Bank Records and Net Worth Increases
court agrees that it is not improper to exclude from such net worth
estimate such items as accounts receivable and accounts payable, which
are not attributable to the defendant's current income (income being
that income which is reportable by a taxpayer on a cash basis). However,
if the Government does exclude all non-cash items such as accounts
payable and accounts receivable it must not include in its net worth
figure any assets which were purchased by means of accounts payable or
any other non-cash liability account. For example, the value of a house
purchased by means of a still outstanding loan could not be included in
the net worth statement unless it was set off by the balance of the loan
still owing. Similarly, if the defendant here had obtained certain
materials for his crane business through accounts payable which were
still unpaid at the end of the tax year in question, the value of such
material could not appear in the closing net worth figure for that year
unless offset by the balance of the accounts payable.
the instant case the Government offered evidence from which the jury
could infer that the principal assets of J. Scanlon and Company were
purchased with cash and that this cash was obtained neither through
accounts payable, loans outstanding or any other non-income source. For
example, a bank official testified that the defendant had purchased a
bank check for $19,335 which was apparently made up of a withdrawal of
$1335 from the defendant's bank account plus an unknown credit from
another source; and this bank check was endorsed by a corporation from
which the defendant purchased a crane for J. Scanlon and Company for
$21,435. The Government also provided evidence tending to prove that the
only outstanding loan to J. Scanlon and Company which it had been able
to find was that of a local bank in the amount of $10,000, and this loan
was reflected in the Government's estimate of the defendant's net worth.
The Government also provided evidence that J. Scanlon and Company's
accounts payable amounted to $4,030.08, as of January 1, 1949, which
would indicate that no great prejudice could have been suffered by the
defendant through the Government's failure to offset this $4,030.08
item, which it had discovered itself through investigation of the
records of J. Scanlon and Company, against the value of a crane costing
twenty-four thousand dollars purchased by the defendant in 1948 along
with a truck and welding equipment. Moreover, there was no suggestion by
the defendant that the purchase in 1948 of these assets was made
possible though the establishment of an account payable of about only
four thousand dollars. The record does not reveal any other lead given
to the Government by the defendant which could possibly explain how
these assets were obtained other than through cash attributable to
current income and "* * * where relevant leads are not forthcoming,
the Government is not required to negate every possible source of
nontaxable income, a matter peculiarly within the knowledge of the
defendant." Holland v. United States, supra, at 138.
defendant contends that the Government should have offered evidence from
which it could be found that his income from his gambling activities
exceeded his reported income before the allegedly prejudicial fact that
he was a bookie was made known to the jury. This contention does not
warrant lengthy discussion. In
, supra, at pp. 137, 138, it was said "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." Here it was shown that the defendant was a bookie and
that he kept no records to show income from his bookmaking operations
although the defendant had reported income from gambling operations. The
Government also produced evidence tending to prove that the defendant
was a bookie in other to make a large profit and not "for just a
week's pay." The proving by direct evidence of the extent of the
defendant's income from bookmaking was not necessary in this case so
long as the jury could reasonably find that it was a likely source from
which the defendant's increases in net worth arose.
defendant contends that Special Agent Charpentier's testimony was
improperly admitted. Charpentier testified in direct examination that on
February 24, 19
53, he "showed Mr. Scanlon that according to the net worth
statement prepared by Mr. Burnett, and also according to figures we were
preparing, that it was abvious that there was unreported income."
After objection by defendant that this was opinion evidence the trial
court allowed the answer on the ground it was a statement made to the
defendant and that as such it was not an inadmissible opinion of a
witness on an issue to be decided by the jury. See 7 Wigmore, Evidence
§1969(2), (3rd ed. 1940). We are of the opinion that the admission of
this testimony was not an abuse of discretion on the part of the trial
defendant's objection to Charpentier's statement that proper accounting
on a cash basis would not consider accounts payable or receivable is
without substantial merit as Charpentier was in this instance properly
acting as an expert on income tax matters. United States v. Johnson,
503 (1943) [43-1 USTC ¶9470], United States v.
, 199 Fed. (2d) 905 (3 Cir. 1952) [52-2 USTC ¶9540]. The admission
in evidence near the close of the trial of two Government exhibits, one
being a net worth statement and the other a tax computation was not an
abuse of discretion by the trial judge as both were merely summaries of
evidence that had been properly offered by the Government and could have
been disbelieved by the jury in whole or in part. Defendant was free to
present his own evidence and summaries if he wished to rebut this
evidence. Hanson v. United States, supra.
further contention that the trial court was guilty of improper conduct
in that it demanded that the defendant produce certain documents does
not warrant discussion especially when these alleged demands are viewed
in the context of the entire record.
defendant further contends that the Government did not provide
sufficient evidence for the jury to infer with reasonable certainty that
the Government's beginning net worth figure of $28,599.77 as of
December 31, 19
46 was an accurate representation of the defendant's actual net worth on
that date. Defendant relies on Bryan v. United States, 175 Fed.
(2d) 223 (5 Cir. 1949) [49-1 USTC ¶9322], affirmed 338
552 (1950) [50-1 USTC ¶9140] but the evidence presented in that case
was certainly weaker than was presented by the Government in the instant
case. In the
case there was no admission by the defendant as to the extent of his
beginning net worth. See Pollock v.
, 202 Fed. (2d) 281, 284 (5 Cir. 1953) [53-1 USTC ¶9229], cert.
993. In the instant case there was properly admitted in evidence a net
worth statement signed and sworn to by the defendant and prepared by the
defendant's accountant which stated his beginning net worth was
$26,262.22. It is to be noted that the net worth figure finally relied
upon by the Government was $28,599.77 or $2,337.55 more than the
defendant's own estimate of his net worth. Other admissions made by the
defendant during the course of the investigation by Special Agent
Charpentier supply additional evidence from which the jury could infer
that all of the defendant's assets as of
December 31, 19
46 were reflected in the Government's $28,599.77 net worth figure.
Arguments to Jury]
defendant cntends that certain portions of the Government's argument to
the jury were so prejudicial as to entitle the defendant to acquittal.
With regard to the interest of Bernard Cowette in J. Scanlon and Company
and the Government's allegedly prejudicial remark with reference
thereto, the Government counsel was merely presenting to the jury his
conception of a reasonable deduction to be made from Cowette's
testimony. See Keal Driveway Co. v. Car & General Ins.
Corporation, 145 Fed. (2d) 345 (5 Cir. 1944). Defendant's contention
that Government counsel failed to completely discuss the capital gains
and losses provision of the Internal Revenue Code is without merit. The
remarks concerning the source of defendant's income were withdrawn after
objection and do not constitute prejudicial error.
defendant also objected to that portion of the Government's counsel's
argument to the jury which is as follows:
submit to you, ladies and gentlemen of the jury, that although, as Mr.
Graf points out, the defendant does not have to take the stand, and a
jury is not entitled to make any inference from that, if there were that
information available, if in fact somebody had given Mr. Scanlon ten
thousand dollars in 1946 or 1947 or 1948, they could have brought him in
for you. But did you see any evidence of it? No."
Government argues that this comment was allowable on two grounds. One
ground appears to be that the defendant's counsel had already discussed
the subject of the defendant not having to testify and that consequently
the Government could be allowed to comment on the defendant's
nonpresentation of witnesses. The Government cites as authority for this
point United States v. Feinberg, 140 Fed. (2d) 592 (2 Cir. 1944),
cert. denied 322
726, and Myres v. United States, 174 Fed. (2d) 329 (8 Cir. 1949)
[49-1 USTC ¶9275], cert. denied 338 U. S. 849, but these cases
presented situations unlike that presented in the instant case and do
not stand as authority for the Government's contention. In the instant
case defendant's counsel did not attempt to indicate what the defendant
would have said if he had testified and thus did not create an
opportunity for the prosecution to comment upon the defendant's lack of
evidence. The other ground of the propriety of Government's counsel's
comment is that it is allowable to comment on the failure of the
defendant to bring in a witness who could testify as to giving or
loaning the defendant such sums of money as would justify the
defendant's net worth increases. In Graves v. United States, 150
U. S. 118 (1893), the Supreme Court, although reversing a conviction
because of prejudicial comment by the district attorney, stated at p.
121: "The rule even in criminal cases is that if a party has it
peculiarly within his power to produce witnesses whose testimony would
elucidate the transaction, the fact that he does not do it creates the
presumption that the testimony if produced would be unfavorable."
This rule has been generally followed and consequently comments on the
non-production of evidence which is peculiarly within the control of the
other party have been allowed. 88 C. J. S. Trial §184;
& O. Ry. Co. v. Richardson, 116 Fed. (2d) 860 (6 Cir. 1941),
cert. denied 313
574; Milton v. United States, 110 Fed. (2d) 556 (D. C. Cir.
1940); see Bell v. United States, 185 Fed. (2d) 302, 309 (4 Cir.
1951) [50-2 USTC ¶9499], cert. denied 340
930. In the instant case the testimony of any person who had made a gift
or loan to the defendant would certainly be evidence peculiarly within
the control of the defendant and consequently the allowance of the
prosecution's comment did not result in prejudicial error.
[Trial Court's Charge]
defendant's final contentions deal with the trial court's charge. This
charge adequately instructs the jury as to placing on the Government the
burden of proving the defendant's guilt beyond a reasonable doubt and
also made clear to the jury that the fact of the defendant's indictment
was not to be considered as evidence of guilt. Objection was made to the
trial court's instruction that if the defendant's net worth statement
was voluntarily given, the jury must consider its contents. This
instruction, however, did not invade the province of the jury for only
if the jury decided the statement was obtained voluntarily was it to
consider the contents of that statement and the weight to be given to
the contents was left entirely to the judgment of the jury.
main objection of the defendant is to the trial court's instruction with
regard to the defendant's net worth on
December 31, 19
46. It is contended that the trial court in effect made what amounted to
a finding of fact on this issue when it stated: "The prosecution in
this case has taken
December 31, 19
46, as a base or starting point and has determined the amount of the
excess of his assets over his liabilities at that time. This constitutes
his net worth as of that date." However, when this was objected to
by the defendant the trial judge attempted to correct any
misunderstanding on the part of the jury by further charging the jury on
this point. In our opinion the jury should have understood from this
amounded instruction that it was their function to determine whether or
not the defendant's net worth was substantially identical to the
judgment of the district court is affirmed.
26 U. S. C. §145(b) (1946), 53 Stat. 62 (1939)
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."
United States of America
, Plaintiff-Appellee v. David H. Terrell, a/k/a Daniel H. Ford,
U. S. Court of Appeals, 5th Circuit, No. 84-1366, 754 F2d 1139,
[Code Sec. 7201]
Crimes: Failure to report income: Net worth method.--Use of the
net worth income reconstruction method in convicting a taxpayer of tax
evasion was upheld. On appeal, the taxpayer argued that the IRS failed
to include in his opening net worth the prices he received for selling
cattle. But, according to the appellate court, there was no need to
consider the amounts because the taxpayer concealed the cattle sales,
and the IRS, after following leads on the sales, correctly decided to
exclude the sales from computations. The IRS also properly used the
source and applications of funds method to conclude that the taxpayer
did not have cash on hand at the beginning of the net worth
reconstruction period. Attacks against jury instructions were dismissed
as gross misrepresentations of what the lower court judge actually
charged. Finally, the lower court's refusal to sever the trial of one of
the tax evasion counts from the others was upheld. Although the
taxpayer's attorney was a potential government witness regarding that
count, he was never called and his testimony was not indispensable.
Also, prosecution of all counts was based on the same body of evidence.
J. Muller, III, One Alamo Center, San Antonio, Tex. 78205, Harvey G.
Sanders, Jr., 217 East Coffee St., Greenville, S. C. 29602, for
plaintiff-appellee. Edward C. Prado, United States Attorney, Sidney
Powell, Jack O'Donnell, San Antonio Tex. 78206, Glenn L. Archer, Jr.,
Assistant Attorney General, Michael L. Paup, Kent S.
ert E. Lindsay, Department of Justice, Washington, D. C. 20530, for
GOLDBERG, POLITZ and WILLIAMS, Circuit Judges.
H. Terrell appeals from his conviction by jury on four counts of
willfully attempting to evade federal income taxes for the years 1976
through 1979, in violation of 26 U. S. C. §7201. The proof showed that
appellant's taxable income during those years totaled in excess of
$439,000, while he reported only $217,000. Appellant alleges, inter
alia, that the government failed to establish a prima facie
case as to his net worth starting point, and that the court erroneously
shifted the burden of establishing the net worth starting point to him.
Appellant also alleges several errors relating to jury instructions and
evidentiary rulings. We find no error, and accordingly affirm.
H. Terrell had made his living as an evangelist since the late 1950's.
In 1965, he formed a tax-exempt corporation known as the New Testament
Holiness Church. He preaches under the auspices of that church, while
not receiving any direct compensation from the corporation. Because he
received no direct compensation, appellant's income for the indictment
period, 1976 through 1979, was reconstructed using the net worth plus
expenditures method of proof. 1 Appellant's
net worth increases and taxable income for the indictment period as
established by the evidence are:
Net Worth Corrected Taxable Income Tax Due
Year Increases Taxable Income Not Reported and Owing
1976 ..... $ 82,604.51 $ 67,901.78 $ 34,459.31 $ 19,071.07
1977 ..... 69,451.27 72,764.42 35,355.77 18,289.75
1978 ..... 116,145.49 123,566.48 86,454.49 43,220.21
1979 ..... 200,760.47 194,121.32 84,846.70 42,232.56
Total .... $468,961.74 $458,354.00 $241,116.27 $122,813.59
increases in appellant's net worth over the indictment were largely
attributable to his acquisition of loan receivables, five parcels of
real estate totaling 482 acres at a cost of $347,315, and tradings in
sixteen automobiles, including several motor homes, at a total cost of
$150,000. In addition, during 1978 and 1979, appellant paid cash for his
$138,000 residence and a $29,000 guitarshaped swimming pool.
likely source of appellant's income was money earned through his
ministry. Terrell preached daily at branches of his church and traveling
tent revivals. At each service, in addition to collecting church
offerings, appellant collected person contributions known as "love
offerings". Typically, a bucket would be placed in front of the
congregation for church offerings, and Terrell would make an appeal to
his audiences to help him personally by handing him money directly or
placing it in one of the pockets of an apron that he wore at the time of
the offerings. In addition, contribution envelopes were distributed at
services resulting in the receipt of substantial sums of money through
the mail at a post office box in
. After a particular service, receipts were at least partially recorded
on slips of papers referred to as "love offering breakdowns".
