Bank Records and Net Worth Increases 4 Page4

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This 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.

In 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.

[Income From Gambling]

The 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 United States v. Holland , 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.

The 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 court.

The 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, 319 U. S. 503 (1943) [43-1 USTC ¶9470], United States v. Caserta , 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.

Defendant's 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.

The 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 U. S. 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 Bryan case there was no admission by the defendant as to the extent of his beginning net worth. See Pollock v. United States , 202 Fed. (2d) 281, 284 (5 Cir. 1953) [53-1 USTC ¶9229], cert. denied 345 U. S. 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.

[Government's Arguments to Jury]

The 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.

The defendant also objected to that portion of the Government's counsel's argument to the jury which is as follows:

"I 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."

The 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 U. S. 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; Chesapeake & O. Ry. Co. v. Richardson, 116 Fed. (2d) 860 (6 Cir. 1941), cert. denied 313 U. S. 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 U. S. 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]

The 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.

The 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 Government's figure.

The judgment of the district court is affirmed.

^* 26 U. S. C. §145(b) (1946), 53 Stat. 62 (1939)

"§145. Penalties

* * *

"(b) Failure to collect and pay over tax, or attempt to defeat or evade tax. Any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution."

 

 

 

[85-1 USTC ¶9249] United States of America , Plaintiff-Appellee v. David H. Terrell, a/k/a Daniel H. Ford, Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 84-1366, 754 F2d 1139, 2/14/85

[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.

Charles 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. Rob inson, Rob ert E. Lindsay, Department of Justice, Washington, D. C. 20530, for defendant-appellant.

Before GOLDBERG, POLITZ and WILLIAMS, Circuit Judges.

WILLIAMS, Circuit Judge:

David 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.

I. Facts

David 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

 

The 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.

The 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 Waco , Texas . 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 investigation.

Terrell 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.

The 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

In 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 indictment period.

During 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 Texas 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.

Terrell 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.

II. Net Worth Starting Point

Section 7201 of 26 U. S. 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 U. S. 343, 351, 85 S. Ct. 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.

Where 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.

The use of the net worth method in criminal tax prosecutions was approved in Holland v. United States [54-2 USTC ¶9714], 348 U. S. 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." Id. at 124, 75 S. Ct. at 130. The Court in Holland 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. Id. at 129, 75 S. Ct. at 132.

In Holland , 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." Id. at 132, 75 S. Ct. 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.

A. 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 calculation.

Assets 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.

No 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.

In 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.

Appellant, 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 U. S. 970, 99 S. Ct. 463, 58 L. Ed. 2d 430 (1978) (citing Holland , 348 U. S. at 135-136, 75 S. Ct. at 135-136). Schafer also establishes that it is sufficient for the Government to identify with "reasonable specificity" a defendant's basis in assets. Id. at 778.

We 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 providing leads.

B. 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 U. S. 1114, 99 S. Ct. 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.

As 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.

The 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.

Appellant 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 U. S. 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 amount." Id. 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.

In 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.

We 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.

III. Jury Instructions

Appellant 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:

The 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 non-taxable sources.

As 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 U. S. 141, 146-47, 94 S. Ct. 396, 400, 38 L. Ed. 2d 368 (1973).

Terrell 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:

A 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.

Appellant 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.

Finally, 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 instructed:

The 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.

The 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 items.

The court thereafter properly charged the jury on the definition and elements of a gift. ³

We 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 merit.

IV. Evidentiary Rulings

Terrell 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 U. S. 1, 11-12, 103 S. Ct. 1610, 1616, 75 L. Ed. 2d 610 (1983).

Terrell's 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 his defense.

The 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.

Terrell 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 case.

At 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 information.

The district court's final denial of the motion for severance is reviewable only for abuse of discretion. United States v. Hamilton , 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. Id. , (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.

Appellant's 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 prejudice.

Two 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.

In 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.

We perceive no error in the thorough case presented by the government nor in the careful trial of the case by the district court.

AFFIRMED.

¹ The net worth method of reconstructing income is discussed infra in Part II.

² Appellant was credited in the net worth analysis with total non-taxable gifts of $57,878 for the years 1976 through 1979.

³ The instruction on gifts was as follows:

It 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:

1. 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.

2. 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.

3. 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.

4. A payment is not a gift if the person making the payment felt he had a duty or obligation to make the payment.

5. A payment is not a gift if the person making the payment did so out of fear or intimidation.

This 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.

 

 

[55-2 USTC ¶9576]Raymond J. Kasper, Appellant v. United States of America , Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 14,492, 225 F2d 275, July 11, 19 55

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.

Davis & Colvin, Reynold H. Colvin, Sidney Feinberg, San Francisco , Calif. , for appellant. Lloyd H. Burke, United States Attorney, Rob ert H. Schnacke, Richard Foster, Assistant United States Attorneys, San Francisco, Calif., for appellee.

