Bank Records and Net Worth Increases
4 Page5
[Proof
Under Net Worth Theory]
The
Government took as its starting point to prove the net worth of the
defendant on
January 1, 19
46, the first day of the crucial year, the balance sheet as of
August 14, 19
30 furnished the Bureau by the defendant on
January 18, 19
39, and estimated his net worth on
January 1, 19
46 as $64,606.56, a figure which will be discussed hereafter. 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 the prosecution
year. Basically, the Government's case depended upon its proof of (1) no
cash resources at the start of the prosecution year; (2) the falsity of
certain loans alleged to have been made by the defendant in 1946 for the
purchase of securities, and (3) proof that an item which appeared in the
books of account of the Carson Packing Company, of which company
defendant was a partner, was taxable income. The tax due on these three
items when added together substantially constituted the deficiency in
tax which the Government contended had been willfully evaded.
It
is obviously impossible in a short opinion to recount in detail the
evidence adduced in fourteen days of trial. The theory of the
Government's case was that on the basis of its proof, the defendant's
net worth during the year 1946 increased some $120,000; that such
increase was not attributable to gifts, inheritances, loans, or other
nontaxable sources, and that the increase constituted a measure of
taxable income. To establish this the Government started, as stated
above, with the balance sheet of
August 14, 19
30 and attempted to show what funds had been available in the form of
income (taxable and nontaxable) to both the defendant and his wife
between
August 14, 19
30 and
December 31, 19
45. Outlining all known financial transactions in which either the
defendant or his wife participated between the years 1930 and 1945 and
making allowance for all investments and expenditures of which it had
knowledge during those years, the Government presented for consideration
a balance sheet showing the defendant to have a net worth of $64,606.56.
The net worth figure at the starting point for the crucial year of 1946
was calculated by the "net worth method" from income and
expenditures covering fifteen years. In other words, this case involves
really the determination of both the starting and final figures purely
by net worth computations.
In
its case in chief, specifically, the Government undertook to show that
claimed cash assets of $20,500 and loans of $86,500 set forth in
defendant's balance sheet for the year 1946 were substantially false and
fictitious. By its calculations in its "net worth"
computations for the years 1930-1945 the Government charged that not
only could there be no cash assets but actually there was a deficiency
of cash-on-hand on defendant's part on
January 1, 19
46.
[Increased
Net Worth in Prior Years]
In
the Government's case, primarily from cross-examination of Government
witnesses, there was elicited uncontradicted evidence that in 1924 the
defendant had a net worth of $28,000; in 1930 $49,000; and that he had
claimed an increased net worth in 1937 of over $80,000. The 1924 and
1930 figures were substantiated by written documents. The claim of
increased net worth of 1937 was made during the first investigation and
for a year for which the defendant was examined and audited by the
Bureau of Internal Revenue. No specific evidence was introduced by the
Government with respect to that figure and no calculation of net worth
of the defendant at that time was made in the Government's case.
Notwithstanding these circumstances and despite the fact that during the
succeeding years the defendant and his wife made substantial and
lucrative investments, all of which produced income, and during which
time the defendant was gainfully employed as a public official, without
attempting to show any extraordinary disbursements or loss of assets in
the intervening years, the Government asserted for the purposes of this
case that the net worth of the defendant, instead of increasing, had
substantially diminished on
January 1, 19
46 to the amount of $64,000.
There
was also uncontradicted evidence, again elicited primarily on
cross-examination, that the defendant had, and that the Government had
knowledge that he had, dealt in substantial cash sums during the
intervening years. The Government conceded that the defendant had
cooperated with it in its investigation. In support of his contention
that he did possess a substantial sum of cash, defendant permitted
Government agents during the course of the investigations to visit and
open his safety deposit box where, upon examination, the agents found
many thousands of dollars in cash. Further uncontradicted testimony also
established that as early as the year 1937, defendant's wife possessed
cash assets of at least $53,000 or $54,000, the disposition of which is
not clear from the record made in this case. Under such circumstances
the evidence, all adduced in the Government's case, falls far short of
the substantial proof necessary to establish a total lack of cash
resources on
January 1, 19
46.
