7203 - Bank Records and Net Worth Increases 4 Page 1

Home | Services | FAQ | Site Map | Contact Us

Articles by Alvin Brown
Tax Preparation
Offer In Compromise
State Offers in Compromise
Levy
IRS Tax Liens
IRS Tax Liens - continued
IRS Tax Liens - continued 2
Levy - continued
IRS Audits
Audit Techniques Guide
Congressional Contacts
Criminal Investigation
D.O.J Criminal Tax Manual
Tax Litigation
Penalty
Installment Agreements
Statute of Limitations
Frivolous Tax Argument
Interest Abatement
IRS Misconduct
IRS Abuses
Tax Fraud
Fraud Statutes
Bankruptcy
Tax Reform Legislation
Tax Shelters
Tax Court
Trust Fund Penalty
Legislation
Innocent Spouse Relief
Important Links


Fraud Statutes 

Additional Information:

 

7203 - Accountant-Client Privilege
7203 - Accrual Basis
7203 - Admissibility 1 p1
7203 - Admissibility 1 p2
7203 - Admissibility 1 p3
7203 - Admissibility 1 p4
7203 - Admissibility 1 p5
7203 - Admissibility 1 p6
7203 - Admissibility 2 p1
7203 - Admissibility 2 p2
7203 - Admissibility 2 p3
7203 - Admissibility 2 p4
7203 - Admissibility 2 p5
7203 - Admissibility 3 p1
7203 - Admissibility 3 p2
7203 - Admissibility 3 p3
7203 - Admissibility 3 p4
7203 - Admissibility 3 p5
7203 - Admissibility 4 p1
7203 - Admissibility 4 p2
7203 - Admissions p1
7203 - Admissions p2
7203 - Advice of Counsel p1
7203 - Advice of Counsel p2
7203 - Amendment
7203 - Appeal Right to
7203 - Appeal Timeliness
7203 - Appeal Waiver
7203 - Appeal without merit
7203 - Arrest
7203 - Fraudulent Return
7203 - Defeat & Evade Income Taxes p1
7203 - Defeat & Evade Income Taxes p2
7203 - Defeat & Evade Income Taxes p3
7203 - Defeat &  Evade Income Taxes p4
7203 - Attorney Disqualified
7203 - Attorney's Testimony p1
7203 - Attorney's Testimony p2
7203 - Attorney's Testimony p3
7203 - Attorney's Testimony p4
7203 - Bail
7203 - Bank Records &  Net Worth Increases 1 p1
7203 - Bank Records &  Net Worth Increases 1 p2
7203 - Bank Records &  Net Worth Increases 1 p3
7203 - Bank Records &  Net Worth Increases 1 p4
7203 - Bank Records &  Net Worth Increases 1 p5
7203 - Bank Records &  Net Worth Increases 1 p6
7203 - Bank Records &  Net Worth Increases 2 p1
7203 - Bank Records &  Net Worth Increases 2 p2
7203 - Bank Records &  Net Worth Increases 2 p3
7203 - Bank Records &  Net Worth Increases 2 p4
7203 - Bank Records &  Net Worth Increases 2 p5
7203 - Bank Records &  Net Worth Increases 3 p1
7203 - Bank Records &  Net Worth Increases 3 p2
7203 - Bank Records &  Net Worth Increases 3 p3
7203 - Bank Records &  Net Worth Increases 3 p4
7203 - Bank Records &  Net Worth Increases 3 p5
7203 - Bank Records &  Net Worth Increases 4 p1
7203 - Bank Records &  Net Worth Increases 4 p2
7203 - Bank Records &  Net Worth Increases 4 p3
7203 - Bank Records &  Net Worth Increases 4 p4
7203 - Bank Records &  Net Worth Increases 4 p5
7203 - Bank Records &  Net Worth Increases 5 p1
7203 - Bank Records & Net Worth Increases 5 p2
7203 - Bank Records & Net Worth Increases 5 p3
7203 - Bank Records & Net Worth Increases 5 p4
7203 - Bank Records & Net Worth Increases 5 p5
7203 - Base Sentence p1
7203 - Base Sentence p2
7203 - Base Sentence p3
7203 - Base Sentence p4
I7203 - Bill of Particluar Conspiracy
7203 - Bill of Particulars
7203 - Books and Records
7203 - Burden of going forward with evidence
7203 - Burden of Proof
7203 - Carryback Offset
7203 - Changing Plea
7203 - Character witness p1
7203 - Character witness p2
7203 - Circumstanial Evidence p1
7203 - Circumstanial Evidence p2
7203 - Circumstanial Evidence p3
7203 - Circumstanial Evidence p4
7203 - Collateral Estoppel
7203 - Collection
7203 - Commitment by U.S. Commissioner
7203 - Communication to Jury
7203 - Compromise
7203 - Consolidation
7203 - Conspiracy p1
7203 - Conspiracy p2
7203 - Conspiracy 1 p1
7203 - Conspiracy 1 p2
7203 - Conspiracy 1 p3
7203 - Conspiracy 1 p4
7203 - Conspiracy 1 p5
7203 - Conspiracy 1 p6
7203 - Conspiracy 1 p7
7203 - Conspiracy 1 p8
7203 - Conspiracy 2 p1
7203 - Conspiracy 2 p2
7203 - Conspiracy 2 p3
7203 - Constitutional Grounds 1 p1
7203 - Constitutional Grounds 1 p2
7203 - Constitutional Grounds 1 p3
7203 - Constitutional Grounds 1 p4
7203 - Constitutional Grounds 1 p5
7203 - Constitutional Grounds 2 p1
7203 - Constitutional Grounds 2 p2
7203 - Constitutional Grounds 2 p3
7203 - Constitutional Grounds 2 p4
7203 - Constitutional Grounds 2 p5
7203 - Constitutional Grounds 3 p1
7203 - Constitutional Grounds 3 p2
7203 - Constitutional Grounds 3 p3
7203 - Constitutional Grounds 3 p4
7203 - Constitutional Grounds 3 p5
7203 - Constitutional Grounds 4 p1
7203 - Constitutional Grounds 4 p2
7203 - Constitutional Grounds 4 p3
7203 - Constitutional Grounds 4 p4
7203 - Constitutional Grounds 5 p1
7203 - Constitutional Grounds 5 p2
7203 - Constitutional Grounds 5 p3
7203 - Constitutional Grounds 5 p4
7203 - Constitutional Grounds 5 p5
7203 - Constitutional Grounds 6
7203 - Contempt Finding Ag. Defendant's Counsel
7203 - Continuance p1
7203 - Continuance p2
7203 - Continuance p3
7203 - Conviction Required
7203 - Copies of Records p1
7203 - Copies of Records p2
7203 - Corporation Officer
7203 - Costs
7203 - Credit for Time Served
7203 - Criminal Contempt
7203 - Cross-Examination PART 1 p1
7203 - Cross-Examination PART 1 p2
7203 - Cross-Examination PART 1 p3
7203 - Cross-Examination PART 1 p4
7203 - Cross-Examination PART 1 p5
7203 - Cross-Examination PART 2
7203 - DefendantHaving Facts Available p1
7203 - DefendantHaving Facts Available p2
7203 - DefendantHaving Facts Available p3
7203 - Degree of Proof p1
7203 - Degree of Proof p2
7203 - Depositions
7203 - Different Statute Cited
7203 - Discovery, Scope Of
7203 - Documentary Evidence in Jury Room
7203 - Double Jeopardy 1 p1
7203 - Double Jeopardy 1 p2
7203 - Double Jeopardy 1 p3
7203 - Double Jeopardy 1 p4
7203 - Double Jeopardy 1 p5
7203 - Double Jeopardy 2 p1
7203 - Double Jeopardy 2 p2
7203 - Double Jeopardy 2 p3
7203 - Double Jeopardy 2 p4
7203 - Enhanced Sentence Sophisticated Means p1
7203 - Enhanced Sentence Sophisticated Means p2
7203 - Enhanced Sentence p1
7203 - Enhanced Sentence p2
7203 - Entrapment
7203 - Erroneous calculation of tax
7203 - Exclusion of Oral Testimony
7203 - Exercise Privilege-Exclusion from Courtroom
7203 - Expert Witness p1
7203 - Expert Witness p2
7203 - Expert Witness p3
7203 - Expert Witness p4
7203 - Extenuating Circumstances
7203 - Fact Finding p1
7203 - Fact Finding p2
7203 - Fact Finding p3
7203 - Fact Finding p4
7203 - Fact Finding p5
7203 - Failure of IRS to File Return
7203 - Failure to Assess Tax
7203 - Failure to Prosecute p1
7203 - Failure to Prosecute p2
7203 - Failure to Prosecute p3
7203 - Failure to Prosecute p4
7203 - Failure to Prosecute p5
7203 - Failure to Report Income 1 p1
7203 - Failure to Report Income 1 p2
7203 - Failure to Report Income 1 p3
7203 - Failure to Report Income 1 p4
7203 - Failure to Report Income 1 p5
7203 - Failure to Report Income 1 p6
7203 - Failure to Report Income 2 p1
7203 - Failure to Report Income 2 p2
7203 - Failure to Supply Information
7203 - False Return
7203 - Fictitious names
7203 - Fraud Case Procedures p1
7203 - Fraud Case Procedures p2
7203 - Fraud Case Procedures p3
7203 - Fraud Case Procedures p4
7203 - General Exception
7203 - Good Faith p1
7203 - Good Faith p2
7203 - Good Faith p3
7203 - Good Faith p4
7203 - Government Agent Prosecuting Claim
7203 - Grand Jury 1 p1
7203 - Grand Jury 1 p2
7203 - Grand Jury 1 p3
7203 - Grand Jury 1 p4
7203 - Grand Jury 1 p5
7203 - Grand Jury 2 p1
7203 - Grand Jury 2 p2
7203 - Hearsay Evidence p1
7203 - Hearsay Evidence p2
7203 - Hearsay Evidence p3
7203 - Hearsay Evidence p4
7203 - Hearsay Evidence p5
7203 - Hostility of the Court p1
7203 - Hostility of the Court p2
7203 - Hostility of the Court p3
7203 - Hypnosis
7203 - Identification
7203 - Ignorance of Law
7203 - Immunity p1
7203 - Immunity p2
7203 - Immunity p3
7203 - Impeachment p1
7203 - Impeachment p2
7203 - Improper Comment PART 1 p1
7203 - Improper Comment PART 1 p2
7203 - Improper Comment PART 1 p3
7203 - Improper Comment PART 1 p4
7203 - Improper Comment PART 1 p5
7203 - Improper Comment PART 2 p1
7203 - Improper Comment PART 2 p2
7203 - Improper Comment PART 2 p3
7203 - Improper Comment PART 2 p4
7203 - Improper Comment PART 2 p5
7203 - Improper Comment PART 3
7203 - Improper Question
7203 - Incrimination 1 p1
7203 - Incrimination 1 p2
7203 - Incrimination 1 p3
7203 - Incrimination 1 p4
7203 - Incrimination 1 p5
7203 - Incrimination 2 p1
7203 - Incrimination 2 p2
7203 - Incrimination 2 p3
7203 - Incrimination 2 p4
7203 - Incrimination 2 p5
7203 - Incriminaton Before Grand Jury p1
7203 - Incriminaton Before Grand Jury p2
7203 - Instructions to Jury 1 p1
7203 - Instructions to Jury 1 p2
7203 - Instructions to Jury 1 p3
7203 - Instructions to Jury 1 p4
7203 - Instructions to Jury 1 p5
7203 - Instructions to Jury 2 p1
7203 - Instructions to Jury 2 p2
7203 - Instructions to Jury 2 p3
7203 - Instructions to Jury 2 p4
7203 - Instructions to Jury 2 p5
7203 - Instructions to Jury 3 p1
7203 - Instructions to Jury 3 p2
7203 - Instructions to Jury 3 p3
7203 - Instructions to Jury 3 p4
7203 - Instructions to Jury 3 p5
7203 - Instructions to Jury 4 p1
7203 - Instructions to Jury 4 p2
7203 - Instructions to Jury 4 p3
7203 - Instructions to Jury 4 p4
7203 - Instructions to Jury 4 p5
7203 - Instructions to Jury 5 p1
7203 - Instructions to Jury 5 p2
7203 - Instructions to Jury 5 p3
7203 - Instructions to Jury 5 p4
7203 - Instructions to Jury 5 p5
7203 - Instructions to Jury 6 p1
7203 - Instructions to Jury 6 p2
7203 - Instructions to Jury 6 p3
7203 - Instructions to Jury 6 p4
7203 - Instructions to Jury 6 p5
7203 - Instructions to Jury 7 p1
7203 - Instructions to Jury 7 p2
7203 - Instructions to Jury 7 p3
7203 - Instructions to Jury 7 p4
7203 - Instructions to Jury 7 p5
7205 Convictions p1
7205 Convictions p2
7205 Convictions p3
7205 Convictions p4
7205 Convictions p5
7205 Double Jeopardy
7205 Exemption Certificates
7205 Hostility of the Court
7205 Indictment
7205 Information
7205 Intent to Deceive Lacking
7205 Right to Counsel
7205 Trial, Timeliness
7205 Variance
7205 Venue
7205 Willfulness
7206 False Returns 1 p1
7206 False Returns 1 p2
7206 False Returns 1 p3
7206 False Returns 1 p4
7206 False Returns 1 p5
7206 False Returns 2 p1
7206 False Returns 2 p2
7206 False Returns 2 p3
7206 False Returns 2 p4
7206 False Returns 2 p5
7206 False Returns 3 p1
7206 False Returns 3 p2
7206 False Returns 3 p3
7206 False Returns 3 p4
7206 Basis for Allegation of Fraud
7206 Concealment of Assets p1
7206 Concealment of Assets p2
7206 Conspiracy 1 p1
7206 Conspiracy 1 p2
7206 Conspiracy 1 p3
7206 Conspiracy 1 p4
7206 Conspiracy 2 p1
7206 Conspiracy 2 p2
7206 Constitutionality p1
7206 Constitutionality p2
7206 Constitutionality p3
7206 Costs
7206 Disclosure of Returns
7206 Estoppel p1
7206 Estoppel p2
7206 Estoppel p3
7206 Evidence 1 p1
7206 Evidence 1 p2
7206 Evidence 1 p3
7206 Evidence 1 p4
7206 Evidence 1 p5
7206 Evidence 2 p1
7206 Evidence 2 p2
7206 Evidence 2 p3
7206 Evidence 2 p4
7206 Evidence 2 p5
7206 Evidence 3 p1
7206 Evidence 3 p2
7206 Evidence 3 p3
7206 Evidence 3 p4
7206 Evidence 3 p5
7206 Evidence 4 p1
7206 Evidence 4 p2
7206 Evidence 4 p3
7206 False Claims Against U.S.
7206 False Documents p1
7206 False Documents p2
7206 False Statements in Return 1 p1
7206 False Statements in Return 1 p2
7206 False Statements in Return 1 p3
7206 False Statements in Return 1 p4
7206 False Statements in Return 1 p5
7206 False Statements in Return 2 p1
7206 False Statements in Return 2 p2
7206 False Statements in Return 2 p3
7206 False Statements in Return 2 p4
7206 False Statements in Return 3 p1
7206 False Statements in Return 3 p2
7206 False Statements in Return 3 p3
7206 False Statements in Return 3 p4
7206 False Statements in Return 3 p5
7206 False Statements in Return 4 p1
7206 False Statements in Return 4 p2
7206 False Statements in Return 4 p3
7206 False Statements in Return 4 p4
7206 False Statements in Return 4 p5
7206 False Statements in Return 5 p1
7206 False Statements in Return 5 p2
7206 False Statements in Return 5 p3
7206 False Statements in Return 5 p4
7206 False Statements to IRS Agents p1
7206 False Statements to IRS Agents p2
7206 False Statements to IRS Agents p3
7206 Forgery
7206 Grand Jury
7206 Guilty Plea p1
7206 Guilty Plea p2
7206 Immunity
7206 Indictment 1 p1
7206 Indictment 1 p2
7206 Indictment 1 p3
7206 Indictment 1 p4
7206 Indictment 1 p5
7206 Indictment 2 p1
7206 Indictment 2 p2
7206 Instructions to Jury 1 p1
7206 Instructions to Jury 1 p2
7206 Instructions to Jury 1 p3
7206 Instructions to Jury 1 p4
7206 Instructions to Jury 1 p5
7206 Instructions to Jury 2 p1
7206 Instructions to Jury 2 p2
7206 Instructions to Jury 2 p3
7206 Instructions to Jury 2 p4
7206 Instructions to Jury 2 p5
7206 Instructions to Jury 3 p1
7206 Instructions to Jury 3 p2
7206 Instructions to Jury 3 p3
7206 Instructions to Jury 3 p4
7206 Instructions to Jury 3 p5
7206 Jury Verdict Disregarded
7206 Jury p1
7206 Jury p2
7206 Jury p3
7206 Lesser Included Offense p1
7206 Lesser Included Offense p2
7206 Motion For Continuance
7206 Motion to Sever
7206 Motion to Transfer
7206 Motion to Vacate Sentence
7206 Net Worth Statement
7206 Offer in Compromise
7206 Perjury
7206 False or Fraudulent Returns p1
7206 False or Fraudulent Returns p2
7206 False or Fraudulent Returns p3
7206 False or Fraudulent Returns p4
7206 False or Fraudulent Returns p5
7206 Prior Convictions
7206 Prior Law
7206 Probation
7206 Prosecutor's Comment p1
7206 Prosecutor's Comment p2
7206 Restitution
7206 Right to Counsel p1
7206 Right to Counsel p2
7206 Sentence p1
7206 Sentence p2
7206 Sentence p3
7206 Sentence p4
7206 Sentencing Guidelines 1 p1
7206 Sentencing Guidelines 1 p2
7206 Sentencing Guidelines 1 p3
7206 Sentencing Guidelines 1 p4
7206 Sentencing Guidelines 1 p5
7206 Sentencing Guidelines 2 p1
7206 Sentencing Guidelines 2 p2
7206 Sentencing Guidelines 2 p3
7206 Statute of Limitations p1
7206 Statute of Limitations p2
7206 Venue
7206 Willfulness Defined p1
7206 Willfulness Defined p2
7206 Willfulness Defined p3
7206 Willfulness Defined p4
7207 Conviction
7207 Defenses
7207 Motion to Dismiss
7207 Sentencing
7207 Willfully Defined
7210 Willful Failure to Obey Summons
7212 Assault
7212 Bribery
7212 Constiutionality
7212 Indictment
7212 Interference p1
7212 Interference p2
7212 Interference p3
7212 Interference p4
7212 Jury Instructions
7212 Rescue of Seized, Levied Property p1
7212 Rescue of Seized, Levied Property p2
7212 Sentence p1
7212 Sentence p2
7212 Statute of Limitations
7212 Suppresion of Evidence
7215 Constitutionality
7215 Conviction
7215 Corporation
7215 Defenses
7215 Evidence
7215 Intent
7215 Speedy Trial
7216 Consent
7216 Preparer Defined
7216 Scope of Statute
7217 IRS Employees

