Bank Records and Net Worth Increases
4 Page2
Here,
too, the Government's contention must fall. In the Adonis case
the defendant had previously misrepresented the source of his income in
a judicial proceeding so as to carefully explain away most all his
income for the year under indictment. In the case before us appellant's
attorney while urging against criminal prosecution presented the
appellant's inheritance without even stating an amount. Since we do not
believe this was a "calculated misrepresentation" within the
meaning of the Adonis case, we believe that case is inapplicable.
While
we have mentioned the Adonis case, above, and the Second Circuit Ford
case, earlier in this opinion, we do not mean to infer that we either
approve or disapprove of the exceptions to the necessity of proving
likely source that these holdings seem to have established. Suffice it
to say that we believe that constitutional guarantees of a defendant
must be as zealously guarded in tax evasion cases based upon the net
worth theory as they are in other criminal cases. Inroads upon the
enunciated net worth safeguards can only result in forcing the accused
to prove his innocence, an inherent danger of the net worth theory from
inception.
A
judgment will be entered vacating the judgment of the District Court,
setting aside the verdict, and remanding the case for further
proceedings not inconsistent with this opinion.
1
"§145. Penalties
*
* *
"(b)
Failure to collect and pay over tax, or attempt to defeat or evade
tax. Any person required under this chapter to collect, account for,
and pay over any tax imposed by this chapter, who willfully fails to
collect or truthfully account for and pay over such tax, and any person
who willfully attempts in any manner to evade or defeat any tax imposed
by this chapter or the payment thereof, shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, be fined not more than $10,000, or imprisoned for not more than
five years, or both, together with the costs of prosecution.
*
* *"
2
We note in passing that "[w]hether there was sufficient proof of
the agency to warrant the admission of the acts and declarations of the
agent in evidence, was a preliminary question for the court to
determine." Cliquot's
Champagne
, 70
U. S.
114, 140 (1865). However, the district court here submitted the question
of agency to the jury only after holding voir dire hearings and
presumably it would not have done so if it had not been convinced that
there was sufficient proof of the agency. Under such circumstances we do
not believe it was prejudicial error for the court to leave the question
to the jury.
3
The Government states that the tax return history of appellant prior to
the indictment years shows very little other income besides his police
salary. Further, it urges that from the admission of receipt of graft
previous to the indictment a jury could find that in the preindictment
years Massei evaded his income taxes. Previous evasions constitute
relevant evidence of present intent to evade. See Mitchell v.
United States
, 213 Fed. (2d) 951 (9 Cir. 1954) [54-2 USTC ¶9449], cert. denied
348
U. S.
912 (1955); United States v. Sullivan, 98 Fed. (2d) 79 (2 Cir.
1938) [38-2 USTC ¶9429]; Tinkoff v. United States, 86 Fed. (2d)
868 (7 Cir. 1936) [36-2 USTC ¶9487], cert. denied 301
U. S.
689 (1937).
[Dissenting
Opinion]
WOODBURY,
Circuit Judge, (Dissenting):
It
seems to me that proof of position on a municipal police force, where
everyone knows opportunities for graft exist, is as much proof of a
likely source of unreported income as is proof of ownership of a
business capable of producing income. Cf. Holland v.
United States
, 348
U. S.
121 (1954) [54-2 USTC ¶9714]. And this is especially true where there
is evidence, which I think admissible, indicating that a position on the
police force had been a bountiful source of unreported income in the
form of graft in prior years.
The
admissions made by the appellant's attorney were, I think, clearly
within the scope of his authority to speak for the appellant. I cannot
recognize the legitimacy of such a "special authority" as that
contended by the appellant, whereby the authority for the admission
depends on facts subsequent to the utterance, i. e., if the admission
works out to the advantage of the principal it was authorized, but if
ultimately disadvantage results, there was no authority. And the fact
that the admissions constituted evidence of the commission of a crime
other than the one for which the appellant was on trial does not
necessarily render the admissions inadmissible. Relevancy is the test of
admissibility of this kind of evidence. That is to say, the degree of
probative force as weighed against the possibility of undue prejudice
determines admissibility. Irrelevant testimony of the commission of some
crime other than the one with which a defendant is charged is so highly
prejudicial that it is not admissible for that reason. *
But otherwise relevant testimony is not rendered inadmissible only
because of its tendency to show the commission of another crime. Green
v.
United States
, 176 Fed. (2d) 541, 543 (C. A. 1, 1949). Whether the prejudicial
tendency of relevant evidence of the commission of some other crime
outweighs its probative value in the case on trial is a matter committed
to the discretion of the trial court. Here the evidence of prior graft
as a police officer is so logically relevant to prove a continuing
source of unreported income that I think the court not only did not
abuse its discretion in admitting the evidence but was quite right in
doing so. It seems to me that proof of substantial increases in net
worth during the prosecution years, coupled with evidence of a through
but fruitless search for a non-taxable source for those increases,
served the dual purpose of providing adequate corroboration for the
admissions of graft-taking during pre-prosecution years and in addition
warrants the inference that the appellant continued to take graft during
the years covered by the indictment. The fact that the appellant's
assignments as a police officer during the prosecution years were
different from his previous assignments does not indicate that he did
not take graft during the indictment years. I think there can be little
doubt that opportunities for graft exist whatever a police officer's
assignments or rank may be. Indeed, with higher rank the opportunities
probably would increase. I would affirm on the general line of reasoning
followed by Judge Hinks in United States v. Ford, 237 Fed. (2d)
57 (C. A. 2, 1956) [56-2 USTC ¶9823].
*
Evidence of the commission of another unrelated crime can not be
admitted merely to prove the defendant a "bad man," and
therefore more likely to have committed the crime alleged than a
"good man" with a clean record. While such evidence may in
some situations be of some remote relevance, the probability of undue
prejudice to the defendant therefrom so far outweighs its probative
force with respect to the particular crime alleged that it is
universally excluded.
[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."
Here,
too, the Government's contention must fall. In the Adonis case
the defendant had previously misrepresented the source of his income in
a judicial proceeding so as to carefully explain away most all his
income for the year under indictment. In the case before us appellant's
attorney while urging against criminal prosecution presented the
appellant's inheritance without even stating an amount. Since we do not
believe this was a "calculated misrepresentation" within the
meaning of the Adonis case, we believe that case is inapplicable.
While
we have mentioned the Adonis case, above, and the Second Circuit Ford
case, earlier in this opinion, we do not mean to infer that we either
approve or disapprove of the exceptions to the necessity of proving
likely source that these holdings seem to have established. Suffice it
to say that we believe that constitutional guarantees of a defendant
must be as zealously guarded in tax evasion cases based upon the net
worth theory as they are in other criminal cases. Inroads upon the
enunciated net worth safeguards can only result in forcing the accused
to prove his innocence, an inherent danger of the net worth theory from
inception.
A
judgment will be entered vacating the judgment of the District Court,
setting aside the verdict, and remanding the case for further
proceedings not inconsistent with this opinion.
1
"§145. Penalties
*
* *
"(b)
Failure to collect and pay over tax, or attempt to defeat or evade
tax. Any person required under this chapter to collect, account for,
and pay over any tax imposed by this chapter, who willfully fails to
collect or truthfully account for and pay over such tax, and any person
who willfully attempts in any manner to evade or defeat any tax imposed
by this chapter or the payment thereof, shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, be fined not more than $10,000, or imprisoned for not more than
five years, or both, together with the costs of prosecution.
*
* *"
2
We note in passing that "[w]hether there was sufficient proof of
the agency to warrant the admission of the acts and declarations of the
agent in evidence, was a preliminary question for the court to
determine." Cliquot's
Champagne
, 70
U. S.
114, 140 (1865). However, the district court here submitted the question
of agency to the jury only after holding voir dire hearings and
presumably it would not have done so if it had not been convinced that
there was sufficient proof of the agency. Under such circumstances we do
not believe it was prejudicial error for the court to leave the question
to the jury.
3
The Government states that the tax return history of appellant prior to
the indictment years shows very little other income besides his police
salary. Further, it urges that from the admission of receipt of graft
previous to the indictment a jury could find that in the preindictment
years Massei evaded his income taxes. Previous evasions constitute
relevant evidence of present intent to evade. See Mitchell v.
United States
, 213 Fed. (2d) 951 (9 Cir. 1954) [54-2 USTC ¶9449], cert. denied
348
U. S.
912 (1955); United States v. Sullivan, 98 Fed. (2d) 79 (2 Cir.
1938) [38-2 USTC ¶9429]; Tinkoff v. United States, 86 Fed. (2d)
868 (7 Cir. 1936) [36-2 USTC ¶9487], cert. denied 301
U. S.
689 (1937).
[Dissenting
Opinion]
WOODBURY,
Circuit Judge, (Dissenting):
It
seems to me that proof of position on a municipal police force, where
everyone knows opportunities for graft exist, is as much proof of a
likely source of unreported income as is proof of ownership of a
business capable of producing income. Cf. Holland v.
United States
, 348
U. S.
121 (1954) [54-2 USTC ¶9714]. And this is especially true where there
is evidence, which I think admissible, indicating that a position on the
police force had been a bountiful source of unreported income in the
form of graft in prior years.
The
admissions made by the appellant's attorney were, I think, clearly
within the scope of his authority to speak for the appellant. I cannot
recognize the legitimacy of such a "special authority" as that
contended by the appellant, whereby the authority for the admission
depends on facts subsequent to the utterance, i. e., if the admission
works out to the advantage of the principal it was authorized, but if
ultimately disadvantage results, there was no authority. And the fact
that the admissions constituted evidence of the commission of a crime
other than the one for which the appellant was on trial does not
necessarily render the admissions inadmissible. Relevancy is the test of
admissibility of this kind of evidence. That is to say, the degree of
probative force as weighed against the possibility of undue prejudice
determines admissibility. Irrelevant testimony of the commission of some
crime other than the one with which a defendant is charged is so highly
prejudicial that it is not admissible for that reason. * But
otherwise relevant testimony is not rendered inadmissible only because
of its tendency to show the commission of another crime. Green v.
United States
, 176 Fed. (2d) 541, 543 (C. A. 1, 1949). Whether the prejudicial
tendency of relevant evidence of the commission of some other crime
outweighs its probative value in the case on trial is a matter committed
to the discretion of the trial court. Here the evidence of prior graft
as a police officer is so logically relevant to prove a continuing
source of unreported income that I think the court not only did not
abuse its discretion in admitting the evidence but was quite right in
doing so. It seems to me that proof of substantial increases in net
worth during the prosecution years, coupled with evidence of a through
but fruitless search for a non-taxable source for those increases,
served the dual purpose of providing adequate corroboration for the
admissions of graft-taking during pre-prosecution years and in addition
warrants the inference that the appellant continued to take graft during
the years covered by the indictment. The fact that the appellant's
assignments as a police officer during the prosecution years were
different from his previous assignments does not indicate that he did
not take graft during the indictment years. I think there can be little
doubt that opportunities for graft exist whatever a police officer's
assignments or rank may be. Indeed, with higher rank the opportunities
probably would increase. I would affirm on the general line of reasoning
followed by Judge Hinks in United States v. Ford, 237 Fed. (2d)
57 (C. A. 2, 1956) [56-2 USTC ¶9823].
*
Evidence of the commission of another unrelated crime can not be
admitted merely to prove the defendant a "bad man," and
therefore more likely to have committed the crime alleged than a
"good man" with a clean record. While such evidence may in
some situations be of some remote relevance, the probability of undue
prejudice to the defendant therefrom so far outweighs its probative
force with respect to the particular crime alleged that it is
universally excluded.
[58-1
USTC ¶9326]
United States of America
, Petitioner v. William V. Massei
Supreme
Court of the
United States
, No. 98, 355
US
595, 78 SCt 495, 3/3/58, Affirming CA-1, 57-1 USTC ¶9434, 241 Fed. (2d)
895
On writ of certiorari to the United States Court of Appeals for the
First Circuit.
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]
Tax evasion: Net worth method: Proof of likely source of income.--A
District Court had found taxpayer guilty of tax evasion. The First
Circuit remanded the case for further proceedings and set aside the
verdict, basing its remand in part on the absence of "proof of
likely source," which it regarded as an indispensable element of
the net worth method. The Supreme Court affirms the judgment of the
First Circuit because a new trial is permissible under the terms of its
order. However, it makes it clear that in Holland v. U. S., 348
U. S.
121, 54-2 USTC ¶9714, the court did not intend to imply that proof of
likely source was necessary in every case. Should all possible sources
of nontaxable income be negatived, there would be no necessity for proof
of a likely source.