[Negation
of Loans]
Another
important and substantial aspect of the Government's case rested in its
attempted negation of some $57,500 of the $86,500 in loans alleged by
the defendant to have been made for the purchase of stocks and bonds
during the year 1946. In the Government's investigation the agents made
some inquiries both of the defendant and his accountants as to the
source of the loans. All of the defendant's books and records were in
the possession of his accountants. From the defendant himself the agents
learned the source of two of the loans totalling $38,000. Additionally
the agents were informed by his accountants as to the source of loans
totalling $38,500.00, leaving a balance of $10,000 about which the
agents were not informed as to source. Certain of the sources were
checked by the agents and of those sources checked each verified the
loan as stated by either the defendant or his accountants. However, and
as a substantial part of the deficiency alleged, the Government
disallowed loans of $30,000; $10,000 and $17,500 which it charged
represented taxable income. The Government contended that this
disallowance was proper and that it could ask the jury to find that
these sums represented taxable income on the basis of the following
facts and inferences to be drawn therefrom.
One
loan of $30,000 was stated by the defendant to have been received from a
deceased jurist. No attempt was made by the Government to demonstrate
that the deceased jurist did not have resources from which such a loan
could have been made, or that there did not exist a friendship between
the defendant and the deceased jurist which might reasonably account for
such a loan. The Government merely argued that since the jurist was
deceased and could not substantiate or deny the allegation that
circumstance created a suspicion that the loan was not made and from
that fact alone the jury should be permitted to infer that the loan as a
matter of fact was not made. The Government had the burden of proving
that defendant's explanations were false in order to justify the
inference that the alleged loans were in fact taxable income, United
States v. Harold John Adonis, decided
March 28, 19
55, -- Fed. (2d) -- (C. A. 3) [55-1 USTC ¶9310]. The Government's proof
has fallen far short of the standard required in criminal cases. It has
failed to establish by competent legal proof that the loan actually was
not made and the Court could not permit a jury to guess that it was not
made simply on the circumstance that the alleged lender was deceased.
[Additional
Loans]
As
to the loan of $10,000, the only evidence presented was that there was a
discrepancy of that amount between the loans reflected on defendant's
books and the amounts of loans, the sources of which he disclosed. On
the other hand, there is nothing in the evidence to show that the
defendant or his accountants had that fact specifically brought to their
attention or were ever asked about it. At best, as to that item, the
Government has established a lack of explanation rather than a false
explanation. At worst, it has established a failure on its part to
follow out a possible lead as to source of nontaxable income.
As
to the loan of $17,500 stated by defendant's accountants to have been
made from one Herbert Perry in 1946, the Government's proof consisted of
this: in an action in the Court of Common Pleas of Philadelphia County
filed by Herbert Perry against defendant to recover to sum of $17,500
alleged to have been loaned to defendant in 1947 (not 1946), the
defendant filed a sworn answer alleging that he had not borrowed $17,500
from Herbert Perry in 1947 or at any other time. That evidence
established inconsistent statements of the defendant and his accountants
and creates grave suspicion, but it does not prove the vital fact for
which it was offered, i.e., that in 1946 Herbert Perry did not loan John
J. O'Malley $17,500. It would appear that one of the statements was
false, but which one? The jury should not have been permitted to
speculate. Perry might have been produced to shed light on the
situation, but he was not. There was no evidence that he had ever been
interviewed by Government agents, no showing that he was unavailable as
a witness, nor was any explanation given as to his absence at the trial.
Under the circumstances, defendant's answer in the civil action
instituted by Perry should not have been admitted for the purpose of
proving that the loan was not made.
[Partnership
Income]
One
of the items relied upon by the Government to establish an important
element of the alleged deficiency appeared in the books of the Carson
Packing Company wherein the capital account of O'Malley in that company,
a partnership, increased substantially during the year 1946, when one of
the partners withdrew. There was no attempt by any evidence whatsoever
on the part of the Government to prove that O'Malley paid one single
penny for his increased interest in the company. The Government,
however, contends from the book entries alone that it is entitled to
consider the increase there reflected as part of taxes willfully evaded.
As to this item I feel that the Government has misconceived the burden
placed upon it. In a criminal prosecution the burden of establishing a
willful tax evasion remains with the Government throughout the case and
never shifts to the defendant, Holland v. United States, 348 U.
S. 121, at pages 138, 139 [54-2 USTC ¶9714]. I do not feel that this
evidence, standing alone, is sufficient to permit the Court to allow the
jury to find beyond a reasonable doubt that as to this item defendant
was guilty under the standards of proof governing criminal prosecutions.