 

Bank Records and Net Worth Increases 4 Page1

Back ] Next ]

   

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 point. From the middle of 1946 until the latter part of 1947 the defendant was assigned in connection with the performance of his duties to posts in Phoenix, Arizona and Los Angeles, California. During this period approximately forth-eight deposits totalling some $13,700. were made in the Bernard Kleinman accounts in Brooklyn and in New York City. Assuming, arguendo, that these were deposits of the defendant's funds in the continued pursuit of a conspiracy in his behalf, in the absence of evidence indicating the actual state of facts, it is as reasonable to conclude that this was the systematic disposition by the father of a hoard accrued by the defendant in some prior period, as it is to conclude that the funds were the current unreported earnings of the defendant transmitted to his father in some unknown manner. If such was the case, it may have been the case in the year 1949, with which we are primarily concerned, and in such event it would be clearly erroneous to assimilate deposits in the Bernard Kleinman accounts with current unreported income of the defendant. Secondly, it appears that in 1947 Bernard Kleinman received $990. as the proceeds of a twenty year endowment policy and deposited this amount in one of the aforementioned accounts in his name. This was included in the balance of said account which was assigned to the defendant's net worth for that year as calculated by the Government. I cannot perceive how this can be counted as an asset of the defendant at that time. But it is perhaps more significant that the deposit of these proceeds clearly indicates that if the Government's theory is correct, the funds of Bernard Kleinman were combined with those of the defendant in the bank accounts in question, but to an unknown extent. Bernard Kleinman was gainfully employed from at least 1944 through 1949. He lived frugally with his unmarried daughter who had her own income. He had no dependents during this period and for an undetermined period prior thereto. If he deposited $990. of his funds in these accounts it is fair to infer that he may have deposited other savings therein. And if this is so, the Government's charts are an unreliable calculation of even the defendant's approximate net worth throughout the period here involved.

[Government's Case]

Essentially, the Government has attempted to establish these funds as the assets of the defendant in the following manner: (1) It has shown that within a short time after the deposits were made the funds or their proceeds were transferred to the ostensible control of the defendant and members of his family and that the defendant did, in fact, exercise dominion over the funds and use them for his benefit. (2) It attempted to show the defendant's allegedly willful fabrication as to the source of the funds coming into his possession. Upon the trial the parties were asked to brief the question of whether, if the Court disbelieved the defendant's testimony as to the source of the funds in his possession such disbelief would amount to proof of the contrary, inasmuch as the contrary was part of what the Government had to prove in its affirmative case. The Government appears to rely only upon United States v. Adonis, supra, to support the affirmative of this proposition. There was a "clear and impressive showing" that the defendant wilfully misrepresented the source from which he obtained large amounts of money. In Ford it was noted that such proof of fabrication was itself some affirmative evidence of guilt, the Court of Appeals stating:

". . . Of course, standing alone, such evidence would not be sufficient to support a conviction. But when coupled with extensive affirmative proof of tax evasion under the net worth method, it may suffice. . . ." 237 Fed. (2d) 57, 63 fn. 10 [56-2 USTC ¶9823].

In the instant case there was evidence that for years before the Bernard Kleinman accounts were opened, Bernard Kleinman maintained a safe-deposit box, and that in 1941, at the time Bernard Kleinman suffered a heart attack, he was carrying approximately $1,000 upon his person. The exact number of years in which he was employed is not known, but it would appear that he worked all his life until a few years before his death in 1954 at age 77. Bernard Kleinman's income tax returns show that he earned between two and three thousand dollars a year from 1945 through 1949. The defendant testified that during the 1940's his father earned about $50 per week, and that prior to that period he earned more. The defendant's mother worked for fifteen years prior to her death in 1929, and earned about $35 per week which she gave to her husband. The defendant and his two sisters started working at a young age and turned money over to their father. It appears that one of the sisters lived with Bernard Kleinman until his death and was employed throughout this period. Before 1930 the family lived in an apartment on the Lower East Side of New York at a rental of fifteen to twenty dollars per month. After the death of the defendant's mother the family moved to a Brooklyn apartment, where Bernard Kleinman lived until his death, at a maximum rental of $35 per month. The defendant testified to the frugal manner in which his father lived, and there was no evidence brought forward by the Government of improvident or excessive expenditures by Bernard Kleinman.

[Father's Income]

Government investigators were aware of what was later the defendant's testimony upon the trial, and in August, 1952, interviewed and took a statement from Bernard Kleinman. The substance of this interview was not brought out upon the trial (principally because of the Government's objection thereto), but it does appear that Bernard Kleinman told the investigator that he had lived frugally and had been able to accumulate the money in his bank accounts, which were his savings over a long period of years. Investigation was then made as to Bernard Kleinman's last employment, and as to the rent which he had paid in previous years. The Government did not, upon the trial, establish Bernard Kleinman's income for years other than 1945 through 1949, nor did it show his living expenses at any time. There was no direct testimony by the Special Agent as to the rent which Bernard Kleinman was paying, but on cross-examination it was shown that the information which he received did not necessarily contradict the defendant's claims in this regard. The Government attempted to introduce Social Security records pertaining to Bernard Kleinman, but these were not properly authenticated and were excluded upon the defendant's objection.

[Taxpayer's Proof]

On the other side of the coin, it was shown that in a statement filed in 1935 the defendant indicated his father as a dependent. In a letter to his draft board in 1943 the defendant claimed that his salary was used partially to support his father. The defendant's testimony was that in 1944 he learned that his father had a large hoard of money which his father told the defendant he had seved; that the defendant advised him to put it into the bank a few hundred dollars at a time to avoid investigation by the Treasury Department; that in 1946 he told his father that inheritance and gift taxes could be avoided if his father were to turn over, in his lifetime, about $12,000 per year to the defendant and the three members of his family; that the transfers to the defendant were in pursuance of this scheme; and that there was an understanding between the defendant and his father that the defendant was to stand in the place of his father and hold the money for the benefit of himself and his two sisters, as it was needed. This testimony is, at best, unlikely. It is difficult to believe that Bernard Kleinman, on his income as we know it, could have accumulated savings of $55,000. It is important to note, however, that the Government's evidence merely established the improbability of this fact. It does not establish its falsity. It is, further, difficult to believe that if Bernard Kleinman were the type of individual who was willing and able to accumulate $55,000, he would have disposed of it in the manner claimed herein. Further, it was testified that none of the funds went to the defendant's sisters during their father's lifetime. It was shown that the funds in the hands of the defendant were dealt with by him as his own, and in a manner wholly inconsistent with any obligations of trust.

It thus appears that the defendant's explanation of the origin of the funds and the reason for and manner of their transfer to his control is unlikely, contradictory, and provides the basis for its own refutation. Cf., United States v. Nunan, 236 Fed. (2d) 576 (2nd Cir., 1956) [56-2 USTC ¶9876], certiorari denied 353 U. S. 912, 77 S. Ct. 661 (1957). But this is far from the "clear, precise and uncontroverted" proof of expenditures found in Adnis, or the "undisputedly sufficient," "independently supported," and "never challenged" evidence of the Ford case. Other cases in which assets held in the names of third persons were attributed to the defendant indicate the quantum of proof which is requisite in this situation.

In O'Connor v. United States, 203 Fed. (2d) 301 (4th Cir. 1953) [53-1 USTC ¶9324]:

"There was, however, evidence tending to show that the property which appeared on the land records in the names of husband and wife had actually been purchased with the defendant's funds. The persons who negotiated the sales testified that they dealt with the defendant alone, and the settlement sheets made no reference to the wife but indicated that the properties were bought for the account of the defendant. Furthermore the defendant's income returns for the years 1944 to 1946 showed that his wife had no income during this period; and when he took the stand as a witness he made no claim that his wife had contributed to the purchase price. She herself was not produced as a witness. . . ." 203 Fed. (2d) 301, 303 [53-1 USTC ¶9324].

[Uncontradicted Evidence Required]

In Smith v. United States, 210 Fed. (2d) 496 (1st Cir. 1954) [54-1 USTC ¶9259], affirmed 348 U. S. 147, 75 S. Ct. 194 (1954) [54-2 USTC ¶9715] there was charged to the defendant's net worth an annuity, real estate, stocks and bonds, and bank accounts held in the name of his wife, and jointly in the name of his wife and her brother. The latter testified that he had no interest in any of these accounts. In that case a written statement was introduced in evidence showing the defendant's net worth at the beginning and end of the years in issue. This had been prepared by the defendant's accountant and had been signed by the defendant. There was evidence of verbal admissions of ownership of assets by the defendant. The Court found ample corroborating evidence of the written and verbal statements of the defendant which "accurately fixed his net worth" at the beginning of the prosecution period "and revealed substantial increases in his net worth above what he reported as taxable income in his tax returns for the years in issue." 210 Fed. (2d) 496, 499 [54-1 USTC ¶9259].

In United States v. Costello, 221 Fed. (2d) 668 (2nd Cir. 1955) [55-1 USTC ¶9342], affirmed Costello v. United States, 350 U. S. 359, 76 S. Ct. 406 (1956) [56-1 USTC ¶9321], the defendant alleged error in permitting the jury to include his wife's expenditures in the prosecution years as part of his own. The Court of Appeals stated:

". . . As to his wife's income, the evidence justified a finding that the money had not come out of it, except in 1946 when she was credited with about $16,000 gross income, which she separately returned. In 1937 Costello had sworn that she had no income; in 1939 that, whatever money went into her bank account, he gave her; and in 1943 he told his lawyer that in 1941 she bought a motor car with his money, as well as 'all the living expenses.' In applying for insurance in 1940 she stated that she was supported by her husband. Furthermore, the prosecution traced many cheques received by him into her bank account and in 1943 two payments of Costello's estimated income tax were paid out of her account. From all this it was a permissible inference that in the four 'indictment years' she had no separate income beyond what was credited to her in 1946." 221 Fed. (2d) 668, 672 [55-1 USTC ¶9342].