Before MCALLISTER, FEE, and CHAMBERS, Circuit Judges.

MCALLISTER, Circuit Judge:

Appellant 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.

[Increase in Net Worth]

Appellant is a physician who began his practice in 1934 in Wahoo, Nebraska , a town of 3,000 inhabitants. He left Nebraska in 1942 to work for a few months in a railroad hospital in Missouri at a salary of $175 a month, and thereafter, in the same year, came to Fresno , California , 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.

Appellant's 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 Nebraska . From the time he came to Fresno , 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.

Appellant sought to account for the increase in his wealth which occurred after his arrival in Fresno by his testimony that he had $40,000 in cash which he had kept hidden in a hollow tile in his cellar in Nebraska , and that he had brought this cash with him to California 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.

The 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.

However, 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 Wahoo, Nebraska , 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 California in 1942, he asked for and received an advance of salary in the amount of $200 from his employer.

After his first few years of practice in Fresno , 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.

[Taxpayer's Defense]

Appellant 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 47, and 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 California 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.

The 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 U. S. 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.

According 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.

The 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.

As 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 U. S. 146[142] [54-2 USTC ¶9713]. The district court was not in error in denying appellant's motion for a judgment of acquittal.

[Court's Instruction]

As 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 appellant's guilt.

Appellant 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.

[Examination of Witnesses and Evidence]

Error 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 v. United States , 335 U. S. 469; Stewart v. United States , 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. United States , 93 Fed. (2d) 537 (C. C. A. 10); Westfall v. United States , 2 Fed. (2d) 973 (C. C. A. 6).

Appellant 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.

We 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.

No reversible error appearing, the judgment of the district court is affirmed.

 

 

[56-1 USTC ¶9518] United States , Appellee v. Frank Costello, Appellant

(CA-2), In the United States Court of Appeals for the Second Circuit, October Term, 1955, Docket No. 23149, 232 F2d 958, May 7, 19 56

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.

Morris Shilensky, Joseph Leary Delaney, for petitioner.

Before CLARK , HAND and FRANK, Circuit Judges.

PER CURIAM:

The 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.

Nevertheless, 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).

The 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.

The petition is denied.

 

 

[56-1 USTC ¶9321]Frank Costello, Petitioner v. United States of America

In the Supreme Court of the United States , No. 72.--October Term, 1955, 350 US 359, 76 SCt 406, March 5, 19 56

On writ of certiorari to the United States Court of Appeals for the Second Circuit.

[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.

Morris 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 respondent.

JUSTICE BLACK delivered the opinion of the Court:

We 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 U. S. 819.

Petitioner, Frank Costello, was indicted for wilfully attempting to evade payment of income taxes due the United States 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 U. S. 503 [43-1 USTC ¶9470].

Counsel 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. United States , 318 U. S. 332, 340-341.

[5th Amendment Not Violated]

The 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 England 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 England 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

In Holt v. United States, 218 U. S. 245, this Court had to decide whether an indictment should be quashed because supported in part by incompetent evidence. Aside from the incompetent evidence "there was very little evidence against the accused." The Court refused to hold that such an indictment should be quashed, pointing out that "The abuses of criminal practice would be enhanced if indictments could be upset on such a ground." 218 U. S. , at 248. The same thing is true where as here all the evidence before the grand jury was in the nature of "hearsay." If indictments were to be held open to challenge on the ground that there was inadequate or incompetent evidence before the grand jury, the resulting delay would be great indeed. The result of such a rule would be that before trial on the merits a defendant could always insist on a kind of preliminary trial to determine the competency and adequacy of the evidence before the grand jury. This is not required by the Fifth Amendment. An indictment returned by a legally constituted and unbiased grand jury, 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 nothing more.

Petitioner urges that this Court should exercise its power to supervise the admin istration of justice in federal courts and establish a rule permitting defendants to challenge indictments on the ground that they are not supported by adequate or competent evidence. No persuasive reasons are advanced for establishing such a rule. It would run counter to the whole history of the grand jury institution, in which laymen conduct their inquiries unfettered by technical rules. Neither justice nor the concept of a fair trial requires such a change. In a trial on the merits, defendants are entitled to a strict observance of all the rules designed to bring about a fair verdict. Defendants are not entitled, however, to a rule which would result in interminable delay but add nothing to the assurance of a fair trial.

Affirmed.

JUSTICE CLARK and JUSTICE HARLAN took no part in the consideration or decision of this case.

¹ 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.

² 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].

³ 221 Fed. (2d) 668. The Court of Appeals reversed petitioner's conviction on the 1947 count on grounds not material here.