J.
Lee Rankin, Solicitor General, Charles K. Rice, Assistant Attorney
General, Earl E. Pollock, Assistant to Solicitor General, Joseph F.
Goetten, John J. McGarvey, Department of Justice, for petitioner.
Richard Maguire,
31 Milk Street
,
Boston
,
Mass.
(Thomas J. Carens,
Rob
ert J. Sherer, of counsel), for respondent.
[Proof
of Likely Source]
PER
CURIAM:
The
Court of Appeals [57-1 USTC ¶9434] has based its remand in part on the
absence of "proof of likely source," which it regards as an
"indispensable" element of the net worth method, citing Holland
v. United States, 348 U. S. 121 [54-2 USTC ¶9714], in support of
its conclusion. 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 nontaxable 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. The above explanation must be taken into consideration in
applying the
Holland
doctrine to this case. A new trial being permissible under the terms of
the order of the Court of Appeals, we affirm its judgment.
JUSTICE
DOUGLAS would affirm the judgment below on the opinion of the Court of
Appeals, 241 Fed. (2d) 895, 900-901 [57-1 USTC ¶9434].
[75-1
USTC ¶9278]
United States of America
v. William S. Terrell, a/k/a James Terrell and Goldfinger, Defendant
U.
S. District Court, So. Dist. N. Y., 74 Cr. 1058, 390 FSupp 371, 2/20/75
[Code Secs. 7201 and 7203]
Criminal penalties: Evading or defeating collection of tax: Bank
records and net worth increase: Fictitious names.--The taxpayer was
convicted of willfully evading the payment of tax for the years 1968,
1969 and 1970. The evidence indicated that the taxpayer was unable to
pay small sums in 1966 but he was able to make sizable cash payments in
each of the years involved. The taxpayer used sham corporations and the
names of other parties to conduct many transactions. There was evidence
of his involvement in the illicit narcotics business. Since the taxpayer
offered no evidence to show that the funds came from sources of
nontaxable income, the court concluded that the government established
beyond a reasonable doubt all the essential elements of the offense. The
court did not reach the lesser offenses (under Code Sec. 7203), which
were already included in the tax evasion offenses.
Paul
J. Curran, United States Attorney, Steven A. Schatten, Assistant United
States Attorney, New York, N. Y., for U. S. Nancy Rosner, 401 Broadway,
New York, N. Y., for defendant.
Opinion,
Findings of Fact
WEINFELD,
District Judge:
The
defendant, William S. Terrell, is charged with willful evasion of his
individual income taxes for the years 1968, 1969 and 1970, under counts
1, 3 and 5, respectively, in violation of 26 U. S. C., section 7201.
[Charges
Made]
The
tax evasion charges are based upon a claim that in each year the
defendant received substantial taxable income, knew that taxes were due
thereon, and that his failure to file returns was deliberate,
intentional and with the unlawful purpose of evading the payment of
taxes due.
The
indictment further charges that with respect to each of the years 1968,
1969 and 1970, the defendant willfully and knowingly failed to file tax
returns, counts 2, 4 and 6, respectively, in violation of 26 U. S. C.,
section 7203. Thus as to each year the defendant is charged with the
lesser included offense under section 7203.
The
government urges that upon the totality of evidence it has fully
sustained its burden of proof beyond a reasonable doubt as to the
essential elements under counts 1, 3 and 5, the willful tax evasion
counts: (1) that the defendant received substantial taxable income upon
which substantial federal income tax was due and owing from the
defendant for the year in question; (2) that the defendant made an
attempt to evade or defeat the tax due; and (3) that he did so
willfully.
The
government contends that in each of the tax years the defendant had
substantial income derived from extensive illicit narcotic activities.
The evidence received on this subject was limited strictly to the issue
of whether or not the defendant had a source of taxable income during
this period.
[Admissions
Established Income]
I.
As to this first element, the government has met its burden that the
defendant received substantial income as a result of his activities as a
narcotics distributor. This was abundantly established by the
defendant's admission to James Nauwens, a member of the Joint Task
Force, that his largest income from narcotics activities was in the year
1969, when he made as much as $60,000 a day for about a four-month
period. The defendant also acknowledged that he was good for more than
$100,000 a week from a narcotics partnership operation in
Detroit
,
Michigan
. There was no evidence to impugh the integrity or the reliability of
these admissions made by the defendant after he was fully advised of his
constitutional rights. 1
In
addition, Ferdinand Hunt testified that he made deliveries of half kilo
and kilogram packages of narcotics for the defendant, for which he
picked up $18-20,000 for each delivery, following which he left the
moneys at designated premises. Hunt's testimony was received under a
grant of immunity. He sought at this trial to limit his services with
the defendant up to the year 1967 in contrast with his sworn testimony
at another trial previously conducted in this district in which Hunt was
a defendent. Hunt then testified that his dealings with the defendant
took place from 1967 through 1969. It was evident to this court, based
upon Hunt's demeanor, that he was trimming his testimony by dating his
activities with the defendant prior to the income tax years at issue in
an effort to help the defendant. However, his prior sworn trial
testimony may be and is considered affirmative evidence. 2
[Activities'
Existence Inferred]
Entirely
apart from the foregoing, as already noted, the defendant admited that
the largest income derived from his narcotics dealings was in the year
1969. This rationally permits an inference that his narcotics activities
existed for a reasonable time both before and after that date, absent a
showing of material change in circumstances, and none has been shown to
exist. 3 An inference
that defendant had income from narcotics dealings in 1968 and 1970, as
well as in the year 1969, based upon his admission to Agent Nauwens, is
warranted from his similar course of conduct in 1968 and 1970, discussed
hereafter--large cash expenditures; continuous purchases of cars coupled
with defendant's statements to Nauwens that he bought cars frequently to
frustrate attempts by government agents at surveillance of his
activities; the use of sham corporations and individuals as conduits for
transactions in an effort to cover up that he was the true party in
interest; and evidence that in 1968 and 1970, as in 1969, the defendant
has no probable source of any other income except through his narcotics
activities.
[Cash
Expenditures Method]
To
further support its claim, the government relies upon the specific cash
expenditure method to demonstrate that in each of the tax years the
defendant expended, directly or through nominees, substantial sums for
the purchase of homes, improvements on one of them, and the purchase of
expensive cars, and that these expenditures indicate that defendant has
taxable income in these years. In support of this contention, the
government effectively negated that prior to 1968, the defendant had
sufficient funds or access to nontaxable funds to account for those
expenditures.
The
evidence establishes that the last time the defendant filed a personal
income tax return was in the year 1960, when he obtained a refund of
$84.30; that for the years 1961 through 1966 he filed no personal income
tax returns with the Manhattan District of the Internal Revenue Service;
and that for the years 1967 through 1970 he did not file any personal
income tax return anywhere, and that the Social Security records show no
earnings of the defendant beyond the first quarter of 1963. In 1967,
defendant opened a bank account, the balance of which never exceeded
$175. An investigation by an Internal Revenue Agent into various banks
in the area of the defendant's residences and business addresses
revealed no other bank accounts in the name of the defendant. Zula
Terrell, (his mother), Frances Terrell (his wife), Olive Terrell, Olive
McDonald, Teasla Taxi or Terrell Productions. 4
The
evidence also establishes that for 1966-1971 Frances Terrell, his wife,
and Olive McDonald, referred to hereafter whom he at one time described
as a secretary and at another as a dependent, filed no personal income
tax returns with the Brooklyn, Manhattan and Newark District Offices of
the Internal Revenue Service. In a 1970 loan application the defendant
represented that Frances Terrell was a housewife with no income.
[Unsufficient
Funds in 1966]
In
1966 the defendant was arrested on two separate State charges and held
in bail, which was reduced to $15,000 on each charge. He did not post
bail for more than four months and remained in detention until bail was
furnished upon collateral put up by a friend of his mother whose help
had been solicited by the mother, 5 and others.
The
defendant was a lessee of store premises in the Bronx, New York, and a
dispossess proceeding for nonpayment of three months' rent totalling
$375 was commenced in July 1967 and a judgment by default was entered on
September 8, 19
67, awarding possession of the premises to the landlord. The inference
is permissible that in 1966 the defendant was without funds to put up
the bail required to effect his release or to pay the premium for bonds,
and further that in September 1967 he was without funds to pay the
modest three months rent of $375 for the store premises.
[Source
of Income]
There
is no contention that the defendant furnished any leads to the
government as to any possible nontaxable source of income to account for
his expenditures from 1968 through 1970. 6 Here the
government proved a likely source of income. It was not required to
negate all possible sources of nontaxable income, 7 particularly
when defendant himself furnished no leads to the government, a matter
within his peculiar knowledge. 8
Following
the defendant's dispossess in early September 1967, he thereafter
commenced to purchase expensive automobiles to the end of the year. Upon
the evidence it appears likely that it was at or about this period that
defendant commenced his illicit narcotics activities and that the income
derived therefrom accounts for the purchase of those cars. The court
finds that as of
December 31, 19
67 the defendant did not have sufficient funds on hand to make the very
substantial expenditures totalling almost $300,000 in the tax years in
question.
Year
1968--Count 1
In
the year 1968 the defendant purchased seven automobiles, six Cadillacs
and a Lincoln Continental, for an approximate net cost of $37,000. 9 These
purchases were made by the defendant either in his own name or in the
name of Terrell Productions, Inc., a corporation dominated, controlled
and wholly owned by the defendant, of which he described himself as
"president and principal . . .." The evidence warrants a
finding that Terrell Productions, Inc., as well as Teasla Taxi, Inc.,
also used by the defendant, were sham corporations used by him to cover
up or conceal that he was the real party in interest in various
transactions and that he was the individual making the payments for
various acquisitions. In the instance of Teasla Taxi, Inc., he
acknowledged he was the owner of a fleet of thirty cars operated under
its name. The payment for cars was generally made in cash. While the
defendant did not personally hand over cash for a number of these
transactions, the evidence is overwhelming that he was the source of the
funds and the purchaser of the cars. He ordered the cars, signed various
purchase orders for the cars, had control of them, and acquired them for
the purpose of throwing off surveillance agents.
In
all, the evidence establishes by the required degree of proof that for
the year 1968 defendant received substantial income, approximately
$35,000, upon which substantial taxes were due.
Year
1969--Count 3
In
August 1969, the defendant purchased a home at
445 North Woodland Street
,
Englewood
,
New Jersey
, the title of which was taken in his name and one Olive Terrell. 10 The
purchase was made by defendant through a George Brooks, a real estate
broker, and the seller was told that all the money would be paid through
the broker. Upon the signing of the contract the seller received from
Brooks $20,000 cash in 100 and fifty dollar bills on account of the
purchase price. The seller testified before the grand jury that at the
closing of title he received approximately a $10,000 cash balance from
the defendant himself, but at this trial he testified that this sum came
from Brooks. However, the seller's testimony leaves no doubt that the
defendant was the purchaser of the home and that he supplied the cash
payments of $30,000, using Brooks as the intermediary. The defendant was
present on each occasion, that is, at the contract and title closing,
when the cash payments were made. The suggestion by defense counsel that
Brooks may have made a gift of that sum flies in the face of substantial
evidence. The seller's testimony is explicit that "Mr. Terrell
bought the house through Mr. Brooks and all the transactions of the
money was done [sic] through Mr. Brooks."
[Large
Purchases]
Following
the purchase of this home substantial alterations and improvements were
made totalling $85,173 from October 1969 through August 1970, of which
$38,490 was expended in 1969 and the balance in 1970. The contract for
these improvements was signed by defendant as "owner." Of the
total paid in 1969 on account of the improvements the contractor
received $28,000 by checks from the George Brooks Realty Company, Inc.,
which acted on behalf of the defendant in disbursing the funds. Between
85 and 90% of the balance of $10,490 was paid directly by the defendant
in cash to the contractor. A further expenditure of $2,000 was made for
the installation of a TV surveillance and alaram system in the home.
In
that same year, ten Cadillac cars were purchased at a total cost of
$87,153. Two of these cars were customized at an additional cost of
$9,080. In these instances, as in the prior years, the defendant was the
negotiator for, and the purchaser of, the cars, title to which in nine
instances was taken in the name of Teasla Taxi, Inc., the contracts for
which, in six instances, were signed by him as an officer. Title to the
other car was taken in the name of Sally Christopher, but the salesman
for this transaction testified that all but $500 of the purchase price
was paid for by Teasla Taxi. Payments for these ten purchases were made
in cash. Two payments on account of eight cars were made in the amounts
of $29,393 and $20,725 in twenty dollar bills or less; hours were
required to count the currency.
