Bank Records and Net Worth Increases
4 Page1
7203: Willful
Failure to File Return, Supply Information, or Pay Tax: Evidence: Bank
Records and Net Worth Increases
Part 4
[55-1
USTC ¶9473]Emmitt R. Warring, Appellant v.
United States of America
, Appellee
(CA-4),
In the United States Court of Appeals for the Fourth Circuit, No. 6930,
222 F2d 906,
May 23, 19
55
Appeal from the United States District Court for the District of
Maryland, at Baltimore.
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]
Tax evasion: Criminal prosecution under 1939 Code Sec. 145(b): Cash
disbursements and net worth methods: Sufficiency of proofs.--The
conviction to defeat and evade taxes a professional gambler, on the
charge of unlawfully attempting to defeat and evade taxes for 1947 in
violation of 1939 Code Sec. 145(b), was upheld where the Government
utilized the cash disbursements method and the net worth method of
ascertaining his true taxable income for that year. The taxpayer had
contended that the net worth statement and the expenditures statement,
introduced by the Government, were inadmissible in evidence on the
grounds that they were inaccurate, replete with errors, uncorroborated
and unsupported by any substantial evidence, and that the Government
failed to follow obvious leads furnished by taxpayer. The books and
records of taxpayer were deemed to be practically worthless for the
purpose of verifying his return.
G.
C. A. Anderson (Charles E. Ford and Anderson, Barnes & Coe, on
brief), for appellant. George Cochran Doub, United States Attorney
(James H. Langrall, Assistant United States Attorney, on brief), for
appellee.
Before
PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.
DOBIE,
Circuit Judge:
Emmitt
R. Warring, an unmarried resident of Washington, D. C., was indicted in
the United States District Court for the District of Maryland for
federal income tax evasion in violation of Title 26, U. S. C. A. Section
145(b). The indictment charged that Warring unlawfully attempted to
defeat and evade income taxes for the year 1947 by filing with the
Maryland Collector of Internal Revenue a false and fraudulent return
stating his net income was $29,559.96, and the amount of tax was
$12,005.31, whereas he knew his net income was actually $147,967.12 upon
which he owed a tax of $104,087.45. A jury returned a verdict of guilty
and the Court imposed a sentence of three years' imprisonment and a fine
of $10,000 and costs; Warring has duly appealed to us.
[Methods
of Proof]
Since
the books exhibited by Warring to representatives of the Treasury
Department were deemed worthless for the determination of taxable
income, the Government utilized the cash disbursements method and the
net worth method of ascertaining ahd taxpayer's true taxable income for
1947. Under both the cash disbursements method and the net worth method
of proof, Warring's true income was shown to have been $163,000 for the
year 1947.
Warring
did not take the witness stand. The testimony of defense witnesses was
largely limited to showing that Warring had on deposit at the Arlington
Trust Company, Arlington, Virginia, as of July, 1946, $284.40; as of
January, 1947, $285.82; and as of July, 1947, $287.25; that a building
association made a loan on
January 16, 19
39, to Warring in the amount of $10,500; and that Warring had a balance
in a building association account at the end of 1946 of $1.23 and at the
end of 1947, $1.25. Also, that a member of the bar then representing
Warring saw in 1939 "a great deal of money" in a safe of
Warring's sister at her home on Massachusetts Avenue in Washington. The
amount of this money was not established. The effect of the defense
testimony, so the Government contends, was to increase, rather than
decrease, Warring's unreported income for the year 1947.
The
painstaking and able charge to the jury made by Judge Chesnut was deemed
so fair to Warring by his counsel that they assert no error upon this
appeal with respect to the charge.
Warring
was a professional gambler engaged in the so-called "numbers"
business, in which the betting, usually in small amounts, and the
pay-off, are on a cash basis. The business requires considerable
organization, including a "writer," a "runner," a
"controller" and a "backer." Warring was a
"backer," who receives the money bet and makes the pay-off,
through intermediaries, to the winners.
The
chief attack by Warring's counsel seems to be that the net worth
statement and the expenditures statement, introduced by the Government,
were inadmissible in evidence on the grounds that these statements were
inaccurate, replete with errors, uncorroborated and unsupported by any
substantial evidence, and that the Government failed to follow obvious
leads, furnished by Warring, which would have clearly shown how faulty
were these statements. We think there is no merit in these contentions.