⁴ 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. United States , 141 Fed. 225; United States v. Violon, 173 Fed. 501; Nanfito v. United States , 20 Fed. (2d) 376, 378; Brady v. United States , 24 Fed. (2d) 405 [1928 CCH D-8043]; Banks v. United States , 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.

⁵ 1 Holdsworth, History of English Law (1927), 323.

⁶ 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.

⁷ See, e.g., Pierre v. Louistana, 306 U. S. 354.

[Concurring Opinion]

JUSTICE BURTON, concurring:

I 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.

Here, as in Holt v. United States, 218 U. S. 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.

To 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.

 

 

[54-2 USTC ¶9713]David Friedbert, Petitioner v. United States of America , Respondent

In the Supreme Court of the United States , No. 18. October Term, 1954, 348 US 142, 75 SCt 138, December 6, 19 54

On Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit.

[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.

Rob ert N. Gorman, Stanley A. Silversteen, 803 Traction Building, Cincinnati , Ohio , 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 respondent.

CLARK, Justice:

This 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 1944.

While 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.

[Evidence on Opening Net Worth Attacked]

Although 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 Holland , 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.

This 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.

Yet 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 such reserve.

[No Errors in Trial Procedure]

Petitioner's 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.

This 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.

Finally, 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.

Affirmed.

¹ 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.

² The instruction was:

"The 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 United States , 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."

 

 

[53-2 USTC ¶9538] United States of America v. George L. Smith, Appellant

(CA-3), In the United States Court of Appeals for the Third Circuit, No. 10,872, 206 F2d 905, August 17, 19 53

On Appeal from the United States District Court for the District of New Jersey.

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 47, and 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.

Charles A. Stanziale, 1180 Raymond Boulevard , Newark 2, N. J., for appellant. Assistant United States Attorney, Post Office Building , Newark 1, N. J., for appellee.

Before BIGGS, Chief Judge, and STALEY and HASTIE, Circuit Judges.

Opinion of the Court

STALEY, Circuit Judge:

Defendant seeks reversal of a judgment entered upon a jury's verdict convicting him of violating Section 145(b) of the Internal Revenue Code.

The 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 seven counts.

[Failure to File Returns]

We 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:

Defendant 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.

Aside 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.

[Immunity from Prosecution]

Defendant's 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 contention.

In 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. United States , 337 U. S. 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.

Upon 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. United States , 335 U. S. 1 (1948); Heike v. United States , 227 U. S. 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. United States v. Swift, 186 Fed. 1002 (N. D. Ill., 1911); People v. Woodson, 309 Mich. 391, 15 N. W. (2d) 679 (1944), cert. denied, 324 U. S. 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.

The 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 U. S. 640, 641 n.1 (1946); Abrams v. United States , 250 U. S. 616 (1919). See also Hirabayashi v. United States, 320 U. S. 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.

[Failure to File Return v. Evasion]

We 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.

Subsections (a) and (b) of Section 145 are as follows:

"(a) 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.

"(b) Failure to collect and pay over tax, or attempt to defeat or evade tax. Any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution." 26 U. S. C. §§ 145(a) and (b).

Citing 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:

"The 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 felony." 317 U. S. at 498-499.

Obviously, 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 U. S. 927 (1950), but it is not the only instance. In fact, the Spies case states at page 499:

"By 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."

[Willful Attempts to Evade Tax]

Subjected 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 U. S. 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 case.

Defendant 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 U. S. at 500.

[Proof of Net Worth]

Next, 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.

[Proof of Amount of Income]

Defendant 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. United States 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. United States , 191 Fed. (2d) 993 (C. A. 9, 1951) [51-2 USTC ¶9474], cert. denied, 342 U. S. 909 (1952).

Defendant 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 U. S. 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.

[Jury Instructions]

Finally, 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. United States , 191 Fed. (2d) 286 (C. A. 5, 1951) [51-2 USTC ¶9425], cert. denied, 342 U. S. 920 (1952); Wright v. United States, 175 Fed. (2d) 384 (C. A. 8), cert. denied, 338 U. S. 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.

The judgment of the district court will be affirmed.

¹ "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).

² "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 (1893), 49 U. S. C. A. §46 (1951).

³ 26 U. S. C. §3748(a)(2).

⁴ Id. (a).

⁵ 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.

⁶ This the accountant refused to do, and his services were terminated.

⁷ 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 was returned.

⁸ This is what he asked for:

"A 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."

This is what he got:

"In 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. . . .

"There 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."

 

 

[58-1 USTC ¶9313] United States of America v. Emil Uccellini

U. 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 proved.

D. Malcolm Anderson , United States Attorney, Hubert I. Teitelbaum, First Assistant United States Attorney, for United States . 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.

Opinion and Order (8/27/57)

Opinion

MARSH, District Judge:

The 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 been granted.