In
sum, the total expenditures by the defendant for the purchase of a home,
improvements thereon and the purchase of ten cars, totalling $168,000,
together with the direct evidence that the defendant had sizeable income
from his narcotics activities, establish that in 1969 the defendant
received substantial income on which substantial taxes were due.
Year
1970--Count 5
In
1970, payments were made in the amount of $46,683 on the balance due for
the improvements of defendant's home at
445 North Woodland Street
. Of this amount, $44,683 was paid in cash and the defendant personally
paid 85 to 90% of this amount to the contractor.
In
January of 1970, within four months after he acquired the
North Woodland Street
home in
Englewood
,
New Jersey
, the defendant bought a second home at
224 Tenafly Road
,
Englewood
,
New Jersey
, and took title in his name and his wife
Frances
[sic]. He expended therefor $18,000 over and above the mortgages
and he and his wife executed a purchase money mortgage. George Brooks
Realty Company was also the defendant's agent in this purchase. Checks
from Brooks Realty Company were used to make mortgage payments in 1970.
In
February of this year, the defendant purchased in his individual name a
Cadillac Eldorado demonstrator car for $11,500. The same company from
whom he purchased this car also customized four other cars, title to
which was in Teasla Taxi. The defendant personally directed how the cars
were to be customized. A total cash payment of $20,000 was made for the
demonstrator car and the customizing, delivered in a paper bag in
denominations of primarily fives, tens and twenty-dollar bills. This
cash payment was made in response to a phone call to the defendant after
a check drawn on the joint account of William and Olive Terrell of 445
North Woodland, signed by Olive Terrell, was returned for insufficient
funds. There is no doubt that the $20,000 came from the defendant.
The
evidence abundantly establishes that in 1970 the defendant received
substantial income in the amount of approximately $87,000 upon which
substantial taxes were due.
As
to the third and fifth counts, an additional finding is made. Assuming,
as defendant argues, that the evidence is insufficient to establish that
payments made by or in the name of other parties cannot be attributed to
him, the evidence is beyond dispute that in the years 1969 and 1970 the
defendant personally made 85-90% of the cash payments to the contractor
for the balance of $54,000 (over and above the check payments by George
Brooks Realty Company) for improvements on his home at 445 North
Woodland Street. On this evidence alone, not considering other cash
payments made directly and personally by defendant for cars purchased in
his individual name, the court finds that in each of the years 1969 and
1970 the defendant had substantial income on which substantial taxes
were due.
[Second
Element of Evasion]
II.
The government has also established beyond a reasonable doubt the second
element of the offense charged under 26 U. S. C., section 7201, in
counts 1, 3 and 5, namely, that for each of the years 1968, 1969 and
1970, the defendant attempted to evade and defeat the payment of taxes
due. His failure to file returns in any of these years, when he had
substantial income and substantial taxes were due, was deliberate,
purposeful and intended to evade payment of the taxes due. The record
further establishes beyond any question that defendant attempted to
conceal his income in each year and evade payment of taxes due by
purchasing automobiles in the names of sham corporations; by making
payment in major transactions with large sums of cash in small
denominations; by purposely avoiding making records in his own name in
his expenditures; by using other persons to execute transactions and
make payments on his behalf; and by falsely concealing the source and
amount of his income as he did in a loan application in 1970.
This
calculated conduct, repeatedly engaged in, was an attempt to mislead and
conceal his income and to evade payment of substantial taxes due. 11
[Absence
of Records]
III.
As to the third element of the offense, that the defendant willfully
attempted to evade the payment of taxes, the court finds overwhelming
evidence of willful intent. The defendant was fully aware of his duty to
pay taxes in his income and he deliberately attempted to evade payment
thereof. 12
The
defendant's willful intent is inferred from his use of large sums of
cash in the major portion of his transactions, 13 his
practice of placing his assets in the names of other persons, 14 his use of
sham corporations, 15 and by his
conduct in avoiding making records usual in transactions of the kind in
which he was engaged. 16 Further
evidence of his willful intent is found in the fact that he did file a
tax return in the year 1960, thus demonstrating his awareness of his
duty to pay taxes, and in his loan application of January 1970, wherein
he falsely stated that on his income of $18,600 as a gas station
mechanic he owed $2,300 in federal and state taxes for the past twelve
months. What the Supreme Court said in Spies v. United States 17 is
particularly appropriate here: "If the tax evasion motive plays any
part in such conduct the offense may be made out even though the conduct
may also serve other purposes such as concealment of other crime."
The
court therefore finds that the government has established beyond a
reasonable doubt all the essential elements of the offense charged under
26 U. S. C., section 7201, and finds the defendant guilty on each of
counts 1, 3 and 5. In view of these findings, it is unnecessary to reach
the lesser included offenses charged under 26
U. S.
C., section 7203, in counts 2, 4 and 6. 18 However,
were the court called upon to decide these counts, the evidence
overwhelimingly establishes that the government also has sustained its
burden of proof as to counts 2, 4 and 6 and that a verdict of guilty on
each is warranted.
The
foregoing shall constitute the Court's Findings under Rule 23(c) of the
Federal Rules of Criminal Procedure.
1
Defendant argues that there is no independent evidence corroborating his
admissions to Agent Nauwens as required by Smith v. United States
[54-2 USTC ¶9715], 348
U. S.
147, 155 (1954). The independent evidence, however, need only establish
either that the admissions were reliable or that the crime charged was
in fact committed. United States v. Marcus [68-2 USTC ¶9599],
401 F. 2d 563, 565 (2d Cir. 1968), cert. denied, 393
U. S.
1023 (1969); United States v. Pawlak [72-2 USTC ¶9646], 352 F.
Supp. 794, 797 (S. D. N. Y. 1972). As indicated later, in addition to
Hunt's corroborative testimony, the record contains substantial
independent evidence that the defendant had taxable income in these
years, thus corroborating his admissions. United States v. Smith,
348
U. S.
at 157; United States v. Calderon [54-2 USTC ¶9712], 348
U. S.
160, 166-67 (1954).
2
United States v. Klein, 488 F. 2d 481 (2d Cir. 1974); United
States v. Pfingst, 477 F. 2d 177, 197-98 (2d Cir.), cert. denied,
412 U. S. 941 (1973); United States v. Briggs, 457 F. 2d 908 (2d
Cir.), cert. denied, 409 U. S. 986 (1972); United States v.
DeSisto, 329 F. 2d 929 (2d Cir.), cert. denied, 377 U. S. 979
(1964).
3
McFarland v. Gregory, 425 F. 2d 443 (2d Cir. 1970); Amalgamated
Clothing Workers of
America
v. NLRB, 345 F. 2d 264 (2d Cir. 1965); Russell, Poling &
Co.
v. Conners Standard Marine Corp., 252 F. 2d 167 (2d Cir. 1958); 2
Wigmore on Evidence §435 (3d ed. 1940). See e.g., Government of
Virgin Islands v. Williams, 438 F. 2d 1085 (3d Cir.), cert.
denied, 404
U. S.
881 (1971).
4
See United States v. Penosi [72-1 USTC ¶9103], 452 F. 2d 217
(5th Cir. 1971), cert. denied, 405
U. S.
1065 (1972).
5
See United States v. Calles [73-2 USTC ¶9544], 482 F. 2d 1155,
1159 (5th Cir. 1973).
6
See
Holland
v.
United States
[54-2 USTC ¶9714], 348
U. S.
121, 138 (1954).
7
United States v. Massei [58-1 USTC ¶9326], 355
U. S.
595 (1958); United States v. Calles [73-2 USTC ¶9544], 482 F. 2d
1155, 1159 (5th Cir. 1973).
8
Holland
v.
United States
[54-2 USTC ¶9714], 348
U. S.
121, 138 (1954). Cf. Fleichtmeir v. United States, 389 F. 2d 498,
503 (9th Cir. 1968); Talik v. United States [65-1 USTC ¶9163],
340 F. 2d 138, 140 (9th Cir. 1965); Kampmeyer v. United States
[55-2 USTC ¶9779], 227 F. 2d 313 (8th Cir. 1955).
9
During the course of the trial, defense counsel made objections when a
witness called by the prosecution could not make a positive
identification of the defendant as the person with whom he dealt, but
could only say that the defendant "looks like" or
"resembles" the person. Passing for the moment the fact that
some of these witnesses produced documents containing defendant's
signature (a matter not disputed by the defense), there is no rule of
law that identifications must be positive beyond any possible doubt. The
sufficiency of an identification is generally for the trier of fact and
testimony that the defendant "looks like" or
"resembles" the person about whom the witness is testifying
may be sufficient when considered with other evidence. United States
v. Lewis, 485 F. 2d 236, 237 (5th Cir. 1973), cert. denied,
415 U. S. 980 (1974); United States v. Scarpellino, 431 F. 2d
475, 477 (8th Cir. 1970); United States v. Johnson, 427 F. 2d
957, 961 (5th Cir. 1970); Smith v. United States, 358 F. 2d 695
(5th Cir.), cert. denied, 384 U. S. 971 (1966); United States
v. Kelley, 334 F. Supp. 435, 436 (S. D. N. Y. 1971), aff'd
without opinion, 471 F. 2d 647 (2d Cir. 1973).
10
The record is not clear whether Olive Terrell was defendant's wife at
this time or at any other time. A Frances Terrell, acknowledged to be
the defendant's wife, was named as a grantee with respect to the
purchase of a second home, referred to under 1970 count 5.
11
Spies v.
United States
[43-1 USTC ¶9243], 317
U. S.
492, 499 (1943).
12
United States v. Berger [71-1 USTC ¶9387], 325 F. Supp. 1297 (S.
D. N. Y.), aff'd, [72-1 USTC ¶9329] 456 F. 2d 1349 (2d Cir.
1971), cert. denied, 409
U. S.
892 (1972).
13
Cannady v.
United States
, 354 F. 2d 849, 855 (8th Cir. 1966); United States v. Holovachka
[63-1 USTC ¶9291], 314 F. 2d 345, 358 (7th Cir.), cert. denied,
374
U. S.
809, (1963).
14
United States v. Calles [73-2 USTC ¶9544], 482 F. 2d 1155 (5th
Cir. 1973);United States v. Holovachka [63-1 USTC ¶9291], 314 F.
2d 345 (7th Cir.), cert. denied, 374 U. S. 809 (1963); United
States v. Shipani, 293 F. Supp. 156 (E. D. N. Y. 1968), aff'd,
414 F. 2d 1262 (2d Cir. 1969), cert. denied, 397 U. S. 922
(1970).
15
United States v. Holovachika [63-1 USTC ¶9291], 314 F. 2d 345,
358 (7th Cir.), cert. denied, 374 U. S. 809 (1963); Remmer v.
United States [53-1 USTC ¶9421], 205 F. 2d 277 (9th Cir. 1953), vacated
on other grounds, [54-1 USTC ¶9274] 347 U. S. 227 (1954), reaff'd,
[55-1 USTC ¶9500] 222 F. 2d 720 (9th Cir.), cert. denied, 350 U.
S. 820 (1955). Cf. United States v. Rifkin [71-2 USTC ¶9751],
451 F. 2d 1149 (2d Cir. 1971).
16
Spies v.
United States
[43-1 USTC ¶9243], 317
U. S.
492, 499 (1943).
17
[43-1 USTC ¶9243] 317 U. S. 492, 499 (1943).
18
Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 349
(1965); United States v. Slutsky [73-2 USTC ¶9733], 487 F. 2d
832, 845 (2d Cir. 1973), cert. denied, 416 U. S. 937 (1974); United
States v. Newman [73-2 USTC ¶9719], 468 F. 2d 791, 796 (5th Cir.
1972), cert. denied, 411 U. S. 905 (1973); United States v.
Rosenthal [72-1 USTC ¶9205], 454 F. 2d 1252, 1255 n. 2 (2d Cir.), cert.
denied, 406 U. S. 931 (1972).
[65-1
USTC ¶9328]
United States of America
, Plaintiff-Appellee v. Fred T. Mackey, Defendant-Appellant
(CA-7),
U. S. Court of Appeals, 7th Circuit, No. 14584, 345 F2d 499, 4/1/65,
Affirming unreported District Court
[1954 Code Secs. 446 and 7201]
Crimes: Evasion of tax: Net worth method.--A jury conviction of a
taxpayer for willful evasion of income tax based on the net worth
increase method was affirmed where the evidence was sufficient to
support the Government's contention that an increase in the taxpayer's
net worth was due to his operation of a policy wheel and not to
additional income of several corporations owned by the taxpayer. A minor
variance between the bill of particulars and the evidence introduced at
the trial did not result in reversible error.