Adjustments made on accounting records of a company have often been the
subject of civil litigation between the Commissioner of Internal Revenue
and taxpayers, creating questions of tax liability which challenge the
ingenuity of accountants and attorneys skilled in tax techniques. It
would be extremely unfair to a defendant to permit him to be found
guilty based solely on a capital accounting adjustment made on the books
of a company. Particularly is this true where the Government offers no
evidence to prove that that adjustment was made as the result of an
actual expenditure of funds by the defendant in the prosecution year, or
that the adjustment was made with specific intent to defraud.
[Supreme
Court Views Controlling]
Since
the trial of this case the Court has had the benefit of the views of the
Supreme Court of the
United States
on the net worth theory of prosecutions in income tax evasion cases.
Certain rules governing net worth prosecutions have been laid down in
the opinions of Mr. Justice Clark in four cases decided
December 6, 19
54, to wit: Holland v. United States, supra; 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]. The principles there enunciated
together with the decision of Circuit Judge Hastie of the United States
Court of Appeals for the Third Circuit in the case of United States
v. Harold John Adonis, cited above, are dispositive of this motion.
In
the
Holland
case, Mr. Justice Clark held that in net worth prosecutions the
Government has the burden of showing a likely source of unreported
taxable income but only with reasonable certainty. His language in that
regard is very specific and states:
"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. . . ."
As
to likely source of income, the
Holland
case posed no difficulty. The defendant there operated a hotel and bar
during the prosecution year. The Government alleged that only part of
the income was registered in the books and it was shown that the hotel
had produced, before the defendant became owner, profits substantially
in excess of those reported. There was also evidence in that case, to
disprove claimed accumulations of cash by the defendant over a period of
twenty years, that the defendant had been pressed by creditors in 1928
and 1929, lost his restaurant on a foreclosure in 1933, that his wholly
owned corporation became insolvent, leaving over $35,000 in debts, that
the defendant had left his family and worked for six years as a Chef in
another city at $175.00 a month, during which time his wife had been
forced to work to help support the family. These factors establish
beyond paradventure of doubt the hotel as the likely source. The
evidence in the instant case is directly contrary. The Government admits
in this case that it has no evidence whatsoever to show that defendant
John J. O'Malley had a likely source of income other than from the
sources reported in his income tax return filed for the prosecution
year. The Government further conceded that the information in the tax
return as to amounts reported from these revealed sources had been
verified by the Government's own investigation and that there was no
inaccuracy in the amounts reported.
[Likely
Sources of Income]
In
the Adonis case, supra, the Government did not prove a
likely source of taxable income, but it was held that deliberate
falsification as to alleged nontaxable sources of receipts to explain
large expenditures or accumulations was a legally acceptable
circumstantial showing that the funds were derived from current income.
In that case the Government proved that Adonis during the prosecution
year increased his assets some $45,000 over and about his income and
previous net worth. There was no explanation of the apparent increase in
net worth in that year. When the investigation of income tax liability
started Adonis elected not to talk with the investigators who sought to
interrogate him but the investigation did disclose that in his own
circle of friends and acquaintances he had made a detailed and complete
explanation of his ability to acquire these assets in an amount which
was completely out of line with his apparent circumstances which were
extremely modest. After proving the explanations of the defendant as
made to friends and acquaintances who testified at the time of trial,
the Government by clear and convincing evidence established the complete
falsity of the defendant's explanation of alleged sources of the money
necessary to acquire the assets. For example, it proved that Adonis'
mother from whom he was supposed to have received a substantial amount
of money was in fact indigent and the object of charity of her family;
that an amount of money obstensibly a loan evidenced by a mortgage had
in fact never been made; and finally, a statement that he had received a
very substantial sum of money from a woman acquaintance, a clerk earning
only a small salary and of modest circumstances, was entirely without
foundation. Circuit Judge Hastie in the Adonis opinion held that
the defendant's itemizing of supposed sources of nontaxable receipts was
a calculated misrepresentation designed to conceal current income.