The defendant was engaged in the restaurant business in Pittsburgh . Since about 1942 he operated restaurants as an equal partner with Gilbert Kinderman who individually conducted a restaurant supply business. On March 31, 19 51, defendant bought Kinderman's interest and thereafter operated the restaurant known as "Emil's" as an individual enterprise.

In 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 Pittsburgh . One of the latter was sold prior to 1950, ¹ but the defendant continued to own the others through 1951. ²

Defendant derived income from the restaurant and rentals from some of the real estate.

Other than a check book, he kept no personal books or records of his income.

There was evidence that his expenditures in the two indictment years, after deducting allowances, depreciation and non-income items, exceeded his reported income.

For 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.

The 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.

[Partnership Income]

A check dated 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.

Defendant 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 50.

The 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.

It 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 the prosecution.

* * *

[Reconstruction of 1951 Income]

For 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.

Mindful 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.

Accordingly, it was proved that in the preindictment years (1942-1949), defendant's private expenditures exceeded his available declared cash resources. See Johnson v. United States , 319 U. S. 503. The agents interviewed the defendant concerning inheritances, gifts and loans. Court records were searched for inheritances and none were found.

They 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.

At the trial, 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.

Defendant 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 place.

Disputes, 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.

Consequently, 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 rents.

The 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 deficiency.

Preliminarily, 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, 1951.

It 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 3.

[Available Cash]

Thus the government itself proved that defendant had available cash from March to May 3, 19 51, totalling $24,000.

The 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

These 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

[Likely Source]

Defendant 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.

All 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.

The 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

The 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 United States 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 January to May 3, 19 51] are taxable income."

Even 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.

[Supreme Court]

We 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 supplied).

Seemingly 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.

We 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.

An order for judgment of acquittal will be entered.

Supplemental Opinion and Order (2/5/58)

MARSH, District Judge:

Following 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.

Counsel 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 case.

[Proof]

The 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.

In 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

The 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.

[Net Worth Cases]

The 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.

The 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.

[Fabrications]

The 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.

Without 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.

¹ Testimony, p. 287.

² See government's Exhibits 5, 14d, 19, 25.

³ See United States v. Johnson, 319 U. S. 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].

⁴ Government's Exhibit 15; Testimony, p. 57

⁵ Smith v. United States , 348 U. S. 147; Stinnett v. United States , 173 F. 2d 129 (4th Cir. 1949); Gleckman v. United States , 84 F. 2d 394 (8th Cir. 1935).

⁶ See Beard v. United States , 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].

⁷ 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).

⁸ Testimony, pp. 248-248b.

⁹ See footnote 2.

¹⁰ Testimony, pp. 248a-248b; government's brief, pp. 9, 13.

¹¹ Holland v. United States , 348 U. S. 121 at p. 139 [54-2 USTC ¶9714].

¹² $20,000 from a bank and $6,800 which defendant told the agent he borrowed from Paul Gormley.

¹³ Government's Exhibit 17.

¹⁴ The highest share reported by the partnership was $9,552.87 in 1948. Government's Exhibit 2.

¹⁵ The partnership owned an efficient cash register during the indictment years.

¹⁶ Testimony, pp. 192-198, 259-260.

¹⁷ See government's Exhibit 5.

¹⁸ See cases cited in footnote 2.

¹⁹ See Holland v. United States , 348 U. S. 121 at p. 129--"6" [54-2 USTC ¶9714].

²⁰ See footnote 14.

²¹ Holland v. United States, 348 U. S. 121 at p. 129 [54-2 USTC ¶9714]; Smith v. United States, 348 U. S. 147 at p. 159 [54-2 USTC ¶9715].

²² See observations of Judge Hincks in United States v. Ford, 237 Fed. (2d) 57, 64-65 (2d Cir. 1956) [56-2 USTC ¶9823].

²³ Government's brief sur motion to vacate judgment of acquittal, p. 2.

²⁴ United States v. Adonis, 221 Fed. (2d) 717 (3d Cir. 1955) [55-1 USTC ¶9310].

²⁵ United States v. Ford, supra, footnote 1.

 

 

[55-1 USTC ¶9492] United States of America v. John J. O'Malley

In the United States District Court for the Eastern District of Pennsylvania, Criminal No. 16,658, 131 FSupp 409, June 3, 19 55

[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.

Fred G. Folsom, Special Assistant to the Attorney General, and W. Wilson White, United States Attorney, for plaintiff. Lemuel B. Schofield and Marvin Comisky, 1810 Morris Building , Philadelphia 2, Pa. , for defendant.

Opinion

CLARY, District Judge:

There 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.

[The Facts]

The 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 24 to 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 defendant on 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 30 to 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 50 to November 14, 19 50.