[1954 Code Sec. 7201]
Crimes: Evasion of tax: Jury conviction.--A jury conviction of a
taxpayer for willful evasion of income tax was affirmed over the
taxpayer's allegations that he was denied certain peremptory challenges,
that a member of the jury was the secretary to the grand jury foreman,
and several other objections.
[1954 Code Sec. 7201]
Crimes: Evasion of tax: Willfulness.--A jury conviction of a
taxpayer for willful evasion of income tax was affirmed where certain
actions of the taxpayer were sufficient to support a jury finding of
willfulness.
Charles
A. McNelis, Department of Justice, Washington, D. C. 20530, Alfred W.
Moellering, United States Attorney, Ft. Wayne, Ind., for
plaintiff-appellee.
Rob
ert J. Downing, William M. Ward, Edward B. Stroh,
105 S. LaSalle St.
,
Chicago
,
Ill.
, for defendant-appellant.
Before
HASTINGS, Chief Judge, and KILEY and SWYGERT, Circuit Judges.
HASTINGS,
Chief Judge.
Defendant
Fred T. Mackey was indicted in March, 1963 in five counts for
"willfully and knowingly attempt[ing] to evade and defeat a large
part of the income tax due and owing by him and his wife for the
calendar year[s] of 1956 [through 1960] by willfully preparing and
causing to be prepared * * * false and fraudulent income tax return[s] *
* * [i]n violation of Section 7201 Internal Revenue Code; 26 U. S. C.
Section 7201."
A
jury verdict and judgment entered thereon found defendant guilty on all
five counts. Defendant was fined $10,000 and costs and sentenced to five
years in prison on each count, the prison sentences to run concurrently.
Defendant paid the fine and costs which totaled $65,000. The district
court stayed the judgment pending appeal and defendant appealed.
Government
used the net worth method to prove its case. Government's theory at the
trial was as follows. The net worth of defendant and his wife at the
starting point,
December 31, 19
55, was $361,461.52 and their net worth at the end of 1960 was
$1,519,744.05. These amounts included assets held in the names of the
Gibraltar
insurance companies (discussed infra) and other nominees for the
benefit of defendant. During this five-year period defendant and his
wife reported $143,339.24 of taxable income.
Government
contended that the Gibraltar Industrial Life Insurance Company
(Gibraltar Industrial), Gibraltar Mutual Life Insurance Company
(Gibraltar Mutual) and the M. W. E. & S. Investment Company, Inc., 1 were
entirely under defendant's dominion and control. It asserted these
companies had three safes into which flowed an average of about $4,000
per week in currency during the five prosecution years, in excess of the
sums which could be accounted for by the combined gross receipts of the
companies, plus the income reported by defendant and his wife, and that
defendant helped himself to this excess at will.
[Policy
Wheel Operation]
Government's
theory was that the source of defendant's excessive net worth increases
was a policy wheel operation which defendant admitted conducting and
that the excess of $4,000 per week, supra, was from profits
earned by defendant on this operation.
Government,
in its brief, states that the main issue at the trial was whether this
excess $4,000 per week was from the policy wheel operation or from
unrecorded and unreported premium income earned by the
Gibraltar
companies.
On
appeal, defendant lists seventeen issues and states:
"The
principal errors relied upon are: the court refused to grant defendant
ten peremptory challenges as provided in Rule 24(b), Federal Rules of
Criminal Procedure, and was granted only eight such challenges;
numberous errors in the admission of evidence, both oral testimony and
documentary; failure to strike an admittedly incorect and inaccurate net
worth summary, Gov. Ex. 800 (consisting of 50 pages) and related
exhibits 801, 802 and 803; failure of the government to meet the
standards set down for net worth cases and the unconstitutionality of
such method as applied to this case; failure to grant many defendant
motions to suppress and strike evidence and for mistrial; denial of
motion for acquittal made at conclusion of the government's case and
after the jury verdict; in certain instruction given and refused and in
repeating certain instructions to the jury during its deliberation;
prejudicial remarks of the court; and the failure to hold a post-trial
hearing upon the allegation that a petit juror was secretary to the
foreman of the grand jury."
[Peremptory
Challenges]
I.
Defendant contends the district court committed reversible error by
invoking a rule which limited him to eight peremptory challenges rather
than permitting him ten as provided by Rule 24(b), Federal Rules of
Criminal Procedure, 18
U. S.
C. A.
On
the first day of the trial, the district court announced that Government
would first have opportunity to exercise peremptory challenges and that
upon exercising these challenges no further challenges would be allowed
except as to new jurors who might come into the jury box as a result of
challenges made by defendant. The court said the same rule would apply
to defendant. The effect of this rule was to permit each side one
opportunity to challenge each prospecitive juror. Defendant objected to
this rule.
Government
did not exercise any challenges on its first opportunity. Defendant
exercised eight peremptory challenges and tendered the panel back to
Government. Government challenged one of the eight new members of the
panel, accepted the juror who replaced this member and accepted the jury
as then constituted. Defendant expressed the desire to exercise one or
two of his remaining two peremptory challenges as to prospective jurors other
than the one who replaced the member challenged by Government. The
court ruled that defendant could only peremptorily challenge the new
juror. Defendant objected to this ruling and did not challenge the new
juror.
The
manner in which peremptory challenges are exercised is within the sound
discretion of the trial court, see Pointer v. United States, 151
U. S. 396, 410 (1894), and in the absence of violation of settled
principles of criminal law, federal statutes or constitutional rights of
defendant, such discretion is not abused. See
Id.
at 407, 408.
Defendant
complains he was given only one opportunity to challenge each juror and
that while he had the opportunity to exercise all ten of his peremptory
challenges, the court's rule denied him the effective use of two
challenges.
[One
Challenge per Person]
The
Supreme Court approved a rule which gave each party only one opportunity
to peremptorily challenge each juror. St. Clair v.
United States
, 154
U. S.
134, 147-148 (1894). The Supreme Court also approved a method which
could deny a party the effective use of some of his peremptory
challenges. In Pointer v. United States, supra, the trial court
used a method of peremptory challenge by which all jurors were examined,
thirty-seven found qualified to sit and each party given a list of these
thirty-seven jurors. From these lists Government could strike five and
defendant twnety names. Defendant argued, in essence, that Government
may have struck some of the same names which he struck and that
Government should have been required to strike names before the list was
tendered to him so that he would not waste his challenges on names
struck by Government. The Supreme Court in upholding this method stated:
"It
is true that, under the method pursued in this case, it might occur that
the defendant would strike from the list the same persons stricken off
by the government. But that circumstance does not change the fact that
the accused was at liberty to exclude from the jury all, to the number
of twenty, who, for any reason, or without reason, were objectionable to
him. No injury was done if the government united with him in excluding
particular persons from the jury. He was not entitled, of right, to
know, in advance what jurors would be excluded by the government in the
exercise of its right of peremptory challenge. He was only entitled, of
right, to strike the names of twenty from the list of impartial jurymen
furnished him by the court." Pointer v.
United States
, supra at 412.
Defendant
places primary reliance on Avila v. United States, 9 Cir., 76 F.
2d 39 (1935). The majority opinion, which held that defendant was denied
the constitutional right of trial by jury because the court denied him a
peremptory challenge on the ground he had waived this challenge,
appears to be based upon the trial court's failure to follow Rule 51 of
the District Court for the Southern District of California. To the
extent that the majority opinion does not rely on Rule 51, we disagree
with it. We agree with the dissent filed in that case, to the effect
that the trial court did not abuse its discretion by invoking a rule
similar to the one in the instant case. 76 F. 2d 43.
In
the instant case, the panel of prospective jurors was examined on voir
dire by the trial judge in the presence of defendant; defendant
understood that he would have but one opportunity to challenge each
juror; and defendant challenged eight jurors the first time the panel
was tendered to him. He had an opportunity to challenge one juror the
second time the panel was tendered but chose not to do so. We conclude
defendant has not been denied any statutory or constitutional right and
hold the district court did not abuse its discretion in the rule it
invoked for the use of peremptory challenges.
[Foreman's
Secretary]
We
disagree with defendant's contention that a new trial is required
because petit juror Dolores Watkins did not state upon voir dire
examination that she was employed by Leslie Ross Bain, the foreman of
the grand jury which returned the instant indictment against defendant.
There is no evidence that Watkins concealed this fact. She testified on voir
dire that she was a secretary for the insurance firm of Guffin,
MacLennan & Bain.
[Net
Worth Method]
II.
Defendant urges that the manner in which the net worth method was
applied in this case denied him due process of law and was
unconstitutional. His reasons are as follows:
"(a)
assets allegedly owned by the defendant, his wife, and three separate
corporate entities are mixed together in the government's net worth
statement; (b) starting point (Dec. 31, 1955) not correct; (c) assets
included with no evidence connecting them to defendant or Mrs. Mackey;
(d) amounts arbitrarily determined; (e) evidence does not establish
ownership of asset by defendant or Mrs. Mackey as of December 31 for
each of the years; (f) the net worth statement is based in part on a
13th juror; (g) failure to investigate; (h) lack of proof of current
taxable income from a likely source for each year; and (i) willfulness
not established."
In
substance, defendant's assertions are that the evidence was insufficient
to support the verdict and that evidence was admitted which was
irrelevant and should have been excluded.
We
have carefully reviewed the evidence in the light most favorable to
Government and conclude that the net worth method was applied to
defendant within the standards established in Holland v. United
States [54-2 USTC ¶9714], 348
U. S.
121 (1954) and there was sufficient evidence to support the jury's
verdict.
Inclusion
by Government of assets of three separate corporate entities in
defendant's net worth statement.
Defendant's
argument on this point is primarily concerned with Gibraltar Industrial.
M. W. E. & S. conducted limited operations and defendant was given
full credit in Government's net worth reconstruction for all income
reported by M. W. E. & S. The exclusion from the net worth summary
of the assets held in the name of Gibraltar Mutual would have reduced
the total unreported income by only about 8%.
Gibraltar
Industrial was chartered by the State of
Indiana
in 1920 and had offices in
Indianapolis
and
Gary
. The corporation had no stockholders. Defendant acquired an interest in
it in 1947 and was chairman of the Board of Directors during the years
named in the the indictment (1956 through 1960). Defendant's sister,
Mrs. Fannye Benford, was treasurer of Gibraltar Industrial during these
years. She was responsible for the corporation's financial transactions.
She received money coming into the corporation, paid all claims and
bills, supervised employees and checked the bookkeeping.
During
these years the president of Gibraltar Industrial was Bruce Mackey, Jr.,
a brother of defendant and the vice-president was Marion Davis, a son of
defendant's uncle. The secretary from 1956 through 1957, William Mackey,
is a brother of defendant. The secretary from 1958 through 1960, Ardie
Jenkins, is defendant's nephew.
Gibraltar
Mutual, like Gibraltar Industrial, was chartered by the State of
Indiana
, had offices in
Indianapolis
and
Gary
, did not have stockholders and had defendant's above-named five
relatives as officesr during the years in question.
M.
W. & E. Investment Co., Inc., was incorporated in
Indiana
in August, 1957. Early in 1959, the name was changed to M. W. E. &
S. Investment Co., Inc. Until April, 1959, defendant and the three
members of his immediate family (see footnote 1, supra) were the
sole owners and officers of this corporation. On
April 4, 19
59, the corporation's minute book bore an entry indicating that 49% of
the stock was being issued to certain named friends and relatives of
defendant, including Benford, Jenkins, Marion Davis and Odie Davis
(Marion Davis's father).
[Preparation
of Returns]
Harry
Pettrie, a public accountant, testified that he prepared for Gibraltar
Industrial the annual statements which are required for the Indiana
Department of Insurance and federal income tax returns. He prepared
these from Gibraltar Industrial's books and records which included the
cash journal, bank statements and canceled checks. The assets held in
the name of Gibraltar Industrial which were included in Government's
reconstruction of defendant's income did not appear on the corporation's
books and records and were not listed on the annual statements or
federal income tax returns. Pettrie testified he was never informed the
corporation was acquiring assets in the form of real estate and
securities.