The
facts of the instant case do not bring it within the ruling in the Adonis
case. Defendant here, either directly or through his accountants,
furnished the investigators with essential information to substantiate
his claim of receipt of funds from nontaxable sources. I have discussed
previously the facts involved as shown by the evidence in the case. In
the Adonis case the Government directly proved calculated
misrepresentation of source. In the instant case the nearest approach to
the facts of the Adonis case rests in the evidence relating to
the Perry loan. In that matter (the Perry loan) the Government has
proved inconsistent statements but it has not proved which statement is
false. In the Adonis case direct proof of falsity was offered. To
permit a jury in this case on the evidence presented to find as a fact
that the loan actually was not made would be an unwarranted and
undesirable extension of the principle enunciated by Circuit Judge
Hastie. A ruling in favor of the Government's contention would result in
a lowering of the standards of proof required and the weakening of the
safeguards prescribed by the Supreme Court in the
Holland
decision and by the Court of Appeals of this Circuit in the Adonis
case.
[Conclusion]
The
defendant may well have over a period of years substantially increased
his net worth and on a basis which may have involved understatement of
taxable income. However, in a criminal prosecution for income tax
evasion in a particular calendar year, the Government is not permitted
to allocate summarily such unaccounted-for accretions to a particular
year without meeting the requirements laid down in the
Holland
and the Adonis decisions. The Government has, in the opinion of
the Court, failed to meet such requirements in the instant prosecution.
My conclusion, therefore, is that the proof adduced is insufficient to
permit a jury to find beyond a reasonable doubt that defendant John J.
O'Malley for the year 1946 willfully evaded income taxes due the
United States
.
An
order for judgment of acquittal will be entered in accordance with the
foregoing opinion.
[55-1
USTC ¶9446]The
United States of America
v. Vincent Cefalu
In
the United States District Court for the Eastern District of Louisiana,
Criminal Docket No. 24,683,
May 18, 19
54
[1939 Code Sec. 145--similar to 1954 Code Secs. 7201-7203]
Evasion of taxes: Motion to dismiss indictment.--The defendant
filed a motion to dismiss an indictment for income tax evasion, because
the indictment, as amended by the bill of particulars, shows only an
estimate of the value of machines on hand at the beginning of the
taxable period without showing the actual number of such machines, in
the Government's attempt to establish, through use of the net worth
method, that a substantial amount of income had been fraudulently
evaded. The Court dismisses the motion as premature, since the
Government may be able to establish through evidence the amounts of
purchases and the value of machines on hand at the close of the tax
period without the necessity of showing the number of items on hand at
the beginning of the year.
George
R. Blue, United States Attorney, Federal Building, New Orleans, La., for
plaintiff.
Roland
C.
Kizer
,
Louisiana
National
Bank
Building
,
Baton Rouge
,
La.
, for defendant.
On
Motion to Dismiss Indictment
(Motion argued by Mr. Frank S. Craig, Jr.)
THE
COURT: The Court agrees with the law as expounded by counsel, and as
outlined in the Bryant case and also in the Demetree case
[53-2 USTC ¶9646]. There is no question that when the Government
determines to proceed on a net worth theory in proving an income tax
prosecution, it must prove beyond a reasonable doubt a beginning point,
and it must prove beyond a reasonable doubt an ending point. In other
words, it must prove the amount of net worth of the defendant at the
beginning of the tax period in question. It must prove beyond a
reasonable doubt the net worth of the defendant at the close of the tax
period in question.
[Opening
Net Worth]
Much
of this evidence by its very nature must necessarily be circumstantial,
and when the Government relies solely on circumstantial evidence to
prove a beginning net worth, or a net worth at the end of the tax
period, then of course, that circumstantial evidence must negative every
reasonable hypothesis of innocence. This statement of the law, and
counsel agrees, is in line with the Bryant case and the Demetree
case, and other cases that come from the Fifth Circuit, if not from
other circuits. Counsel's argument, however, fails on the fact that the
Government indictment shows, as amended by the bill of particulars, that
as of the date of the beginning of the first period,
December 31, 19
45, the defendant had on hand some $11,000.00 in machines. It is true
that the Government had admitted it could not show the number or the
kind of machines which the defendant had on hand at that time. The
Government in its indictment and bill of particulars asserts that it
will show that the value of the machines, whatever number (and this is
an important thing), will be in the vicinity of $11,000.00.
It
may well be that the Government merely added to that valuation of
$11,000.00 for machines on hand at the beginning of the tax period, the
amount of purchases of machines during the tax period in question.