The Court held that this evidence "standing uncontradicted as it did" was sufficient to support an inference that Mrs. Costello's purchases were made out of her husband's money. 221 Fed. (2d) 668, 674.

The Supreme Court has warned that the use of the net worth method requires the exercise of great care and restraint. Holland v. United States, supra. Where a conviction for tax evasion is sought by equating an increase in net worth with unreported taxable income, caution demands that proof of the defendant's alleged ownership of the assets included in the final net worth figure be made by clear and convincing evidence. The Court is aware of no case applying a less stringent standard. Here, while it must be said that the Court cannot give credence to the defendant's claims, the Court is not satisfied that the improbabilities inherent in the defendant's explanation which bar acceptance of his claims amount to clear and convincing evidence that the funds in question originated with the defendant, that is, that Bernard Kleinman merely held the accounts as the agent or proxy of his son.

[Question of Current Income]

Assuming, again arguendo, that all of the funds deposited in the Bernard Kleinman accounts belonged to the defendant, as the Government contends, there would remain the question of whether such deposits represented current income. In Holland it was shown that although the business of the hotel operated by the defendants apparently increased during the prosecution years, the reported profits fell to approximately one-quarter of the amount declared by the previous management in a comparable period; that the cash register tapes on which the books were based were destroyed by the defendants; and that the books did not reflect the receipt of money later withdrawn from the hotel's cash register for the personal living expenses of the defendants and for payments made for restaurant supplies. The Court found that there was ample evidence that not all the income from the hotel had been included in its books and records and that, in fact, the Government's claimed net worth increase for 1948 could have come entirely from the unreported income of the hotel and still the hotel's earnings for the year would have been only 73% of the sum reported by the previous owner for the comparable period in 1945. The necessity of showing that the unreported earnings occurred in the tax year which the charge specifies was specifically treated in Adonis, 221 Fed. (2d) 717, 721 [55-1 USTC ¶9310]:

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

In 1949 the sum of $9,000 was deposited into the bank accounts of Bernard Kleinman as follows: from January 3 to April 26, fifteen deposits of $300 each; on April 12 and April 26, deposits of $50 each; from May 9 to November 10, twenty-two deposits of $200 each. About half of this amount was transferred to the defendant and his wife and children in the same year. The full amount was included in the Government's calculation of the defendant's net worth. Assuming the full $9,000 to have been funds originally acquired by the defendant, there appears to be no basis upon which to conclude that the funds were earned at the time they were deposited in the Bernard Kleinman accounts. It would be as reasonable to conclude that the deposits represent the systematic concealment of unreported taxable income earned by the defendant in a prior period.

The same must be said of the remaining items comprising the excess of the defendant's net worth plus expenditures, as calculated by the Government, over reported income for the year 1949: a mink cape purchased in 1949 for $900; various household appliances purchased in that year for amounts totalling $2,161.12; and approximately $2,340 in living expenses which, when the defendant's other expenses are considered, could not have been paid for out of reported income. Assuming that these items represent taxable income of the defendant, the circumstances of the instant case are such that it cannot be said with any degree of reasonable certainty that this was income received by the defendant in the year 1949. As stated in United States v. O'Malley, supra, the requirements laid down in the Holland and Adonis decisions have not been met, and the Government is not permitted to allocate summarily these unaccounted-for accretions to the year 1949. In United States v. Ford, supra, there was "strong" evidence of "fabrication, misrepresentation, and concealment" which, together with other factors, produced "firm ground to infer the accuracy of the Government's opening net worth figure." Since the other figures on the Government's net worth chart "were independently supported and were never challenged . . . there was adequate support for a finding by the jury of unreported income during the indictment years from some source." It is enough to say that the evidence in the instant case has not moved the Court to this conclusion.

Here the defendant testified that he received cash from his father to pay for the cape, the appliances, and a portion of his living expenses. It is not clear from the record whether the defendant so advised the Government during the course of the investigation, nor whether inquiry was made of Bernard Kleinman during his lifetime as to the truth of these assertions. The Government's proof showed that it was both unlikely and improbable that the defendant's explanation was true. But this is short of the showing made in Adonis where "the Government by clear and convicing evidence established the complete falsity of the defendant's explanation of alleged sources of the money necessary to acquire the assets." United States v. O'Malley, supra, 414.

It is the Court's conclusion that the case against the defendant is not clear, convincing and inconsistent with a reasonable hypothesis of innocence and that a finding of guilt should not be based upon speculation and conjecture. Cf., United States v. Riganto, 121 Fed. Supp. 158 (E. D. Va. 1954) [54-2 USTC ¶9531]. In view of the foregoing the Court finds the defendant not guilty of Court Two of the indictment.

 

 

[82-2 USTC ¶9484]United States of America, Appellee v. Eugene Mastropieri, Herbert Pate and Carolyn Pate, Appellants

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket Nos. 81-1017, 81-1019, 685 F2d 776, 7/20/82

[Code Sec. 7201]

Criminal penalties: Tax evasion: Net worth: Source of income: Jury instructions: Admissibility.--In a tax evasion case, the IRS may satisfy any burden it might have by showing that, for each consecutive year in issue, expenditures vastly exceeded taxpayer's small opening balance for the first year, as determined by independent investigation, increased by any known nontaxable sources. Where the IRS is unable to develop a likely source of taxpayer's income, it has done enough when it investigates reasonable, possible sources of nontaxable income and explores whatever leads the taxpayers or others may proffer; it need not negative all possible sources of nontaxable income. Jury instructions which were, in part, improper did not harm taxpayer. Evidence of an attempt to suppress evidence was admissible.

Edward R. Korman, United States Attorney, Brooklyn, N. Y. 11201, James D. Harmon, Jr. and Thomas P. Puccio, Department of Justice, Brooklyn, N. Y., for appellee. William Sonenshine, New York, N. Y., for Eugene Mastropieri, William I. Aronwald, Bartles, Pykett & Aronwald, 925 Westchester Avenue, White Plains, N. Y. 10604, for Herbert and Carolyn Pate.

Before MOORE, FRIENDLY and OAKES, Circuit Judges.

FRIENDLY, Circuit Judge:

In this trial before Judge Mishler and a jury in the District Court for the Eastern District of New York, Herbert Pate, his wife Carolyn, and his attorney, Eugene Mastropieri, were convicted of a number of offenses growing out of the alleged filing of false income tax returns (or, in one instance, failure to file a return) by the Pates for the years 1971, 1972, 1973, 1974 and 1975. The trial was on three separate indictments, 78 Cr. 219, 79 Cr. 238 and 80 Cr. 174.

The first indictment was limited to charging the Pates with willfully and knowingly attempting to defraud the United States by filing an income tax return which substantially understated their income for 1971, in violation of 26 U. S. C. §7201 and 18 U. S. C. §2. The second indictment charged the Pates with willfully and knowingly attempting to evade income taxes by failing to file a return for 1972, in violation of 26 U. S. C. §7201 and 18 U. S. C. §2. The third indictment began with a count charging the three defendants with conspiring with each other and one Fiore B. Acovino 1 to defraud the United States in violation of 18 U. S. C. §371, by obstructing the lawful functions of the Internal Revenue Service (IRS) in the assessment and collection of revenue. Count Two charged that Herbert Pate had endeavored to obstruct the due and proper admin istration of the Internal revenue laws by causing Dennis Ilich to state falsely to IRS agents that he had given the Pates $10,000 in cash, in violation of 18 U. S. C. §§ 1505 and 2. Counts Three and Four charged Herbert Pate with suborning Dennis and Daisy Ilich, respectively, to give false testimony before a grand jury that was investigating the charges of tax evasion by the Pates, in violation of 18 U. S. C. §1622. Count Five charged the Pates with tax evasion for 1973 in the same manner as the first indictment had charged in respect of 1971 and additionally charged Mastropieri with aiding and abetting their attempt. Count Six charged that Herbert Pate had violated 26 U. S. C. §7206(1) by including in his 1973 income tax return the amount of $6,450 as income as a process server when he knew he had not received any such income. Counts Seven and Ten were the analogues of Count Five with respect to 1974 and 1975 income and Count Eight was an analogue of Count Six with respect to 1974 income. Count Nine charged that Mastropieri had violated 26 U. S. C. §7206(1) by claiming as a 1974 deduction the process server income reported by Herbert Pate for that year.

All three defendants were convicted on all counts in which they were named, except that Herbert Pate was acquitted of suborning the perjury of Dennis Ilich and Carolyn Pate was acquitted of tax evasion for 1972. Herbert Pate was sentenced to concurrent five year terms of imprisonment on the conspiracy and tax evasion counts to run concurrently with three year concurrent terms of imprisonment on the false return counts, all to run consecutively to five year concurrent terms of imprisonment on the obstruction and subornation counts. Mastropieri was sentenced to concurrent three year terms of imprisonment on each count on which he was convicted. Carolyn Pate was placed on probation for two years. The Pates and Mastropieri appeal on a multitude of grounds. We affirm.

I. The Facts

The Government's proof on the tax evasion counts was primarily that during the tax years 1971-75 the Pates had made investments in real estate, a corporation, an investment fund, and an insurance policy, and had made various other expenditures, including $7,723.25 for Herbert Pate's attendance at a North Carolina weight reducing clinic in 1974, of a size far beyond what could be accounted for by their resources on January 1, 1971 and the amounts they had reported as income plus non-taxable receipts such as loans, gifts or inheritances, less normal living expenses. 2

The predicate for this analysis was an effort to determine the Pates' financial position as of January 1, 1971. IRS Special Agent Conlisk canvassed 47 banks, 71 brokerage firms and 13 lending institutions in the vicinity of the Pates' residence. 3 In addition, Conlisk searched the local property records of Bronx, Nassau, Queens, Kings and Suffolk Counties "for the years during the investigation and prior to 1967" 4 and failed to disclose any real property purchased or sold or any mortgages given or received under the names of Herbert or Carolyn Pate, the last name Bidmead (Herbert's former surname) or Ilich (Carolyn's maiden name) other than the properties discussed below. He checked records of the Savings Bond division of the United States Treasury Department covering the period "1947 or 1952" through 1975 and found no bonds issued in any of the Pates' names. He checked records of the IRS to determine whether the Pates had been named as recipients on gift tax returns. He checked County Clerk records to determine whether the Pates had received any fudns from judgments or inheritances. He also interviewed unnamed friends and relatives of the Pates to determine whether they had loaned or given any money to the Pates, and received a generally negative response. A similar investigation was made with respect to Acovino except that the starting point was January 1, 1972.

From this analysis and his examination of the 32 separate bank accounts used by the Pates and Acovino, Conlisk determined that the Pates had no cash on hand as of January 1, 1971 ; that Acovino had $3,724.75 on hand as of January 1, 1972 ; that the Pates had received relatively small amounts of funds from nontaxable sources; but that the Pates had made expenditures in the tax years 1971-75 of over $292,730.70 5 as compared with reported income of $35,082.24 and Acovino had expended in the tax years 1972-74 over $338,624.45.

In establishing a January 1, 1971 starting point for the Pates, the Government relied not only on Agent Conlisk's investigation but also on an interview on July 13, 1970 , between Herbert Pate and a state probation officer, Sanford Eisler, in which Pate told Eisler that he had no financial assets except a small sum in his checking account. During this same interview, in filling out a questionnaire requiring him to "[l]ist all other properties such as bank accounts, life insurance, automobile, stocks, bonds, real property, etc., owned by you and your dependents", Pate responded "life insurance $10,000 myself and wife owned since 1968."

As heretofore noted, see not 2 supra, the Government's principal proof of expenditure was not of a gradual increase of net worth, see, e.g., Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 130 (1954), or of ordinary payments in excess of reported income, see e.g., United States v. Bianco [76-1 USTC ¶9351], 534 F. 2d 501 (2 Cir.) cert. denied, 429 U. S. 822 (1976), although some such payments were proved, but instead centered on four transactions, each involving considerable sums of money, in each of which the Pates had taken much trouble to conceal the fact or the extent of their participation. We shall discuss these in connection with the tax years in which they occurred.

1. 1971 and the purchase of 559 West Beech Street

Total 1971 expenditures of $44,972.04 for the Pates, as against reported income of $5,827.39, included life insurance premiums, rental of a summer house, the purchase of an automobile, and residence payments totalling $13,410.74. However, the major expenditure was $31,561.30 for the purchase of a house at 559 West Beech Street in Long Beach, Long Island. On July 10, 1971 , a contract to purchase the house was made by Mrs. Pate (using her maiden name, Carolyn Ilich) and her sister-in-law, Barbara Sacchitello. Barbara and her husband Peter lived in Port Washington Long Island, with their children. An attorney was given $4,500 to make the down payment. On July 23 and August 16 Barbara deposited $5,000 and $8,000 into her bank account. The $5,000 was cash, allegedly provided by her husband; the $8,000 was a check drawn on a savings account in the name of Carolyn Bidmead. On July 26 Barbara deposited in a second account $5,500 allegedly provided by her since-deceased father-in-law. At the closing on July 26 two checks on these accounts drawn to Peter Sacchitello in the amounts of $13,000 and $5,000 were used to pay part of the purchase price. Additional funds were supplied by two checks, in the amounts of $7,385 and $444, drawn on accounts of Carolyn Ilich.

There is no basis for doubting that the two last-mentioned checks and the $4,500 down payment came from the Pates. The checks were signed by Carolyn Ilich/Pate, and a receipt for the down payment bore the notation "deposit from Ilich". The case with respect to the two checks, totaling $18,000, signed by Peter Sacchitello is only a little less clearcut. The Government's proof began with the fact that the Sacchitellos were a couple of modest means; he worked for ConEd and his wife testified, "I [was] working, but not what you would call a job." Nonetheless, in the two months before the purchase of the house the Sacchitellos deposited $18,500 in various bank accounts; the Sacchitello checks for the house were later to come from these accounts. Of the $18,500 that the Sacchitellos deposited, $8,000, as we have already seen, was plainly Pate money. While the remaining $10,000 was deposited into the Sacchitello accounts in cash, and thus was less directly traced to the Pates, circumstantial evidence pointed to the Pates as the source. The Pates lived in the house at all times; the Sacchitellos never did. Likewise, the Pates paid all the expenses associated with the residence--mortgage, taxes, maintenance, and so forth--even though Peter Sacchitello, in accord with "the deal" he had made with the Pates, deducted the property taxes and mortgage interest on his income tax returns. When the house was sold in July 1979, the Pates received $30,000, although the Sacchitellos purportedly will receive the remainder in monthly payments. Even more telling was Peter Sacchitello's account of how he and his wife obtained the funds for the purchase of the West Beech Street house. He testified at trial that his father, a 62 year-old plasterer, gave him $18,000 in cash some time before the purchase, although he could not remember whether the money had been given to him all at once or in installments, nor where it had been handed over to him, nor what denominations the bills were. Despite his assertion that he had been given the money for investment purposes, he kept the money, "[i]n the closet, probably", for a considerable period before depositing the money in the bank. He could not recall in which closet he had stashed the money, but said it was "probably" wrapped in a paper bag. His memory was also remarkably weak with respect to how much of the $18,000 patrimony had gone towards the purchase of the West Beech Street House. In 1976, while represented by Mastropieri, Sacchitello told Agent Conlisk that $15,000 had been so furnished. When confronted by Conlisk with the $8,000 Carolyn Bidmead check, he asked Mastropieri, "How do I answer that?" Before the grand jury Sachitello repeated the $15,000 figure, while at trial he testified that only $10,000 had gone to buy the house.