[Sources
of Income]
Warring's
income tax return for 1947 described in his income as a single item,
bearing the somewhat cryptic designation "money won gambling."
No income was reported as dividends from securities, interest from
bonds, mortgages or loans, or rents. The return failed to disclose that
Warring had a business or occupation, nor did it include any business
deductions, such as expenses or losses. The return was prepared by
Burdine, a Deputy Collector of Internal Revenue for the District of
Maryland. Warring showed no books to Burdine, who merely took the
figures furnished to him by Warring, included them in the return and
figured the amount of the tax accordingly.
Although
taxpayers are required to keep records sufficiently adequate to show
true income in order that the Treasury Department might be able to
verify tax returns, the books of Warring consisted of "little black
books," which were deemed practically worthless for the purpose of
verifying his return. The pencil figures in these notebooks were limited
to a date, a number and one figure purporting to represent Warring's net
income or net loss on that day. The notebooks did not disclose the gross
receipts of Warring on any day, or the amount of any losses paid out, or
from what the receipts were derived, or to whom the alleged loss
payments were made. The "little black books" were admitted in
evidence over the Government's objection on the ground that there was no
authenticating defense testimony explaining how these books were kept,
who kept them, or that they showed or even purported to show Warring's
true income for the year 1947. We examined these books on the bench.
The
testimony of both Revenue Agent Ford and Special Agent Kennedy that
these books were worthless for the purpose of ascertaining Warring's
correct income was not controverted. Agent Ford testified that a backer,
such as Warring, normally would have a slip from a so-called K book.
This slip would show a nickname or symbol identifying the person betting
with him, the amount bet and the number bet. From such slips, it seems
evident, the Government could have verified any number which Warring
claimed had hit and on which the bettor had been paid. No K books were
introduced in evidence. There was no defense testimony that any K book
slips, which Warring presumably kept, had been destroyed or were
otherwise unavailable. The meagre figures in the little black book for
the year 1947 purported to confirm the income reported in Warring's tax
return.
Warring
did not utilize normal business methods of handling his affairs. His
business receipts were received in cash. He did not use a checking
account at any bank until
September 10, 19
47, when he made a deposit of $12,000 in cash and checked out $11,750 on
September 12, 19
47, to pay for the so-called Belfiori property. On
September 26, 19
47, he deposited the sum of $25,000 in this account, but on the same day
withdrew the sum of $24,500 to pay for the so-called Williams property.
With the exception of these two deposits and two withdrawals in
September, 1947, Warring never used a checking account in the year 1947
or in any prior year. He paid his Federal income taxes in cash. He
purchased a Cadillac car in 1947 for the sum of $3,500 for which he must
have paid cash. He bought real estate and paid for that in cash, i. e.,
the Shapero property (3933-35 Massachusetts Avenue, N. W.) in 1937, cash
$15,119.35; cash deposit on Williams property in 1947 $2,500; cash
purchase of David property in 1947, $15,090.39; and cash deposit of $500
in 1947 on purchase of the Belfiori property. Since he had no checking
account, his living expenses must have been paid in cash.
Warring's
method of handling the receipts from his business was for him to go to
the Pennsylvania Avenue Branch of the Hamilton National Bank two or
three times a week with a canvas bag containing coins and currency in
small denominations. He took the bag to a teller's window, but, instead
of depositing its contents, he converted the coins and currency into
bills of large denominations. Warring then carried these large bills
away from the bank, which made no record of the currency exchanges.
The
currency and coins of a business would normally have been deposited in a
taxpayer's bank account and drawn against by checks. The fact that
Warring did not deposit them but instead converted them into bills of
large denominations could certainly have been properly considered by the
jury as a highly suspicious circumstance.
[Agents'
Investigations]
On
July 2, 19
48, Revenue Agent Ford, to whom Warring's tax returns had been referred
for examination, went to Warring's home to obtain information with
respect to his income for the years 1946 and 1947 and was shown the
"little black books." Ford told Warring that these books were
inadequate and inquired whether he had any other books or records.
Warring replied that he did not.
Agent
Ford then requested permission to inventory Warring's safe deposit box.
Warring stated that he would have to talk to his lawyer first. After
making a telephone call, he stated that he would open the box.
