pattern of investing, the court concluded,
"it is obvious that Scott seldom let such funds remain idle,
without earning any interest."). The defendants acknowledged the
one known accumulation of cash, the $21,000 seized by the DEA, and
explained it as being money received from a loan and the sale of a house
in mainland
China
. Testimony revealed that the reason the defendants were still in
possession of the cash was that Chu and Cheng could not agree on what to
do with the cash:
Chu
wanted to apply the $21,000 to reduce their outstanding mortgate, while
Cheng wanted to invest in gold. Other than this $21,000, the record is
silent of any evidence of any significant cash on hand on December 31,
1976 or at any time during 1977 or 1978 that was not included in the
government's opening net worth calculation. Thus, the defendants'
statements that they had a maximum of $500.00 cash on hand on December
31, 1976 and that they "never had a practice of accumulating large
sums of currency," except for the $21,000.00 seized by the DEA,
together with the evidence of the defendants' pattern of investing
available money, when viewed in a light most favorable to the
government, provides sufficient evidence for a reasonable trier of fact
to conclude that the government did establish the defendants' opening
"cash on hand" with reasonable certainty.