Benford
(defendant's sister) testified on direct examination that the
corporation's books and records from which the statements and returns
were prepared were complete as to the corporation's income and financial
transactions. On cross-examination, she testified the corporation
received substantial premium income which was not recorded on the books
and records and which was used to buy the assets listed in Government's
statement of defendant's net worth. Government's prosecutor told the
jury at least three times during his argument that if the jury believed
Benford's testimony to the effect that these assets were purchased by
unreported premium income of Gibraltar Industrial and Gibraltar Mutual,
then the jury must find defendant not guilty.
The
annual statements prepared by Pettrie for Gibraltar Industrial disclosed
that during the years 1956 through 1960, Gibraltar Industrial averaged
$55,000 per year in net premiums. The statements further showed that
during these years the corporation paid out in death benefits and sick
and accident benefits to policyholders an average of $16,352.06 per
year. Thus, according to the corporation's books and statements, it was
annually paying out to policyholders an average of about 30% of its
premium income. Defendant's argument that the assets in question were
purchased by unreported premiums received by the corporation, if
correct, would mean that policyholders were receiving in benefits
approximately only 11% of the money they were paying as premiums.
This
issue was properly submitted to the jury and there was ample evidence
from which it could reasonably find that the assets in question were not
purchased with income of the three corporations.
Defendant's
net worth at staring point.
Government
used the income tax returns of defendant and his wife from 1929 through
December 31, 19
55 as a guide in determining defendant's net worth at the starting
point. The total income reported by defendant and his wife during these
years was $181,465.77. Government did not deduct personal living
expenses from this amount but did deduct the income taxes paid during
this period, $22,306.04, leaving a balance of $159,159.73. Defendant's
contentions that these income tax returns had no probative value, were
irrelevant and were too remote, are without merit. The net worth of
defendant and his wife at the starting point,
December 31, 19
55, including assets held in the names of nominees, was computed by
Government to be $361,461.52.
Defendant
argues that "[t]he evidence conclusively established that the
December 31, 19
55 starting point (net worth) of $361,461.52 was understated by
at least $62,721.65" and no amount of cash of hand was included for
defendant.
Defendant
states that the simple net worth statement which Government furnished
defendant before trial established his net worth at the starting point
to be $398,691.57 and that this figure properly includes $37,230.05, of
which Government had knowledge, yet failed to include in its starting
point net worth.
This
net worth statement, which was introduced into evidence as Government's
Exhibit 8, was, in essence, a bill of particulars. There is no merit in
defendant's assertion that these items must be included in the starting
point. There were several items contained in this statement, some of
which favored defendant and some Government, which were not
substantiated during the trial by admissible evidence. Government's
starting point must be based upon items which are supported by evidence
introduced during trial. It is certainly not unusual in cases of this
type for the starting point as proved during the trial to vary from the
bill of particulars or indictment which are prepared prior to trial.
[Stocks
Purchased]
Defendant
asserts the following three assets were proved during trial, yet
excluded from the net worth starting point:
"James Lees & Sons Stock .... $ 2,841.76
W. F. Hall Stock ............. 1,886.53
Central Indiana
Gas Stock .... 7,187.70
Total ........................ $11,916.99"
As
to the first two items (Lees and Hall stock), evidence was introduced at
trial that defendant bought them on
November 30, 19
54, but there was no evidence as to the purchase price or whether the
stock was sold at any time. In the absence of such evidence, it was not
error to exclude these items from the starting point.
The
third item (gas stock) was an asset of defendant at the beginning and
end of the prosecution years and could not have affected unreported
income. Thus, exclusion of this asset would not be prejudicial error.
Government's net worth summary did include 190 of these shares at a cost
of $3,063.95. The other 550 shares were excluded due to the absence of
evidence as to their purchase price.
Defendant
argues that Government's Exhibit 805 demonstrates Gibraltar Industrial
had $25,491.60 in cash at the starting point and this amount should have
been included in defendant's net worth at the starting point. We
disagree. It appeared that this amount had been invested in assets of
Gibraltar Industrial by the end of 1955 and thus could not have been in
the form of cash. Further, Gibraltar Industrial's annual statement
showed that as of
December 31, 19
55, the "Cash in Association's Office" was $4,379.44. The
burden of proving that Gibraltar Industrial's cash was more than this
amount was on defendant. See United States v. Hornstein, 7 Cir.
[49-2 USTC ¶9326] 176 F. 2d 217, 220 (1949).
Defendant
also argues there was evidence to show that Gibraltar Industrial had
$590,506.12 in cash at the starting point. This argument is based upon
testimony of Benford, defendant's sister, and Jenkins, defendant's
nephew. The jury was entitled to disbelieve this testimony.
[Cash
on Hand]
Government
did not include any cash on hand in defendant's net worth at the
starting date or at any point throughout the years in issue. Defendant
claims this is prejudicial error.
Treasury
agent Edward Harrington testified that investigation had not revealed
any cash on hand at any time in the net worth period and that if he had
included a figure for cash at the starting point such figure would have
been purely arbitrary.
During
the investigation, a treasury agent asked defendant if he had
substantial amounts of cash on hand but defendant's attorney advised him
not to answer the question.
Whether
defendant had substantial sums of cash at the starting point is a matter
within defendant's knowledge. Under circumstances such as those in this
case, where Government conducted a thorough investigation and failed to
uncover evidence of cash on hand, the burden is on defendant to come
forward with evidence of cash and he remains quiet at his peril. See Holland
v. United States [54-2 USTC ¶9714], 348
U. S.
121, 138-139 (1954) and United States v. Holovachka, 7 Cir. [63-1
USTC ¶9291], 314 F. 2d 345, 354 (1963).
Sufficiency
of the evidence to support the inclusion by Government of certain assets
in defendant's net worth.
Defendant's
brief lists several items which Government included in defendant's net
worth. Defendant argues these should not have been included. Defendant
urges exclusion of these items because of insufficient evidence to
connect these assets to defendant or his wife, arbitrary evaluation of
the value of some of these items by Harrington and lack of evidence that
defendant or his wife owned certain property at the end of the
indictment years.
We
have carefully examined each item listed and the contention made by
defendant and find no prejudicial error in including these assets at
their listed value in defendant's net worth. It would not serve any
useful purpose to further lengthen this opinion by setting out the
evidence pertaining to each item challenged by defendant.
Some
of these items appear in defendant's net worth at the end of each year
and thus could not affect any unreported income by defendant.
Government's treasury agent Harrington testified concerning these items
and explained why the assets were included and how their value was
arrived at. While in some instances there was evidence contrary to
Government's evidence and Harrington's explanations, the issue of
whether a specific asset was properly included in defendant's net worth
was one of fact and properly submitted to the jury. Defendant makes the
mistake of viewing the evidence in the light most favorable to him.
Defendant
complains that Government did not offer evidence to show that he owned
certain properties at the end of the years in question and argues that
he may have sold these properties. He does not contend that he
did sell them and his federal income tax returns did not list the sale
of these properties. We find no error in the inclusion of these items in
defendant's net worth.
Sufficiency
of Government's investigation, establishment of likely source of income
and establishment of willful evasion of income tax.
Defendant
states Government is required to determine whether he and his wife
received any loans, inheritances or gifts during the indictment years
and whether defendant and his wife used a prior accumulation of funds
during such years. He contends Government did not offer evidence that
the above possibilities were investigated and that this constitutes
prejudicial error.
Government
is required to investigate and negate "reasonable explanations by
the taxpayer inconsistent with guilt" in order to establish its
proof in a net worth theory case. Holland v. United States [54-2
USTC ¶9714], 348
U. S.
121, 135 (1954). (Italics added.) However, defendant in this case did
not furnish any explanation which would attribute his increased net
worth to other than taxable income. Defendant had the right to remain
silent but he did so "at his peril."
Id.
at 139.
Defendant
stated "[t]here was no direct evidence of * * * a likely source of
current taxable income for each of the years 1956 through 1960."
Defendant concedes that he was a policy wheel operator during the years
in question. There was no direct evidence that any of the defendant's
alleged unreported income was obtained from his policy wheel operation.
Direct evidence is not required. "[P]roof of a likely source, from
which the jury could reasonably find that the net worth increases
sprang, is sufficient."
Id.
at 138. The following language in United States v. Costello, 2
Cir., [55-1 USTC ¶9342] 221 F. 2d 668, 671-672 (1955), affirmed, 350
U. S.
359 is applicable: "There was no difficulty in the case at bar in
pointing to such a [likely] source. By his own admission * * *
[defendant] was a gambler * * *. * * * Gambling is an occupation with
indeterminate possibilities * * *."
[Willfulness]
Defendant
argues in the alternative that assuming, arguendo, he failed to
report taxable income for the indictment years, Government did not prove
such failure to be willful.
The
Supreme Court in Spies v. United States [43-1 USTC ¶9243], 317
U. S. 492, 499 (1943) said that "willful attempt may be inferred
from conduct such as keeping a double set of books, making false entries
or alterations, or false invoices or documents, destruction of books or
records, concealment of assets or covering up sources of income,
handling of one's affairs to avoid making the records usual in
transactions of the kind, and any conduct, the likely effect of which
would be to mislead or to conceal." In light of this language and
evidence introduced at the trial, e.g., recording of defendant's
personal transactions on the books of Gibraltar Industrial and
defendant's acquisition of property and putting title in the name of
Gibraltar Industrial, we hold there was sufficient evidence from which
the jury could reasonably find willfulness.
Harrington's
Testimony
Defendant
asserts that Government's expert witness, treasury agent Harrington,
"usurped the exclusive function of the jury by weighing the
evidence and determining its credibility" and he was, in effect, a
"13th juror."
He
testified at length concerning, inter alia, the assets which
Government included in defendant's net worth at the starting point and
end of each indictment year. Such evidence and explanatory testimony is
admissible in cases of this type to aid the jury in understanding a
complex fact situation. United States v. Johnson [43-1 USTC ¶9470],
319
U. S.
503, 519 (1943). See United States v. Doyle, 7 Cir., [56-1 USTC
¶9553] 234 F. 2d 788, 794 (1956), cert. denied, 352
U. S.
893. We have read Harrington's testimony and do not find its admission
to constitute prejudicial error.
[Other
Errors Alleged]
III.
Defendant raises various issues, inter alia, whether the
indictment was defective; whether the trial judge improperly admitted
certain evidence; whether the jury was prejudiced by defendant's brother
being called as a witness when Government allegedly knew he would plead
the Fifth Amendment; whether the court erred in charging to defendant
the cost of the court's copy of the transcript; and whether certain
instructions were erroneous. We have carefully considered these and all
other issues raised by defendant and find no prejudicial error.
[Conclusion]
In
sum, Government introduced evidence from which the jury could reasonably
find that defendant and his wife reported $181,465.77 on their income
tax returns from 1929 through 1955; that their net worth as of
December 31, 19
55, including assets held in the names of nominees, was $361,461.52;
that their net worth five years later was $1,519,744.05; that during
this five-year period they reported only $143,339.24 of taxable income
on their returns; that a likely source of this unreported income was
defendant's policy wheel operation and that failure to report this
income was willful.
We
hold there was sufficient evidence to support the jury's verdict and no
prejudicial errors were committed before or during the trial as would
require a reversal of the judgment of conviction. Defendant received a
fair trial.
The
judgment of conviction appealed from is affirmed.
AFFIRMED.
1
The initials for this corporation apparently were derived as follows:
"M" from defendant's name (Mackey), "W" from the
middle name of defendant's son (Wardell), "E" from defendant's
wife's first name (Ella) and "S" from defendant's daughter's
first name (Sesame).
[86-1
USTC ¶9231]
United States of America
v. Joseph E. Todaro, Sr
U.S.
District Court, West.
Dist.
N.Y.
, CR-83-29E, 6/6/85, 610 FSupp 923, (610 FSupp 923.)
[Codes Secs.
446 , 7201 and 7206 ]
Crimes: Attempt to evade or defeat tax: Fraud and false statements:
Evidence: Reconstruction of income: Bank records and net worth
increases: Sufficiency of indictment: Separate counts: Motion to
sever.--A taxpayer charged with three counts of willfully evading
income tax and four counts of willfuly filing false income tax returns
was denied a motion for dismissal premised on the contention that the
government failed to discharge its obligation to investigate all
possible leads when using the net worth method of reconstruction of
income. A district court reasoned that to rule on the motion would be
premature, since it presupposes that the government will fail to
establish at trial that it had discharged its obligation to investigate
such leads. However, the court granted the taxpayer's motion to sever
count seven for willful filing of false statements from the other six
counts, since the government utilized a different theory of proof, the
specific item deduction method, which might unfairly prejudice the
taxpayer's case as to that issue. Furthermore, in an unrelated motion
involving the same parties, the court denied the government's motion to
require the taxpayer to provide written objections to the authenticity
of certain designated records before trial to expedite the proceedings,
because the government was not entitled to the advantage of pretrial
rulings on its proposed exhibits.