Agent
Ford and Agent William C. Albrecht inventoried Warring's safe deposit
box at the Hamilton National Bank on the same date in the presence of
Warring, and found cash totaling $250,000 in currency. The currency
consisted of two hundred and forty $1,000 bills and one $10,000 bill.
There were no papers or documents of any kind in the safe deposit
box--nothing except the hoard of cash.
In
the course of a conference held on
July 15, 19
48, and in the presence of Warring's attorney, Agent Ford asked Warring
whether any part of the $250,000 found in cash in the safe deposit box
pertained to his winnings during the year 1948. Warring said
"Yes" and produced his black book for the year 1948, which
purported to show that Warring's earnings from
January 1, 19
48, to and including
May 28, 19
48, were $110,754. This was at the rate of approximately $22,000 a
month.
May 28, 19
48, was the last day on which Warring had entered his safe deposit box
prior to its inventory on
July 2, 19
48, so no cash could have been deposited or taken from the box between
May 28, 19
48, and
July 2, 19
48, and the contents of the box must have remained the same during that
period. Warring also told the Revenue Agent on that occasion in the
presence of his counsel that in February, 1948, he had played $20 on a
number with a competitor and had won a result of that bet, $17,000.
The
Government, unable to contradict these statements of Warring, accepted
them in connection with its cash disbursements method and net worth
method of proof and assumed that $127,754 of the total cash of $250,000
had been deposited by Warring in his safe deposit box between
January 1, 19
48, and
May 28, 19
48, as he asserted, leaving a sum of $122,246 as the amount obtained by
Warring prior to the year 1948. The exclusion of $127,754 of this cash
in determining Warring's true income for 1947 was, of course, most
favorable to him.
In
August, 1948, Agent Kennedy was assigned to the case. Kennedy had
participated in the prior 1936 and 1937 investigations of Warring. He
first reviewed the old file. For and Kennedy then proceeded to check for
other bank accounts and safe deposit boxes of Warring at ten or twelve
banks in the District of Columbia and in the nearby counties of Maryland
and Virginia. They located a trifling savings account at the Hamilton
National Bank and the checking account opened in the fall of 1947
referred to above. They ran the land records for the District of
Columbia and nearby counties of Maryland and Virginia to ascertain
whether Warring had purchased or sold any real estate, mortgages or
trusts. They found no other bank accounts or safe deposit boxes and no
sales of real estate or mortgages between
December 31, 19
36, and
December 31, 19
46. They also attempted to ascertain from records of the District of
Columbia whether Warring had received any bequests or legacies over a
20-year period, and found none. They checked the records of Internal
Revenue and found no gift tax returns filed by Warring as donor or
donee.
On
October 21, 19
48, Kennedy and Special Agent McIntyre inventoried Warring's safe
deposit box at the Hamilton National Bank and found in the box at that
time a cash hoard aggregating $165,000.
The
sum of $5,000 attributed to Warring as living expenses for 1947 seems
moderate. In September, 1947, Warring opened for the first time a
checking account and deposited in it $37,000 in cash. In 1947 he made
additional cash disbursements aggregating $41,647.92, or total cash
disbursed $78,647.92, as compared with disbursements in prior years
after 1937 of a maximum of $15,000 or $16,000. It was in the fall of
1947 that he purchased the David farm property in Fairfax County,
Virginia, for $15,090.39; the Williams farm property in Fairfax County,
Virginia, for $27,000, and the Belfiori property, Washington, D. C., for
$12,250. Yet Warring had never made a purchase of real estate during the
9-year period from 1938 to 1947. Likewise, it was in 1947 that Warring
purchased his Cadillac sedan for $3,500. It would thus seem on this
evidence that Warring's expenditures in 1947 far exceeded his reported
income.