Although as a matter of course, the offerings received were counted and
recorded on breakdowns after Saturday morning revivals, they were
frequently not recorded for revivals during the week. Appellant had
exclusive control over the record keeping process of the breakdowns.
After services, the cash received and all records were placed in
Terrell's possession. Despite the fact that Terrell would receive
between $400 and $5,000 a week through the mail, the breakdowns only
twice included receipts from offerings received in this manner, both
times after he had been notified that he was the subject of a criminal
had been advised by his accountant that the money he personally received
during services was taxable income. He was instructed to keep track of
his receipts and report them to his tax return preparers. Terrell
provided his tax return preparers with the "love offering
breakdowns" as a purported record of his total receipts. The
breakdowns were submitted weekly, and showed average gross weekly income
of approximately $800 to $1,000. Yet Terrell told IRS agents that he
often received $4,000 to $5,000 in the course of a week-long revival.
evidence produced at trial represented a three-year investigation by the
Internal Revenue Service. IRS agents consulted with Terrell at the
beginning of the investigation and questioned him about his non-taxable
sources of income to ensure that they would be excluded from the net
worth calculations. At that time, Terrell and his attorney provided
agents with a list of his non-taxable sources of income dating back to
1967, including loans and gifts that he had received while he was a
minister. The list in a form of a book was represented to the IRS agents
as itemizing "substantially all his gifts for those years".
The Government credited appellant with all gifts indicated in the book,
and built that figure into its net worth computation as non-taxable
sources of income. 2
order to ensure that pre-indictment savings could not have accounted for
the increases in Terrell's net worth, the government conducted a
"source and application of funds" analysis of his finances
between 1967 and 1975. The analysis showed that Terrell's expenditures
exceeded his reported income plus nontaxable gifts during that period by
$229,000. This analysis was used for the sole purpose of determining
that appellant held no substantial cash-on-hand at the beginning of the
the time covered by the investigation, Terrell made several attempts to
conceal his income. Terrell possessed numerous bank accounts with
substantial balances, and dealt almost exclusively in cash. Among his
cash purchases were an automobile for $12,000 and real estate for
$25,000. When purchasing property in 1976, appellant paid a real estate
commission of $10,000 and requested that the agent not report it until
the following year. Also in 1975, Terrell legally changed his name to
Daniel H. Ford and began purchasing assets in the name of Ford,
including two farms of 375 and 400 acres. Yet he continued to file tax
returns under the name of Terrell. During the course of the IRS
investigation, Terrell discussed his real estate holdings with IRS
agents but never mentioned those properties held in the name of Ford. He
possessed 25 automobiles over the investigation period in six different
names, using eight different home addresses. Real estate was purchased
in six different names, and he maintained
driver's licenses in both the names of Terrell and Ford. Furthermore, in
an attempt to characterize some of his expenditures as loan repayments,
Terrell on two separate occasions approached individuals to execute loan
papers in order to substantiate nonexisting loans.
was indicted on four counts of willful attempt to evade federal income
taxes for the years 1976 through 1979, in violation of 26 U. S. C. §7201.
The indictment charged that he earned taxable income during those years
totaling in excess of $439,000, while reporting only $217,000. His
alleged tax liabilities for those years totaled in excess of $184,000,
although he reported only $71,000. After a thirteen-day jury trial,
Terrell was convicted on all four counts. He was sentenced to five years
imprisonment to be served concurrently on counts One through Three, and
a five-year sentence on Count Four was suspended and appellant placed on
probation. Terrell was fined $5,000 on each count and ordered to pay the
cost of prosecution. A notice of appeal was timely filed.
Net Worth Starting Point
7201 of 26
C. imposes criminal sanctions upon "any person who willfully
attempts in any manner to evade or defeat any tax imposed by this
title". To establish a violation of §7201, the Government has the
burden of proving beyond a reasonable doubt that (1) the defendant owed
taxes for the period in question; (2) that he attempted to evade payment
of them; and (3) that he acted willfully. Sansone v. United States
[65-1 USTC ¶9307], 380
343, 351, 85
1004, 1110, 13 L. Ed. 2d 882 (1965), United States v. Dwoskin
[81-1 USTC ¶9416], 644 F. 2d 418, 419 (5th Cir. 1981). The primary
contention of appeallant is that the Government failed to meet its
burden of proof on taxes owing for the indictment period because the
Government's reconstruction of appellant's income using the net worth
method was incomplete.
a taxpayer's records are an inadequate basis for determining income tax
liabilities, the net worth method of determining income has been
utilized in criminal tax prosecutions to reconstruct income. Using this
method, the Government first must establish the taxpayer's total value
of assets at the beginning of a given period and compare that worth to
the value of the taxpayer's assets at the end of the period. The
Government must take into account cash-on-hand as an asset at the
starting point of the net worth evaluation. Increases in net worth are
subject to certain adjustments before it can be claimed that such
increases represent income acquired over the period in question. For
example, the Government subtracts from net worth increase any gifts,
inheritances, loans and the like that may account for unexplained
increases in net worth. Nondeductible expenditures are then added back
into the net worth figure. Once these adjustments have been made, the
Government attempts to prove that any unexplained increase in net worth
represents unreported income.
use of the net worth method in criminal tax prosecutions was approved in
Holland v. United States [54-2 USTC ¶9714], 348
121, 75 S. Ct. 127, 99 L. Ed. 150 (1954). The Court recognized that such
a reconstruction of income might be the only way to prosecute
individuals who kept inaccurate records and who cleverly concealed
income. But the Court's approval was given with the caveat that
establishing unreported income by the net worth method "involved
something more than the ordinary use of circumstantial evidence in the
usual criminal case."
at 124, 75
at 130. The Court in
recognized that an innocent individual with poorly kept records may not
always be in a position to explain discrepancies in net worth. In order
to avoid the pitfalls of the net worth system, the Government must
conduct a meticulous investigation, and the investigation techniques and
figures are subject to close scrutiny. Moreover, the court must be
particularly mindful of the potential dangers of using the method in
drafting its instructions.
at 129, 75
, the Supreme Court set out the standard that the Government must
meet in order to establish a prima facie showing of tax evasion
using the net worth method. The Government must establish with
"reasonable certainty" an opening net worth as the basis upon
which to calculate increases in the taxpayer's assets. "The
importance of accuracy in this [net worth] figure is immediately
apparent, as the correctness of the result depends entirely upon the
inclusion in this sum of all assets on hand at the outset."
at 132, 75
at 134. Appellant argues that the Government has not met its burden of
proving an opening net worth with reasonable certainty because it did
not include certain assets in its starting net worth.
The Herd of Cattle. Appellant claims that he received as a gift a
herd of cattle worth $76,500 in 1974, prior to the indictment period. He
alleges that at least some of the cattle were sold sometime during the
indictment period, and that the proceeds were used to purchase other
property. He argues that the basis in all of the cattle should have been
added to the starting net worth evaluation, and that the Government knew
of the existence of the cattle during their investigation but
intentionally failed to take them into consideration in its net worth
may be included in the net worth analysis at their basis so long as cost
basis is consistently used throughout the analysis. Dwoskin, 644
F. 2d at 421. Using cost basis to determine net worth means that assets
preexisting the indictment period are a source of non-taxable funds only
to the extent of that basis. Appellant contends that he had a herd of
cattle with a basis of $75,600 that should have been included in the net
worth starting point calculation. But appellant overlooks the elementary
fact that the basis established in a net worth calculation is irrelevant
so long as the same basis is used throughout and at the end of the
calculation. Thus the only relevance of the herd of cattle already owned
by appellant at the beginning of the tax period is to be found in
purchases and sales of the cattle during that period. It is the profit
and loss realized from such sales that have the sole relevance to the
prosecution for income tax evasion. Actually, the cattle and cattle
sales could at best create only a minor lessening of appellant's tax
liability. But because he stresses them in his argument, we go into them
in some detail.
cattle sales were reported by Terrell for the years 1976 or 1978. On his
1977 return, he reported the purchase and resale of $1,600 worth of
cattle. Terrell's income tax return for 1979 indicated that he had sold
$19,981.73 worth of cattle in which he claimed no recoverable basis.
This return was filed after his second interview with the Government. At
this point, appellant had already turned over to the government the
"gift book" in which he identified what he considered
"substantially all" the gifts he had received for the years
investigated. After receiving the 1979 tax return reporting the cattle
sales, the Government once again contacted appellant to state that the
return did not account for all his expenditures for the year and to
inquire if there had been any additional sources of income. Nothing was
said about the cattle, and appellant never provided any leads to sales
of cattle in which he had a basis.
its investigation, however, the Government did discuss cattle sales with
four witnesses, and all leads provided by those witnesses were traced.
In addition to the sales reported on the 1979 return, the investigation
turned up two additional sales. In 1977, Terrell apparently sold $9,000
worth of cattle which he did not report, and similarly, $6,000 worth in
1978. Because appellant had not volunteered any information concerning
sales of cattle, the Government concluded that the proceeds for sale of
cattle generated more unexplained increase in net worth. But even
assuming, arguendo, that the basis of this cattle should have
been included in the net worth starting point, and that appellant's
basis in the cattle sold was equal to the total proceeds of the sales,
the net worth starting calculation would have been off by a maximum of
$15,600, the total of the unreported sales. Because the appellant's
unreported income for 1977 and 1978 combined exceed $120,000, failure to
credit him with the basis in cattle would have had a minimal impact on
the net worth starting point. The amount of tax owing for those years
would still have been in excess of $100,000.
again overemphasizing the importance of the cattle in the case, also
contends that the Government failed to establish a prima facie
case because it failed to follow leads appellant had given them on the
existence of the cattle. Holland, 348 U. S. at 135, 75 S. Ct. at
135, placed upon prosecutors using the net worth evaluation the burden
of investigating leads that may be furnished by the taxpayer that could
result in an explanation for increases in net worth. Failure to pursue
leads that are reasonably susceptible of being checked could result in
serious injustice. Terrell accuses the Government of not following leads
to identify non-taxable sources of income, yet the evidence shows that
appellant, even during the course of investigation, continued to conceal
information relating to cattle sales. Terrell did not provide the
Government with a single lead pertaining to the sale of cattle.
Moreover, if a taxpayer has transactions in previously owned assets
which provide him with non-taxable funds, "the taxpayer has a
burden to furnish 'leads' on them, so that the Government can
investigate and perhaps clear the taxpayer prior to trial." United
States v. Schafer [78-2 USTC ¶9717], 580 F. 2d 774, 779 (5th Cir.),
cert. denied, 439
970, 99 S. Ct. 463, 58 L. Ed. 2d 430 (1978) (citing
at 135-136, 75
at 135-136). Schafer also establishes that it is sufficient for
the Government to identify with "reasonable specificity" a
defendant's basis in assets.
find that the Government can in no way be faulted for failure to
identify any possible basis in cattle. Even if Terrell did have a basis
in these cattle, the effect on the net worth computation would be
minimal because substantial sums for the years 1977 and 1978 would still
be owing above and beyond the amount in question. Moreover, the
Government was diligent in following up on all leads relating to the
cattle, despite the fact that Terrell himself was uncooperative in
Source and Application of Funds Analysis: Cash-on-hand. Appellant
also claims that the Government's starting net worth figures were
inaccurate because he was not given credit for having any cash-on-hand
at the beginning of the indictment period. In its net worth analysis,
the Government concluded that there was no cash-on-hand, while Terrell
claimed that he had approximately $200,000 at the beginning of the
indictment period. The Government must take into consideration
cash-on-hand as an element of its net worth analysis. While the source
and existence of cash-on-hand need not be proved with mathematical
exactitude, the amount must be established with reasonable certainty. United
States v. Boulet [78-2 USTC ¶9628], 577 F. 2d 1165, 1170 (5th Cir.
1978), cert. denied, 439
1017, 59 L. Ed. 2d 72 (1979). The question of whether a defendant has a
substantial amount of cash-on-hand at the beginning of the indictment
period must be carefully investigated because the existence of a cash
hoard could greatly distort the net worth evaluation. Unaccounted for
funds that surface during the course of the net worth evaluation might
be explained by the fact that a defendant accumulated large sums of cash
which he kept on hand and began to spend during the indictment period.
a means of determining whether appellant had an appreciable amount of
cash-on-hand at the beginning of an indictment period, the IRS conducted
a "source and application of funds" analysis. Under this
analysis, appellant's sources of cash were compared with his
expenditures over the investigation period. The surplus (or deficit)
from each year covered when expenditures were subtracted from sources of
funds was recorded as "net funds available." Net funds for the
years 1967 to 1975 were added together to arrive at a "cumulative
net funds available" figure. This "cumulative net funds"
figure, indicating possible sources of cash accumulated over this
preindictment period, represented how much cash appellant was likely to
have had on hand at the beginning of an indictment period.
Government began its investigation of Terrell's funds with the year
1967. All of his returns for the years 1967 through 1975 were examined,
and gross receipts indicated on the returns were entered as part of the
source of funds analysis. Added to those figures were any other sources
identified by the appellant or other witnesses, such as appellant's
proceeds from assets listed in his "gift book". As of December
31, 1975, the Government's analysis indicated that Terrell had expended
nearly $230,000 more than his total accumulated funds for the nine-year
period covered. This means that in order to have arrived even at a
figure of zero for cash-on-hand for the net worth starting point figure,
appellant would had to have had additional sources of funds between 1967
and 1975 totaling at least $230,000, and more than $400,000 of
additional funds to have netted his $200,000 cash-on-hand figure. The
only use the Government made of the source and application of funds
analysis was to conclude that any cash Terrell might have had on hand
would not have been substantial enough to affect the opening net worth.
This purpose was clearly presented to the jury, and no inference was
made that the unaccounted-for expenditures for the investigation years
1967-1975 were at issue in Terrell's prosecution.
makes a second attack on the source and application of funds analysis,
arguing that in its evaluation the Government unjustifiably relied upon
his uncorroborated admissions concerning sources of funds. He relies
upon Smith v. United States [54-2 USTC ¶9715], 348
147, 154-55, 75 S. Ct. 194, 198, 99 L. Ed. 192 (1954), which requires
the Government to corroborate post-offense admissions regarding net
worth. We have held, however, that the corroboration requirement does
not necessarily extend to admissions relating to cash-on-hand, a figure
that is ultimately incorporated into the starting net worth figure. United
States v. Normile [79-1 USTC ¶9151], 587 F. 2d 784 (5th Cir. 1979).