Anthony
M. Bruce, Department of Justice,
Washington
,
D.C.
20530
, for plaintiff. Joseph Latona, John W. Condon, Jr., 300 Statler Bldg.,
Buffalo
,
N.Y.
, for defendant.
Memorandum
and Order
ELFVIN,
District Judge:
In
this prosecution charging three counts of willfully and knowingly
attempting to evade federal income tax liabilities in violation of 26
U.S.C. §7201 and four counts of
willfully and knowingly making and subscribing false tax returns in
violation of 26 U.S.C. §7206(1)
, the abovenamed individual ("the defendant") has
moved to dismiss the Indictment and, alternatively, for a severance of
the trial of Count Seven of the Indictment from the other six counts.
The
government has indicated, with respect to the tax evasion counts, that
it intends to demonstrate at trial the existence and extent of
defendant's unreported taxable income in each year by utilization of the
"net worth plus non-deductible expenditures" method of proof. See
Holland v. United States [54-2 USTC ¶9714 ],
348 U.S. 121 (1954). Defendant's dismissal motion is premised upon the
government's alleged failure to have investigated adequately certain
"leads" that he had provided to it regarding three substantial
loans which he has claimed had been made to him during the periods in
question.
Under
Holland v. United States, supra, when income tax evasion is
sought to be established by use of the net worth method, the government
has an obligation to investigate all leads provided to it be the
defendant when and to the extent that such leads are reasonably
susceptible of being checked. "When the government fails to show an
investigation into the validity of such leads, the trial judge may
consider them as true and the Government's case insufficient to go to
the jury."
Id.
at 136.
Although
the government has submitted affidavits and documentation with respect
to the nature and scope of its investigation of the provided leads,
consideration of such is not necessary to the determination of
defendant's dismissal motion inasmuch as this Court finds that such
motion is premature. The government has correctly contended that the
motion presupposes that the government will fail to prove at the trial
of this case that it had discharged its obligation to investigate the
leads. Should the government thus fail at trial, this Court could, with
legal propriety, prevent the govenment's case from going to the jury. See
Holland
v.
United States
, supra, at 135-136; United States v. Scott [81-2 USTC ¶9663 ],
660 F.2d 1145, 1167 fn.42 (7th Cir. 1981), cert. denied, 455 U.S.
907 (1982). Defendant's additional contentions that the government had
failed to exhaust the leads during the Grand Jury's investigation and
should have presented informant evidence to that body regarding one of
the claimed loans have been considered and have been found insufficient
to warrant dismissal of the Indictment. Accordingly defendant's request
for dismissal shall be denied without prejudice.
Defendant's
motion to sever Count Seven from the other six counts, is bottomed on
the assertion that such count had been improperly joined with the other
six under Fed.R.Crim.P. rule 8(a). He has further contended that
severance of said count from the others is appropriate under
Fed.R.Crim.P. rule 14 due to the separate transaction upon which Count
Seven is premised, the dissimilar theory of proof that will be utilized
by the government regarding such count and the possible jury confusion
and unfair prejudice to him of a trial of this count jointly with the
others.
The
parties are in basic agreement that: (a) Counts One through Six charge
defendant with willfully evading income tax liability (Counts One, Three
and Five) and willfully filing false tax returns (Counts Two, Four and
Six) for fiscal years ending in 1976, 1977 and 1978 respectively; (b)
the government's evidence regarding these charges will be presented
according to the net worth/non-deductible expenditures method of proof;
(c) Count Seven charges defendant with willfully filing a false income
tax return for the fiscal year ending
June 30, 1979
due to his alleged fraudulent deduction of the payment of a personal
gambling debt as a business expense; and (d) the government will utilize
a "specific item" method of proof regarding Count Seven. The
government has also indicated the substantial correctness of defendant's
prediction that, with one or two possible exceptions, different
witnesses will be called by the government in attempting to prove Counts
One to Six than with respect to Count Seven.
Rule
8(a) of the Federal Rules of Criminal Procedure permits joinder of two
or more offenses in the same indictment where the crimes charged
"are of the same or similar character." In the case at bar the
offense charged in Count Seven--namely, the willful filing of a false
income tax return with respect to the fiscal year ending
June 30, 1979
in violation of 26 U.S.C. §7206(1) --is sufficiently
similar to the violations of 26 U.S.C. §7206(1) charged in Counts
Two, Four and Six--and even to Counts One, Three and Five--to warrant
joinder under rule 8(a). Cf.
United States
v. Sciandra, 529 F.Supp. 316, 318 (S.D.N.Y. 1981).
"Moreover,
Rule 8(a) is not limited to crimes of the 'same' character but also
covers those of 'similar' character, which means '[n]early
corresponding; resembling in many respects; somewhat alike; having a
general likeness.' "
United States
v. Werner, 620 F.2d 922, 926 (2d Cir. 1980).
However,
the propriety of the joinder of distinct offenses under rule 8(a) does
not preclude the granting a severance under Fed.R.Crim.P. rule 14
"if it appears that the defendant is prejudiced by the
joinder."
Id.
at 928. In United States v. Halper [79-1
USTC ¶9127 ], 590 F.2d 422, 430-431 (2d Cir. 1978), it was
explained:
"When
all that can be said of two separate offenses is that they are of the
'same or similar character,' the customary justifications for joinder
(efficiency and economy) largely disappear. Whereas the joinder of
offenses 'based on the same act or transaction' or of offenses based 'on
two or more acts or transactions connected together or constituting
parts of a common scheme or plan' is reasonable and desirable both from
the government's and the defendant's perspective, the same cannot be
said for joinder of offenses of the 'same or similar character.' "
The
Court in Halper (wherein two separate indictments had been joined
for trial) noted the potential dangers to which a defendant is exposed
by joinder of offenses of the "same or similar character"--e.g.,
the jury might view the government's evidence cumulatively or improperly
utilize the evidence regarding one offense to infer a criminal
disposition on the part of defendant regarding another offense--and
announced a rule requiring
"a
severance of offenses that are purportedly of the 'same or similar
character' unless evidence of the joined offenses would be mutually
admissible in separate trials or, if not, unless the evidence is
sufficiently 'simple and distinct' to mitigate the dangers otherwise
created by such a joinder."
Id.
at 431.
In
the instant criminal action application of this rule justifies a
separate trial of Count Seven. The government's assertion that
"evidence that the defendant committed any one of the first six
counts might be admissible in a separate trial of Count Seven" is
too speculative to deny the sought severance in view of the possible
unfair prejudice to defendant and is not persuasive in view of the
absence of any contention by the Government of a common scheme or plan
by defendant to have evaded taxation regarding all of the charged
offenses. Such assertion is, in all probability, not going to be
fulfilled on trial. In view of the numerous documents and witnesses that
the government is expected to utilize regarding Counts One through Six,
as well as the complexity of the net worth theory of proof, the expected
relative simplicity of the government's case with respect to Count Seven
does not warrant denial of defendant's motion. While it might not be an
abuse of this Court's discretion to deny the severance, it most
certainly can not be deemed improper to grant such relief. The latter
course will not enable the government to adduce evidence of the
defendant's gambling activities, if any there be, with its unfair
influence upon the jury to the substantial adverse interest of the
defendant on the trial of Counts One through Six.
For
these reasons it is hereby
ORDERED
that defendant's motion for dismissal of the Indictment is denied
without prejudice; and it is hereby further
ORDERED
that defendant's motion for a severance and a separate trial of Count
Seven of the Indictment is granted; and it is hereby further
ORDERED
that the government shall, within fifteen (15) days of the entry of this
Memorandum and Order elect in writing whether it will go to trial
September 10, 1985
on Counts One through Six or on Count Seven. 1
Memorandum
and Order
In
this prosecution charging defendant with willfully attempting to evade
federal income tax liabilities in violation of 26 U.S.C. §7201 and willfully
subscribing false tax returns in violation of 26 U.S.C. §7206(1) , the government
has moved pursuant to Fed.R.Cr.P. rule 12(d)(1) to require defendant to
file written objections to the authenticity of certain designated
records and for a pretrial hearing for the purpose of ruling on any
objections filed by defendant. Defendant has opposed such motion,
asserting that the government is not entitled to the relief sought.
Fed.R.Cr.P.
rule 12(d)(1) permits the government to provide a defendant with notice
of "its intention to use specified evidence at trial in order to
afford the defendant an opportunity to raise objections to such evidence
prior to trial" in the form of a motion to suppress evidence under
rule 12(b)(3). In the case at bar the government seeks to compel
defendant to make his position known prior to trial with respect to the
authenticity vel non of some 568 exhibits that the government
intends to offer at trial. Although this Court recognizes that the
granting of the instant motion would conserve its time, would reduce the
length of what is expected to be a prolonged trial by eliminating
certain witnesses and/or testimony and possibly would diminish confusion
of the jury which can arise when attorneys argue about and witnesses
testify as to the authenticity of records, rule 12(d)(1) does not
authorize the procedure sought by such motion and the government has not
cited any other rule or authority which would permit such procedure. In
addition, although this Court certainly would favor a stipulation by the
parties as to the authenticity of any exhibits the genuineness of which
is not disputed, I shall not order defendant to file specific objections
inasmuch as such procedure could serve to provide the government with
notice of problem as to a specific exhibit and an opportunity to rectify
such prior to trial. Absent the requested order the government might
find at trial that it is unable to introduce into evidence a certain
exhibit or exhibits for lack of having established adequately its or
their authenticity. Accordingly, I find that the government is not
entitled to the advantage of pretrial rulings on the authenticity vel
non of its exhibits.
For
these reasons it is hereby ORDERED that the government's motion is
denied.
1
The government had indicated, tentatively, that it would opt to try the
defendant on Count Seven initially and then on Counts One through Six.
Inasmuch as the unfair prejudice works in but a single direction--viz.,
from Count Seven into the disposition of Counts One through Six--it
would appear that, if the government were to try the latter first, the
same jury could be utilized. In a sense, there would be a bifurcated
trial with a single jury.
[82-1
USTC ¶9271]
United States of America
, Plaintiff-Appellee v. Frederick G. Raymond, Defendant-Appellant
(CA-6),
U. S. Court of Appeals, 6th Circuit, No. 80-1664,
11/13/81
[Code Sec. 7201]
Crimes: Income tax evasion: Evidence: Net worth reconstruction of
income: Wilfulness.--A taxpayer's conviction for income tax evasion
based on a reconstruction of income using the net-worth increase method
was affirmed. Leads furnished by the taxpayer were either followed up by
Internal Revenue Service agents or not beneficial to the taxpayer and a
parcel of real estate which the taxpayer held in joint tenancy with his
nephew was not includible in the taxpayer's net worth. Wilfulness was
proven even though some of the items the government included in the
taxpayer's net worth involved areas of uncertainty in the tax laws.
James
K.
Rob
inson, United States Attorney, Detroit, Mich. 48226, M. Carr Ferguson,
Assistant Attorney General,
Rob
ert E. Lindsay, James P. Springer, Department of Justice, Washington, D.
C. 20530, for plaintiff-appellee. Erwin A. Rubenstein, Rubenstein,
Isaacs, Lax and Borden, 17220 West 12 Mile Road, Southfield, Mich.
48076, John K. Lynch, 315 Williamson Building, Cleveland, Ohio 44114,
for defendant-appellant.
Before
EDWARDS, Chief Judge; LIVELY, Circuit Judge; and HOLSCHUH, District
Judge. *
PER
CURIAM:
The
defendant appeals from his jury conviction of willfully attempting to
evade the payment of income taxes due for the years 1973, 1974 and 1975,
26 U. S. C. §7201. The government's case was based on a "net
worth" reconstruction of taxable income for the years in issue.
The
primary argument for reversal is that the government failed to follow
leads beneficial to the defendant and improperly excluded certain assets
in determining net worth. Our examination of the record fails to reveal
an instance in which the government failed to follow leads beneficial to
the defendant. When analyzed these leads either were never given during
the government's investigation or, if given, were checked out by IRS
agents.