Whether or not that is so, is a question of proof. However, the figure
cited by counsel indicating that addition, indicates the exact dollars
and cents valuation of the machines bought during the tax period. Those
figures indicate that that is possibly what the Government has done as
to that particular item.
However,
there is no way that the defendant can know at this time whether or not
the Government has made up for that calculation in some other
calculation. Further than that, assume, as the defendant possibly thinks
he can show, that some of the machines which made up the $11,000.00
valuation at the beginning of the tax period, were used in purchasing as
down payments or trade-ins on the machines purchased during the tax
period. That would not negative the Government's case, although it might
cut down the amount of tax which is alleged to have been evaded. In
other words, if the true amount of money spent by the defendant during
the tax year in question is something in the vicinity of $20,000.00,
just to take a figure, instead of $40,000.00 alleged in the indictment
and in the bill of particulars, then of course, while the defendant
could get some comfort from the fact that the Government has not proved
its case to the hilt, the fact is, and the law is that if the Government
proves a substantial part of its case, if the Government proves that a
substantial amount of income had been fraudulently evaded, improperly
unreported, then of course, the Government proved its case in spite of
the fact that the dollars and cents are not proved up to the full amount
shown in the bill of particulars, or in the indictment.
The
Court does not follow the argument at all that because the Government
can not show the exact number of machines in the defendant's possession
and ownership at the beginning of the tax period, that therefore the
Government can not show the net worth of those machines at that time. It
is completely possible, depending upon the type of evidence the
Government has to show that the defendant had on hand a certain
valuation in the machines without showing the number. For example, the
Government may be in a position to show that the defendant filed the net
worth statement with some bank, which would show that he had on hand and
owned by himself machines valued at $11,000.00, without itemizing the
number or kind of machines. Such evidence would be admissible and would
be rather persuasive as to the value of the machines on hand at the end
of the tax period.
[Motion
Is Untimely]
I
will say that the motion might well be made at the close of all the
evidence, but at this stage of the proceedings the motion must fail,
because it assumes that the Government is not going to undertake its
burden of proving its case as it is alleged in the indictment and in the
bill of particulars.
The
Government will not have to argue their case on this motion. The motion
is denied, and all rights of the defendant will be reserved in
connection with it.
MR.
KIZER: If your Honor please, we of course, would like to reserve our
exceptions and all of our rights under the motion and ruling of the
Court. At this time we would like to withdraw our formal plea of not
guilty in this case and enter a plea of nolo contendere, with your
Honor's permission.
MR.
SCOTT: The Government will not accept the plea of nolo contendere.
THE
COURT: The Court will accept the plea of nolo contendere. The Court will
now hear the evidence that the Government has with reference to the
case.
[55-1
USTC ¶9274]
United States of America
v.
Lawrence
L. Rice
In
the United States District Court for the Eastern District of Virginia,
Richmond Division, Criminal No. 5545,
January 14, 19
55
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]
Tax evasion: Net worth increase: Failure of Government's proof.--The
evidence was lacking in support of the indictment for tax evasion
against taxpayer that he filed false and fraudulent returns by failing
to report income from his business in amounts greater than shown on the
books of the business over a period of four years. The books were found
satisfactory on their face. Furthermore, since the net worth set at the
beginning of the period is not determined with reasonable certainty, the
whole case of determination of net income on the basis of increase in
net worth falls.
L.
S. Parsons, Jr., United States Attorney, and William F. Davis, Assistant
United States Attorney, for plaintiff.
Rob
ert Ash and Carl S. Bauersfeld, both of Washington, D. C., and Tom
Stockton, Roanoke, Va., for defendant.
Before
HUTCHESON, District Judge.
Verdict
and Finding of the Court
THE
COURT: I have followed the evidence as closely as I could as it was
being introduced. I thank you for the argument. As I told you at the
beginning, I was anxious to hear full discussion of the evidence from
the viewpoint of counsel.
There
has been a great deal of evidence. I have undertaken to bear in mind as
we went along what I thought was the important part, or what appeared to
me as the most important.
[The
Facts]
It
is pretty well proven, I think, that Mr. Rice is a man who has had a
large amount of cash on hand for a good many years. As to the source of
that amount of cash and the precise amount, the evidence is vague in
some respects; at least, it is not lacking in haziness. It is rather
natural that it should be, over this period of time.