In Normile, the Government relied on the defendant's statement
that he had only $100 cash-on-hand at the beginning of the indictment
period because he did not feel safe having larger amounts on hand. The
court held that this statement did not necessitate corroboration because
"the inherent secrecy of the cash hoard makes it impossible for any
but the keeper to know even of its existence, let alone the
at 786. Thus, we find no error in the use of the source and application
of funds analysis to conclude that Terrell had no cash-on-hand at the
beginning of the indictment period. The Government clearly met its
burden of establishing this fact with reasonable certainty.
reviewing the record in this case, we can only be surprised by
appellant's attack on the thoroughness of the Government's
investigation. The investigation consumed three and one-half years.
Approximately 20 agents canvassed public records to determine the extent
of appellant's holdings. Thirty banks were contacted, and twenty banks
produced documents or witnesses. Nearly 300 potential witnesses were
interviewed, many of them several times. IRS agents identified in excess
of 70 assets purchased and sold by Terrell, and questioned third parties
involved in these transactions. Additionally, every expenditure made by
Terrell was traced, including all cashier's checks traced back to their
sources to determine how they were purchased.
find appellant has not made a meritorious challenge to the procedures or
figures used by the Government in its source and application of funds
analysis. We conclude that there was sufficient evidence for the jury to
find that there was no cash-on-hand at the beginning of the Government's
net worth analysis.
also alleges several errors relating to the jury instructions. On the
issue of net worth starting point, appellant claims that the testimony
of several prosecution witnesses created the impression that he carried
the burden of establishing the net worth starting point and that the
court therefore erred in not giving the jury a requested instruction on
the burden of proof to correct this impression. This argument is without
merit. The trial court's instructions on the net worth method were
thorough and accurate. The court clearly explained to the jury that the
Government had the burden of proving beyond a reasonable doubt that
substantial income tax was owing, and that the net worth method had been
used by the Government to establish this element. In alleging the
inadequacy of the instruction, appellant ignores the following portion
of the charge:
burden is always upon the Government to establish beyond a reasonable
doubt that any amount reflected in the Defendant's increased net worth,
plus nondeductible expenditures, was from taxable, rather than
for appellant's claims that comments by Government witnesses and the
prosecutors implied that the burden of proof shifted to appellant, we
have carefully examined these statements. If the comments could be taken
to have implied a shift in the burden of proof, and we do not feel that
they did, the instruction given clearly cured any such emphasis in
testimony. See Cupp v. Naughten, 414
141, 146-47, 94
396, 400, 38 L. Ed. 2d 368 (1973).
also challenges the propriety of an instruction dealing with
establishing basis in assets. He claims that the court committed error
in instructing the jury that Terrell could not claim a basis in assets
if he had not reported the receipt of the assets as income in a prior
tax year. Appellant's argument refers to the following instruction:
taxpayer must report as income the fair market value of property
received as income. If he fails to report the fair market value of an
asset as income, he cannot later claim the fair market value as his
basis. Instead, his basis would be zero.
reads this instruction out of context to imply that he could not claim a
basis in the cattle because the cattle were received as gifts. We find
no such implication in this instruction. The court was careful in
framing its charge to the jury to state accurately the law concerning
basis in assets received as income, and separately charged the jury on
the proper treatment of gifts.
appellant alleges that the court instructed the jury that all amounts
received by a minister were taxable and that the court refused to
instruct the jury on the elements of a non-taxable gift. This challenge
is a gross misrepresentation of the charges given to the jury. The court
federal income tax is levied on income received by ministers. When an
individual provides ministerial services as his trade or business,
controls the money he receives in that business, and receives no
separate salary, the income of that business is taxable to the minister.
Voluntary contributions, when received by the minister, are income to
him. Payments made to a minister as compensation for his services also
constitute income to him. If money is given to a minister for religious
purposes, any money used instead for the personal benefit of the
minister becomes taxable income to him.
law provides that funds or property received from certain sources do not
constitute taxable income. Since no income tax is levied on such funds
or property, they are not properly reported as income. Such non-taxable
funds or property includes such items as gifts, inheritances, the
proceeds of life insurance policies, loans and other miscellaneous
court thereafter properly charged the jury on the definition and
elements of a gift. 3
find that the court's instructions were complete and accurate in all
respects and reject all of appellant's objections to them as lacking in
argues that the court abused its discretion in failing to grant his
motion for continuance. Where, as here, the purpose for requesting the
continuance was for trial preparation, a defendant must show that the
court acted with "unreasoning and arbitrary insistence upon
expeditiousness in the face of a justifiable request for delay."
See Morris v. Slappy, 461
1, 11-12, 103
1610, 1616, 75 L. Ed. 2d 610 (1983).
argument centers around the admission of the "source and
application of funds" analysis prepared by the Government and
submitted to the defense five days before trial. Appellant represents
the analysis as a submission of computations covering the years 1967 to
1975 for the first time only days before trial. Although he does not
deny the relevancy of the computations, he alleges he did not have
sufficient time to examine the computations and adequately to prepare
court properly denied appellant's motion for continuance on the ground
that all of the information contained in the analysis had been in his
possession for nearly six months. The analysis was a summary of
appellant's tax returns over the investigation years, as well as other
information, e.g., entries taken from the "gift book" given to
the Government by appellant. In short, this analysis, which was
completed by the Government in response to Terrell's repeated
declarations that he had considerable sums of cash-on-hand at the
beginning of the indictment period, presented no surprises for the
defense. The district court acted well within its discretionary powers
in denying the motion for continuance.
also alleges that the court erroneously denied his motion for severance
of Count Four, the count involving the 1979 return. The request was made
due to the involvement of defense counsel in the preparation of
Terrell's tax return for 1979. Defense counsel Harvey Sanders and his
firm, Leatherwood, Walker, Todd and Mann, were involved in drafting the
return, advising changes, and providing some information to be included
in the 1979 return. The Government first sought to disqualify defense
counsel and his firm on the ground that their involvement in the 1979
return might become an issue at trial and that members of the firm were
prospective Government witnesses. Defense counsel responded by moving to
sever Count Four to avoid possible prejudice because of his involvement.
After hearing, the court denied both motions, finding that defense
counsel's testimony was not indispensable to the Government's case. As
for the severance motion, the court accepted the Government's
representation that the proof of all counts was essentially the same,
and that, therefore, severance would not be warranted. The court also
considered the fact that appellant hired an independent attorney,
Charles Muller, to assist in his defense when it became obvious that the
1979 return was at issue. Attorney Muller had no connection with Mr.
Sanders' firm, and he prepared and signed all defense pleadings in the
trial, the Government did not call Mr. Sanders or any member of the
Leatherwood firm as witnesses. The Government did make references to the
involvement of defense counsel in the 1979 return, but only after
obtaining the permission of the court. References to appellant's
attorney were made only in the course of examining one Government
witness who had provided accounting services for appellant in the
preparation of his tax returns. Much of the information used by the
accountant was received from defense counsel, and the Government's
questions were limited to defense counsel's role as provider of such
district court's final denial of the motion for severance is reviewable
only for abuse of discretion.
, 694 F. 2d 398, 400-401 (5th Cir. 1982). In order to demonstrate
abuse of discretion, the defendant bears a heavy burden of showing
"specific and compelling" prejudice.
, (quoting United States v. Morris, 647 F. 2d 568, 570
(5th Cir. 1981)). We find that the trial court correctly denied
severance and find no compelling prejudice to appellant that would call
for reversal on this ground.
final contention is that prejudicial testimony relating to his religious
beliefs and general moral character was admitted at trial. We note that
the Government repeated in opening and closing arguments that the
appellant was not on trial for his religious beliefs, and we find no
testimony in the record that brings into question any of his religious
beliefs. Terrel's claim concerns the testimony of several witnesses. The
first allegation of prejudice relates to the testimony of one of
Terrell's religious followers who testified that Terrell solicited funds
by prophesying to his audiences that tragedy would befall them if they
did not make offerings. The witness testified that Terrell said he was a
prophet and that he who gave unto him would have a prophet's reward. The
Government argues that the manner in which offerings were obtained was
relevant to the issue of whether the offerings were given as gifts or as
compensation, and that the probative value outweighed any potential
female witnesses were questioned regarding land and property
transactions. Appellant argued that the Government attempted to imply
that he had improper relationships with the two women. The questions
directed to these women dealt with the joint property owned by the women
and Terrell. In relation to witness Betty Caroline Johnson, the
Government obtained court approval before delving into any personal
matters. The Government pointed out that on three occasions, Ms. Johnson
signed deeds or sale contracts for property as "Betty C.
Terrell". In relation to another piece of property, she purchased
the property for which the sale contract was drawn up in the names of
David and Betty Johnson. Yet the witness claimed that appellant had no
interest in the property. The Government contends that examination of
this witness was necessary to establish possible bias of the witness and
also to establish the possible source and application of some of
Terrell's funds. The witness had an income of approximately $300 a
month, half of which she gave to the church. Yet her payments on
property she purchased in 1977 totalled in excess of $7,000.
determining whether the probative value of evidence outweighs potential
prejudicial impact, this Court must accord great deference to the
district court. We do not not find that the inquiries in question
unfairly prejudiced appellant. The court's rulings on the admission of
the challenged testimony must go undisturbed.
perceive no error in the thorough case presented by the government nor
in the careful trial of the case by the district court.
The net worth method of reconstructing income is discussed infra
in Part II.
Appellant was credited in the net worth analysis with total non-taxable
gifts of $57,878 for the years 1976 through 1979.
The instruction on gifts was as follows:
is for you, the Jury, to decide whether certain funds are taxable or
nontaxable to the Defendant. In determining whether a payment of money
or property to the Defendant is a nontaxable gift, you should look to
the intent of the parties at the time the payment was made, particularly
the intent of the person making the payment. Such payments are gifts if
they proceed from a detached and disinterested generosity, out of
affection, respect, admiration, charity, or like impulses. In making
this determination, however, you must took at all the facts and
circumstances in this case. The characterization given to a certain
payment by either the Defendant or the person making the payment is not
conclusive. Rather you the members of the Jury, must make an objective
inquiry as to whether a certain payment is a gift. You should look at
the terms and substance of any request made by the Defendant for the
funds. In addition, you may take into account the following factors:
A payment is not a gift if it is made to compensate the Defendant for
his services. In this connection, you should consider how the defendant
made his living.
A payment is not a gift if the person making the payment expects to
receive anything in return for it. A payment would not be a gift if it
was made with the expectation that it would allow the Defendant to
remain in business.
A payment is not a gift to the Defendant if it is made with the
expectation that it will be used to further the religious or ministerial
activities of the Defendant.
A payment is not a gift if the person making the payment felt he had a
duty or obligation to make the payment.
A payment is not a gift if the person making the payment did so out of
fear or intimidation.
is not a complete listing of all the factors you should consider. You
should take into account all the facts and circumstances of this case in
determining whether any payment was a gift.
USTC ¶9576]Raymond J. Kasper, Appellant v.
United States of America
In the United States Court of Appeals for the Ninth Circuit, No. 14,492,
225 F2d 275,
July 11, 19
Upon appeal from the United States District Court for the Northern
District of California, Southern Division.
[1939 Code Sec. 145--similar to 1954 Code Sec. 7201]
Tax evasion: Admissibility of evidence: Substantial evidence.--The
taxpayer, a physician, was convicted of tax evasion on the basis of
income reconstructed by reference to increase in net worth. As a defense
he claimed that he had cached away an amount received as a gift from his
mother and savings from his medical practice and that these amounts
should have been included by the Government in determining opening net
worth. The Government brought in evidence that the taxpayer during this
period had borrowed quite regularly and evidence of other conduct
inconsistent with that of a person having sufficient earnings to
accumulate savings. It was held that the facts were sufficient to
justify the jury's verdict of conviction and that the trial court did
not err in refusing to direct a verdict of acquittal. It was also held
that alleged errors in introduction of evidence, questioning of a
witness and instructions to the jury were not such as could have been
prejudicial to the taxpayer.
& Colvin, Reynold H. Colvin, Sidney Feinberg,
, for appellant. Lloyd H. Burke, United States Attorney,
ert H. Schnacke, Richard Foster, Assistant United States Attorneys, San
Francisco, Calif., for appellee.
MCALLISTER, FEE, and CHAMBERS, Circuit Judges.
was convicted of attempting to defeat and evade income taxes by filing
false and fraudulent returns for the years 1947 and 1948, in which he
understated the income of his wife and himself for the two years by a
total of $42,509.29, and evaded payment of taxes in the sum of
$15,041.14. He appeals, claiming that the trial court erred in the
denial of his motion for judgment of acquittal on the ground that there
was no substantial evidence to support the verdict; that the court erred
in admitting certain evidence and in instructions to the jury; and that
the district attorney, during the cross-examination of a witness, was
guilty of prejudicial conduct which requires reversal.
in Net Worth]
is a physician who began his practice in 1934 in Wahoo,
, a town of 3,000 inhabitants. He left
in 1942 to work for a few months in a railroad hospital in
at a salary of $175 a month, and thereafter, in the same year, came to
, and went to work for another doctor at a salary of $500 a month. He
continued this work until sometime in 1943, when he began to practice
for himself, which he continued through and after the year 1948.
income was computed on the net worth basis. As of October, 1936, his net
assets were, by his own statement, far less than $8,000, and did not
become more than that amount during any of the time he lived in
. From the time he came to
, in 1942, up to the end of 1948, his net worth had increased to more
than $90,000, and during that entire period, he had reported a total
income of less than $38,000. The Commissioner, by use of the net worth
computation, showed unreported income of $29,624.50 for 1947, and
$7,842.14 for 1948.
sought to account for the increase in his wealth which occurred after
his arrival in
by his testimony that he had $40,000 in cash which he had kept hidden in
a hollow tile in his cellar in
, and that he had brought this cash with him to
in 1942. He accounted for having this money on hand by the claim that he
had received $12,000 in cash from his mother, who gave it to him in an
envelope shortly before her death in 1939, and that he had saved between
$300 and $400 a month from his medical practice in Nebraska during the
last few years there, although he stated that the practice never
produced more than a gross of $5,000 per year.
reason that appellant gave for hiding this large amount of cash in the
hollow tile was that a financial institution in which he had a deposit
in Omaha in 1929 was thereafter restricted in payments to depositors,
although it did not close its doors, and, as a further reason, that
three out of four banks in Wahoo, Nebraska, had failed during 1929.
it appears from the evidence that while in Wahoo, appellant had made a
number of small loans from the bank there in amounts ranging from $70 to
$475, at interest rates of 7% and 8%. He testified that he made these
loans not because he needed the money, but to establish his credit by
borrowing and promptly repaying. However, he could not explain why,
after eight years, he still was trying to establish his credit by making
a loan of $200 at 7% just two months before he left Wahoo. It also
appeared from the government's evidence that appellant was in poor
financial circumstances during his practice in Nebraska, and that he had
told one of his doctor friends that his practice there was very lean;
that he wasn't making a go of it; and that he didn't have enough money
to pay his dues to the medical society. In each of the years 1936 to
1946, inclusive, appellant stated under oath to the Tax Collector at
, that he had no unbanked cash in his possession except $90 in 1939,
$200 in 1940, and $100 in 1941. Within two months of his arrival in
in 1942, he asked for and received an advance of salary in the amount of
$200 from his employer.
his first few years of practice in
, appellant carried on all important transactions in cash rather than by
check. In the construction of his home during a later time, at a cost of
$43,298.62, he paid the contractor $29,273.13 in cash in a number of
different payments, and the balance, by three checks drawn by others to
appellant or his wife, and endorsed over to the contractor. Checks
received by him for services rendered to patients were not generally
deposited in the commercial account maintained by him, but, instead,
were used to make payments on appellant's bank loans, or were cashed, or
used to purchase cashier's checks or money orders. He also paid
substantial amounts of cash to purchase savings bonds. When the Internal
Revenue agent sought to examine appellant's records, he was told that
some had been destroyed. Appellant used, as basic records in computing
his income from his medical practice, cards for patients, and a date
book or log book. The separate card for each patient contained the date,
charge, payment, and balance owing, and charges and payments were
entered daily from the patient cards to the log book. Appellant claimed
to have only eight cards for the year 1947, and about thirty, for the
year 1948. The other cards for years before 1949 were destroyed by
appellant, as well as the log books for the years 1944 to 1950, for
reasons given by appellant which the jury probably found unconvincing.