The
claim that the government wrongfully failed to include assets in the net
worth statement refers principally to a parcel of real estate described
as "9261 Field." This real estate was mortgaged for $25,000 by
the defendant and on the same date he transferred the property to
himself and his nephew as joint tenants with right of survivorship. In
investigating these transactions the government determined that the
nephew was making all the mortgage payments, though defendant was the
sole obligor on the mortgage note. We conclude that it was reasonable to
omit the property from the assets on the net worth statement and to omit
the mortgage from the liabilities, given the ambiguous nature of the
transaction with respect to "9261 Field." The jury heard the
witnesses for both sides on the issue, including the defendant and his
nephew, and found defendant guilty for 1973, the year in which the
"9261 Field" transactions took place. We find no error in this
determination. Other claims of omitted assets are not supported by the
record.
It
is also argued that willfulness was not proved because some of the items
and transactions upon which the government based its case involved areas
of legal uncertainty. The short answer to this contention is that the
government is required to make a total reconstruction of taxable income
and a total recomputation of tax due in a net worth case. The fact that
some features of such a case relate to clear cut issues of tax law while
some involve contested issues does not vitiate the entire case for the
prosecution by foreclosing a finding of willfullness. The question of
willfullness was submitted to the jury under instructions to which no
objection was made.
The
court has also considered the contentions of the defendant that the
court committed reversible error by denying both of his attorneys an
opportunity to participate in closing argument and that he was deprived
of a fair trial by reason of comments contained in the argument for the
government. We conclude that there was no reversible error in either
respect.
The
judgment of the district court is affirmed.
*
The Honorable John D. Holschuh,
Judge
,
U. S.
District Court for the Southern District of Ohio, sitting by
designation.
[80-1
USTC ¶9109]
United States of America
, Appellee v. Ben Klein, Appellant
(CA-10),
U. S.
Court of Appeals, 10th Circuit, No. 73-1923, 12/13/79
[Code Sec. 7201]
Crimes: Attempt to evade or defeat tax: Willful evasion of tax:
Evidence: Mental competency: Conviction affirmed.--A taxpayers
conviction of wilful attempt to evade or defeat tax was affirmed.
Challenges made, based on the government's alleged failure to prove the
taxpayer's mental competency, the use of the net worth method of proof,
and the admissibility of various pieces of evidence, were rejected by
the court of appeals.
James
L. Treece, United States Attorney, Richard J. Spelts, John W. Madden
III, Assistant United States Attorneys, Denver, Colo., for appellee.
Herbert W. Delaney, Jr.,
50 S. Steels St.
,
Denver
,
Colo.
for appellant.
Before
LEWIS, Chief Judge, SETH, and BARRETT, Circuit Judges.
SETH,
Circuit Judge:
Ben
Klein appeals from his conviction on five counts of violating 26
U. S.
C. §7201. This section reads in part: "Any person who willfully
attempts in any manner to evade or defeat any tax imposed by this title
or the payment thereof shall, in addition to other penalties provided by
law, be guilty of a felony . . ." The jury found that Klein had
violated the section as to his income tax liability for the years 1966
through 1970.
Klein's
returns for all the indictment years were prepared by accountants. He
based his defense on a combination of theories to meet the Government's
net worth case. The major defense was that Klein had been mentally ill
for a number of years, and was so incompetent that he could not have
formed the intent to willfully evade his taxes. He also relied on
a generally contemptuous attitude toward money and claimed that mistakes
in his returns were made by his accountants. Klein further contended
that increases in his net worth which the Government listed as
unidentifiable taxable income could be explained and traced to specific
sources, including large gifts of cash from his father, Sam Klein. He
also argued that the use of the net worth method of proof was improper.
These defenses were resolved against him by the jury in reaching its
verdict. Many grounds for reversal are asserted on this appeal.
First,
it is argued that the trial judge erred in refusing to grant a judgment
of acquittal at the close of the Government's case on the grounds that
the Government had not met its burden of proof on the issue of defendant
Klein's competency. The record shows that Klein was hospitalized shortly
after he learned that the investigation into his taxes was being
referred to the United States Attorney for prosecution. He was
thereafter found competent to stand trial on two separate occasions
after hearings, one held in April 1973, and the other in September 1973
on the first day of the trial. We find no error as to these
determinations.
At
trial the defense was urged that Klein was also not legally competent at
the time of the commission of the offenses in that he was too ill to
have been capable of forming the specific intent to "willfully
evade" his taxes at the times the five returns involved were filed.
The test for criminal responsibility in this Circuit is stated in Wion
v. United States, 325 F. 2d 420 (10th Cir.):
".
. . [T]hat at the time the accused committed the unlawful act, he was
mentally capable of knowing what he was doing, was mentally capable of
knowing that it was wrong, and was mentally capable of controlling his
conduct."
Two
psychiatrists and two psychologists testified that Klein was not legally
competent at the time of the offense. Their general diagnosis was that
he was an obsessive-compulsive, paranoid schizophrenic. In addition,
twelve lay witnesses and a handwriting expert gave testimony of erratic
behavior and other incidents to support a finding of incompetency. This,
of course, rebutted the presumption of sanity and the burden was on the
Government to prove competency, which it undertook to do. Competency
thus became an element of the offense as it had been for all practical
purposes from the outset. United States v. Bettenhausen [74-2
USTC ¶9544], 499 F. 2d 1223 (10th Cir.); Wion v. United States,
325 F. 2d 420 (10th Cir.).
Three
psychiatrists and one psychologist testified as part of the Government's
case that while Klein was possibly mentally ill, he was competent at the
times the offenses were committed. This testimony was supported by that
of several lay witnesses. What Klein asserts is that the evidence in
favor of incompetency was so overwhelming that it was error to allow the
question to go to the jury. We cannot agree. This court held in United
States v. Coleman, 501 F. 2d 343 (10th Cir.):
"In
order to hold that the court below erred in denying the motion for
judgment of acquittal we must be persuaded that, viewing the facts
before us and the reasonable inferences to be drawn therefrom in the
light most favorable to the government, reasonable men must necessarily
possess a reasonable doubt as to defendant's sanity. . . ."
Summarizing
the evidence presented here would serve no purpose, and it is sufficient
to state that the issue was properly presented to the jury, and there
was ample evidence from which the jury could have concluded that Klein
was competent. The standard indicated in Coleman was followed.
Furthermore, matters of credibility were resolved in the trial court.
United States
v. Smaldone, 485 F. 2d 1333 (10th Cir.). The attempted reliance
on Hartford v. United States, 362 F. 2d 63 (9th Cir.), is
misplaced as the evidence here was clearly conflicting.
The
psychiatrists and psychologist who testified during the Government's
case had been appointed by the court under 18
U. S.
C. §4244 to examine Klein to determine his competency to stand trial.
Klein now urges that it was error to allow these doctors to also testify
as to his competency to commit the offense, relying on a Second Circuit
decision, United States v. Driscoll [68-2 USTC ¶9500], 399 F. 2d
135 (2d Cir.). This objection was not raised during the trial, and
Klein's attorneys had ample opportunity to cross-examine the
Government's doctors concerning their examinations of him. Driscoll
has been limited to its facts by the Second Circuit.
United States
v. Matos, 409 F. 2d 1245 (2d Cir.). The law in this Circuit
under United States v. Julian, 469 F. 2d 371 (10th Cir.), is
that:
"Numerous
cases recognize that examinations pursuant to §4244 embrace also the
question of capacity to commit the offense. So, therefore, both reason
and authority distate that the dual examination is valid."
No
error is involved in allowing the Government's doctors to testify as to
Klein's competency to commit the offense, even though they were
initially appointed to determine his competency to stand trial. Their
examinations were within Julian, and the competency issue in all
its ramifications was in the case from the outset.
Klein
next argues that his conviction must be reversed because of error in the
instruction given to the jury on the issue of his competency. The trial
judge instructed the jury:
"A
person is not criminally responsible for his conduct if, at the time of
the conduct, as a result of mental disease or defect, he lacked
substantial capacity either to appreciate the wrongfulness of his
conduct, or to conform his conduct to the requirements of the law.
"As
applied to this case, the test for criminal responsibility on the part
of the defendant means that before you may return a verdict of guilty,
you must be convinced beyond a reasonable doubt that the defendant
committed the act with which he is charged, if you find he did commit
the act, he was mentally capable of knowing what he was doing, was
mentally capable of knowing it was wrong, and was mentally capable of
controlling his conduct." (Emphasis added.)
Klein
agrues that the phrasing of the emphasized portion in effect requires
the jury only to find that Klein committed the act, and that the other
requirements follow from that finding. Klein's attorneys made no
objection to the above instruction when and as given. Without such
objection, the instruction will not be reviewed on appeal unless there
is "grave error infringing upon the fundamental rights of the
accused." Coffman v.
United States
, 290 F. 2d 212 (10th Cir.);
United States
v. Williams, 440 F. 2d 1300 (10th Cir.); Fed. R. Crim. P. 30. We
find no such error. Also, since no objection was made at the proper
time, the apparent meaning, rather than the construction urged on appeal
by defendant, must have been accepted. The instructions as a whole make
it quite clear to the jury that the question of competency was a
separate and essential element of the offense charged. We cannot hold
that the phrasing of this one portion of the instructions constitutes
plain error, or grave error infringing fundamental rights. The
instruction satisfies the standard in Wion, even though it does
not follow Wion verbatim. Kitchens v. United States [60-1
USTC ¶9178], 272 F. 2d 757 (10th Cir.).
The
propriety of the use of the net worth method of proof in this case is
raised on appeal. The record shows that during the indictment years,
Klein was a practicing attorney and a member of the
Colorado
legislature. He claims, as part of his defense, that he was contemptuous
of money and paid little attention to it. There was much testimony to
the effect that his office was a "pigpen," with files, money,
and checks scattered everywhere. Checks would be used as bookmarkers,
and frequently would not be cashed for months or years after receipt.
Office and personal bills were paid out of the same checking account,
and what records were kept were inadequate. Klein was also involved in
numerous other business ventures which had poor records. These
circumstances provide a basis for use of the net income method when
considered with the testimony of the agents. We are mindful of the
dangers inherent in the net worth method of proof as expressed in Holland
v. United States [54-2 USTC ¶9714], 348
U. S.
121, but after a careful review, we are convinced that the net worth
method of proof was properly used. Proper starting figures were arrived
at, including the cash figure. The "likely source" under
Holland
was apparent.
Holland
established a duty for the Government
when using the net worth method of proof to investigate
"leads" which are "reasonably susceptible of being
checked, which, if true, would establish the taxpayer's innocence."
The opinion also states that: "When the Government fails to show an
investigation into the validity of such leads, the trial judge may
consider them as true and the Government's case insufficient to go to
the jury."
The
leads involved here include asserted gifts from defendant's
father which were developed, dealings with a person named Redd, and a
partnership with Dr. Thomas. The latter was an investment venture and
the income tax returns for the partnership showed Klein as having an
ordinary loss of $439.45 and a capital loss of $24,020.36 in 1966, and
an ordinary loss of $2,691.25 in 1967. Agent Grimes testified that,
although he was aware of the returns, he gave Klein no credit for this
"loss." Grimes said this was because the records for the
partnership were confused, and further because Dr. Thomas had lent Klein
the money for his initial contribution into the partnership. Grimes
stated that partnership losses in excess of basis are not deductible [26
U. S.
C. (I. R. C. 1954) §752], and that Klein's contribution of money loaned
from Dr. Thomas was insufficient to provide Klein a basis in the
partnership under the tax law. Klein's contributions to the partnership
through 1966 totaled about $1,500.00; his total through 1970 was
$1,670.00. Klein signed a promissory note to Dr. Thomas in 1972 to
settle what he would Dr. Thomas for contributions to the partnership
venture. Klein now argues that the failure of the agent to investigate
the Klein-Thomas venture further resulted in an incorrect net worth
figure for 1966 and the succeeding years since the loss was not allowed.
The trial judge denied a motion for a judgment of acquittal on this
ground and submitted the issue to the jury.
The
"leads" point was fully developed by the evidence, and the
trial attorneys for Klein accepted the instructions relating to the
Thomas matter. After carefully reviewing the facts, we conclude under
the prevailing authorities that the Government's asserted failure under
Holland
to follow the "leads" concerning the Klein-Thomas partnership
and others were properly submitted to the jury as part of the overall
case. See United States v. Ramsdell [71-2 USTC ¶9627], 450 F. 2d
130 (10th Cir.); United States v. Hom Ming Dong [71-1 USTC ¶9175],
436 F. 2d 1237 (9th Cir.); Lenske v. United States [67-2 USTC ¶9631],
383 F. 2d 20 (9th Cir.); Mighell v. United States [56-2 USTC ¶9630],
233 F. 2d 731 (10th Cir.). The Thomas matter, and also the cash gifts,
in the final analysis, ceased to be "leads" in the
Holland
sense as the matters were fully developed at trial, and the tax aspects
were explored by both sides. The Government's failure to give credit for
a "loss" was based on its determination of the applicable tax
laws as to the Thomas matter.