[Proper
Basis of Proof]
Counsel
for Warring contends that the net worth statement prepared by the
Government was improperly admitted in evidence since the opening figure
for cash on hand was based on an extra-judicial statement made by
Warring in 1936 and was not corroborated. The Supreme Court in the
recent case of Smith v. United States, 348 U. S. 147 [54-2 USTC
¶9715], held that such a statement, if it is made after the fact to an
investigating agent and is material to the Government's case, may not be
used if it is uncorroborated. See Warszower v. United States, 312
U. S. 342. We think there was sufficient corroboration in this case.
The
statement was made to two agents investigating Warring's civil liability
for taxes. On
December 31, 19
36, these two agents in the presence of Warring and his accountant
opened Warring's safe deposit box and found therein $25,590.26. Warring
stated that this was all the cash on hand he had at that time. The
Government made this statement the basis of their opening cash figure in
Warring's net-worth and cash-disbursements statement for 1947. They used
this 1936 figure as total cash on hand as of that date and, then, using
the cash disbursement method over the intervening years, computed
Warring's cash on hand as of
December 31, 19
46, from that figure.
Smith
v. United States, supra, is
similar to the instant case in that there the taxpayer had made a net
worth statement, and the Government used in its opening net worth
figures, information from the taxpayer's net-worth statement plus his
extra-judicial admissions. In that case, as in this case, the admissions
were used to establish part of the opening net worth figures.
The
Court pointed out, 348 U. S. 158 and 159:
"But
substantiating the opening net worth is just one method of corroborating
these extra-judicial statements. Petitioner's admissions may also be
corroborated by an entirely different line of proof--by independent
evidence concerning petitioner's conduct during the prosecution period,
which tends to establish the crime of tax evasion without resort to the
net worth computations.
*
* *
"These
substantial expenditures, savings and investments might not, of
themselves, suffice to support a conviction of tax evasion
without evidence of a starting point indicating a lack of funds from
which these payments might have come. But this conduct does corroborate
the net worth statement by tending to show that the petitioner
was understating his income during the prosecution years. We cannot say
that there is so little relation between expenditures and income that
the Government's proof of expenditures far in excess of reported income,
coupled with proof of a business producing unrecorded amounts of income,
fails to corroborate the charge that petitioner's earnings during the
prosecution years exceeded his declared income." (Italics ours.)
This
is the type of corroboration that we have here. Even though there may be
little direct corroboration of the opening cash figure, other evidence
tends to support the understatement of income shown by the statements as
a whole. The record shows substantial purchases of real and personal
property during 1947 that could not have been made on the income
reported by Warring. This is the very type of corroboration which the
Supreme Court relied upon in the Smith case, 348 U. S. at pages
158, 159.
As
the Court pointed out in the Smith case, corroboration is needed
only to allay suspicion of the veracity of the admission; it need not be
proof of the offense beyond a reasonable doubt, but need only tend to
support the admitted fact. The record here shows such corroboration.
Since
we find corroboration, we need not discuss the problem of whether or not
the admission was made after the fact. It appears that the admission was
made during investigation of civil liability in 1936 but used in a
criminal prosecution in 1947. Whether the "fact" was the
existence of possible civil liability in 1936 we need not answer.
[Prima
Facie Case]
In
the light of what has been set out, and other evidence in the voluminous
record, we think the Government fairly made out a prima facie case for
the jury, which resolved against Warring, by its verdict of guilty, many
of the controverted issues of fact. There is ample evidence to sustain
Agent Kennedy's testimony that the statements he prepared for the year
1947 reflected Warring's income "as clearly and as accurately as I
could possibly ascertain it. I believe it is reasonably close."
See, in this connection, United States v. Calderon, 348 U. S. 160
[54-2 USTC ¶9712]; Smith v. United States, 348 U. S. 147 [54-2
USTC ¶9715]; Holland v. United States, 348 U. S. 121 [54-2 USTC
¶9714]; United States v. Johnson, 319 U. S. 503 [43-1 USTC ¶9470];
Warszower v. United States, 312 U. S. 342; Bateman v. United
States, 212 Fed. (2d) 61 [54-1 USTC ¶9341]; Graves v. United
States, 191 Fed. (2d) 579 [51-2 USTC ¶9431]; Bell v. United
States, 185 Fed. (2d) 302 [50-2 USTC ¶9499]; Jelaza v. United
States, 179 Fed. (2d) 202 [50-1 USTC ¶9149]; United States v.
Fenwick, 177 Fed. (2d) 488 [49-2 USTC ¶9448]; Bryan v. United
States, 175 Fed. (2d) 223 [49-1 USTC ¶9322].