Appellant had received no inheritances, and could not think of any gifts
he had received during the years 1947 or 1948.
did not defend upon the ground that the government's net worth
calculations were wrong as to his net worth as of
December 31, 19
December 31, 19
48, but, on the other hand, maintained that his net worth on
December 31, 19
46, was considerably greater than the government calculated it to be.
The difference, he stated, arose primarily out of the fact claimed by
him as to the $43,000 in cash which he maintained was in his possession
when he came to
in 1942, and which he insists the government failed to give him credit
for in its net worth computations. He further maintained that his
taxable income during the years 1947 and 1948 had been truthfully
reported on the tax returns for the years in question.
government, in order to sustain the burden of proving a net worth case
of income tax evasion, must produce evidence that increases in
appellant's net worth for the tax years in question were attributable to
currently taxable income, or must produce evidence from which the jury
can infer that fact. Holland v. United States, 348
121 [54-2 USTC ¶9714]. The government, in the instant case, established
that appellant was in an income-producing business. We must assume from
the jury's verdict that they did not believe appellant's story that he
came to Fresno in 1942 with $40,000 that he had received in cash from
his mother and from professional fees, which he had kept hidden in a
hollow tile in his cellar; and that, accordingly, he did not have such a
cash reserve to start with.
to his own figures, appellant performed medical services for which he
charged an average of $24,480 in each of the two years of 1947 and 1948.
But, according to appellant, his patients never paid one-third of these
charges. Whatever the case, appellant's medical practice produced
substantial income. It was, of course, impossible for the government to
prove any specific items of unreported income because appellant had
destroyed all of his records from which such items of income could be
ascertained, and, in addition, had refused to allow the revenue agents
to ascertain the names of any of his patients in order to find out what
he had charged and received.
possible source of income was adequately demonstrated, together with the
substantial increase in net worth during the years in question, and this
properly gives rise to the inference that the net worth increase derived
from unreported income from the practice of medicine, especially in view
of the fact of appellant's destruction of all records that would show
what the actual receipts from his medical practice might have been.
to the argument that the government did not negate all sources of
nontaxable income for the years in question, the agent, in the course of
his investigation of appellant's assets and liabilities, checked all
banks in the area, as well as the records in recorders' offices,
assessors' offices, insurance companies, department stores, and the
like, and found no leads to any loans, assets, or liabilities of
appellant other than reflected in the net worth statement. Appellant
never, at any time, either before or during his trial, suggested any
leads as to possible kinds of nontaxable income as the source of his
expenditures. The evidence clearly established the increase in
appellant's net worth and the only leads supplied by appellant to prove
that the net worth income was attributable to prior accumulations of
cash could be and were readily disbelieved by the jury. A likely source
of unreported, taxable income was demonstrated which was adequate to
support the inference that the increase in net worth was attributable to
currently taxable income. Furthermore, the evidence indicated that the
funds expended by appellant during the years 1947 and 1948, had not
derived from nontaxable sources. Holland v. United States, supra;
Friedberg v. United States, 348
146 [54-2 USTC ¶9713]. The district court was not in error in
denying appellant's motion for a judgment of acquittal.
to the court's instruction that character evidence "is to be
considered by you along with all of the other evidence in the case in
determining the guilt or innocence of the defendant," this was not
erroneous; and it was not necessary to charge upon this subject in the
language of appellant's proffered instructions. The court fully
instructed the jury on the question of reasonable doubt, clearly
charging them that they must acquit if, from all of the evidence
including the character evidence, they had a reasonable doubt of
contends that the trial court erred in instructing the jury as to a
certain payment claimed to have been made to him by a patient. Evidence
was introduced and appellant testified, on cross-examination, that he
had received $2,500 under the following circumstances: Appellant had
received ceived a call one night from a man whose name he did not
disclose, and, in answering the call, he went to a hotel where he
treated a woman for injuries suffered when the man had mutilated her
with a broken bottle. Subsequently, the man paid appellant for his
services. The mutilation, which was, of course, a criminal offense, was
not reported to the police; but sometime afterward, appellant claimed
that he had received $2,500 in cash through the mail from someone who
remained anonymous but whose initials corresponded with those of the man
whose identity was not disclosed on the trial. Appellant testified that
he had considered the $2,500 a gift. The court instructed the jury:
"You have one issue in this case that may or may not enter into
your consideration in determining the ultimate fact in the case. There
was reference in the testimony to a so-called payment of $2500 to the
defendant by a man who [sic], under circumstances that were
described as warranting the inference that it was a gift. Now, the jury
will have to determine, if that enters into your consideration in the
ultimate outcome of the case, as to whether or not that $2500 payment
was a gift or whether or not it was in response to some act done or not
done on behalf of the giver by the recipient of the gift."
Appellant contends that this instruction was unnecessary because the
issue could not enter into the case for the reason that the incident did
not occur during the tax years; that it was not an element in the proof
of net worth; and that it was prejudicial in that it focused the
attention of the jury on a transaction which might have reflected
adversely on the character of appellant. It seems as though the
instruction was directed to appellant's credibility as a witness. He had
claimed that other sums of money had been similarly received by him from
patients as gifts rather than as payment for professional fees. If the
jury did not believe him in the matter of these claimed gifts, they
could disbelieve him in other matters. It is to be said, nevertheless,
that it is not entirely clear what the instruction was pointed at; but
if there was any error in the failure of the court to be specific as to
the bearing of such evidence, it cannot be held to have affected any of
appellant's substantial rights, and must be considered as harmless. Rule
52, Federal Rules of Criminal Procedure.
of Witnesses and Evidence]
is also assigned because of claimed prejudicial misconduct of the
district attorney in cross-examining one of appellant's character
witnesses by asking the question: "Did you know or have you heard
that Doctor Kasper was discharged by Doctor Burks for dishonesty?"
The rule is settled that in cross-examining a character witness, the
proper form of the above question is: "Have you heard?" Michelson
469; Stewart v.
, 104 Fed. (2d) 234 (C. A., D. C.). At the time the question was
asked, objection was not made to its form or that the question assumed a
fact not in evidence, but it was objected to on the general grounds that
it was incompetent, irrelevant, and immaterial. When the court overruled
the objection, stating that it assumed that it was asked in good faith,
no further grounds of objection were stated. The witness replied that he
knew appellant had been discharged. Thereafter, the district attorney
proceeded to ask: "Had you known that, would that have affected
your opinion?" The court sustained appellant's objection to this
question. However, while the first question should not have been asked
in the form it was, and the second question was objectionable, there is
nothing that indicates, or convinces us, that they affected the
substantial rights of the appellant to a fair trial, or resulted in a
miscarriage of justice. See Green v.
, 93 Fed. (2d) 537 (C. C. A. 10); Westfall v.
, 2 Fed. (2d) 973 (C. C. A. 6).
further claims error in the introduction in evidence of photostatic
copies of the joint returns of his wife and himself, to which were
attached certifications setting forth that the returns were involved in
criminal or civil investigation which had not been completed at the time
such returns were to be destroyed. It is claimed that the exhibits with
these certifications raised an inference that appellant had been in
difficulty with the Internal Revenue Service before and that their
introduction was prejudicial to him. The only objection to their
introduction was that they were incompetent, irrelevant, and immaterial.
The certifications were not mentioned nor was any objection made to
them. If there had been any such objection, it would have been an easy
matter to remove the certifications from the returns. In any event,
there was no harm to appellant by reason of the language of the
certifications. The fact that the criminal trial was in progress
obviously showed that it had been preceded by an investigation, and the
certifications, therefore, added nothing from which the jury could have
drawn inferences prejudicial to appellant.
have reviewed the instructions on net worth which appellant claims were
misleading, confusing, and prejudicial. We find that, read as a whole,
the instructions were clear and calculated to inform the jury properly
of the facts, the law, and the issues in the case. Other instructions
proffered by appellant and refused by the trial court were either
inaccurate or were fully covered by the instructions given.
reversible error appearing, the judgment of the district court is
, Appellee v. Frank Costello, Appellant
In the United States Court of Appeals for the Second Circuit, October
Term, 1955, Docket No. 23149, 232 F2d 958,
May 7, 19
On petition by the appellant for a reargument.
[1939 Code Sec. 145(a)--similar to 1954 Code Sec. 7203]
Criminal prosecution for tax evasion: Jurisdiction to grant
reargument.--After the United States Supreme Court had affirmed the
Court of Appeals and ordered the case remanded to the District Court,
the Court of Appeals had no jurisdiction to grant a rehearing.
Furthermore, even if the court had jurisdiction it would refuse to grant
a rehearing because no reason was stated to show that the court had not
considered the issue on which a reargument was sought.
Shilensky, Joseph Leary Delaney, for petitioner.
, HAND and FRANK, Circuit Judges.
mandate of the Supreme Court [56-1 USTC ¶9321] in this case reads as
follows: "It is ordered and adjudged by this Court that the
judgment of the United States Court of Appeals [55-1 USTC ¶9342] in
this cause be and the same is hereby affirmed; and that the cause be and
the same is hereby, remanded to the United States District Court for the
Southern District of New York." We have no discretion to vary this
direction in any respect (Ex parte Dubuque & Pacific Railroad,
1 Wall. 69, 73; Durant v. Essex Company, 101 U. S. 555; In re
Washington & Georgetown Railroad Co., 140 U. S. 91; Gaines v.
Rugg, 148 U. S. 228, 242, 243). It is true that unlike the decisions
just cited the Supreme Court did not pass upon the point involved; but
that, as we understand it, does not permit us to deal with the appeal to
us because of the remand direct to the District Court, which leaves us
without any jurisdiction while it stands.
it may not be improper to say that, if we had any jurisdiction to grant
a petition for rehearing, we should have refused to grant it. The only
complaint is that at the trial the prosecution failed to prove that Mrs.
Costello's expenditures, which it alleged had been made out of her
husband's income, did not, or at least might not have, come out of some
accumulated undisclosed sum of money of her own--her own
"hoard." This point was several times raised in the briefs on
the appeal (Appellant's Brief, pp. 12, 13, 17, 18; Appellee's Brief
Point II §§ 1 and 5, pp. 15-21; pp. 32-34; Reply Brief "Answering
Point II" §§ 1 and 5, pp. 6, 13). Moreover the Reply Brief was
followed two months later by a "Supplemental Brief," all of
which we considered; and now we are asked to reconsider this issue over
a year after we decided the appeal, and denied a petition for rehearing
in which the appellant declared that he would "confine himself to
one matter only"--i.e., "that the net worth statement
prepared by the government as of
December 31, 19
45, was incorrect to the extent that it failed to include a currency
reserve of at least $40,000" (pp. 1 and 2).
case had our best attention during the six months that it was before us;
and the trial was conducted with every solicitude for the rights of the
accused. It is undoubtedly true that the determination of charges of
this kind is not susceptible of the kind of certainty that is often
attainable in other prosecutions. This the Supreme Court has recognized
and, it has accepted the method here employed when used with caution. We
are now asked to reconsider a point that would require a re-examination
of the whole record, and no reason is stated to show that we did not
consider it before.
petition is denied.
USTC ¶9321]Frank Costello, Petitioner v.
United States of America
the Supreme Court of the
, No. 72.--October Term, 1955, 350 US 359, 76 SCt 406,
March 5, 19
On writ of certiorari to the United States Court of Appeals for the
[1939 Code Sec. 145(b)--substantially unchanged in 1954 Code Sec. 7201]
Criminal prosecution: Net worth method: Indictment by grand jury
based on hearsay evidence.--Defendant was indicted for willful
evasion of income taxes due for the years 1947, 1948 and 1949. His
motion for inspection of the minutes of the grand jury and for dismissal
of the indictment was denied. The cross-examination at the trial
disclosed that the three investigating government agents had been the
only witnesses before the grand jury. Defendant again moved to dismiss
the indictment on the ground that the only evidence before the grand
jury was hearsay since the officers had no firsthand knowledge of the
transactions upon which their computations were based. The motion was
again refused and defendant was convicted. On appeal the Second Circuit
affirmed, holding that the indictment was valid even though the sole
evidence before the grand jury was hearsay. The Supreme Court affirmed
the Second Circuit on the ground that there was no violation of the
Fifth Amendment since the latter does not prescribe the kind of evidence
upon which the grand juries must act. Furthermore, the Supreme Court
sees no necessity of establishing a rule permitting defendants to
challenge indictments on the ground that they are not supported by
adequate or competent evidence.