Klein's
next point on appeal concerns several items admitted into evidence. The
major objection is to the admission into evidence over strenuous
objection of his 1971 income tax return. This was for the first year
following the last indictment year. For the indictment years, Klein paid
the following amounts of income tax: $3,279.90 in 1966; $1,853.58 in
1967; $2,408.23 in 1968; $689.00 in 1969, and $319.00 in 1970. The 1971
return shows $55,096.00 in taxable income, with $23,269.00 due in taxes.
This reflects a $36,000.00 profit from the law firm. Klein argues that
it is unduly prejudicial and improper to allow the jury to see the 1971
return and infer that if he had paid $55,000.00 of taxable income in
1971, he must have had more than he reported in 1966 through 1970. There
is support for his position in the case law: United States v. Baum
[71-1 USTC ¶9130], 435 F. 2d 1197 (7th Cir.); United States v.
Stoehr [52-1 USTC ¶9299], 196 F. 2d 276 (3d Cir.).
Counsel
for the Government argues that the 1971 return was admitted for a
limited purpose. There is no indication, however, in the transcript of
the trial that it was so limited by the court, and we must conclude that
the return was admitted generally. See
United States
v. McClain, 440 F. 2d 241 (D. C. Cir.).
The
standard for review as to the return and other items here questioned is
set out in United States v. Twilligear, 460 F. 2d 79 (10th Cir.):
".
. . The materiality and relevance of proffered evidence, and
introduction of same, resides in the sound discretion of the trial
court; absent a clear abuse of discretion, an appellant [sic] court is
bound to uphold the decision of the trial court. . . ."
The
1971 return indicates a likely source of taxable income, if more proof
is needed, to explain the increases in net worth for 1966 to 1970. Also
Klein had theretofore introduced his 1971 books and records to
substantiate a defense which was actively advanced that some of the
income attributed to 1970 by the Government should be allocated to 1971.
The 1971 returns were relevant to this issue also. Returns for years
subsequent to those under indictment are not per se improper evidence. Lisansky
v.
United States
[1929 CCH D-9277], 31 F. 2d 846 (4th Cir.). We find that the trial
judge did not abuse his discretion in admitting Klein's 1971 income tax
return.
The
Government concluded its case with a "summary witness" who
presented, with the aid of a summary chart, a synthesis of the evidence
from the witnesses. Klein did not object at trial to the introduction of
the summary chart, and was allowed full cross-examination of the summary
witness. The jury was properly instructed on the function of a summary
chart both at the time of its introduction and in the final
instructions.
During
cross-examination of the Government witnesses concerning their work
papers for the summary chart, some minor differences were developed
among them, and discrepancies between the Government's figures and
Klein's figures. These matters were explored, and there was no showing
that all of these were "mistakes," and not matters of
interpretation. Klein's objection to the summary chart is not completely
clear, but he seems to claim that it was error to allow the chart to be
used without correcting it to reflect these "mistakes" which
he claims were "flatly conceded." He also claims that the
summary witness misrepresented that his summary chart covered all
of the evidence introduced to that point. (Some of the defense exhibits
had been introduced at the beginning of the trial pursuant to a
stipulation.) The witness was put on the witness stand to summarize the
Government's case, and not all of the evidence then in. It does not
appear from the transcript that the jury could have been misled in any
way concerning the summary chart. The differences among the witnesses
were developed but the objections raised on appeal were not raised at
trial. The jury was instructed on the proper use of the summaries, and,
as indicated, there was adequate opportunity to cross-examine the
summary witness. The use of the chart here is proper, and within the
rule we announced in Swallow v. United States, 307 F. 2d 81 (10th
Cir.). See also United States v. Michals [72-2 USTC ¶9737], 469
F. 2d 215 (10th Cir.); Hedrick v. United States [66-1 USTC ¶9269],
357 F. 2d 121 (10th Cir.).
Several
other items of evidence are asserted to be prejudicial and improperly
admitted, and so providing grounds for reversal. These include campaign
literature of Klein circulated during the indictment years and which
urged reduced taxes, and tax reform; suspension of Klein from the
practice of law, in 1972; the failure of Klein's father, Sam Klein, to
file gift tax returns for the alleged cash gifts to the defendant;
evidence of numerous purchases made by defendant Klein which were added
to his increase in net worth as nondeductible expenses (Klein argued
that there was insufficient evidence to identify whether the purchases
were personal or business items). Under the standard in United States
v. Twilligear, 460 F. 2d 79 (10th Cir.), there was no abuse of
discretion in the admission of this evidence.
Finally,
Klein claims that there was insufficient evidence to support the jury's
finding that he willfully evaded taxes. We said in United
States v. Ortiz, 445 F. 2d 1100 (10th Cir.):
".
. . The evidence--both direct and circumstantial, together with the
reasonable inferences to be drawn therefrom--is sufficient if, when
taken in the light most favorable to the government, the fact finder may
find the defendant guilty beyond a reasonable doubt. . . ."
The
arguments and evidence used by appellant to support this point are
essentially the same as those used in the contention that there was
insufficient evidence of competency to allow the issue to be presented
to the jury. Proof of willfullness may be accomplished by circumstantial
evidence. United States v. Ramsdell [71-2 USTC ¶9627], 450 F. 2d
130 (10th Cir.). The issue of willfullness may be resolved by the jury. United
States v. Dowell [71-2 USTC ¶9642], 446 F. 2d 145 (10th Cir.).
There is sufficient evidence from which the jury could have concluded
that Klein acted willfully in evading his income taxes for the years
1966 through 1970.
We
have considered the other points and issues raised by the appellant and
find no error.
AFFIRMED.
[78-1
USTC ¶9132]
United States of America
, Plaintiff-Appellee v. Paul F. Garavaglia, Defendant-Appellant
(CA-6),
U. S. Court of Appeals, 6th Circuit, No. 77-5115, 566 F2d 1056,
12/16/77
, Affirming unreported District Court decision
[Code Sec. 7201--result unchanged by '76 Tax Reform Act]
Crimes: Evasion of taxes: Intent.--The taxpayer was found guilty
of willful evasion of taxes where his only records of gross receipts
were his bank deposits, which did not include all his income, and he
instructed his wife to discard all records of income but to save all
purchase invoices and supplier's bills, some of which were listed twice.
Philip
M. Van Dam, United States Attorney, Steven W. Rhodes, Assistant United
States Attorney, Detroit, Michigan 48226, Myron C. Baum, Acting
Assistant Attorney General, Gilbert E. Andrews, James A. Bruton,
Department of Justice, Washington, D. C. 20530, Wynette Hewett, for
plaintiff-appellee. William J. Weinstein, Weinstein, Kroll & Gordon,
1935 First National Bldg., Detroit, Mich. 48226, for
defendant-appellant.
Before
PHILLIPS, Chief Judge; CELEBREZZE and LIVELY, Circuit Judges.
LIVELY,
Circuit Judge:
Paul
F. Garavaglia was convicted of attempting to evade income taxes for 1966
and 1967 in violation of 26
U. S.
C. §7201. 1 A jury was
waived and the trial judge entered findings of fact and conclusions of
law after a trial which lasted ten days. On appeal it is asserted that
the evidence at the trial was insufficient to support the district
court's conclusion that "the Government has proved each of the
essential elements of this offense beyond a reasonable doubt."
Conviction
under §7201 requires proof of three essential elements: (1)
willfulness; (2) the existence of a tax deficiency; and (3) an
affirmative act constituting an evasion or attempted evasion of a tax. Sansone
v.
United States
, 380
U. S.
343, 351 (1965). At trial the defendant admitted that his tax returns
understated taxable income by $22,484 for 1966 and $26,366 for 1967.
Filing such false returns satisfied the §7201 requirement of an
affirmative act. Sansone, supra, at 352. The existence of
significant income tax deficiencies for the two years was conceded. The
only issue in the trial court, and on appeal, is whether the government
proved beyond a reasonable doubt that defendant willfully understated
his income with intent to evade or defeat taxes which were due.
Garavaglia contends that the evidence showed that the errors were made
by his wife, his attorney and an accountant, and that he took no part in
recordkeeping or preparation of the tax returns.
During
1966 and 1967 the defendant operated Paul Garavaglia Trucking as a sole
proprietorship in
Detroit
. Starting with one truck in 1955 he had acquired additional equipment
and was operating a substantial business by 1966. The defendant
testified that he had a seventh grade education and did not understand
bookkeeping or taxes. Mrs. Garavaglia kept the "haul tickets"
reflecting payments due from customers and the bills and invoices in
paper sacks in the dining room of their home. The haul tickets for each
customer were totalled from time to time and duplicate invoices were
prepared. When the invoice was paid Mrs. Garavaglia threw away her only
copy, though the haul tickets were kept for about one year. There was no
regular billing procedure and no regular pay period for the truck
drivers who worked for the defendant.
Though
the admitted gross receipts of the business exceeded $100,000 in 1966
and $200,000 in 1967, no books were kept. Mrs. Garavaglia testified that
she determined gross receipts by adding the year's deposits in the only
bank account which she or her husband maintained. The defendant told
investigating agents that the receipts of his business were determined
from the record of bank deposits. Mrs. Garavaglia testified that she
added the monthly totals of deposits from the bank statements and that
she furnished the sum of these twelve totals to the preparer. The
defendant's wife testified also that she determined the business
expenses by adding up all bills and invoices, and contacting certain
suppliers. These totals were furnished to an attorney who prepared the
1966 return in a few hours.
Beginning
in May or June 1967 an independent accountant was employed to do the
bookkeeping at $25.00 per month. Mrs. Garavaglia testified that she took
the bank statements and bills to the accountant at the end of each
month. Nothing related to customer billing was ever furnished the
accountant. The accountant testified that after he had prepared the 1967
return, Mrs. Garavaglia told him that she could prove much larger
expenses, particularly for contract labor. He acknowledged that he then
increased the total of business deductions without ever being furnished
documentation.
The
defendant admitted that twenty-two checks which were received during
1966 and 1967 representing payments from customers were never deposited
in his bank account, though he endorsed them. He maintained that these
checks were used to pay bills of the trucking company, purchase tires,
pay for contract hauling and to repay a "loan shark." Since
business expenses were computed from bills and invoices as well as
cancelled checks, if some bills were paid with third-party checks
representing payments from customers, the effect was that defendant
received a double deduction--the amount shown on the bill and the
undeposited payment. In addition to the undeposited receipts there were
significant discrepancies each year between the actual deposits and the
amounts reported as gross receipts. These understatements were explained
as resulting from failure to list one month's deposit in 1966 and
failure to account for entire receipts on various occasions in 1967
where only part of a check from a customer was deposited and the
remainder was taken in cash.
Defendant's
brief and oral argument in this court presented only the evidence
favorable to him. However, there are many conflicts in the evidence and
we are required to view it, after conviction, in the light most
favorable to the government. The record fully justifies a finding that
Paul Garavaglia was much more involved in the finances of his company
than his statements to IRS agents and testimony on direct examination
might indicate. He received many payments personally and wrote most of
the checks which were introduced in evidence. He made out most of the
deposit slips including all of those where only part of a payment was
deposited and the rest was taken in cash. He computed the pay of the
drivers and told Mrs. Garavaglia when to pay bills and purchase
invoices. Furthermore, he instructed his wife to destroy invoices to
customers after they had been paid, thus virtually precluding any
accurate determination of whether all payments were in fact deposited in
the bank. The court was not required to accept the innocent explanation
which he and Mrs. Garavaglia offered for this irregular practice. This
is particularly true when it was shown that all purchase invoices and
suppliers' bills were retained and some were listed several times in
computing business expenses.
The
extensive testimony about loans and their payment is contradictory, and
to a great extent, irrelevant. If in fact there were some deposits which
represented loan proceeds rather than income, this did not justify
defendant's repaying the loans with checks from customers which
represented income, but which were never recorded or deposited. The
defendant testified that he kept no record of the amounts he borrowed
from an alleged "loan shark," and his estimates of the amount
varied on different occasions. We conclude that the testimony concerning
loan transactions does not negate the inferences which may reasonably be
drawn from other evidence in the record.