There
is no merit in the contention that the Government failed to prove that
the money in the safe-deposit box was all owned by Emmitt Warring, as
against the claim that part of the money might well have been owned by
his brother, Charles Warring. True it is that the safe-deposit box was
rented in the names of both Emmitt Warring and Charles Warring. The
District Judge, on this item, properly instructed the jury:
"There
is no affirmative evidence in the case that Charles R. Warring did enter
the safe deposit box, although it is argued by counsel for the defendant
that it is possible he may have at some time accompanied Emmitt Warring,
when the latter visited the box and signed slips for authorized entry.
"There
is no evidence in the case that Charles R. Warring ever personally owned
any property, or was engaged in any gainful pursuit. He was not called
as a witness in this case either by the Government or by the defendant.
"If
the jury believes from the evidence in the case, much of which has
heretofore been referred to with respect to the safe deposit box and its
contents, and the occasion for and the circumstances concerning it, and
the conversations between the revenue agent leading to the inventory of
the box on
July 2, 19
48, and finding therein $250,000 in cash, and the subsequent
conversation between the revenue agent and the defendant in the presence
of the defendant's personal counsel, the jury may possibly find that the
whole constitutes a prima facie case by the Government that the
defendant was in possession and control of the $250,000 in the box at
the time of its inventory."
The
same observations might be made as to the contention that Kyle and
Sweeney, alleged partners of Warring in the "numbers" game,
had an interest in this money. Even if Kyle and Sweeney were Warring's
partners in this nefarious racket, the jury were amply warranted in
concluding that all the money was owned by Warring. It is a fair
assumption that if these partners could have given testimony indicating
that they had any interest in the income attributed to Warring, Warring
would have called them as witnesses.
We
find no reversible error in the alleged improper conduct of the District
Attorney in his closing argument to the jury. When the District Attorney
once possibly went too far, his remark was quickly withdrawn upon the
caution of Judge Chesnut, who carefully warned the jury:
"It
is not disputed in this case that the defendant was engaged in gambling
for many years prior to 1947 with the exception of the years 1939 to
1942, in which years he filed no income tax returns, and was not engaged
in any business not being at liberty at that time; but you are
instructed that assuming that the defendant's type of gambling was
illegal, he is not indicted for that offense and in considering your
verdict in this case you should not entertain any prejudice against him
for that reason because the case related only to alleged evasion of
federal income tax payments."
It
seems, too, that defense counsel, at the time, took no exception to
these remarks of the District Attorney. See, United States v.
Secony-Vacuum Oil Co., 310 U. S. 150, 239; Crumpton v. United
States, 138 U. S. 361, 364;
Rob
inson v. United States, 144 Fed. (2d) 392; DiCarlo v. United
States, 6 Fed. (2d) 364, 368.
[Obvious Leads Disregarded]
Nor
is there merit in the contention that the Government utterly failed to
follow obvious leads which would have disclosed facts favorable to
Warring. Judge Chesnut did express some concern that the Government
failed to call Charles Warring as a witness. The District Attorney
properly replied that this was not necessary since he was confident that
a strong, prima facie case had been made against Emmitt Warring. It
seems a fair presumption that Charles Warring, a brother of Emmitt
Warring, would not have been favorably disposed to the Government. If he
was available, and could have helped Emmitt Warring, he could have been
called as a witness by Emmitt Warring's counsel.
Counsel
for Warring argued energetically to the jury many alleged errors or
discrepancies in the Government's cash disbursements and net worth
statements. These contentions involved, for the most part, questions of
fact for the jury, and the jury resolved those factual issues against
Warring by its verdict of guilty.
No
controverted issue of fact was withdrawn from the jury and Judge Chesnut
made it crystal clear that the jury was not required to accept the
testimony and calculations of the Government agents, and he carefully
included in his elaborate charge the precautions suggested by the
Supreme Court in the very recent cases of United States v. Calderon,
348 U. S. 160 [54-2 USTC ¶9712]; Smith v. United States, 348 U.
S. 147 [54-2 USTC ¶9715]; United States v. Friedberg, 348 U. S.
142 [54-2 USTC ¶9713]; Holland v. United States, 348 U. S. 121
[54-2 USTC ¶9714]. See, also, United States v. Johnson, 319 U.
S. 503, 517-519 [43-1 USTC ¶9470]; Guzik v. United States, 54
Fed. (2d) 618 [1931 CCH ¶9681].