Shilensky, Osmond K. Fraenkel, 120 Broadway, New York 5, N. Y., Joseph
Leary Delaney, 580 Fifth Avenue, New York 36, N. Y., for petitioner.
Simon E. Sobeloff, Solicitor General, Marvin E. Frankel, Assistant to
the Solicitor General, H. Brian Holland, Assistant Attorney General,
Joseph M. Howard, Richard B. Buhrman, Justice Department, for
BLACK delivered the opinion of the Court:
granted certiorari in this case to consider a single question: "May
a defendant be required to stand trial and a conviction be sustained
where only hearsay evidence was presented to the grand jury which
indicted him?" 350
Frank Costello, was indicted for wilfully attempting to evade payment of
income taxes due the
for the years 1947, 1948 and 1949. 1 The charge
was that petitioner falsely and fraudulently reported less income than
he and his wife actually received during the taxable years in question.
Petitioner promptly filed a motion for inspection of the minutes of the
grand jury and for a dismissal of the indictment. His motion was based
on an affidavit stating that he was firmly convinced there could have
been no legal or competent evidence before the grand jury which indicted
him sinee he had reported all his income and paid all taxes due. The
motion was denied. At the trial which followed the Government offered
evidence designed to show increases in Costello's net worth in an
attempt to prove that he had received more income during the years in
question than he had reported. 2 To establish
its case the Government called and examined 144 witnesses and introduced
368 exhibits. All of the testimony and documents related to business
transactions and expenditures by petitioner and his wife. The
prosecution concluded its case by calling three government agents. Their
investigations had produced the evidence used against petitioner at the
trial. They were allowed to summarize the vast amount of evidence
already heard and to introduce computations showing, if correct, that
petitioner and his wife had received far greater income than they had
reported. We have held such summarizations admissible in a "net
worth" case like this. United States v. Johnson, 319
503 [43-1 USTC ¶9470].
for petitioner asked each government witness at the trial whether he had
appeared before the grand jury which returned the indictment. This
cross-examination developed the fact that the three investigating
officers had been the only witnesses before the grand jury. After the
Government concluded its case, petitioner again moved to dismiss the
indictment on the ground that the only evidence before the grand jury
was "hearsay," since the three officers had no firsthand
knowledge of the transactions upon which their computations were based.
Nevertheless the trial court again refused to dismiss the indictment,
and petitioner was convicted. The Court of Appeals affirmed, 3 holding that
the indictment was valid even though the sole evidence before the grand
jury was hearsay. 4 Petitioner
here urges: (1) that an indictment based solely on hearsay evidence
violates that part of the Fifth Amendment providing that "No person
shall be held to answer for a capital, or otherwise infamous crime,
unless on a presentment or indictment of a Grand Jury . . ." and
(2) that if the Fifth Amendment does not invalidate an indictment based
solely on hearsay we should now lay down such a rule for the guidance of
federal courts. See McNabb v.
Amendment Not Violated]
Fifth Amendment provides that federal prosecutions for capital or
otherwise infamous crimes must be instituted by presentments or
indictments of grand juries. But neither the Fifth Amendment nor any
other constitutional provision prescribes the kind of evidence upon
which grand juries must act. The grand jury is an English institution,
brought to this country by the early colonists and incorporated in the
Constitution by the Founders. There is every reason to believe that our
constitutional grand jury was intended to operate substantially like its
English progenitor. The basic purpose of the English grand jury was to
provide a fair method for instituting criminal proceedings against
persons believed to have committed crimes. Grand jurors were selected
from the body of the people and their work was not hampered by rigid
procedural or evidential rules. In fact, grand jurors could act on their
own knowledge and were free to make their presentments or indictments on
such information as they deemed satisfactory. Despite its broad power to
institute criminal proceedings the grand jury grew in popular favor with
the years. It acquired an independence in
free from control by the Crown or judges. Its adoption in our
Constitution as the sole method for preferring charges in serious
criminal cases shows the high place it held as an instrument of justice.
And in this country as in
of old the grand jury has convened as a body of laymen, free from
technical rules, acting in secret, pledged to indict no one because of
prejudice and to free no one because of special favor. As late as 1927
an English historian could say that English grand juries were still free
to act on their own knowledge if they pleased to do so. 5 And in 1852
Mr. Justice Nelson on circuit could say "No case has been cited,
nor have we been able to find any, furnishing an authority for looking
into and revising the judgment of the grand jury upon the evidence, for
the purpose of determining whether or not the finding was founded upon
sufficient proof . . ." United States v. Reed, 27 Fed. Cas.
727, 738. 6
Holt v. United States, 218
245, this Court had to decide whether an indictment should be quashed
because supported in part by incompetent evidence. Aside from the
incompetent evidence "there was very little evidence against the
accused." The Court refused to hold that such an indictment should
be quashed, pointing out that "The abuses of criminal practice
would be enhanced if indictments could be upset on such a ground."
, at 248. The same thing is true where as here all the evidence before
the grand jury was in the nature of "hearsay." If indictments
were to be held open to challenge on the ground that there was
inadequate or incompetent evidence before the grand jury, the resulting
delay would be great indeed. The result of such a rule would be that
before trial on the merits a defendant could always insist on a kind of
preliminary trial to determine the competency and adequacy of the
evidence before the grand jury. This is not required by the Fifth
Amendment. An indictment returned by a legally constituted and unbiased
grand jury, 7 like an
information drawn by the prosecutor, if valid on its face, is enough to
call for trial of the charge on the merits. The Fifth Amendment requires
urges that this Court should exercise its power to supervise the
istration of justice in federal courts and establish a rule permitting
defendants to challenge indictments on the ground that they are not
supported by adequate or competent evidence. No persuasive reasons are
advanced for establishing such a rule. It would run counter to the whole
history of the grand jury institution, in which laymen conduct their
inquiries unfettered by technical rules. Neither justice nor the concept
of a fair trial requires such a change. In a trial on the merits,
defendants are entitled to a strict observance of all the rules designed
to bring about a fair verdict. Defendants are not entitled, however, to
a rule which would result in interminable delay but add nothing to the
assurance of a fair trial.
CLARK and JUSTICE HARLAN took no part in the consideration or decision
of this case.
The indictment was based on §145(b) of the Internal Revenue Code of
1939. 53 Stat. 63. There was also a count in the indictment for the year
1946 but petitioner was found not guilty of this charge.
For discussions of the "net worth method," see Holland v.
United States, 348 U. S. 121 [54-2 USTC ¶9714]; Friedberg v.
United States, 348 U. S. 142 [54-2 USTC ¶9713]; Smith v. United
States, 348 U. S. 147 [54-2 USTC ¶9715]; and United States v.
Calderon, 348 U. S. 160 [54-2 USTC ¶9712].
221 Fed. (2d) 668. The Court of Appeals reversed petitioner's conviction
on the 1947 count on grounds not material here.
Varying views have been expressed concerning whether indictments may be
challenged because based in whole or in part on incompetent evidence.
See, e.g., Chadwick v.
, 141 Fed. 225;
v. Violon, 173 Fed. 501; Nanfito v.
, 20 Fed. (2d) 376, 378; Brady v.
, 24 Fed. (2d) 405 [1928 CCH D-8043]; Banks v.
, 204 Fed. (2d) 666 [53-1 USTC ¶9402]; Zacher v. United States,
227 Fed. (2d) 219. See also cases collected in 62 Harv. L. Rev. 111; 38
Yale L. J. 680; 71 Cent. L. J. 9; Joyce, Indictments (2d ed., Blakemore,
1924), 166-168; Note, 24 A. L. R. 1432.
1 Holdsworth, History of English Law (1927), 323.
As to the development of the grand jury as an institution here and in
England, see Hale v. Henkel, 201 U. S. 43, 59; Blair v. United
States, 250 U. S. 273, 282; McGrain v. Daugherty, 273 U. S.
135, 157; United States v. Johnson, 319 U. S. 503 [43-1 USTC ¶9470];
4 Blackstone Commentaries 301 et seq.; 1 Pollock and Maitland,
History of English Law (1895), 130; 1 Holdsworth, History of English Law
(1927), 312-323; Morse, A Survey of the Grand Jury System, 10 Ore. L.
Rev. 101, 217, 295.
v. Louistana, 306
agree with the denial of the motion to quash the indictment. In my view,
however, this case does not justify the breadth of the declarations made
by the Court. I assume that this Court would not preclude an examination
of grand-jury action to ascertain the existence of bias or prejudice in
an indictment. Likewise, it seems to me that if it is shown that the
grand jury had before it no substantial or rationally persuasive
evidence upon which to base its indictment, that indictment should be
quashed. To hold a person to answer to such an empty indictment for a
capital or otherwise infamous federal crime robs the Fifth Amendment of
much of its protective value to the private citizen.
as in Holt v. United States, 218
245, substantial and rationally persuasive evidence apparently was
presented to the grand jury. We may fairly assume that the evidence
before that jury included much of the testimony later given at the trial
by the three government agents who said that they had testified before
the grand jury. At the trial, they summarized financial transactions of
the accused about which they were not qualified to testify of their own
knowledge. To use Justice Holmes' phrase in the Holt case, such
testimony, standing alone, was "incompetent by circumstances"
(supra, at 248), and yet it was rationally persuasive of the
crime charged and provided a substantial basis for the indictment. At
the trial, with preliminary testimony laying the foundation for it, the
same testimony constituted an important part of the competent evidence
upon which the conviction was obtained.
sustain this indictment under the above circumstances is well enough,
but I agree with Judge Learned Hand that "if it appeared that no
evidence had been offered that rationally established the facts, the
indictment ought to be quashed; because then the grand jury would have
in substance abdicated." 221 Fed. (2d) 668, 677. Accordingly, I
concur in this judgment, but do so for the reasons stated in the opinion
of the Court of Appeals and subject to the limitations there expressed.
See also, Notes, 62 Harv. L. Rev. 111; 65 Yale L. J. 390.
USTC ¶9713]David Friedbert, Petitioner v.
United States of America
the Supreme Court of the
, No. 18. October Term, 1954, 348 US 142, 75 SCt 138,
December 6, 19
On Writ of Certiorari to the United States Court of Appeals for the
[1939 Code Secs. 41 and 145--similar to 1954 Secs. 446, 7201, and 7202]
Criminal penalties: Fraud: Net worth method.--Tracing the
taxpayer's finances from 1922 through 1944-1947, the prosecution years,
the government's evidence pointed to the conclusion that the taxpayer's
net worth accumulated between 1922 and 1941 was not $60,000 and the jury
could readily have concluded that the taxpayer had saved no such
reserve. Nor were there errors in the trial procedure where the special
agent's summarization of evidence already introduced amounted to
testimony as to a negative fact--namely, that he had not included cash
for 1941 because he had found no evidence of cash. Further, there was no
error where the trial court's phrase "compromise and adjust your
differences" did not indicate that a compromise verdict was
permissible and the jury was not misled.
ert N. Gorman, Stanley A. Silversteen,
803 Traction Building,
, for petitioner. Simon E. Sobeloff, Solicitor General, H. Brian
Holland, Assistant Attorney General, Ellis N. Slack, David L. Luce,
Richard B. Buhrman, Special Assistants to the Attorney General, for
is the second in the group of four cases involving income tax
prosecutions under the net worth method of proof. In this case
petitioner was indicted [53-2 USTC ¶9632] for the years 1944 through
1947, and convicted on all counts except the first, covering the year
the discussion in Holland v. United States ante, p. -- [54-2 USTC
¶9714], is dispositive of some of the more general problems raised by
this type of prosecution, petitioner here directs his fire specifically
at the sufficiency of the evidence as to his opening net worth. To
highlight his contention that the Government had not properly accounted
for an alleged hoard of cash and bonds on hand at the beginning of the
indictment period, petitioner has stipulated virtually every other net
worth issue out of the case.
on Opening Net Worth Attacked]
petitioner's testimony as to this cash on hand vacillated, 1 we conclude
from a careful examination of the testimony that the largest amount
claimed at the starting point was "far in excess" of $60,000.
The Government's evidence, as in
, did not directly dispute this, but it did painstakingly trace
the Friedbergs' finances from 1922 through the prosecution years. It
pointed unmistakably to the conclusion that petitioner had no such hoard
of cash at the starting point.
evidence, briefly outlined, was as follows: Petitioner filed no tax
return for 1922, paid nominal taxes for 1923, 1924 and 1925, and except
for 1926, 1927, 1930 and 1937, when he filed nontaxable returns, he
filed no returns from 1926 through 1937. He borrowed small sums of money
on three occasions in 1931. In 1934, when he failed to pay $30 a month
on a real estate mortgage, the mortgagee brought a foreclosure suit and
petitioner was unable to meet the modest compromise terms offered him by
the court. In 1936 and 1940, levies on a judgment for $13.76 were
returned nulla bona. A mortgage on his former home was foreclosed
in 1937, and a deficiency judgment entered for over $3,500. The writ of
execution was returned "nothing found" in 1939, and petitioner
then settled the judgment by paying $100 to the mortgagee in return for
release from liability. In 1939, petitioner stated in an application for
a loan that his total assets were $9,200, including $150 cash on hand,
while his liabilities were $500. The tailoring business in which
petitioner had worked since 1922 for an average pay of $50 a week was
dissolved in 1941 because it could not meet its bills, and petitioner
bought its assets for $650.
it was during these years, from the 1920's until 1941, that petitioner
claimed to have accumulated "far in excess" of $60,000. We
think the jury could readily have concluded that petitioner had saved no
Errors in Trial Procedure]
other objections can be disposed of quickly. First, he contends it was
error for the special agent, a witness for the Government, to give his
"personal opinion" that petitioner had no cash on hand at the
starting point. But this distorts what actually happened. The agent was
asked on cross-examination to give a "yes or no" answer to
whether in his net worth statement he had credited petitioner with any
cash on hand for 1941. The agent said "there was no evidence
available to show there was cash." After defense counsel's
insistence that the witness answer "did you or didn't you"
give credit for any cash, the court allowed the agent to explain his
answer. He explained that his investigation disclosed no evidence which
would permit him to credit petitioner with cash on hand in 1941 and on
redirect examination he elaborated, pointing out the foreclosures and
the other evidence which has been detailed above. From this, he said, he
"could see no reason why [he] should . . . include" any cash
on hand at the starting point.
was hardly a "conclusion of the witness" which is an
"ultimate issue to be decided by the jury," as petitioner
claims. The agent, upon petitioner's insistence, was testifying to a
negative fact: he had not included cash because he had found no evidence
of cash. The evidence which he then summarized on redirect was only that
which had already been introduced at the trial. It is difficult to see
how he invaded the province of the jury; nor do we see how petitioner's
question could have been answered otherwise.
error is asserted in the trial judge's final instruction to the jury,
which was given some three to four hours after it had begun its
deliberations. Petitioner contends that the instruction called upon the
jury to compromise the issues. 2 It may be
that "compromise" in its literal sense, if used alone, would
leave improper connotations. Though its use here was unfortunate, we do
not think it misled the jury. We note that no objection was made to any
of the instructions, nor was any of petitioner's oral argument devoted
to them a week later on motion for a new trial. In fact, petitioner
specifically disclaimed any intent to make the instruction now attacked
a ground for a new trial. This is persuasive evidence that he did not
originally consider this section of the charge prejudicial; and since
the remaining instructions were fair and negatived any inference that a
compromise verdict was permissible, we are inclined to agree. In the
face of this record, we can hardly conclude that this error is
sufficient ground for reversal.