From all this evidence a jury was surely entitled to infer that Sacchitello's account of the $18,000 was a fabrication induced by the Pates and Mastropieri, and further that the entire purchase price of the house, except for a $14,585 FLSA loan, had been provided by the Pates, although channelled through the Sacchitellos to disguise its true source.

2. 1972 and the investment in Sanzo International

In 1972 the Pates paid $3,174.65 in life insurance premiums to First Investors Life, $10,200 for an investment in First Investors Fund, $4,520.95 for an automobile, and $4,781.26 for residence expenses relating to 559 West Beech St., but reported no taxable income. An even more suspicious item was an investment of $20,000 in a company called Sanzo International Corporation.

Early in 1972 a Fort Lauderdale attorney, Merrill Bookstein, was retained by Joseph Fitch and Joseph Fortman to raise capital for the operation of a marble quarry in Italy. He was told that some people in New York represented by Mastropieri were interested. In July or August, Mastropieri, Pate and Acovino attended a meeting in Bookstein's office. Meanwhile Bookstein has organized Sanzo International Corporation. He had also drawn up a shareholders agreement naming Pate, Acovino, and five others as stockholders and crediting Pate (using his former name of Herbert Bidmead) and Acovino with $20,000 each of a contribution. Bookstein set up a trust account at the Castle Bank & Trust Company, a Bahamian bank, to receive these contributions.

On August 10, 1972 , $37,500 in cash was deposited into the account of the Mastropieri and Joseph law partnership and was recorded, at Mastropieri's direction, as "Sanzo Corporation". On August 16, a $42,000 check, dated August 10 and signed by Mastropieri, was deposited to the Castle Bank trust account. The pattern was repeated a few months later. On October 10, a $14,000 cash deposit was received by the partnership account and recorded, again at Mastropieri's direction, as "Sanzo Corporation"; on the same day, two checks of $7,000 each were drawn to Fitch and Forman, evidently to buy out their interests.

The corporation's operations in Italy were started up by James Sanzo in late 1972. Whenever Sanzo needed operating funds he telephoned Mastropieri, who regularly told him that he would check with his clients. Some $120,000 was transmitted to Sanzo as a result of these conversations, Further, on one occasion Mastropieri and Acovino traveled to Italy and gave Sanzo $8,000 in cash to buy a compressor.

On the basis of this evidence the jury was clearly entitled to infer that Pate had placed $20,000, and probably much more, in this venture.

3. 1973

1973 was the only tax year in which the Pates did not engage in an unusual financial transaction. However, they invested $11,000 with First Investors, incurred residence expenses of $5,790.40 for 599 West Beech St., increased their bank accounts by $4,682.75, and paid withholding tax of $2,362.93--as against reported taxable income of $10,104.62, mostly the "process server" income discussed below. In the same year Acovino made large deposits in the Bank of Perrine in south Florida, which were later transferred to a trust account, under a trust deed prepared by Mastropieri, in the Castle Bank.

4. 1974 and the purchase of 70 Rochester Avenue

During 1974 the Pates spent $6,086.55 for residence expenses, invested $10,800 with First Investors, paid $3,544.05 for life insurance premiums and $7,723.25 for Herbert Pate's attendance and expenses at a weight reducing clinic, increased their bank accounts by $17,347.41, and made tax payments of $2,020.65--as against reported income of $7,971.08. In addition ot all this they spent a considerable sum in purchasing a house at 70 Rochester Avenue in East Atlantic Beach, which was occupied after the purchase by Mr. Pate's mother who paid nothing to live there.

The contract to purchase the house and an adjoining vacant lot was signed by the Pates. The circumstances with respect to payment were as follows. On August 16, 1974 , there was a $34,500 cash deposit into Mastropieri's escrow account. On the same day Mastropieri wrote a $34,500 certified check to Pate which purported to represent the proceeds of a mortgage on the Rochester Ave. property. This was endorsed over to the sellers and the mortgage was recorded. There was no evidence that any interest or principal payments were ever made upon it. In addition the Pates paid $5,000 on the signing of the contract and more than $9,000 in cash on the closing. The jury was amply justified in finding that the $34,500 cash deposit to Mastropieri's account was Pate money and that the mortgage was simply a sham created to conceal the Pates' expenditure. 6

5. 1975 and the purchase of 52 Brookline Avenue

While there were some $23,597.50 of miscellaneous payments in 1975, the major item was $40,000 spent in the purchase of a house at 52 Brookline Avenue--as against reported income of $11,179.15. The house was purchased in the names of Carolyn Pate and her mother, Daisy Ilich, in October, 1975. At the closing a $40,000 check, dated October 6, 1975 , and drawn on an account of a "Mastro Enterprises Ltd., was delivered to the sellers.

One week before the closing a cash deposit of $39,200 was made into the checking account of Mastro Enterprises Ltd. There is no indication who made the deposit. Mrs. Pate instructed her mother, who occupied the house, to write a check each month to cover the mortgage payments. These checks were turned over to Mrs. Pate, who deposited them in the Mastro Enterprises bank account. However, the Pates paid Mrs. Ilich amounts in cash exactly equalling the supposed mortgage payments, and checks to cash in the same amount were drawn on Mastropieri-controlled bank accounts. There is no evidence that other payments were made on the mortgage. The jury could conclude from this that there never was a mortgage loan, that the $40,000 payment on the house was made with the Pates' money and that the monthly payments made by Mrs. Ilich were a sham.

Further material relevant to the charge of tax evasion was furnished by evidence produced to support the charges in Counts Six and Eight of the third indictment that Pate had willfully and knowingly filed 1973 and 1974 income tax returns which falsely stated that he received $6,450 and $7,322.50 as process-server income. 7 The Government's theory was that the Pates and Acovino, feeling the need to show some taxable income, developed, with Mastropieri's assistance, the idea of claiming to be employed by Mastropieri as process servers. This theory was amply supported by the evidence. Mastropieri maintained a partnership with Alan Joseph, which handled ordinary civil business, but had his own criminal and matrimonial practice. Five secretaries in Mastropieri's law office, including Mastropieri's personal secretary, testified that they knew of no process serving of investigation done by Pate or Acovino, although they knew of others who rendered such service. Joseph and one Leonard Eisenberg, who assisted Mastropieri in his criminal practice, testified that they knew Pate and Acovino only as clients of the law partnership and were not aware of their having done any work as process servers or investigators. Mastropieri's accountant, Gordon, who reconciled Mastropieri's bank account on a monthly basis and prepared cash receipt and disbursement ledgers, was never told that any money was being paid to Pate or Acovino, and Mastropieri's checks and checkbooks reflected no evidence of monies paid to either in the form of checks payable to cash or otherwise. The jury was entitled to conclude that the process server income was an invention of Pate, Acovino and Mastropieri, designed to provide some semblance of income which might be presented as accounting at least for their living expenses.

Beyond this there was evidence of Herbert Pate's obstruction of an admin istrative proceeding and subornation of perjury. When Dennis Ilich, Pate's father-in-law, was summoned for an interview by Agent Conlisk, he claimed that in 1964 he and his wife had given the Pates a wedding gift of $10,000. He repeated this before the grand jury. He testified at trial that this was not true and that Pate had told him to lie to Agent Conlisk. 8 Dennis Ilich's wife Daisy testified before the grand jury that she had given the Pates $5,000 in 1964 upon their wedding and another $5,000 in 1967 on the birth of a grandchild. At trial she testified that the testimony she had given the grand jury was false and that Herbert Pate, saying "something about the income tax evasion, of getting off income taxes", had asked her to give it. She further testified at trial that her grand jury testimony to the effect that she had never been repaid the $10,000 which she had put up for the Brookline Ave. house was likewise false. Carolyn Pate had in fact repaid the $10,000 in cash installments, although Mrs. Ilich did not remember who had told her to lie before the grand jury about the matter.

II. Appellants' attacks on the sufficiency of the Government's investigation

The appellants contend that the Government failed to establish an opening net balance as of January 1, 1971 , and opening net balance as of the beginning of each of the ensuing taxable years, with the certainty required by the leading case of Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121 (1954), and by this court in numerous cases of which it suffices to cite United States v. Costanzo [78-2 USTC ¶9575], 581 F. 2d 28 (1978), cert. denied, 439 U. S. 1067 (1979) (affirming conviction), and United States v. Grasso [80-2 USTC ¶9593], 629 F. 2d 805 (1980) (reversing conviction). While the investigation or at least its presentation in the record, see note 3, supra, was not so thorough as in Costanzo and should not be regarded as a model, it was sufficient under the circumstances of this case.

Appellants' attack begins with the fact that Herbert Pate's talk with Probation Officer Eisler occurred in July, 1970, and thus left open the possibility that the Pates had received large resources between July and the end of December. The point might have some force if the Government had not made an independent investigation into the Pates' opening net worth as of January 1, 1971 . Since such an investigation was undertaken, the statement to Eisler simply provided corroboration often not present, and never deemed necessary, in tax evasion cases of this sort. In many net worth or expenditures cases the defendant either says nothing with respect to his financial condition at the beginning of the period of claims "the existence of substantial cash on hand at the starting point . . . made up of many years' savings which for various reasons were hidden and not expended until the prosecution period." Holland v. United States, supra, 348 U. S. at 127; United States v. Bianco, supra. See generally, Duke, Prosecutions for Attempts to Evade Income Tax; A Discordant View of a Procedural Hybrid, 76 Yale L. J. 1, 10-34 (1966). Here we have an admission by Pate, made only six months before the beginning of the prosecution period, that he and his wife had no financial assets except life insurance, for which the Government credited him. To be sure the Pates' absence of financial resources in July 1970 does not absolutely negate the possibility that affluence from non-taxable sources had been attained by January 1971. However, it serves two offices valuable to the Government's case. It constricts the time in which a pre-period "cash hoard" might have come into existence, and it negates the possibility that the Pates had a pre-period asset which could have suddenly appreciated into a large source of wealth.

A second criticism is that Conlisk never interviewed Mrs. Pate. While Pate's oral statement to Eisler seems to have been directed only to his own finances, the questionnaire included Mrs. Pate. The inquiries of banks, brokerage firms, and lending institutions apparently also included Mrs. Pate, as did the checks of savings bonds records, gift tax returns and property records. While an attempt to interview Mrs. Pate would have been advisable, we do not regard its absence as fatal.

A third criticism is that even if the Government made an adequate showing of a near zero net worth as of January 1, 1971 , it failed to make such a showing as of the beginning of each of the four other taxable years. We do not read Holland as requiring a formal net worth statement as of the beginning of each taxable year. Although it does require that increased net worth "can be reasonably allocated to the appropriate tax year", 348 U. S. at 129, the Government met that burden here. None of the purchases made by the Pates was income-producing save for $37,000 in investments in the First Investors Fund. There is no indication in the tax returns that any asset was sold in they years 1971-75. The Government urges it satisfied any burden it might have by showing that in 1971 and each subsequent year, expenditures vastly exceeded the small January 1, 1971 opening balance increased by any known non-taxable sources, such as loans. This appears sufficient under the circumstances. Cf. Taglianetti v. United States, supra, 398 F. 2d at 565 (in cash expenditures cases Holland requirements met without formal net worth presentation if proof "makes clear the extent of any contribution which beginning resources or a diminution of resources over time could have made to expenditures.").

Neither can the Government be faulted for failing to follow "relevant leads furnished by the taxpayer", Holland v. United States, supra, 348 U. S. at 135-36, for the Pates never supplied any. They did not assert the "favorite defense" of a "cache . . . made up of many years' savings which for various reasons were hidden and not expended until the prosecution period," 348 U. S. at 127; although Sacchitello did, the Government discredited his story.

The Pates also make much of the Government's failure to point to a likely source of the illegally unreported income. 9 They rely on the statement in United States v. Grasso, supra, 629 F. 2d at 808:

Either a "likely source" of the illegally unreported income represented by the calculated increase in net worth plus non-deductible expenditures in the year in question must be shown or all possible sources of nontaxable income must be negated.

and contend that the Government did not meet the almost impossible burden of negating "all" possible sources of non-taxable income.

Our statement in Grasso derived from what the Supreme Court had said in United States v. Massei [58-1 USTC ¶9326], 355 U. S. 595, 595 (1958).

In Holland we held that proof of a likely source was "sufficient" to convict in a net worth case where the Government did not negative all the possible non-taxable sources of the alleged net worth increase. This was not intended to imply that proof of a likely source was necessary in every case. On the contrary, should all possible sources of nontaxable income be negatived, there would be no necessity for proof of a likely source.

However, in Holland the Court also made the less extreme statement that "[w]hen the Government rests its case solely on the approximations and circumstantial inferences of a net worth computation, the cogency of its proof depends upon its effective negation of reasonable explanations by the taxpayer inconsistent with guilt", 348 U. S. at 135 (emphasis added), and we have said that the Government can meet its burden under Massei by negating all "reasonably possible sources" of non-taxable income. United States v. Schipani [66-2 USTC ¶9512], 362 F. 2d 825, 830 (2 Cir.), vacated per curiam on other grounds and remanded, [67-1 USTC ¶9115] 385 U. S. 372 (1966). See also United States v. Bianco, supra, 534 F. 2d at 506 (Government need not negate purely hypothetical sources). Cf. United States v. Penosi [72-1 USTC ¶9103], 452 F. 2d 217, 219 (5 Cir. 1971), cert. denied, 405 U. S. 1065 (1972) (Government's burden of negating non-taxable sources met "by producing evidence of an investigation which uncovered no sources"). Unless this common-sense reading is given to the Massi and Grasso standards, the government could seldom, if ever, win a net worth or an expenditures case. See United States v. Bianco, supra, 534 F. 2d at 506. It would be obliged, for example, to produce evidence that no bank or other lending institution in the United States or, for that matter, in the world had made a loan to the defendant and that no decedent, however unrelated or unknown, had made the defendant an object of his beneficence. We do not think the Supreme Court or this court meant to impose so impossible a task on the Government in all cases where it has been unable to develop a likely source of income. In such cases, the Government does enough when, as here, it investigates reasonably possible sources of non-taxable income and explores whatever leads the taxpayers or others may proffer. Once it has thus established a prima facie case, the taxpayer "remains quiet at his peril." Holland v. United States, supra, 348 U. S. at 139.