We
think Warring received an eminently fair trial under the guidance of a
capable, experienced and dispassionate judge. The judgment of the
District Court is, accordingly, affirmed.
Affirmed.
[58-2
USTC ¶9951]United States of America v. George Kleinman, Defendant
U.
S. District Court, East. Dist. N. Y., Criminal No. 43999, 167 FSupp 870,
11/17/58
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]
Crimes: Income tax evasion: Net worth method: Proof of ownership of
assets: Proof that increase earned in taxable year.--Taxpayer was
tried on the charge of willfully evading income tax by filing a false
and fraudulent return for the taxable year 1949. Proof that he had three
times as much income as he actually reported was based on the net worth
expenditure method. The Government attempted to establish opening net
worth by showing that savings accounts opened in the name of taxpayer's
father in 1944 through 1949 were with funds belonging to the taxpayer
because these funds were then transferred to the taxpayer and his family
during these years; that the funds could not have belonged to the father
because of his very meager earnings record. The Government used the same
method to establish closing net worth and claimed that the difference
between the opening and closing figures plus estimated living expenses
was the taxable income for 1949. Taxpayer's explanation of the origin of
the funds was contradictory and provided the basis for its own
refutation. However, the Court held that it was not enough for the
Government to establish the improbability of the source of income
because "improbability" does not establish falsity which must
be established by clear and convincing evidence. Thus, the Government
failed to prove that the assets belonged to taxpayer. But assuming that
the funds did belong to taxpayer, the Government still failed to prove
that the deposits in 1949 represented current income. These two elements
of proof are essential to support a conviction of the crime charged. The
Government having failed to establish these elements, the Court held
that taxpayer was not guilty of the charge.
Cornelius
W. Wickersham, Jr., United States Attorney (Morton Schlossberg,
Assistant United States Attorney, of counsel), for plaintiff. Morris K.
Siegal (Vincent J. Crowe, of counsel), for defendant.
ZAVATT,
District Judge:
The
indictment is in four counts, three of which (Counts One, Three and
Four) were dismissed upon the motion of the Government made during the
trial to the Court without a jury. The trial proceeded as to Count Two
which charges that in 1950 the defendant filed a false and fraudulent
joint income tax return on behalf of himself and his wife for the
calendar year 1949, wherein it was stated that their net income for that
calendar year was $6,141.69, and that the amount of tax due thereon was
$621.12, whereas the defendant knew that their net income for that
calendar year was $20,225.46, upon which there was owing to the United
States an income tax of $3,955.78. The indictment charged the defendant
with willfully attempting to evade and defeat a large part of the income
tax owing by him and his wife in 1949, in violation of Section 145(b) of
the Internal Revenue Code of 1939.
[Net
Worth Method of Proof]
On
January 10, 19
56, the Government furnished a bill of particulars stating that its
proof on its direct case would be based upon the "net worth
expenditure theory", and that it would show the defendant's
approximate net worth at the beginning of 1949 to be $56,718.33, and at
the end of 1949 to be $72,044.71. Upon the trial the Government sought
to prove that the opening net worth of the defendant was $56,718.33, as
stated in the bill of particulars, (The defendant offered to stipulate
to the accuracy of this figure. Inasmuch as it was to the defendant's
advantage to have the Government's opening net worth figure as high as
possible, the offer to stipulate is not viewed as an admission of the
items of which this figure was comprised.), and that his taxable income
for 1949 was the difference between this figure and an asserted closing
net worth of $71,044.71, plus the amount of $6,899.08, which the
Government contended and the defendant did not deny to be the
defendant's estimated living expenses in 1949. In other words, the
Government sought to prove that the defendant's taxable net income in
1949 was $21,225.46, and that after reporting income of $6,824.10, the
defendant had an unreported income for 1949 of $14,401.36.
[Pitfalls
of Net Worth Method]
The
net worth method of proof has been described in Holland v. United
States, 348 U. S. 121, 75 S. Ct. 127 (1954) [54-2 USTC ¶9714], as
being employed in a typical prosecution in the following manner:
".