Both Friedberg and his wife testified that he had "far in
excess" of $50,000 by 1936; at another point he swore he had
between $50,000 and $100,000 by that time; by 1938 he claimed "far
in excess" of $60,000; and finally, he stated that he had
"substantially" $100,000 by 1947.
The instruction was:
Court will stand in recess until one-thirty. The Court may say to the
jury at this time that I want you to make an honest and sincere effort
to reach an agreement as to the merits of this case. I do not want you
to shirk your duty. I want you to be fair to the Government, the
, and the defendant. Nevertheless, this case has taken many days to try,
and I hope you will make a sincere effort to compromise and adjust your
differences and reach a verdict, if possible."
United States of America
v. George L. Smith, Appellant
In the United States Court of Appeals for the Third Circuit, No. 10,872,
206 F2d 905,
August 17, 19
On Appeal from the United States District Court for the District of New
Tax evasion: Immunity from prosecution: Failure to file return v.
evasion: Proof.--Taxpayer could not claim immunity from prosecution
for income tax evasion for 1946 and 1947, even assuming that the
indictment was based on information gained from his testimony, pursuant
to a subpoena, at a hearing conducted by the O. P. A. in April, 1946,
since the offenses for which he was prosecuted were not committed until
March 15, 19
March 15, 19
48. With regard to the charged evasion of tax for 1945, an offense
alleged to have been committed prior to the O. P. A. hearing, no opinion
was rendered as to the effect of taxpayer's immunity argument, inasmuch
as the total sentence imposed upon all counts of the indictment was
sustainable as to any one count standing alone. Proof of willful failure
to file returns, plus evidence of receipt of substantial amounts of
income and other affirmative acts of evasion, was sufficient to charge a
felony under Code Sec. 145(b), as distinguished from a misdemeanor under
Sec. 145(a), so that the six-year, rather than the three-year, statute
of limitations was applicable to the prosecution. It was not necessary
to prove taxpayer's net worth at the beginning of each taxable year
involved or the exact amount of tax evaded. There was no error in
refusing to instruct the jury as requested by taxpayer.
1180 Raymond Boulevard
2, N. J., for appellant. Assistant United States Attorney,
1, N. J., for appellee.
BIGGS, Chief Judge, and STALEY and HASTIE, Circuit Judges.
of the Court
seeks reversal of a judgment entered upon a jury's verdict convicting
him of violating Section 145(b) of the Internal Revenue Code.
indictment was returned on
March 11, 19
52, and contained seven counts. The first three counts charged that
defendant willfully attempted to defeat and evade payment of his
individual income taxes for the calendar years 1945, 1946, and 1947,
respectively. The four remaining counts charged that defendant, as the
officer in control of four different corporations, willfully attempted
to defeat and evade payment of income taxes due from those corporations,
for the calendar year 1946 for one of them and for the calendar year
1947 for the other three. The jury returned a verdict of guilty on all
to File Returns]
deem it unnecessary to set out the testimony in great detail. It is
enough to state that the Government introduced evidence, apparently
credited by the jury, sufficient to establish the following:
was the officer in control of a number of corporations. The four named
in the indictment, Clinton-Osborne Company, Seven, Twenty-Nine, and
Thirty-Three Holding Corporations, were incorporated to hold title to
certain real estate developments. Neither defendant nor any of his four
corporations filed income tax returns for the taxable years covered by
the indictment. The revenue agent who investigated defendant's and the
corporations' financial status made a detailed analysis of bank records,
bank statements, brokerage accounts, and those books and records of the
corporations that he could lay his hands on. From this analysis, he
computed the income and tax due thereon of defendant and his
corporations. His testimony showed that defendant received substantial
amounts of income in the following forms: dividends credited to a
brokerage account conducted in his own name, dividends from shares of
stock, dividends credited to a brokerage account conducted in the name
of his brother-in-law (who, the Government contends, was merely a front
for defendant), interest on United States Treasury Bonds, short-term
capital gains on the sale of securities in his own name and in the name
of his brother-in-law, and dividends and management fees from his
corporations. The revenue agent testified that the four corporations
received substantial amounts of income from the rental and eventual sale
of their properties.
from certain contentions which will be discussed later, defendant admits
that he and his corporations had sizable incomes for the years involved,
and he admits that no returns were filed. Most of his defenses raise
questions of law rather than disputes as to the facts.
first point is relied upon as a defense to all the counts in the
indictment. He says that he is immune from prosecution for the offenses
charged. Some factual background, otherwise unrelated to the present
case, is necessary for the proper understanding and disposition of this
April of 1946, defendant testified, pursuant to a subpoena, at a hearing
conducted by the Office of Price Administration relating to an
investigation of possible misuse of priority ratings and sales at
over-the-ceiling prices by Daisart Sportswear, Inc., another of
defendant's corporations. His assertion of his privilege against
self-incrimination was unavailing since the Emergency Price Control Act
of 1942 1 incorporated
within it the Compulsory Testimony Act of 1893. 2 Thus,
defendant was forced to trade his constitutional right to remain silent
for the Government's statutory promise not to prosecute him for the
matters about which he testified. In spite of the immunity provisions of
the Compulsory Testimony Act, defendant was convicted of violations of
the Second War Powers Act and the Emergency Price Control Act. The court
of appeals affirmed, but the Supreme Court reversed, holding that
defendant was immune from prosecution since he had asserted his
privilege and his testimony, in part at least, had borne directly upon
the subsequent charges. See Smith v.
137 (1949). About one month after his testimony at the Office of Price
Administration hearing, defendant was subpoenaed to appear before an
agent of the Internal Revenue Bureau and to produce the books and
records of Daisart Sportswear, Inc. In October of 1946, defendant
appeared and testified.
these facts, defendant claims immunity from prosecution for the present
offenses, arguing that the information disclosed by him at the prior
hearing was available to the revenue agents and was used by them to
develop further leads which ultimately brought out the facts which were
the basis of this indictment, thus violating his immunity. Of course,
the Government denies that there was any such connection, and, at the
hearing on the matter, conducted by the district court, the revenue
agents who had investigated the fiscal affairs of defendant and his
corporations unequivocally denied that the present indictment was in any
way based upon any information gained from the Office of Price
Administration hearing. However that may be, we need not decide the
question. Even assuming that defendant is right on the facts, his legal
contention is of no help to him. The obvious defect in his argument, at
least as to the counts covering the taxable years 1946 and 1947, is that
it amounts to a claim of immunity from prosecution for crimes not yet
committed when defendant testified. Each count of the indictment charges
that the offense set out was committed on or about March 15 of the year
following that for which the tax was due. Thus, the offense of willfully
attempting to defeat and evade income taxes for the calendar year 1946
is alleged to have occurred on or about March 15, 1947, and the offense
as to the year 1947 is alleged to have been committed on or about March
15, 1948. Thus, defendant's testimony in April of 1946 cannot make him
immune from prosecution for crimes which were not committed until 1947
and 1948. The immunity granted by the Compulsory Testimony Act is
coextensive with the protection granted by the privilege against
self-incrimination. Shapiro v.
1 (1948); Heike v.
131 (1913). Hence, the witness becomes immune only if he could have
properly refused to testify because his answers would tend to
incriminate him. We fail to see how any answer could tend to incriminate
when the crime presently involved was not committed or perhaps even
contemplated when the answer was given.
v. Swift, 186 Fed. 1002 (N. D. Ill., 1911); People v.
391, 15 N. W. (2d) 679 (1944), cert. denied, 324
853 (1945). Thus, defendant was not immune from prosecution for the
offenses charged in counts two to seven even if the revenue agents did
have access to and use the information given by defendant at the hearing
in April of 1946.
offense charged in count one, on the other hand, is alleged to have
occurred on or about
March 15, 19
46, which was before defendant testified at the Office of Price
Administration hearing. We intimate no opinion, however, as to the
effect of defendant's immunity argument upon count one. It is familiar
law that where the total sentence imposed upon conviction on a
multi-count indictment is less than that which could legally have been
imposed upon one count standing alone, the reviewing court will not
search through each count but will affirm if the conviction is
sustainable as to any one count. Pinkerton v. United States, 328
640, 641 n.1 (1946); Abrams v.
616 (1919). See also Hirabayashi v. United States, 320
81, 85 (1943), applying the rule to a case of concurrent sentences. Upon
a conviction as to any one count for a violation of Section 145(b) of
the Internal Revenue Code, defendant could legally have been sentenced
to a $10,000 fine and imprisonment for five years. The total sentence
actually imposed upon his conviction on all seven counts was a $10,000
fine and imprisonment for two years. Hence, his total sentence upon all
seven counts was less than could legally have been imposed upon one
count standing alone. Therefore, the rule stated above governs here, and
we need not review each separate count.
to File Return v. Evasion]
come now to the merits of the case. The indictment charges Section
145(b) violations. Defendant says that if there is any crime at all, it
is a Section 145(a) violation. The difference is not academic. Aside
from the fact that subsection (a) is a misdemeanor, carrying lighter
penalties than the felony described in subsection (b), the statute of
limitations for (b) is six years; 3 for (a) it
is three years./4/ The indictment charges offenses occurring in 1946,
1947, and 1948, but it was not returned until
March 11, 19
52. Consequently, if the Government has not proved a Section 145(b)
case, the prosecution is barred and the judgment must be reversed.
(a) and (b) of Section 145 are as follows:
Failure to file returns, submit information, or pay tax. Any person
required under this chapter to pay any estimated tax or tax, or required
by law or regulations made under authority thereof to make a return or
declaration, keep any records, or supply any information, for the
purposes of the computation, assessment, or collection of any estimated
tax or tax imposed by this chapter, who willfully fails to pay such
estimated tax or tax, make such return or declaration, keep such
records, or supply such information, at the time or times required by
law or regulations, shall, in addition to other penalties provided by
law, be guilty of a misdemeanor and, upon conviction thereof, be fined
not more than $10,000, or imprisoned for not more than one year, or
both, together with the costs of prosecution.
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." 26 U.
S. C. §§ 145(a) and (b).
Spies v. United States, 317 U. S. 492 (1943) [43-1 USTC ¶9243],
the authoritative interpretation of these two subsections, defendant
asserts that the gist of subsection (b) is the filing of a false return
and that, since the proof here is that no return at all was filed, the
Government has proved only a subsection (a) violation. Defendant is
wrong. The Spies case furnishes absolutely no support for such a
statement. The theory of the prosecution here is that this is a case of
a willful failure to file returns and pay the taxes (which would be
enough to sustain a 145(a) misdemeanor conviction), plus evidence of
such other affirmative acts as the Spies case said were
sufficient to raise the offense to the degree of a felony under 145(b).
There the Court explained the difference in this manner:
difference between the two offenses, it seems to us, is found in the
affirmative action implied from the term 'attempt,' as used in the
felony subsection. . . . We think that in employing the terminology of
attempt to embrace the gravest of offenses against the revenues,
Congress intended some willful commission in addition to the willful
omissions that make up the list of misdemeanors. Willful but passive
neglect of the statutory duty may constitute the lesser offense, but to
combine with it a willful and positive attempt to evade tax in any
manner or to defeat it by any means lifts the offense to the degree of
filing a false return is one instance of such affirmative conduct, United
States v. Croessant, 178 Fed. (2d) 96 [49-2 USTC ¶9483] (C. A. 3,
1949), cert. denied, 339
927 (1950), but it is not the only instance. In fact, the Spies
case states at page 499:
way of illustration, and not by way of limitation, we would think
affirmative 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.
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."
Attempts to Evade Tax]
to the test set out in Spies, we think the Government's evidence
here was literally full of "affirmative acts" and "acts
of commission" and was thus clearly sufficient to sustain the
145(b) conviction. There was evidence that defendant and his
corporations received substantial amounts of income and that no returns
were filed. The "willfulness" element is a question of fact, Battjes
v. United States, 172 Fed. (2d) 1 (C. A. 6, 1949) [49-1 USTC ¶9149];
Maxfield v. United States, 152 Fed. (2d) 593 (C. A. 9, 1945)
[46-1 USTC ¶9115], cert. denied, 327
794 (1946), and there was ample evidence from which the jury could have
inferred it here. Furthermore, there was credible evidence that
defendant conducted brokerage accounts in the name of Jeffrey Baker, his
brother-in-law; falsely represented to the investigating agents of the
Bureau of Internal Revenue that certain books and records of the
corporations had been turned over to the purchasers of their properties,
United States v. Beacon Brass Co., 344 U. S. 43 (1952) [52-2 USTC
¶9528]; concealed his assets by having his accountant 5 change the
records so that they would show his check to the Jeffrey Realty Company
as a loan to that company by Jeffrey Baker and made further requests
that the accountant make additional alterations in the records so that
loans that appeared in his name would show as having been made by
members of his family; 6 and used
corporate funds for personal items, such as to pay his jockey, to pay
for insurance on his horses, to pay for repairs to his home, and to buy
a television set. It requires no elaboration to show that these are just
the kind of affirmative acts the Supreme Court was talking about in the Spies
would palliate the effects of these acts by assigning other reasons as
their causes. But, "Such inferences are for the jury. If on proper
submission the jury found these acts [those quoted above] taken together
with willful failure to file a return and willful failure to pay the
tax, to constitute a willful attempt to evade or defeat the tax, we
would consider conviction of a felony sustainable." 317
of Net Worth]
we are told that there is a fatal defect in the Government's proof in
that there is no showing of defendant's net worth as a starting point
for each taxable year. But no such showing is necessary because this is
not a net-worth case. The prosecution relied upon evidence of specific
items of income which, after allowance for known deductions and
exemptions, became net taxable income. Here, the Government did not rely
upon bald cash items and let it go at that. Whether the item was cash or
a check, it was traced to its source and shown to be income within the
legal sense of that term. Thus, elements necessary to a net-worth case
are inapplicable here.
of Amount of Income]
says that there is another gap in the proof because the Government did
not allow him all the deductions and exemptions to which he says he is
entitled. He argues that to compel him to rebut the Government's prima
facie case is to reverse the traditional rule that the prosecution has
to prove its case beyond a reasonable doubt. We are satisfied that there
has been no such reversal here. Defendant filed no returns and refused
to make his records available to the investigating revenue agents. 7 Having
reconstructed defendant's income from what material it could unearth,
the Government showed substantial net income. Defendant complains,
however, that he was not allowed exemptions for his wife and his two
children, that he had certain bad debts, charitable contributions, and
expenses which are deductible. The trouble is that there is no proof as
to these matters or, where there are intimations in the record, the jury
did not draw the inference which defendant seeks. The Government made
out a case for the jury by showing substantial net income. Of course,
defendant could controvert this evidence by testimony that he was
entitled, under the law, to certain deductions which the Government did
not allow him.
v. Link, 202 Fed. (2d) 592 (C. A. 3, 1953) [53-1 USTC ¶9230].