Beyond this, less stringent standards with respect both to establishing opening net worth and to negating non-taxable income sources are justified in a case like this where defendants were shown to have gone to such lengths to conceal their unreported increases in wealth. If in fact the Pates had large resources in January 1971, or re-received large nontaxable amounts thereafter, why did they go to so much trouble to conceal the real estate transactions and the investment in Sanzo Corporation in 1971, 1972, 1974 and 1975? One reasonable inference, that they desired to conceal assretions in wealth in order to avaid income taxation, would be highly incriminating. Another reasonable inference, that they desired to hide the fruits of criminal activity would be equivalent to evidence of a likely source. There is a third possible inference, that they desired to defraud creditors, but there is nothing to suggest that they had any. Still further support for the inference of tax evasion is furnished by the evidence that in two of the tax years Pate reported income for process serving which he did not in fact receive. Why did Pate report and pay taxes on amounts not in fact received unless he was trying to conceal larger amounts that he had received? The evidence of subornation of perjury and obstruction of justice added further fuel to the flame. In short, the Government's proof here was not simply of a naked increase in wealth or expenditures unaccountable by assets at the beginning of the series of tax years; this was supplemented by proof of acts having a distinct aura of criminality, of which defendants were found guilty. It would be grotesque to hold that, with the wealth of proof against the Pates, their convictions for income tax evasion must be set aside because the Government's investigation may not have met standards that might be required in a closer case.

III. The Conspiracy Charge

At the conclusion of the Government's case Mastropieri's counsel moved, out of the presence of the jury, to strike all testimony of acts and declarations of conspirators which had been admitted subject to connection. The judge denied the motion, saying:

I find that the government proved by a fair preponderance of the credible testimony that the conspiracy charged in the indictment was established and existed at or about the time set forth in the indictment for the purposes set forth.

I further find that as to each defendant, there is independent evidence that by the accused acts and declarations the defendant knowingly and wilfully entered into the cospiracy.

I find that the government proved that by a fair preponderance of the credible testimony.

He added:

Having made those findings, I will charge the jury that all the acts and declarations made by any member of the conspiracy may be charged against any accused that they find to be a member of the conspiracy in determining whether that particular defendant knowingly and wilfully entered into the conspiracy by proof beyond a reasonable doubt.

Not disputing the sufficiency of the evidence to support the judge's preliminary determination, appellants single out for criticism one sentence in the charge, reading as follows:

If the government proved the conspiracy charged in the indictment beyond a reasonable doubt, then you may use as evidence any act or declaration made by any individual who you find to be a member of the conspiracy against the accused in order to determine whether that accused knowingly and wilfully entered into the conspiracy.

If this sentence stood alone, it would clearly be erroneous since it omits the essential element that declarations of a party to a conspiracy are admissible against another only if made "during the course of and in the furtherance of the conspiracy." F. R. E. 801(d)(2)(E). However, the judge gave two further instructions, one before and another after the one we have quoted. The first was:

Since every member of a conspiracy becomes the agent of every other member of the conspiracy, with relation to the business of the conspiracy, the acts and declaration of one who you find to be a member of the conspiracy, made during the term of the conspiracy and in furtherance of the purpose of the conspiracy, may be considered as evidence against the accused in determining whether the government proved the conspiracy charged in the indictment. So that all the acts and declarations of all the alleged conspirators may be used to determine whether the government proved the conspiracy charged in the indictment beyond a reasonable doubt.

The second, which followed immediately after the sentence complained of by appellants, read:

Of course, any statement or act by anyone not a member of the conspiracy charged in the indictment may not be considered as evidence against any accused nor may any act or statement that is not in furtherance of the conspiracy or made during the term of the conspiracy be used against any of the accused.

The former scarcely helped since although its first sentence was a correct statement of the law, the second was not. On the other hand, the latter instruction was correct and would have cured the errors if we can believe the jurors were able to separate the wheat from the chaff.

The respective roles of judge and jury with respect to admission of the declarations of one conspirator against another have had a long history in this circuit. It will suffice to begin with United States v. Pugliese, 153 F. 2d 497 (1945), an opinion by Judge Learned Hand, who built so much of this circuit's law. Mr. and Mrs. Pugliese were charged with illegal possession of distilled spirits. Finding that they had been joint venturers, the trial judge allowed the jury to consider the wife's declarations as against the husband. The jury acquitted the wife and the husband claimed this established that admission of the declarations was error. Judge Hand ruled against this, saying, 153 F. 2d at 500:

The admissibility of the wife's declarations in the case at bar was for the judge, and the fact that the jury later acquitted her was irrelevant. The issue before him was altogether different from that before them: he had only to decide whether, if the jury chose to believe the witnesses, Pugliese and his wife were engaged in a joint undertaking; they had to decide whether they believed the witnesses beyond a doubt.

Judge Hand followed this with a more extensive descussion in United States v. Dennis, 183 F. 2d 201, 230-32 (1950), aff'd, without discussion of this point, 341 U. S. 494 (1951). The trial judge in that case had left it to the jury to determine, before considering the declarations of an instructor of the Communist party, whether it was convinced beyond a reasonable doubt that the instructor was a member of the conspiracy and that the teaching was in furtherance of its aims and purposes. If the jury was so convinced, but not otherwise, it could consider the statements and acts of the instructor as if they were said or done by defendants also found to have been members of the conspiracy. Judge Hand observed, 183 F. 2d at 230:

It is not clear in the books that these instructions did not too much confine the jurors' use of the declarations, for it directed them not to regard them at all unless they were first convinced beyond reasonable doubt that the declarant and the defendants were engaged in a common venture which the declarations helped to realize. It is difficult to see what value the declarations could have as proof of the conspiracy, if before using them the jury had to be satisfied that the declarant and the accused were engaged in the conspiracy charged; for upon that hypothesis the declarations would merely serve to confirm what the jury had already decided. In strict logic these instructions in effect altogether withdrew the declarations from the jury, and it was idle to put them in at all. The law is indeed not wholly clear as to who must decide whether such a declaration may be used; but we think that the better doctrine is that the judge is always to decide, as concededly he generally must, any issues of fact on which the competence of evidence depends, and that, if he decides it to be competent, he is to leave it to the jury to use like any other evidence, without instructing them to consider it as proof only after they too have decided a preliminary issue which alone makes it competent. Indeed, it is a practical impossibility for laymen, and for that matter for most judges, to keep their minds in the isolated compartments that this requires.

After referring to United States v. Pugliese, supra, Judge Hand concluded that it was unnecessary to reconsider whether that case had gone too far since the trial judge in Dennis had left the preliminary question of fact to the jury as the defendants had requested.

Passing over such intervening decisions as United States v. Ross, 321 F. 2d 61, 68, cert. denied, 375 U. S. 894 (1963) and United States v. Ragland, 375 F. 2d 471, 477 (1967), cert. denied, 390 U. S. 925 (1968), we next gave extensive consideration to the problem in United States v. Geaney, 417 F. 2d 1116, 1119-20 (1969), cert. denied sub nom. Lynch v. United States, 397 U. S. 1028 (1970). We thought our opinion in that case made certain points entirely clear:

(1) Responsibility for determining whether declarations of an alleged conspirator should be admitted against another rests on the shoulders of the trial judge. He may not allow the jury to consider such declarations without a preliminary affirmative determination on his part.

(2) Before allowing the declarations to be admitted, the judge must "satisfy himself of the defendant's participation in a conspiracy on the basis of the non-hearsay evidence." More particularly, while declarations may be admitted subject to connection with a cautionary instruction, "the judge must determine, when all the evidence is in, whether in his view the prosecution has proved participation in the conspiracy, by the defendant against whom the hearsay is offered, by a fair preponderance of the evidence independent of the hearsay utterances."

(3) If the judge so determines, "the utterances go to the jury to consider along with all the other evidence in determining whether they are convinced of defendant's guilt beyond a reasonable doubt". This necessarily disapproved the practice of allowing the jury to reconsider the admissibility of declarations whose admissibility the judge had sustained under the procedures outlined in (1) and (2).

As we read the Federal Rules of Evidence, our holding in Geaney with respect to the respective roles of judge and jury was approved. Rule 104(a) states that "[p]reliminary questions concerning . . . the admissibility of evidence shall be determined by the court, subject to the provisions of subdivision (b)." Subdivision (b), which reads:

(b) Relevancy conditioned on fact. When the relevancy of evidence depends upon the fulfillment of a condition of fact, the court shall admit it upon, or subject to, the introduction of evidence sufficient to support a finding of the fulfillment of the condition.

is addressed to an entirely different kind of problem, as the Notes of the Advisory Committee show. 10 But see, McCormick, Evidence, §53 at 19 (2d ed. Supp. 1978) (admissibility of conspirator's declarations governed by Rule 104(b)); Kessler, The Treatment of Preliminary Issues of Fact in Conspiracy Litigations: Putting the Conspiracy Back into the Coconspirator Rule, 5 Hofstra L. Rev. 77, 88-92, (1976) (same).

In United States v. Stanchich, 550 F. 2d 1294, 1299, n. 4 (1977), we considered the effect of the F. R. E. upon Geaney and concluded that Rule 104(a) adopted Geaney's conclusion that the admissibility of statements of a conspirator is for the court. We gave further consideration to the problem in United States v. Ziegler, 583 F. 2d 77 (1978). We there reversed a conviction based in part on statements of a conspirator where the judge had refused to make the preliminary determination required by Rule 104(a) and had left the question of admissibility to the jury. We held this abdication of judicial responsibility to be reversible error without regard to whether there was sufficient evidence in the record apart from the challenged declaration to have supported a Geaney ruling. 11

Our belief that the admissibility of conspirators' statements is a matter for the judge alone is strengthened by the wide acceptance which that practice has now won among the courts of appeals. 12 It would be strengthened still further if we were to reconsider the issue on the merits. This very case illustracts the wisdom of Judge Weinstein's observation, 1 Evidence ¶104[05] at 104-44.9:

When the judge decides admissibility, the jurors should not be told anything about the issue. Giving them a "second bite at the apple" serves only to confuse, and achieves no useful purpose, though a number of courts have held that defendant cannot complain of this practice since it theoretically is for his protection.

The better procedure is for the judge to make the final decision as to the admissibility and then to let the jury evaluate the probative force of the evidence in its decision on the merits. (footnotes omitted)

See also United States v. Bey, supra, 437 F. 2d at 191-92; United States v. Santiago, supra, 582 F. 2d at 1136; United States v. Enright, supra, 579 F. 2d at 987; United States v. Bell, supra, 573 F. 2d at 1044.

Here an able and experienced trial judge gave an instruction, two sentences of which, if taken in isolation, would have allowed the jury to consider declarations not in furtherance of the conspiracy. While instructions must be read as whole, Cupp v. Naughten, 414 U. S. 141, 146-47 (1973), this subject is so fraught with complexity that we cannot have the ordinary assurance that the jury will disregard the erroneous instruction because it has been overcome by the correct one; moreover, the judge did not explain what "in furtherance of" meant. Beyond all this, as Judge Hand pointed out in Dennis, supra, the effect of the instruction, if taken literally by the jury, is to deprive the prosecution of evidence on which the law entitles it to rely. We therefore expect that trial judges in this circuit not only will shoulder the responsibility of making the determination of admissibility, as Judge Mishler did, but will hereafter refrain from giving the jury a "second bite." 13

However, the "second bite" instruction does not require reversal in the facts here. In general, as Judge Hand pointed out in Dennis, supra, 183 F. 2d at 230, such an instruction is favorable to the defendant since in a case where the judge has properly determined that the declarant's participation in the conspiracy has been sufficiently established by other evidence, it allows the jury to disregard declarations which it ought to consider. See also United States v. Nickerson, 606 F. 2d 156, 158 (6 Cir.), cert. denied, 444 U. S. 994 (1979) (second bite instruction a "windfall" for defendant). Here the only respect in which the instructions were unfavorable to the defendants was the omission in two sentences of the requirement that the declaration must be in the course and in furtherance of the conspiracy. However, appellants have failed to point to any declarations not in the course and in furtherance of the conspiracy that were received in evidence. The error in allowing the jury a "second bite" was therefore harmless to the defendants and must be disregarded, F. R. Cr. P. 52(a).

IV. Mastropieri's Objection to the Admission of Evidence of Attempted Suppression of Evidence

Mastropieri raises one point, unrelated to the rest of the case, which we can conveniently discuss now. The facts are as follows:

Near the conclusion of the presentation of the Government's case, just before the luncheon recess at about 1 P.M. on September 29, 1980 , the prosecutor applied in open court for a warrant to search Mastropieri's law office, asserting that Mastropieri's financial records would tend to prove the sham nature of the mortgages in the 70 Rochester Ave. and 52 Brookline Ave. transactions and the nonpayment of any fees for investigative services from Mastropieri. The judge reserved decision until the end of the luncheon recess.

Unknown to Mastropieri, his office was under observation by Agent Colasacco. About 1:30 or 1:35 P.M. Agent Colasacco saw Louis Antonaccio, Mastropieri's brother-in-law, walk out of the office and place a carton containing records in the trunk of a car. Antonaccio reentered the office, returned with an attache case, got into the car and drove off, followed by IRS agents. Shortly after 2 P.M. Judge Mishler denied the application for a search warrant. About 4 P.M., Antonaccio, who had been driving aimlessly with the records in his trunk, was served with a "forthwith" subpoena requiring him to produce the records before the judge. The judge impounded the attache case and the carton of records.

At a hearing conducted outside the presence of the jury, the judge ruled that compelling Antonaccio to produce ledger sheets written by Gordon, Mastropieri's accountant, would violate Mastropieri's privilege against self-incrimination. The Government therefore did not offer any of the records that Antonaccio had removed. However, the judge allowed the Government to adduce evidence designed to show Mastropieri's connection with the removal of the records as indicating consciousness of guilt.