. . the Government, having concluded that the taxpayer's records are
inadequate as a basis for determining income tax liability, attempts to
establish an 'opening net worth' or total net value of the taxpayer's
assets at the beginning of a given year. It then proves increases in the
taxpayer's net worth for each succeeding year during the period under
examination and calculates the difference between the adjusted net
values of the taxpayer's assets at the beginning and end of each of the
years involved. The taxpayer's nondeductible expenditures, including
living expenses, are added to these increases, and if the resulting
figure for any year is substantially greater than the taxable income
reported by the taxpayer for that year, the Government claims the excess
represents unreported taxable income. In addition, it asks the jury to
infer willfulness from this understatement, when taken in connection
with direct evidence of 'conduct, the likely effect of which would be to
mislead or to conceal.'" 348 U. S. 121, 125, 75 S. Ct. 127, 130
[54-2 USTC ¶9714].
It
was pointed out in Holland that the pitfalls which are basically
inherent in such a method of proof of tax evasion require the exercise
of great care and restrain in its use. Despite the permissible use of
the method it must be remembered that "the Government must still
prove every element of the offense beyond a reasonable doubt though not
to a mathematical certainty. The settled standards of the criminal law
are applicable to net worth cases just as to prosecutions for other
crimes." 348 U. S. 121, 138, 75 S. Ct. 127, 137 [54-2 USTC ¶9714].
[Supportive Evidence]
It
is firmly established that increases in net worth, standing alone,
cannot be assumed to be attributable to taxable income; that there must
be evidence to support such an inference. In Holland it was held
that it is sufficient for this purpose for the Government to prove a
likely source of taxable income from which a jury could reasonably find
the net worth increases sprang. In United States v. Massei, 355
U. S. 595, 78 S. Ct. 495 (1958) [58-1 USTC ¶9326], it was stated that
there would be no necessity for proof of a likely source in a case in
which the Government could negative "all possible sources of
nontaxable income." And in United States v. Adonis, 221,
Fed. (2d) 717 (3rd Cir. 1955) [55-1 USTC ¶9310], it was held that the
defendant's deliberate falsification as to alleged nontaxable sources of
receipts to explain large expenditures or accumulations was a legally
acceptable circumstantial showing that the funds acquired during the
taxable year were derived from taxable income. Furthermore, as pointed
out in Holland:
"The
statute defines the offense here involved by individual years. While the
Government may be able to prove with reasonable accuracy an increase in
net worth over a period of years, it often has great difficulty in
relating that income sufficiently to any specific prosecution year.
While a steadily increasing net worth may justify an inference of
additional earnings, unless that increase can be reasonably allocated to
the appropriate year the taxpayer may be convicted on counts of which he
is innocent." 348 U. S. 121, 129, 75 S. Ct. 127, 132 [54-2 USTC ¶9714].
That
is, there must be a basis for concluding that unreported income was
realized in the year for which the prosecution was based and was not
acquired in any earlier year, United States v. Adonis, supra,
721, for, as stated in United States v. O'Malley, 131 Fed. Supp.
409, 414 (E. D. Pa. 1955) [55-1 USTC ¶9492]:
"The
defendant may well have over a period of years substantially increased
his net worth and on a basis which may have involved understatement of
taxable income. However, in a criminal prosecution for income tax
evasion in a particular calendar year, the Government is not permitted
to allocate summarily such unaccounted-for accretions to a particular
year without meeting the requirements laid down in the Holland
and Adonis decisions. . . ."
In
the instant case the Government proved that the defendant's net worth as
of
December 31, 19
43 was $2,180.72. It claimed that its evidence established annual
increases in his net worth thereafter as follows:
1944 .... $ 5,292.67
1945 .... 8,583.57
1946 .... 14,538.25
1947 .... 12,551.17
1948 .... 13,571.95
1949 .... 14,326.38
The Government did not show the defendant's living expenses in the years
1944 through 1948. It was shown, however, that the Government's claimed
net worth increases in those years exceeded the defendant's reported
income for those years in the following months:
1944 .... $1,943.64
1945 .... 4,495.74
1946 .... 9,890.57
1947 .... 7,448.59
1948 .... 7,489.15
As stated previously, the Government claimed that the defendant's living
expenses in 1949 plus his claimed net worth increase in that year
exceeded his reported income for that year by $14,401.36.