The only testimony he introduced on this point was in attempting to
establish certain business expenses. No one would doubt that the jury
was not bound to believe the underlying facts upon which he says those
deductions are based. Furthermore, even were he credited with those
deductions, there would still be substantial amounts of income for each
year. That is sufficient, for it is not necessary that the exact amount
of tax evaded be proved, United States v. Johnson, 319 U. S. 503
(1943) [43-1 USTC ¶9470]; nor is the prosecution required to establish
the precise amount which is stated in the indictment. Gendelman v.
, 191 Fed. (2d) 993 (C. A. 9, 1951) [51-2 USTC ¶9474], cert.
relies upon United States v. Fenwick, 177 Fed. (2d) 488 (C. A. 7,
1949) [49-2 USTC ¶9448] and Bryan v. United States, 175 Fed.
(2d) 223 (C. A. 5, 1949) [49-1 USTC ¶9322], aff'd 338
552 (1950) [50-1 USTC ¶9140]. Both are net-worth cases, and both
reversed convictions because, in showing the net worth at the beginning
of the year involved, the prosecution did not establish that the
defendant did not have other assets which could have been used to make
up the increase in net worth which showed up at the end of the year. We
do not quarrel with those cases, but they have no relation to our
problem. There, the Government established a faulty starting point and
asked the jury to infer that the increase in net worth was income. We
think it part of the Government's prima facie case to establish, at
least, that what it charges against defendant is income for the year
involved. It has not established its prima facie case by showing that
defendant has some money and then asking the jury to infer that that
money is "income" for the year involved. Here, the matter was
not left to inference. The prosecution proved income in the legal sense.
it is said that the trial judge's refusal to charge one of defendant's
requests was reversible error. The point is without merit because, in
different words, defendant got substantially the charge he requested. 8 Certainly,
one of the prerogatives of a federal trial judge is to phrase his own
charge. If it states the applicable law correctly, as this charge did,
defendant may not be heard to complain that it offends his literary
taste. Barshop v.
, 191 Fed. (2d) 286 (C. A. 5, 1951) [51-2 USTC ¶9425], cert.
920 (1952); Wright v. United States, 175 Fed. (2d) 384 (C. A. 8),
cert. denied, 338
873 (1949). The charge requested by defendant, the substance of which
was included in the court's instructions, told the jury that a mere
failure to file a return would not sustain a conviction here. In view of
the offenses charged and the issues as made during the trial, defendant
was entitled to no more on that point.
judgment of the district court will be affirmed.
"No person shall be excused from complying with any requirements
under this section because of his privilege against self-incrimination,
but the immunity provisions of the Compulsory Testimony Act of
February 11, 18
93 (U. S. C., 1934 edition, title 49, sec. 46), shall apply with respect
to any individual who specifically claims such privilege." §202(g),
56 Stat. 30 (1942).
"No person shall be excused from attending and testifying or from
producing books, papers, tariffs, contracts, agreements, and documents
before the Interstate Commerce Commission, or in obedience to the
subpoena of the Commission, . . . on the ground or for the reason that
the testimony or evidence, documentary or otherwise, required of him,
may tend to criminate him or subject him to a penalty or forfeiture. But
no person shall be prosecuted or subjected to any penalty or forfeiture
for or on account of any transaction, matter or thing, concerning which
he may testify, or produce evidence, documentary or otherwise, before
said Commission, or in obedience to its subpoena, . . . Provided,
That no person so testifying shall be exempt from prosecution and
punishment for perjury committed in so testifying." 27 Stat. 443
C. A. §46 (1951).
26 U. S. C. §3748(a)(2).
In fairness to the accountant, it should be noted that he made the
change only after demanding and receiving a letter from defendant
authorizing the alteration.
This the accountant refused to do, and his services were terminated.
The record is rather ambiguous as to whether the books and records were
produced a few weeks before the trial pursuant to a subpoena, but, in
any event, it is clear that they were not produced before the indictment
This is what he asked for:
person who files no return has made no misrepresentation. He has simply
failed to do what the statute requires him to do; but the person who
files a willful false return has endeavored to mislead the Government.
He creates the appearance of having complied with the law; whereas, his
neighbor who has filed no return does no such thing. Not only has he
created the appearance of complying but that apparent compliance stands
a good chance of remaining unaltered for the tax authroities cannot
possibly audit every taxpayer's return every year. This is the reason
Section 145(a) is a separate offense from Section 145(b), because under
Section 145(b) there must be an affirmative act to create a willful
attempt to defeat and defraud."
is what he got:
order to constitute a violation of the statute which denounces this
offense there must be a wilful and positive attempt to evade or defeat
the tax in some manner or by some means. . . . Any conduct the likely
effect of which would be to mislead or conceal may be indicative of an
affirmative wilful attempt to evade or defeat a tax due. . . .
has been reference made in the course of the trial to another section of
this statute which charges as a violation of the law failure to file an
income tax. I believe that counsel in his summation admitted that for
the years in question, the defendant failed to file an income tax. But
that is not the charge here. That which distinguishes the present
offense from the offense of failing to file an income tax is the
wilfulness and the intent to defraud and defeat the tax. He is not
charged for failing to file the report, but he is charged with wilfully
attempting to evade or defeat a tax due. Now, the mere fact, as I say,
that he failed to file does not constitute a violation of the particular
section a violation of which is charged in this indictment."
United States of America
v. Emil Uccellini
S. District Court, West. Dist. of Pa., Criminal No. 14895, 2/5/58
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7210]
Tax evasion: Criminal prosecution: Motion to vacate judgment of
acquittal and reinstate jury verdict.--The trial court set aside a
jury's verdict of guilty in a criminal prosecution for tax evasion and
entered a judgment of acquittal, noting that the Government's own
evidence indicated that the defendant had cash available sufficient to
cover expenditures in excess of income and that the cash was not derived
from any known sources of current taxable income. In a Supplemental
Opinion and Order, the trial court denied the Government's motion to
vacate its judgment of acquittal and to reinstate the jury's verdict.
The trial court again stated that the Government's proof was
insufficient for a jury to infer that money representing available cash
and expenditures during 1950 and 1951 was derived from unreported
current receipts, either from a restaurant or some other likely source.
The defendant's net worth at the beginning and end of each year was not
Attorney, Hubert I. Teitelbaum, First Assistant
. Leonard Boreman, Krause & Boreman, 1124 Frick Building, Kalman A.
Goldring, Shapera, Newman, Goldring and Dodd, 1908 Law and Finance
Building, Pittsburgh 19, Pa., for defendant.
and Order (8/27/57)
defendant was convicted of two counts of income tax evasion for the
years 1950 and 1951 under §145(b) of the Internal Revenue Code of 1939.
Decision was reserved upon a motion for judgment of acquittal. After
review of the record and exhibits, in the court's opinion the evidence
was insufficient to sustain the conviction and the motion should have
defendant was engaged in the restaurant business in
. Since about 1942 he operated restaurants as an equal partner with
Gilbert Kinderman who individually conducted a restaurant supply
March 31, 19
51, defendant bought Kinderman's interest and thereafter operated the
restaurant known as "Emil's" as an individual enterprise.
1944 the partnership purchased the building in which "Emil's"
was located, and in 1943 and 1946 defendant, or defendant and his wife,
bought four properties in or near
. One of the latter was sold prior to 1950, 1 but the
defendant continued to own the others through 1951. 2
derived income from the restaurant and rentals from some of the real
than a check book, he kept no personal books or records of his income.
was evidence that his expenditures in the two indictment years, after
deducting allowances, depreciation and non-income items, exceeded his
1950 his net income, arrived at by adding expenditures and giving credit
for all possible allowances, was stipulated at $8,151.57; his reported
income was $6,361.40; the deficiency was $1,790.17.
critical issue is whether the inference, which arose prima facie from
the evidence, that the deficiency was taxable income received by
defendant in 1950 3 was not
overcome by the government's own proofs.
December 29, 19
49, in the sum of $2,000, signed by Kinderman and drawn on the
partnership bank account, payable to and endorsed by defendant, was
received in evidence as defendant's Exhibit 1. Kinderman, testifying for
the government, said this check probably represented defendant's share
in the partnership profits paid at the end of that year. The check was
negotiated to the Mt. Lebanon Federal Savings and Loan Association and
paid by the bank on
January 23, 19
50. Defendant owed the Association money due on a mortgage, and $1,500
was credited to his account on
January 19, 19
50. 4 The
government included this $2,000 in defendant's share of partnership
income for 1949, and it vigorously argues that the jury could find that
he cashed and spent the proceeds in 1949.
just as vigorously contends that this evidence demonstrates that the
$2,000 was available for 1950 expenditures and, in fact, $1,500 of the
proceeds was actually used to make a mortgage payment on
January 19, 19
circumstance on which the government relies to prove that this money was
spent in 1949 is of such slight probative value as to amount to a mere
scintilla in view of its proof that the check was negotiated in 1950 to
a creditor of defendant. Under the government's own evidence, this
$2,000 was probably available for defendant's use in 1950. If it was,
defendant had sufficient money available to cover the alleged
understatement of $1,790 in net income for that year. The evidence to
the contrary merely made it possible that the money was spent in
1949,--it raised a mere conjecture or surmise. In the court's opinion
that conjecture or surmise in the face of a contrary probability
appearing in the government's case is insufficient to sustain the
verdict of guilt on the first count.
was suggested that defendant probably received in late December, 1950, a
distribution of profits which he may not have spent until 1951, thus
tending to counterbalance the $2,000--1949 check. This likewise is a
conjecture which in absence of supporting proofs can be of no help to
[Reconstruction of 1951 Income]
1951 defendant's net income arrived at by adding expenditures, and
giving credit for all possible allowances, was $18,515.38; his reported
income was $8,118.45; the deficiency was $10,396.93.
that expenditures in excess of reported income, standing alone, might
not of themselves suffice to support a conviction of tax evasion 5 without
evidence indicating a lack of available funds from which these
expenditures might have come, the revenue agents, prior to trial,
undertook an elaborate investigation in order that the government might
prove, insofar as it was possible, that defendant did not have any
substantial available cash, and that his 1951 expenditures, after
deductions, were paid out of taxable income earned in 1951.
it was proved that in the preindictment years (1942-1949), defendant's
private expenditures exceeded his available declared cash resources. See
503. The agents interviewed the defendant concerning inheritances, gifts
and loans. Court records were searched for inheritances and none were
attempted to negative a claimed cash hoard of $15,000, allegedly saved
by defendant from earnings up to 1944, by investigating his financial
history back to 1926.
December 31, 19
41 was selected as a starting point. At that date defendant was credited
with the alleged hoard of $15,000. During the succeeding years he was
credited with depreciation and loans from his partner and certain
financial institutions which were revealed by the investigation.
made no claim to the investigating agents that he received any
inheritances or gifts, or that he had accumulated funds in the
partnership bank account, or in his own bank account, or in a hidden
which developed at the trial and were discussed in the briefs, related
to the accuracy of the computations; the likelihood of cash in the
restaurant's cash register at the end of 1949 and 1950 6; and the
possibility of funds being accumulated in the capital account of the
partnership. 7 In absence
of evidence to the contrary, all these disputes could have been resolved
in favor of the government.
it is argued that the jury could conclude that defendant had not only
exhausted the alleged hoard, but in addition had expended approximately
$24,000 in excess of the income reported in his tax returns filed for
the preindictment years, and thus there was no available cash at the
beginning of the indictment years. 8 But the
government's evidence tends to prove just the contrary, i. e., that
defendant either had considerable cash available at the beginning of
1951, or he acquired it during the first four months of 1951 from an
undisclosed source other than his partnership business and real estate
government argues, relying on Johnson, Nunan, Gleckman and Stinnett,
9 that because
it had proved a prima facie case it was up to the defendant to explain 10 the 1951
deficiency of $10,396.93 and, since he did not testify, he remained
"quiet at his peril". 11 We agree
with this rule, but the government's alleged prima facie case must be
tested by its evidence. When thus tested, as in the first count, we
think the government's own evidence destroyed its prima facie case by
revealing that defendant had sufficient available funds to cover the
it is to be observed that defendant might have acquired and set aside
more money than is represented by his expenditures during the
preindictment years and in 1950. Of course, this statement is mere
speculation, but a look at the government's evidence demonstrates that
defendant had a substantial amount of available cash in March and April,
was shown by the government that defendant bought his partner's interest
in March, 1951, for $40,000; he borrowed $26,800 12 and paid
the balance of $13,200 in cash. Then defendant's bank account,
introduced into evidence by the government, 13 discloses
deposits, from April 1 to
May 3, 19
51, aggregating $10,800. Prior to
April 1, 19
51, his bank balances never reached $500 and were usually much less than
$200; after May 3, the balances resumed their usual low level,--the
$10,800 having been withdrawn in various amounts between April 1 and May
the government itself proved that defendant had available cash from
May 3, 19
51, totalling $24,000.
government's proof went on to show affirmatively that the partnership
was not capable of producing anything like that amount as defendant's
share of profits for three months or, indeed, for any of the preceding
years. 14 The efforts
to show that the partnership understated its actual income failed when
the partnership bookkeeper did not testify as expected, but said she
entered the daily receipts in the partnership books as shown by the cash
register tapes which she destroyed. 15 Subsequent
impeachment testimony was expressly offered "for the protection of
the government" and not as substantive evidence. 16
proofs disclosed that defendant's share of the 1951 partnership profits
was only $490, and his other reported income was rent, which for four
months would amount to about $1,373. 17
was not shown to have had any other likely source of 1951 income to
account for what remained of this $24,000 available cash after deducting
the $490 profits plus four months' rentals. Of course, if this money
were accumulated from taxable income earned in prior years, it was not
taxable in 1951. Defendant did not give any leads as to the source of
this cash. It does not appear that he was even asked by the
investigating agent where he got the $13,200 paid to Kinderman in March
or the $10,800 deposited in his bank account in April and early May.