There can be no doubt that an attempt to suppress material records permits an inference of consciousness of guilt and therefore of guilt itself, see 2 Wigmore, Evidence §278(2) (Chadbourn rev. 1979); Di Carlo v. United States, 6 F. 2d 364, 368 (2 Cir.), cert. denied, 268 U. S. 706 (1925); United States v. Graham, 102 F. 2d 436, 442 (2 Cir.), cert. denied, 307 U. S. 643 (1939); United States v. Gottfried, 165 F. 2d 360, 363 (2d Cir.), cert. denied, 333 U. S. 860 (1948). Mastropieri's argument is rather that the Government did not succeed in connecting him with Antonaccio's removal of the records. We think it did.

The jury heard testimony that, at about 1:15 P.M., shortly after the judge had reserved decision on the application for a search warrant, Agent Bellamy saw Mastropieri make a telephone call from a hallway telephone outside the courtroom. Madeline Nigri, who worked in Mastropieri's office, received a call from him between 1 P.M. and 2 P.M. and placed Antonaccio on the phone at Mastropieri's request. About a half hour later Nigri saw Antonccio carry a carton from the office. Nigri also testified that she received no call from Mrs. Mastropieri during the relevant period and that, as she recalled, at no time during that period did anyone else in the office answer the phone.

If this had been the only evidence, it would clearly have sufficed to convince, it reasonable juror beyond a reasonable doubt that Mastropieri had asked Antonaccio to remove the records. However, before calling the agents and Ms. Nigri, the Government had called Antonaccio and Mrs. Mastropieri out of the presence of the jury. Although acknowledging that he received a telephone call between 1:00 and 1:30 P.M., Antonaccio said this had come from Mrs. Mastropieri, who asked him to remove a carton of checks from the rear office and to place it in the trunk of his car, explaining only that the court did not need it but might do so. He claimed that the attache case was his own, and that he had driven around running errands but had never called Mr. or Mrs. Mastropieri concerning the records. Mrs. Mastropieri confirmed that she had called Antonaccio after hearing the Government's request for a search warrant and that when she left the courtroom she saw and heard her husband telephoning a secretary and inquiring only whether there were "Any problems. Any messages. Anything urgent." After the agents' testimony in open court the Government called Antonaccio under a grant of immunity. At this time he claimed that Mastropieri had called him about forty-five minutes or an hour earlier than Mrs. Mastropieri's call. He estimated that Mastropieri's call came before 1 P.M. This was impossible since court did not adjourn until shortly after 1 P.M. and there were no recesses and no record of Mastropieri being excused during the previous hour.

The judge carefully instructed the jury that the evidence they had heard from Antonaccio, Agents Bellamy and Colasacco, and Ms. Nigri was offered for a very limited purpose, namely, to support the Government's claim that there had been an attempt to suppress evidence; that in order to reach such a conclusion the jury must find that Mastropieri directed the removal of the records and did so with intent to suppress them; and that even such a finding would not be proof of guilt but would simply permit an inference of consciousness of guilt.

Mastropieri contends that the Government "totally failed to establish that appellant had directed the removal of the records" since there was no testimony that Mastropieri had instructed anyone to remove the records and since "[e]ven if the jury were to disbelieve Antonaccio's testimony, the void left in the evidence does not operate to justify a finding that it was appellant who directed the removal of the records." Mastropieri Br. at 32. This amounts to saying that all facts must be proved by testimonial rather than circumstantial evidence--an assertion so preposterous that it need only be stated to be rejected, see 1 Wigmore, Evidence §25 (1940 ed.). Indeed, the jury would have been justified in inferring not only that the facts were not as Antonaccio testified but that Mastropieri had caused him to lie. The case is readily distinguishable from Dyer v. MacDougall, 201 F. 2d 265 (2 Cir. 1952) (L. Hand, J.), where the plaintiff had no evidence of the utterance of the slander except his claim that witnesses, whose testimony was against him, were flagrant liars. Here there was affirmative evidence in Agent Bellamy's testimony of Mastropieri's telephone call, Ms. Nigri's testimony that Mastropieri called at the time and spoke to Antonaccio, and Agent Colasacco's testimony that this talk was followed by the removal of the documents. Antonaccio's testimony simply created a conflict for the jury to resolve. The days when the Government could be claimed to have "vouched for" Antonaccio by calling him as a witness are happily gone forever. See Advisory Committee Note to Rule 607.

V. Mastropieri's Other Points

Other contentions by Mastropieri can be briefly handled.

Mastropieri was named only in Count One of the third indictment charging his participation in a conspiracy, Count Nine of the third indictment charging him with falsely claiming a 1974 deduction for process serving fees paid to Herbert Pate, and Counts Five, Seven, and Ten of the third indictment charging him with aiding and abetting the Pates to defeat collection and payment of their 1973, 1974 and 1975 income taxes. He claims that, as to each count, the evidence was insufficient to warrant submission to the jury.

Count Nine requires little discussion. Mastropieri in effect concedes that there was ample evidence to support the Government's claim that Pate had done no work for the law partnership of Mastropieri & Joseph. His contention is rather that, in addition to the partnership business, which handled ordinary civil matters, he was engaged in a matrimonial and criminal practice on his own account for which Pate might have rendered services. But there is absolutely nothing to indicate that Pate did in fact perform any such service. Indeed all of the evidence--the testimony of Mastropieri's secretaries, his accountant Gordon, his law partner Joseph, and Eisenberg, who assisted him in his criminal practice, as well as the evidence that Pate spent half of 1974 at a weight-reducing clinic in North Carolina--pointed decidedly the other way. The Government was not required to prove that Mastropieri could not possibly have incurred the claimed deduction. It was enough if the Government introduced evidence, whether circumstantial or otherwise, from which a jury could reasonably be convinced beyond a reasonable doubt that the claimed deductible expense had not actually been incurred. See United States v. Bianco, supra, 534 F. 2d at 506. See generally, 10 Mertens, Federal Income Taxation, 55 A. 27 (1976 ed.). The Government did so here.

We likewise have no doubt about the sufficiency of the evidence on Counts One (conspiracy) and Counts Five, Seven, and Ten (aiding and abetting tax evasion for 1973, 1974, and 1975). 1974 and 1975 were the years of the 70 Rochester Ave. and 52 Brookline Ave. transactions described above. The evidence there summarized fully supported an inference that Mastropieri made his own bank account available for deposits of cash by the Pates and that the mortgages given by Mastropieri and "Mastro Enterprises" were sham. Mastropieri's argument that he had no reason to know that these transactions were part of a scheme of tax evasion rather than for some other purpose, e.g., a fraud on creditors, was properly addressed to the jury. As to 1973, the evidence, especially the testimony of Mastropieri's accountant, Gordon, who prepared the Pates' tax return with information provided by Mastropieri, amply supported an inference that Mastropieri had helped the Pates to hatch the strategy of reporting false process serving income. This and other evidence stated in our summary were sufficient as well to warrant submission of the charge of conspiracy.

Mastropieri's final claim is that the court erred in excluding letters written by Mastropieri and delivered to the IRS by his accountant, Gordon, in connection with a civil audit of his 1974 tax return. Gordon testified in the absence of the jury that the IRS requested a letter of verification as to the recipient of the payment for investigative services claimed as a deduction for that year. This letter read:

To whom it may concern:

The investigative services for the year 1974 were as follows: Mr. Herbert Pate, SS number 078-32-8104, 559 West Beech Street, Long Beach, New York, $7,320.50. Sincerely, Eugene R. [sic] Mastropieri.

Mastropieri's argument is that if he had intended to conceal Pate's tax evasion, he would not have named Pate. The inference well that Pate had included the income in well that Pate had included the income in his income tax return which Mastropieri had every reason to think the IRS was investigating. In any event the judge was justified in excluding the evidence under Rule 403. There was too much danger that, no matter what the judge might charge, the jury would take the letter as proof of the facts asserted rather than for the limited purpose urged by Mastropieri.

The Court also excluded an earlier letter dated December 14, 1976 , reading:

To whom it may concern

The investigative services I paid for the year 1974 related to the investigations in connection with criminal trials that were pending in the year 1974 and some matrimonial cases. The investigations were for obtaining witnesses and information relating to financial status of various defendants in matrimonial cases. The investigative services were throughout the year 1974. Very truly yours, Eugene F. Mastropieri.

and two other letters stating that the August 16, 1974 deposit of $34,500 into Mastropieri's escrow account represented money belonging not to him but to his "clients".

The only value of the December 14 letter would have been in lending some support to Mastropieri's claim that Pate was engaged in connection with Mastropieri's criminal and matrimonial practice, of which Joseph and the secretaries may not have been aware. As such it was clearly offered for the truth of the matter asserted and was inadmissible hearsay. United States v. Marin, 669 F. 2d 73, 84 (2 Cir. 1982). The same reasoning applies to the two letters in regard to the $34,500 deposit. In addition we fail to see the relevancy of these letters; the Government's claim was precisely that the $34,500 was the Pates' money, not Mastropieri's.

The judgments of conviction are affirmed.

1 Acovino was not charged. He had disappeared on November 2, 1974 .

2 There appears to have been some confusion whether the Government's proof followed the "net worth" or "cash expenditure" method. The Government claims to have relied on the expenditure methold. Judge Mishler charged the jury that this was a net worth case. The Pates, stradding the fence, characterize it as a "net worth/expenditures" case.

The basic difference between the two methods has been well explained by Judge Coffin in Taglianetti v. United States [68-2 USTC ¶9479], 398 F. 2d 558, 562-63 (1 Cir. 1968), aff'd without discussion of this point, [69-1 USTC ¶9295] 394 U. S. 316 (1969). The net worth method is used when a taxpayer shows an increase in net worth not derivable from reported income. Since this method "is unavailing against the taxpayer who consumes his self-determined tax free dollars during the year and winds up no wealthier than before", the cash expenditure method was developed to "reach such a taxpayer by establishing the amount of his purchases of goods and services which are not attributable to the resources at hand at the beginning of the year or to non-taxable receipts during the year." Where, as here, the taxpayer expends his unreported income on investments or durable property, the Government has a choice of methods: It can focus either on the sums expended or the value of the assets accumulated.

The present case does not exactly fit either the net worth or cash expenditure mold, although it more closely resembles the latter. The Government's principal proof was not simply of expenditures but rather of investments, in each year but one, of large amounts of money which appellants had taken pains to conceal.

3 Incredibly the record does not contain the form of letter or letters which Conlisk sent to these institutions. However, appellants do not dispute that the inquires were adequate to elicit information with respect to opening balances and that they disclosed no assets other than the few hereafter mentioned.

4 Counsel for the Pates reads this as meaning 1971-75 and years earlier than 1967. The Government's reading, namely, 1971-75 and back from 1971 to 1967, is more reasonable. On this appeal we are bound to view the evidence in the light most favorable to the Government.

5 Many of these expenditures were made by or in the name of Carolyn Pate. Daisy Ilich, her mother, testified that Carolyn had not worked outside the home since 1967 and that she had held no job in 1973, 1974 or 1975. Conlisk's investigation likewise disclosed that during the tax years at issue Carolyn was a housewife engaged in bringing up her three children.

6 We have omitted mention of highly suspicious activities of Acovino in 1974. One of these, involving the purchase of a house for his parents, was similar to the Pates' purchase described above; in this transaction Mastropieri, after Acovino's death, admitted that the mortgage was sham. Acovino also deposited $100,000 in cash at the Bank of Perrine for transfer to the Castle Bank.

7 As indicated above, Count Nine charged that Mastropieri had falsely claimed a deduction for the $7,322.50 payment in 1974. Mastropieri did not cliam the $6,450 paid to Pate (and a larger amount paid to Acovino) for process serving in 1973, although his accountant, Gordon, who also prepared the Pates' and Acovino's returns, testified that he had advised Mastropieri he could take such a deduction by filing an amended return.

8 He also testified that he had lied to the grand jury on his own in order to conform his testimony to that of his wife and that Pate had told him to tell the truth to the grand jury. Apparently on this basis the jury acquitted Pate of suborning Dennis Ilich's grand jury testimony--the only count on which he was acquitted.

9 At a hearing prior to sentence one Albert Rossi testified that he had had large transactions in heroin with Acovino and Pate, and Judge Mishler found that the cash accumulated by both Pate and Acovino was from an illegal source and at least in part from narcotics deals. However, no evidence to this effect was before the jury, and we cannot and do not consider it.

10 Subdivision (b). In some situations, the relevancy of an item of evidence, in the large sense, depends upon the existence of a particular preliminary fact. Thus when a spoken statement is relied upon to prove notice to X, it is without probative value unless X heard it. Or if a letter purporting to be from Y is relied upon to establish an admission by him, it has no probative value unless Y wrote or authorized it. Relevance in this sense has been labelled "conditional relevancy." Morgan, Basic Problems of Evidence 45-46 (1962). Problems arising in connection with it are to be distinguished from problems of logical relevancy, e.g. evidence in a murder case that accused on the day before purchased a weapon of the kind used in the killing, treated in Rule 401.

If preliminary questions of conditional relevancy were determined solely by the judge, as provided in subdivision (a), the functioning of the jury as a trier of fact would be greatly restricted and in some cases virtually destroyed. These are appropriate questions for juries. Accepted treatment, as provided in the rule, is consistent with that given fact questions generally. The judge makes a preliminary determination whether the foundation evidence is sufficient to support a finding of fulfillment of the condition. If so, the item is admitted. If after all the evidence on the issue is in, pro and con, the jury could reasonably conclude that fulfillment of the condition is not established, the issue is for them. If the evidence is not such as to allow a finding, the judge withdraws the matter from their consideration. Morgan, supra; California Evidence Code §403; New Jersey Rule 8(2). See also Uniform Rules 19 and 67.

The order of proof here, as generally, is subject to the control of the judge.

11 One sentence in the opinion, 583 F. 2d at 80, reads:

Whether or not the the defendant is given a "second bite at the apple" as was done in Dennis, supra, 183 F. 2d at 231, and as is sometimes done by judges in this Circuit, see 1 J. Weinstein & M. Berger, Commentary on Rules of Evidence ¶104[05](2), at 104-39 to 104-45 (1976), the judge can not abdicate his responsibility to take the first bite.

If this was meant to countenance the practice of giving the jury a "second bite" rather than simply recognizing the occasional existence of the practice, it was dictum contrary to Geaney. The cited pages in Judge Weinstein's Commentary disclose no reference to judges in the Second Circuit allowing second bites subsequent to Geaney, although the instant case makes obvious that they sometimes have. Indeed Judge Weinstein dates the Second Circuit's practice of leaving the issue of admissibility to the judge alone as far back as Dennis, see ¶104[05](2) at 104-40 & n. 7.