[Savings Accounts in Father's Name]
The
defendant's father, Bernard Kleinman, died in 1954. Beginning in 1944,
and throughout the years from 1944 through 1949, savings bank accounts
were opened in the father's name. Approximately $55,000 was deposited in
these accounts during these years, and from these accounts approximately
$50,000. was subsequently, and within the years mentioned, transferred
to the defendant or to members of his family. This was accomplished in
part by the transfer of cash by check from Bernard Kleinman to the
defendant and members of his family, and in part by the transfer of
assets from Bernard Kleinman to the defendant, which assets had been
purchased with funds deposited in these savings bank accounts. It was
the Government's theory that all of the deposits made in the name of the
defendant's father were, in effect, additions to the defendant's net
worth, i. e., that the funds belonged to the defendant from the dates of
deposit, and were merely held in the father's name. It was the
Government's foremost burden, therefore, to establish this element of
its case by affirmative proof. The inference that an increase in net
worth may be equated with unreported income in a given year must rest at
least upon a clear and convincing showing that the items claimed in the
Government's net worth computation are in fact the assets of the
defendant. All of the cases which have come to the Court's attention
support this conclusion.
[Degree
of Proof]
In
Adonis, upon which the Government relies, the Government proved
that in 1948 the defendant expended amounts aggregating some $44,000.
For the purchase of a parcel of land and the building and furnishing of
a home thereon. The Court of Appeals for the Third Circuit noted that
"The evidence of the payment of this much money in 1948 for land,
building and furnishings was clear, precise and uncontroverted."
221 Fed. (2d) 717, 718 [55-1 USTC ¶9310]. In United States v. Ford,
237 Fed. (2d) 57 (2nd Cir. 1956) [56-2 USTC ¶9823], vacated upon
suggestion of mootness, Ford v. United States, 355 U. S. 38, 78
S. Ct. 114 (1957) [57-2 USTC ¶10,011], the Court was of the view that
the specific items reflected in the Government's net worth chart
"were based on undisputedly sufficient evidence." 237 Fed.
(2d) 57, 59 [56-2 USTC ¶9823]. And it is later noted in the same
opinion that the figures noted on the Government's net worth chart
"were independently supported and were never challenged." Ibid.,
63.
In
the instant case the defendant was employed as an agent of the Internal
Revenue Service from 1935 until 1951. It should be stated preliminarily
that this is a case involving no specific items of allegedly unreported
income. It appears that the defendant filed returns for and paid income
taxes upon his salary as an agent and upon capital gains, interest and
dividends earned by him during these years.
[Possible
Source of Income]
With
regard to a possible source of income to support an inference that the
defendant acquired, legally or otherwise, the funds which found their
way into the Bernard Kleinman accounts, there has been an insinuation
pervading this proceeding that such funds are the fruits of the
defendant's graft-taking. To begin with, it has never been suggested
that the defendant had any other lawful occupation or business,
disclosed or undisclosed, from which such funds could have derived. The
failure of the Government's investigation to uncover any such occupation
or business excludes a hypothesis that the defendant's alleged affluence
may be attributable thereto. On the other hand, a theory that the
defendant accepted bribes appears to be that upon which the Government
conducted its investigation. The Special Agent who investigated this
case testified that he examined taxpayer's returns which had been
audited by the defendant; that he spoke to some three hundred of such
taxpayers, and investigated taxpayers who prepared returns audited by
the defendant. No one was brought forward to testify that the defendant
had taken a bribe or had offered to take a bribe. The Government in the
late hours of the case candidly advised that it does not ask the Court
to assume that the unreported income of the defendant was received
through bribes. The net result is that there is a void as to a showing
of a possible source of unreported income, and the persuasive value
which such a showing might have is replaced only by speculation of no
probative value whatever.
There
is no evidence that the defendant ever physicall deposited funds in the
Bernard Kleinman accounts. He denies that he ever did so. The only
conclusion which can be reached upon this record is that the physical
acts of making deposits were performed by Bernard Kleinman himself.
Furthermore, there is not a scintilla of evidence to establish that the
defendant turned over moneys to his father, which were deposited by the
latter in accounts in his name. Nor is there anything to show
affirmatively that the two acted in collusion to disguise the
defendant's income as his father's savings for the purpose of evading
income taxes or for any other purpose.
[Current
Unreported Income]
Two
facts are worthy of mention at this po