Thus it does not appear either directly or inferentially from the
government's case that this $24,000 was taxable income received in 1951.
Whatever defendant earned after
May 3, 19
51 could not account for this cash available to him prior to that date.
His reported net income for that year was $8,118.45 which exceeded his
expenditures of approximately $5,500, the latter figure being the
balance of his expenditures after deducting allowances and the $13,200
paid to Kinderman in March out of available cash.
that was shown then, was a deficiency or understatement in reported 1951
income in the sum of $10,396.93, to cover which defendant was in
possession of ample available cash.
inference that excess expenditures are attributable to currently taxable
income must be supported by evidence. Expenditures in excess of reported
income standing alone are not sufficient to support a conviction. 18
government's proof negatived the possibility that defendant's cash
available from March to
May 3, 19
51 was earned during the first four months of 1951 from a likely source,
viz., from his restaurant business and real estate rents. Nor was there
evidence of wilful misrepresentations from which the jury could assume
that the available cash was taxable income. See
v. Adonis, 221 Fed. (2d) 717 (3d Cir. 1955) [55-1 USTC ¶9310]; United
States v. Ford, 237 Fed. (2d) 57 (2d Cir. 1956) [56-2 USTC ¶9823].
Also, as stated in Adonis, "[i]t may not be assumed merely
from the government's inability to find any source of non-taxable
receipts that the funds acquired during the taxable year [here from
May 3, 19
51] are taxable income."
if we assume defendant's available cash was taxable income, it cannot be
allocated reasonably to taxable income received from defendant's
business and rents from January to
May 3, 19
51. 19 The
government's evidence conclusively proved that the partnership was not
capable of producing income remotely approaching $24,000 for defendant's
share even annually. 20 Thus the
fund was either accumulated from receipts in prior years, or it was
acquired in 1951 up to May 3 from an undisclosed source. In either
event, as shown, the conviction on the second count cannot be sustained.
arrive at this conclusion reluctantly, but trial courts have been
directed by the Supreme Court 21 to
scrutinize carefully cases of similar type where a conviction is sought
upon circumstantial evidence. Moreover, as was pertinently stated in Holland
v. United States, 348 U. S. 121 at page 128 [54-2 USTC ¶9714]:
"Although it may sound fair to say that the taxpayer can explain
the 'bulge' in his net worth, [here expenditures in excess of reported
income] he may be entirely honest and yet unable to recount his
financial history. In addition, such a rule would tend to shift the
burden of proof. Were the taxpayer compelled to come forward with
evidence, he might risk lending support to the Government's case by
showing loose business methods or losing the jury through his apparent
evasiveness . . . [T]he courts must minimize this danger." (Italics
appropriate is this admonishment to this case if the taxpayer here were
compelled to state when or from where he accumulated the $24,000 which
he had available from March to
May 3, 19
51, to say nothing of his expenditures in excess of declared income
during the preindictment years.
agree with the government that it was entitled to go to the jury on a
prima facie case under the authority ofJohnson, Gleckman and Stinnett.
But when that case is destroyed by the impact of its own evidence, i.
e., that defendant had cash available sufficient to cover expenditures
in excess of income, which cash was not derived from his known sources
of current taxable income, it cannot shift the burden of proof to the
defendant under the Supreme Court's protective rule.
order for judgment of acquittal will be entered.
Opinion and Order (2/5/58)
the entry of judgment of acquittal, the government moved to vacate said
judgment and reinstate the jury's verdict of guilty. The defendant
opposes this motion and argues that the court does not have jurisdiction
to vacate its judgment of acquittal and reinstate the guilty verdict.
Counsel have not referred to any precedent precisely deciding this
interesting question, and it is unnecessary to decide it in the case at
bar because the court has not been persuaded that the judgment of
acquittal was erroneously entered.
for the government complains that the decision tends to upset that which
he characterizes as "the classical methods of proof" in tax
evasion cases when direct evidence is not available. With respect to
this complaint, it is sufficient to state that there was no disposition
or intention to do so; the essence of the court's decision is that the
facts established by the government itself destroyed the inferences
normally to be drawn from the indirect methods of proof used in this
government continues to urge that the jury could infer from its proofs
that defendant's expenditures in excess of his reported income in the
indictment years were taxable income because the defendant had a
"lucrative" business as a partner in a restaurant. However,
that business was not shown to be lucrative in the sense that it was
capable of producing the cash proved by the government to have been
available to the defendant in the indictment years. On the contrary,
direct evidence introduced by the government tended to prove that the
partnership income did not account for defendant's expenditures in
excess of reported income during pre-indictment years, and likewise
tended to prove that the partnership income during the indictment years
1950 and 1951 did not account for his excessive expenditures to say
nothing of the $24,000 defendant had available in cash during the first
four months of 1951. The partnership kept books of account, and no fraud
or evasion by the partnership was proved.
addition to the foregoing failure of proof, no likely source of income
was shown in the indictment years which would justify an inference that
defendant's excessive expenditures and available cash in those years
stemmed from unreported current receipts. 22
government concedes in its brief that "there must be some
additional evidence from which an inference arises that the moneys spent
represents taxable income derived in the indictment year or years".
23 To supply
this evidence, it again strenuously urges that under the Adonis
case 24 and the Ford
case, 25 the
defendant's alleged fabrication could be sufficient proof that those
funds were derived from current taxable sources.
Adonis and Ford cases were net worth cases. In that type
of case inference of evasion arises from equating a "bulge" in
the net worth during the indictment year with unreported current
receipts, plus enough proof to negative the possibility that those
unreported current receipts were non-taxable. In both cited cases it was
sufficiently, if not conclusively, established by the government that
the defendants received considerable money during the indictment
years from some source which had not been reported. Willful
fabrications by Adonis and Ford pertaining to the sources of these
unreported current receipts were held to be sufficient evidence to
negative a non-taxable source or, as inAdonis, for the jury to
infer that current receipts were in fact taxable income.
case at bar was not of the net worth variety, and the government's proof
was insufficient for the jury to infer that the money representing
defendant's available cash and excess expenditures during each
indictment year was derived from unreported current receipts. In
fact, as pointed out above, the probability, established by the
government's proof, was that in the indictment years that money was not
derived from current restaurant receipts, and no likely source was shown
therefor. Moreover, the defendant made no false representations as to
the source of that money from which the jury might infer that it was
taxable income. He was not even questioned concerning the same.
fabrication which the government contends it proved referred to $15,000
which the defendant claimed to have accumulated long prior to the
indictment years, viz., between 1926 and 1944. Whether or not the jury
found this accumulation to have been a fabrication cannot be determined
from its verdict because the government itself assumed the truth of that
accumulation in presenting its case to the jury. It would be speculative
now to presume that the jury did not accept the government's own
assumption in that regard. In any event, the government proved defendant
spent the 1944 hoard and more prior to
January 1, 19
50; in view of this evidence the alleged fabrication was not referable
to the source of the money spent and available in the indictment years.
In fact the defendant never made any such claim.
doubt, this case presents some unusual and difficult problems of
analysis, involving as it does a partnership, the status of whose bank
accounts, if any, capital structure, and capital accounts of each
partner were not disclosed, and where the defendant's net worth at the
beginning and end of each indictment year was not proved. The court's
decision for acquittal, of course, is not free from doubt, but the doubt
which we entertain as to the sufficiency of the evidence preponderates
in our opinion so much against conviction that the motion to vacate
should be denied.
Testimony, p. 287.
See government's Exhibits 5, 14d, 19, 25.
See United States v. Johnson, 319
503 [43-1 USTC ¶9470]; United States v. Nunan, 236 Fed. (2d) 576
(2d Cir. 1956) [56-2 USTC ¶9876];Stinnett v. United States, 173
Fed. (2d) 129 (4th Cir. 1949) [49-1 USTC ¶9217]; Gleckman v. United
States, 80 Fed. (2d) 394 (8th Cir. 1935) [35-2 USTC ¶9645].
Government's Exhibit 15; Testimony, p. 57
147; Stinnett v.
, 173 F. 2d 129 (4th Cir. 1949); Gleckman v.
, 84 F. 2d 394 (8th Cir. 1935).
See Beard v.
, 222 Fed. (2d) 84, at 89, (4th Cir. 1955) [55-1 USTC ¶9400]; and
cf. Costello v. United States, 221 Fed. (2d) 668, (2d Cir. 1955)
[55-1 USTC ¶9342].
See Schedule H attached to partnership returns of 1949 and 1950
(government's Exhibits 27 and 28) and Schedule I attached to the
partnership return of 1951 (government's Exhibit 29).
Testimony, pp. 248-248b.
See footnote 2.
Testimony, pp. 248a-248b; government's brief, pp. 9, 13.
121 at p. 139 [54-2 USTC ¶9714].
$20,000 from a bank and $6,800 which defendant told the agent he
borrowed from Paul Gormley.
Government's Exhibit 17.
The highest share reported by the partnership was $9,552.87 in 1948.
Government's Exhibit 2.
The partnership owned an efficient cash register during the indictment
Testimony, pp. 192-198, 259-260.
See government's Exhibit 5.
See cases cited in footnote 2.
121 at p. 129--"6" [54-2 USTC ¶9714].
See footnote 14.
Holland v. United States, 348
121 at p. 129 [54-2 USTC ¶9714]; Smith v. United States, 348
147 at p. 159 [54-2 USTC ¶9715].
See observations of Judge Hincks in United States v. Ford, 237
Fed. (2d) 57, 64-65 (2d Cir. 1956) [56-2 USTC ¶9823].
Government's brief sur motion to vacate judgment of acquittal, p. 2.
v. Adonis, 221 Fed. (2d) 717 (3d Cir. 1955) [55-1 USTC ¶9310].
v. Ford, supra, footnote 1.
United States of America
v. John J. O'Malley
the United States District Court for the Eastern District of
Pennsylvania, Criminal No. 16,658, 131 FSupp 409,
June 3, 19
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]
Tax evasion: Criminal prosecution: Proof of unreported income under
net worth theory: Jury disagreement: Court's acquittal.--Upon a
second trial the jury failed to agree on a verdict on charges against
taxpayer for 1946 under 1939 Code Sec. 145(b). The Court granted
taxpayer's motion for acquittal for the reason that the Government's
proofs to establish unreported income did not meet the rules governing
net worth prosecutions as laid down in Holland v. United States,
348 U. S. 121, 54-2 USTC ¶9714 and other cases decided by the Supreme
Court. The Government took as its starting point to prove the net worth
of taxpayer on
January 1, 19
46, the first day of the crucial year, the balance sheet as of
August 14, 19
30 furnished by taxpayer, and estimated his net worth on
January 1, 19
46 as $64,606.56 from income and expenditures covering 15 years. It then
attempted to establish his net worth as of
December 31, 19
46, the last day of the crucial year, in the sum of $179,696.12, which
amount included admitted acquisitions of assets during 1946. It was
found that the Government's case was far short of the substantial proof
necessary to establish a total lack of cash resources on
January 1, 19
46, including the determination of both the starting and final figures
solely by net worth computations. It was admitted that there was no
evidence in the case to show that taxpayer had a likely source of income
other than from the sources reported in his income tax return for 1946.
G. Folsom, Special Assistant to the Attorney General, and W. Wilson
White, United States Attorney, for plaintiff. Lemuel B. Schofield and
Marvin Comisky, 1810
, for defendant.
is presently before the Court for disposition defendant's motion for
judgment of acquittal. John J. O'Malley, defendant herein, was
originally indicted on two counts charging income tax evasions for the
years 1945 and 1946, in violation of Section 145(b) of the Internal
Revenue Code. After a first trial lasting some twenty-one trial days,
the Presiding Judge entered a judgment of acquittal as to Count I of the
indictment covering the year 1945 in which the evasion was alleged to be
in excess of $49,000. Upon timely motion, after a verdict of guilty by
the jury on Count II covering the year 1946, Judge Allan K. Grim for the
reasons set forth in his opinion, United States v. John J. O'Malley,
117 Fed. Supp. 895 [54-1 USTC ¶9317], granted a new trial. At the
second trial, which consumed fourteen days, the Government attempted to
prove a tax evasion of approximately $63,000 for the year 1946, the
indictment having charged an evasion of taxes for that year exceeding
$125,000. When it became apparent that the jury could not agree after
extensive deliberations, the Court declared a mistrial and discharged
the jury. The defendant thereupon renewed in writing the motion made at
the conclusion of the case for judgment of acquittal.
O'Malley tax case has a long history. John J. O'Malley, the
defendant herein, had for upwards of twenty years been under almost
constant investigation by the Bureau of Internal Revenue. He was the
subject of an investigation in the mid-thirties and as part of that
investigation furnished the Government under date of
January 18, 19
39 a statement of his assets and liabilities as of
August 14, 19
30. Other data furnished was a statement of income from
January 1, 19
December 31, 19
30, and supporting documents in connection with his then financial
condition. The Commissioner of Internal Revenue never assessed any
deficiency in taxes for the period covered by that investigation.
Another intensive investigation was inaugurated in June of 1948, out of
which resulted the present indictment. As part of the investigation and
at the request of agents of the Bureau of Internal Revenue, the
November 16, 19
50, through his accountants, Livingston, Montgomery & Company,
furnished the Bureau with an analysis of increase in net worth, which
statement covered the period from
August 14, 19
December 31, 19
43, both for himself and his wife. Other supporting documents included
balance sheets for himself and his wife for the years ending 1943
through 1949 inclusive; a reconcilement of income to increase in net
worth for both husband and wife for the years 1944 through 1949
inclusive; a balance sheet as of
November 14, 19
50, and an analysis of increase in net worth from
January 1, 19
November 14, 19