12 Every court of appeals which has addressed the issue has committed the admissibility determination solely to the judge. Some of these courts have reached this result on the basis of the Federal Rules of Evidence. See United States v. Petrozziello, 548 F. 2d 20, 22-23 (1 Cir. 1977); United States v. James, 590 F. 2d 575, 578-80 (5 Cir.) (en banc), cert. denied, 442 U. S. 917 (1979); United States v. Enright, 579 F. 2d 980, 984-87 (6 Cir. 1978); United States v. Santiago, 582 F. 2d 1128, 1132-36 (7 Cir. 1978); United States v. Bell, 573 F. 2d 1040, 1043-44 (8 Cir. 1978); United States v. Jackson, 627 F. 2d 1198, 1217-18 (D. C. Cir. 1980). Other circuits reached the same result prior to the adoption of the Rules, see United States v. Bey, 437 F. 2d 188, 190-92 (3 Cir. 1971); United States v. Vaught, 485 F. 2d 320, 323 (4 Cir. 1973); Carbo v. United States, 314 F. 2d 718, 735-38 (9 Cir. 1963); cert. denied sub nom. Palermo v. United States, 377 U. S. 953 (1964); United States v. Pisciotta, 469 F. 2d 329, 332-33 (10 Cir. 1972), and have since reaffirmed it. See United States v. Trowery, 542 F. 2d 623, 626-27 (3 Cir. 1977); United States v. Stroupe, 538 F. 2d 1063, 1065 (4 Cir. 1976); United States v. Federico, 658 F. 2d 1337, 1342 (9 Cir. 1981); United States v. Andrews, 585 F. 2d 961 (10 Cir. 1978).

13 This is in accord with the practice approved by most of the treatise writers. In addition to Weinstein, supra, see e.g., E. Devitt and C. Blackmar, Federal Jury Practice and Instructions, §27.06, at 9-20 (3d ed. Supp. 1981) (withdrawing as "unnecessary" previous model instruction); Saltzburg and Redden, Federal Rules of Evidence Manual 63-65 (2d ed. 1977) (if preponderance standard is used by judge, no instruction needs or ought to be given to jury with respect to its use of conspirator's statements). See also 4 Wigmore, Evidence, §1079 at 24 (Chad. rev. Supp. 1982); 21 Wright and Graham, Federal Practice and Procedure: Evidence, §5053 at 259-61 (1977); 10 Moore's Federal Practice ¶104.13[5] (2d ed. 1976). But see McCormick, Evidence, §53 at 19 (2d ed. 1978 Supp.).

 

 

[57-1 USTC ¶9434]William V. Massei, Defendant, Appellant v. United States of America, Appellee

(CA-1), U. S. Court of Appeals, 1st Circuit, No. 5132, 241 F2d 895, 2/27/57, Conviction set aside and case remanded

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

Tax evasion: Net worth method: Admissions made by an attorney as constituting evidence of "likely source".--Primarily on the basis of certain admissions made by his attorney during a pre-indictment investigation as to the sources of his income, the taxpayer was convicted of willfully evading payment of his income taxes. On appeal, the conviction was reversed and remanded for the following reasons: (1) the admissions by the attorney, irrespective of whether they were properly admissible standing alone, could not without the corroboration of other independent evidence establish a "likely source" of the taxpayer's net worth increases, (2) it was error for the trial court to instruct the jury that it could infer from the attorney's admissions as to earlier illegal payments that the taxpayer probably continued taking these payments during the years set out in the indictment, thus establishing a "likely source" for his net worth increases, (3) the admissions would not be relevant in showing net worth increases or establishing intent, (4) evidence of unexplained net worth increases could not be used to bolster the attorney's admissions to show "likely source" because, without the latter, it could not by itself prove where the net worth increases originated, (5) the admission by the attorney, later shown to be false, to the effect that the taxpayer had derived an unspecified amount of money from a certain bequest, was not such a "calculated misrepresentation" within the meaning of the Adonis case, 55-1 USTC ¶9310, as to relieve the government of the necessity of showing "likely source" by competent evidence, and (6) the mere showing that the taxpayer was a policeman on the vice squad, and thus, in a position to receive illegal payments, without direct evidence showing that he in fact did take a bribe, could not, standing alone, be proof of a likely source from which a jury could infer that the taxpayer derived his net worth increases.

One judge dissented.

Richard Maguire (Thomas J. Carens was with him on brief), for appellant. Daniel Needham, Jr., Assistant United States Attorney (Anthony Julian, United States Attorney, was with him on brief), for appellee.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.

Opinion of the Court

HARTIGAN, Circuit Judge:

This is an appeal from a judgment entered in the United States District Court for the District of Massachusetts upon the verdict of a jury finding the appellant guilty on each of five counts of an indictment charging him with willfully and knowingly attempting to defeat and evade a large part of the income tax due and owing by him and his wife to the United States for the calendar years 1946, 1947, 1948, 1949 and 1950, in violation of §145(b) of the Internal Revenue Code, 26 U. S. C. §145(b). 1 The appellant was sentenced to concurrent terms of imprisonment of two years on each count and fined $5,000. Execution of sentence was stayed pending appeal. Although the nearly 800 page record before us contains voluminous facts that concern the many contentions made by appellant, as is the usual situation in such cases, we shall set forth only those facts that we believe pertinent to the disposition of this case.

The appellant was a member of the Police Department of Worcester, Massachusetts, from January 1923 to December 1951. The appellant's assignments as a police officer can be best presented by the chart below:


Jan. 2, 19
23 to

June 1, 19
23 .........       Night patrolman

June 1, 19
23 to              Plainclothesman on vice and

Feb. 15, 19
24 ........       liquor squad

Feb. 15, 19
24 to

Dec. 4, 19
31 .........       Precinct 1--night duty

Dec. 4, 19
31 to

April 20, 19
32 .......       Injured

April 20, 19
32 to            Plainclothesman on headquarters

Mar. 1, 19
33 .........       squad2

Mar. 1, 19
33 to

Jan. 15, 19
34 ........       Precinct 1--night duty

Jan. 15, 19
34 to             Plainclothesman on headquarters

Jan. 20, 19
36 ........       squad

Jan. 20, 19
36 to

Jan. 10, 19
38 ........       Precinct 1--night duty

Jan. 10, 19
38 to             Plainclothesman on headquarters

Sept. 11, 19
39 .......       squad

Sept. 11, 19
39 to            Precinct 1--night duty (promoted

Jan. 6, 19
40 .........       to sergeant)

Jan. 6, 19
40 to              Headquarters squad, sergeant

June 1, 19
43 .........       in charge

June 1, 19
43 to

June 1, 19
47 .........       Personnel officer3

June 1, 19
47 to

Oct. 1, 19
49 .........       License Board investigator4

Sept. 8, 19
47 ........       Promoted to lieutenant

Oct. 1, 19
49 to

Dec. 31, 19
51 ........       Personnel officer


2 Duties of the headquarters squad were the same as the vice squad, i.e. to suppress all forms of vice.

3 Duties of this office were to inspect the physical plant and personnel and to see that patrolmen carried out their assignments.

4 Duties of this office were to investigate license applications for hackney carriages, taxi drivers, gas stations and parking lots.

Appellant's salary for the years 1946, 1947, 1948, 1949 and 1950 was $2,850, $3,300, $3,300, $4,080, $4,080, respectively. From 1937 to 1945 he earned from $2,100 to $2,850 a year. Although the payroll records for the years prior to 1937 had been destroyed and could not be produced, presumably he did not earn more than $2,100 a year during that period. Appellant's wife, from 1933 to 1951, was a housewife with no source of money except that which the appellant gave to her. She has never at any time inherited or received as a gift any money or other valuables.

The Government established the above facts at the trial in attempting to prove that appellant had filed false and fraudulent joint tax returns, for himself and his wife, for the years 1946 to 1950, inclusive. The theory of the Government's case was that the joint net worth of the appellant and his wife was greater at the end than at the beginning of each year in issue, and that the source of their increased net worth was taxable income which exceeded that reported in their joint tax returns.

In this connection the Government produced in evidence the joint returns of the appellant and his wife for the prosecution years which reflected total income of $3,232.62, $3,539.66, $4,549.28, $5,004.91 and $6,701.75 for the years 1946 to 1950, respectively. In contrast to the reported income the Government presented evidence tending to establish that on December 31, 19 45 appellant had a net worth of $61,080.73 and that on December 31, 19 50 appellant had an accumulated net worth of $149,504. Appellant's net worth increases and receipts during the prosecution years, based on records of purchases of annuities, automobiles, land and securities by appellant and his wife, were $27,265.38, $9,991.64, $5,533.22, $9,599.72 and $36,033.31 for the years 1946 through 1950, respectively. Moreover, the Government established that prior to the indictment years there was evidence of receipts by appellant far in excess of the salary paid him. There was no evidence that appellant had ever received any gifts or devises other than an one-half interest in a house which will be discussed below. Since, after a careful study of the record, we believe that the figures concerning opening net worth and increases in net worth during the prosecution years were sufficiently grounded in the evidence, it is not necessary to set forth in detail the many items of proof with respect to them.

As to the likely source of the appellant's net worth increases during the indictment years, the Government stated in its bill of particulars as follows:

"1. The likely source of unreported income of the defendant is moneys received by the defendant as an individual from many persons engaged in various illegal activities for the performance by the defendant of his official duties as a member on the Worcester Police Department, for the non-performance by the defendant of his official duties as a member of the Worcester Police Department, and for the performance by the defendant as a member of the Worcester Police Department of services rendered to such persons in connection with such illegal activities."

The Government's theory, plainly stated, was that appellant throughout his career as a police officer had taken graft. The only evidence in support of this theory was that, during the period when the case was under investigation by the Treasury Department, the appellant, through an attorney who represented him only prior to trial, on four instances admitted to Government agents that appellant had taken graft during the pre-indictment years. This evidence was admitted over the appellant's objections and was relied upon by the prosecution to establish the source from which it was likely that the appellant derived his unreported income during the prosecution years.

The record discloses that on November 27, 19 51 appellant's attorney arranged for the opening by the appellant of his safe deposit box in a Westerly, Rhode Island bank, so that agents Hurst and Calatrello might examine its contents. The agents testified in substance that while Hurst was dictating an inventory of the contents to Calatrello, Hurst turned to the appellant and asked him "the source of the funds that were used to acquire the various assets." The appellant replied that "it came from many different people at different times * * * many years ago," whereupon appellant's attorney interrupted and stated that the appellant got the funds during prohibition days "from letting liquor trucks roll" through Worcester. The appellant then "picked up the conversation again and said he got the funds in the nature of a gift and therefore he didn't report it or he didn't think it was taxable."

Moreover, prosecution witnesses testified that on three occasions appellant's attorney, in the absence of the appellant, told them that the money spent by the appellant from 1946 to 1950 came from graft taken by appellant during prohibition days and while he was on the vice squad between 1933 and 1943. These occasions were as follows: (a) on an unspecified date in November or December 1951 to Hurst in his office; (b) on January 24, 19 52 to Hurst in his office; and (c) on May 20, 19 52 to Hurst and attorney Isber of the Treasury's District Counsel's office in Isber's office at a conference during which appellant's attorney was endeavoring to persuade Isber to recommend against criminal prosecution of the appellant.

Government witnesses also testified that during the conference of May 20, 19 52 with Isber, appellant's attorney stated that in February 1949 the appellant obtained "X dollars, after the death of his father, who had saved a lot of cash" from a partnership interest in a tavern which was engaged in the illegal sales of liquor. F. Joseph Donohue, Register of Probate for Worcester County, testified that the petition for probate of the will and the will itself of Pilade Massei, appellant's father, had been duly filed and allowed but no inventory or account had ever been filed. John Bianchi, executor of the will, testified that he had filed no inventory and that the only asset of the estate which he could find was a three tenement house in Worcester. It was established that the appellant in 1949 had received only an one-half interest in the three tenement house from his father's estate.

The trial judge, before admitting the agents' testimony concerning admissions made by appellant's attorney, held voir dire hearings on the attorney's authority to make such admissions for appellant. At these hearings testimony concerning the Treasury Regulations governing powers of attorney and appellant's attorney's statements was heard. Specifically, the Government presented evidence of many letters between appellant's attorney and agent Hurst showing that the attorney had acquired from appellant and had produced whatever information concerning appellant's finances that Hurst requested during the period of investigation before criminal prosecution was decided upon. The evidence revealed that the appellant through his attorney had cooperated fully with the investigating agents. However, the power of attorney that was supposed to have been given by appellant, as provided for by the Treasury Regulations, could not be produced, although there was substantial evidence that such a power of attorney had been filed.

After the voir dire the district court ruled that the statements of appellant's attorney would be admitted into evidence but "that the ultimate question of the authority of the agent to make admissions binding upon this defendant will be for the jury, under instructions which the Court will consider proper at the appropriate time."

Due to this ruling the appellant endeavored to establish the atmosphere and context in which his attorney's statements had been made. The appellant took the position and offered evidence to show that, at the conferences with Hurst and Isber, his attorney was speaking argumentatively and hypothetically with no intention of binding his client. For example, the appellant offered testimony that his attorney cited decisions to Isber and that he had no personal knowledge of appellant's activities during prohibition and the time he was on the vice squad. The district court, as first, refused to allow such testimony and had it stricken when it was recited, stating that "anything that is a contention I am going to exclude, * * * I am not going to have anything go in that is a contention or an argument, whether it's by the Government or the defendant." Later in the trial, however, the court, without stating the reason for its change of mind, did allow such testimony. Indeed, the attorney, appellant's only witness, was permitted to testify at length that his entire presentation to Isber was a legal argument based upon hypotheses and assumptions. And in its charge the court clearly left it to the jury to determine if the attorney's remarks had been statements of fact or hypotheses, specifically stating "you may not consider them against the defendant, * * * if you find that the alleged statements of fact * * * were made as hypotheses."

The trial judge further charged, concerning the statements of graft taking, as follows:

"Now, if you find that the admissions alleged were made, you have to go a step further. Then it becomes your duty to determine if a source is established, because that is what is necessary. Now, I say this advisedly: the source which the Government alleges--and if I am wrong I desire to be corrected--is illegal payments by persons unknown to induce this defendant Massei to perform acts of misfeasance, malfeasance and nonfeasance, to do something that was improper, that was wrong, and that with particular application to the position which he held, a position of a fiduciary nature, a position of a police officer, a member of the police force of the City of Worcester. There is a presumption, and I am going to instruct you on this, there is a presumption that a police officer does not receive illegal payments. That is a very, very efficacious presumption, and it would apply to other men holding offices of trust and confidence, but if you find that that presumption had been rebutted, and rebutted by the test that I have given you, has been rebutted, for example, by the admissions made by the defendant, so far as the presumption applies to him, then I charge you that you may infer, having in mind his continued position in the police department, you may infer that continued payments of this sort were a likely source of the increases in net worth reflected by the Government's evidence, if you find that they showed it."

The appellant objected to the admissibility of his attorney's statements on the grounds of relevancy and materiality, among others, and at the conclusion of the evidence generally moved to strike the testimony concerning the statements made by his attorney on the ground that they were not corroborated by the evidence.

At the close of the Government's case the appellant moved for a verdict of acquittal on the ground "that the evidence on each count is not legally sufficient to support a conviction." The court refused to pass on the motion in view of the fact appellant had not rested his case. At the close of all the evidence appellant renewed his motion for a verdict of acquittal, stating specifically to the court, among other things, that as to likely source the Government had presented only "these alleged admissions by [appellant's attorney] talking about the defendant's activities back in prohibition days, and also the defendant's activities back when he was on the Vice Squad--all prior to 1943. There is absolutely nothing, if your Honor please, in this case, by way of evidence bearing on the years in question--absolutely nothing."

On appeal the appellant presents as contentions, among others, that the alleged admissions made by him through his attorney were unauthorized, irrelevant and uncorroborated. Further, he argues that without these admissions the Government failed to prove a likely source of the appellant's increases in net worth. Therefore, appellant contends the district court should have granted his motion for a verdict of acquittal made at the close of all the evidence.

The Government, on the other hand, urges that the question of whether appellant's attorney had the authority to make the statements in issue properly was left to the jury. As to relevancy, it urges that the statements were relevant as to the establishment of the starting net worth, as to likely source and as tending to prove previous tax evasions, which, the Government claims, would show fraudulent intent on the part of appellant to evade his taxes during the prosecution years. Moreover, the Government seems to maintain that the admissions of graft taking were fully corroborated by independent evidence that appellant remained on the police force through the indictment years and that appellant had met worth increases that cannot be explained in any other way.

After a careful consideration of the record and the briefs, we are of the opinion that the judgment of conviction cannot stand mainly on the ground that the admissions of appellant through his attorney, whether they were properly admissible or not, as the only evidence of likely source, were not corroborated by independent evidence. In view of this the trial judge erred in not striking out the admissions and in not granting the appellant's motion for a verdict of acquittal. Although we believe the crucial issue in this case is that dealing with corroboration of the aforementioned admissions, we shall also touch upon other questions involved therein.

The Supreme Court in Holland v. United States, 348 U. S. 121, 125 (1954) [54-2 USTC ¶9714] stated "that the Government deems the net worth method useful in the enforcement of the criminal sanctions of our income tax laws. Nevertheless, careful study indicates that it is so fraught with danger for the innocent that the courts must closely scrutinize its use." Further, the Court [at p. 129] declared that "Appellate courts should review the cases, bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation." After these general cautionary remarks, the Court set forth certain safeguards for net worth cases. In this connection it was stated [at pp. 137-138] that "Increases in net worth, standing alone, cannot be assumed to be attributable to currently taxable income. But proof of a likely source, from which the jury could reasonably find that the net worth increases sprang, is sufficient." Recently, in reviewing a civil tax deficiency case, we interpreted the above language as meaning that proof of a likely source is "an indispensable element of the net worth method in any of its applications." Thomas v. Commissioner of Internal Revenue, 232 Fed. (2d) 520, 526 (1 Cir. 1956) [56-1 USTC ¶9449].

Generally, likely source has been proved in net worth cases in two ways. Where the taxpayer disclosed ownership of a business it was considered sufficient proof of likely source for the Government to establish that the disclosed business was capable of producing much more income than was reported. Holland v. United States, supra. Also, where the taxpayer was an owner of an undisclosed business, proof that the undisclosed business was capable of producing income was considered sufficient. United States v. Johnson, 319 U. S. 503 (1943) [43-1 USTC ¶9470].

But absent an income producing business, proof of likely source has been of a different kind. For example, in United States v. Chapman, 168 Fed. (2d) 997, 999 (7 Cir. 1948) [48-1 USTC ¶9312], cert. denied 335 U. S. 853 (1948), where the bill of particulars in effect stated "that the source of the 'other income' was the illegal sale of meat at overceiling prices," the Government introduced the evidence of seven meat peddlers all of whom testified that during the year 1943 they paid overceiling prices, paying the excess in currency either to Chapman, the defendant, or his agents. Likewise, in United States v. Skidmore, 123 Fed. (2d) 604 (7 Cir. 1941) [41-2 USTC ¶9716], cert. denied 315 U. S. 800 (1942), where the theory of the Government apparently was that defendant had received unreported income from payments for "protection", there was some evidence of payments made to the defendant by bookmakers.

And in a recent case, which bears a striking similarity to the case at hand, where the Government's theory was that the unreported taxable income was graft received by the defendant for nonperformance of his duties as a policeman and as a member of the vice squad, "[a]lthough there was no direct evidence that the defendant ever received a bribe, the evidence did disclose that he had 'opportunities' flowing from his position in charge of the investigation of vice." United States v. Ford, 237 Fed. (2d) 57 (2 Cir. 1956) [56-2 USTC ¶9823]. The evidence in the Ford case as to "opportunities" of the defendant to receive bribes, though seemingly not essential to the majority's holding, disclosed that there was wide open gambling in Rochester, New York when the defendant was on the vice squad; that the defendant did not take any action against one selling policy slips, although he knew about it; that statistics of gambling cases disposed of in the City Court of Rochester indicated an upswing in prosecution of gambling after other officers had been assigned to the squad; and that the defendant was on friendly terms with a professional gambler. See also Ford v. United States, 233 Fed. (2d) 56 (5 Cir. 1956) [56-1 USTC ¶9473], cert. denied 352 U. S. 833 (1956).

In the instant case the only direct evidence of likely source were the admissions made by appellant through his attorney in which the latter stated that appellant had taken graft during pre-indictment years. Primarily we must consider, insofar as necessary, the appellant's contention that these statements were inadmissible.

First we turn to the three instances when appellant's attorney stated to the Government agents, in the absence of appellant, that appellant had taken graft. "The general rule is that, upon the trial of an accused person, evidence of another offense, wholly independent of the one charged, is inadmissible." Bracey v. United States, 142 Fed. (2d) 85, 87 (D. C. Cir. 1944), cert. denied 322 U. S. 762 (1944). In this connection it was stated in Railton v. United States, 127 Fed. (2d) 691, 693 (5 Cir. 1942):

"* * * It is logical to conclude, and very apt to be concluded, that because a man was dishonest once he will steal again. It is certainly 'more probable' that a crooked official did steal than if he were an upright one. Yet our law forbids these very premises. It cannot be shown that the accused has committed other similar crimes to show that it is probable he committed the one charged. * * *"

It follows from the above cases, we believe, that it was error for the district court to admit these admissions into evidence and to charge the jury, as it did, that from the admission of graft taking during pre-indictment years it could infer appellant continued taking graft during the indictment years, and thus find likely source. It is not a legally permissible inference, absent some reasonable connection, that appellant having committed a criminal act in the past, continued to do so. Such an inference, in essence, would fly in the face of the above quoted rule that "[i]t cannot be shown that the accused has committed other similar crimes to show that it is probable he committed the one charged." Railton v. United States, supra, at 693. See also Lovely v. United States, 169 Fed. (2d) 386 (4 Cir. 1948); Sang Soon Sur v. United States, 167 Fed. (2d) 431 (9 Cir. 1948); Bracey v. United States, supra.

Moreover, we do not believe that the admissions of graft taking prior to 1943, when appellant, as a patrolman during prohibition and as a member and head of the vice squad at a later date, had opportunities open to him for graft, were connected with the prosecution years, since there was no evidence whatsoever showing that these opportunities continued during the indictment years when appellant performed totally different duties as personnel officer and license board investigator. See United States v. Adonis, 221 Fed. (2d) 717 (3 Cir. 1955) [55-1 USTC ¶9310]. Nor do we think that these admissions, due to the remoteness in time from the indictment years and due to the change in appellant's duties as a police officer, are relevant as to likely source, as tending to establish a common design or plan, which seems to have been the situation in Green v. United States, 176 Fed. (2d) 541 (1 Cir. 1949).

However, it might be contended, aside from the issue of the authority of appellant's attorney to make such statements, 2 that even though the admissions might not be relevant as to likely source, they would be admissible if they are relevant as to other elements of the crime, specifically opening net worth and intent 3 to evade taxes. See Green v. United States, supra. Although this might be so, it is significant that the lower court instructed the jury to consider the statements of graft taking only as to likely source. In this connection the court charged:

"Now also, with respect to [appellant], there has been some testimony as to his past conduct. Please bear in mind that that evidence was allowed in only as it has some bearing upon the issue of the source of the defendant's income and as bearing upon the charge before this court. You are to consider it only on that issue alone."

Furthermore, we are of the opinion that even if the court had charged the jury to consider the statements of graft taking on the issues of opening net worth and intent to evade taxes, it would have been error. As to opening net worth, the Government certainly did not need these declarations of graft taking to prove appellant had sizeable holdings on December 31, 19 45 by reason of the fact that appellant contended, as appears from all events leading up to the trial, that he had even more money than the Government gave him credit for on that date. As to the intent to evade taxes, assuming prior evasions were relevant, we do not believe that the circumstances surrounding the prior evasions would be relevant. The jury could have been informed of the prior evasions, if any, without mention of the graft taking. Since it was the prior evasions, in themselves, that had probative value as to intent to evade and not the graft taking, the admissibility of such prejudicial evidence would not have been warranted on this issue.

Therefore, the only purpose, as manifested by the court's charge, that these admissions could have served would be to prove that appellant continued taking graft during the indictment years. This, as we have discussed above, is not a permissible inference. To hold otherwise, in our considered judgment, would be to run the danger of convicting the appellant for the taking of graft some years before the indictment when the indictment charges him with income tax evasion.

Our views on admissibility, as expressed above, also apply to the statement made by the attorney, in appellant's presence, concerning graft taking by appellant during prohibition, at the Westerly, Rhode Island bank on November 27, 19 51. In fact, this admission in referring only to graft taking during prohibition was even farther removed in time and circumstance from the indictment years than the others.

But, notwithstanding the issue of admissibility, the aforementioned admissions should not have gone to the jury as part of the Government's case since they were not corroborated. In Smith v. United States, 348 U. S. 147 (1954) [54-2 USTC ¶9715], where the defendant had made extrajudicial admissions concerning his net worth which the Government presented as part of its case, the Supreme Court held that an admission embracing a vital element of the crime made after the fact to an investigating official must be corroborated by sufficient independent evidence. In so holding the Court stated at page 155:

"The negative implications of petitioner's opening net worth admission formed the cornerstone of the Government's theory of guilt. Without proof that assets on hand at the beginning of the prosecution period did not account for the alleged net worth increases, the Government could not succeed. * * * An admission which assumes this importance in the presentation of the prosecution's case should not go uncorroborated, and this is true whether we consider the statement an admission of one of the formal 'elements' of the crime or of a fact subsidiary to the proof of these 'elements.' It is the practical relation of the statement to the Government's case which is crucial, not its theoretical relation to the definition of the offense."

Similarly, we believe that in the case before us the statements of graft taking, made by appellant's attorney, "formed the cornerstone of the Government's theory of guilt," since without them there would be no proof of likely source. In the Smith case, the Court, after reviewing evidence, independent of the admissions, dealing with the defendant's assets, was satisfied that there was sufficient evidence corroborating the defendant's admissions as to net worth. Likewise, in United States v. Calderon, 348 U. S. 160 (1954) [54-2 USTC ¶9712], where the admissions of the defendant also concerned net worth, the Court found corroboration.

The Government, apparently influenced by the nature of the evidence reviewed by the Supreme Court in the above two cases in deciding the issue of corroboration, in its brief has set forth in great detail its independent evidence as to the appellant's assets and net worth increases. Then it urges that just as that type of evidence was held to be sufficient corroboration of the admissions in Smith and Calderon, it should be so held here. As additional evidence of corroboration it points to the fact that appellant was proved to have been a police officer as stated in his admissions.

We cannot agree with the Government on this point. We think that independent evidence of the defendant's expenditures, assets and bookkeeping techniques was held sufficient corroboration in Smith and Calderon, either as bolstering the admissions or as evidence tending to establish the crime independent of the admissions, by reason of the fact that the admissions in those cases concerned the net worth of the defendants. Here the admissions of graft as relating to likely source disclosed from where appellant's net worth increases likely came. Only independent evidence of some actual graft taking or, at least, opportunity for graft taking could serve as sufficient corroboration of such admissions. Evidence of unexplained net worth increases does not either bolster the admissions of likely source or establish this element of the crime independent of the admissions, for that evidence, independent of the admissions, does not tend to prove from where the net worth increases likely issued.

Nor does the fact that the Government, in addition, independently proved that appellant was a member of the police force during prohibition and a member of the vice squad prior to 1943 provide the necessary corroboration for the pre-indictment years. And certainly independent proof that appellant remained on the police force during the indictment years also falls short of the corroboration, especially since the appellant during the indictment years was performing duties different from those referred to in his admissions.

The Government had to present some evidence of actual graft taking or opportunity for such in order to establish the element of likely source independent of the admissions. Since it failed to do this, the district court should have stricken the evidence concerning the admissions from the record. And since without the admissions there was no evidence of likely source in the record, it should have granted appellant's motion for a verdict of acquittal.

Finally, we must turn to the Government's contention, which the district court adopted in its charge, that even without proof of likely source the appellant could be convicted under the indictment for the year 1949 under the holding of United States v. Adonis, supra. That case seems to hold that where a defendant has made a "calculated misrepresentation designed to conceal current income" [at p. 720] proof of likely source is not necessary. The Government would have us look upon the statement of appellant's attorney, made on May 20, 19 52 before Government attorney Isber, that appellant obtained "X dollars" from his father's estate in 1949, as such a "calculated misrepresentation."

 

Home ] Services ] FAQ ] Site Map ] Contact Us ]

Presented by Alvin Brown and Associates, tax attorney, formerly with the Office of the Chief Counsel of the IRS. 
Call us for all IRS tax issues, problems and emergencies
Protect yourself from IRS intimidation, errors, and penalties.
www.irstaxattorney.com - ab@irstaxattorney.com - (888) 712-7690 - (703) 425-1400