In
the net worth method of computing income, it is essential that the
starting point be established with reasonable certainty. It is clear
from the testimony here of witnesses whose testimony I accept as
credible--disinterested witnesses--that Mr. Rice did have a large amount
of money at that time; he was a man who dealt in a large amount of
money. Whether he had $160,000, $150,000, or $180,000, or a less amount,
I am not prepared to say and I am not called upon to determine the exact
amount which he had, that is, with absolute mathematical certainty. It
is certain that he did have a large amount of money which was not
considered by the Government in establishing his net worth. Where and
when he obtained it is not shown with certainty.
The
custom of having a large amount of personal cash in these plants is an
unusual arrangement. At first, it struck me as being significant that
these checks payable to the company should find their way into his bank
account, until the testimony concerning this personal cash in the plants
came in. It is an unusual way of doing business, but the case presents a
good many unusual features.
[Records
Satisfactory]
I
fail to see how he could have derived from the business any such amount
as is claimed by the Government. There are discrepancies, there are
errors in his accounting, no doubt about that, but the Government's
contention is that during this four-year period he diverted from this
business an amount greater than the income shown by the books of the
company. He did not keep the records himself; he relied upon bookkeepers
and accountants; and I just cannot believe that he could take from the
business an amount greater than the amount shown on the books of the
company. He could not have done it without the connivance of employees
of the company, and there is no suggestion that there was any such
connivance on the part of the employees. Their method of checking the
drivers in and out would seem to be a pretty close check on the sales. I
do not say it is impossible that he might have siphoned off this money,
but it is highly improbable; and it is not seriously contended that he
got any substantial amount from his farming operations. There were some
discrepancies regarding farm receipts, some omissions, and checks cashed
in
Florida
which, he said, were mailed to
Florida
and which he failed to enter on his records when he returned. That is
carelessness, but it is understandable and does not account for anything
like the difference here.
I
am not called upon to determine whether he owes additional tax or not.
That is a civil matter with which I am not concerned. The only question
before the Court is whether he willfully filed a false and fraudulent
return. The whole case hinges upon the question of intention. The books
on their face are satisfactory. The evidence relied upon by the
Government is the increase in net worth and the tax liability. They
contend that it came from the business, but, as I say, I do not see how
it could have come from the business, under the method of operation
which has been described. Consequently, there is a failure to show a
likely or probable source from which it can be reasonably inferred that
the net worth of the defendant increased in value materially during the
years covered by the indictment and thus represented currently taxable
income.
[Conclusion]
Without
going into further discussion, the evidence is not sufficient to show
with the degree of certainty which the law requires that this man is
guilty of attempting to defraud the Government. He had on hand a large
amount of money, it is obvious, but he is not being tried for having a
lot of money on hand, and the Court is not concerned with the source
from which it was obtained nor the precise amount, but only with whether
he did, in fact, possess it. The testimony of these witnesses, who
apparently are entirely disinterested, concerning the possession of
these large sums is such as to make me feel that the net worth set at
the beginning of the period is not determined with reasonable certainty,
and unless it is so determined the whole case falls so far as the
increase in net worth is concerned. Consequently, without discussing the
facts further, I find the defendant not guilty.
[55-2
USTC ¶9554]George W. Lewis, Appellant v.
United States of America
, Appellee
(CA-9),
In the
United States
Court of Appeals for the Ninth Circuit, No. 14,450, 227 F2d 561,
June 30, 19
55. Cert. denied,
October 10, 19
55
Upon appeal from the United States District Court for the Northern
District of California, Southern Division.
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]
Tax evasion: Criminal prosecution: Understatement of income: Net
worth and expenditures method.--Defendant was convicted by jury
trial on charges of willfully attempting to defeat and evade income
taxes by understatements of income on returns filed for himself and wife
for 1947 and 1948. He either kept no books at all of his gambling
operations, loans, investments or other sources of income, or he
destroyed or concealed those which he had kept. In reconstructing the
income for those years under the net worth and expenditures method, the
Government introduced evidence tending to prove income by showing that
taxpayer had spent, invested or loaned $1,604,608.71 from 1942 to 1948,
and that he had available from earnings, gifts, repayment of loans and
all other disclosed sources a total of $771,615.65 during these same
years. There was also evidence which tended to show that he had net
taxable income greatly in excess of the amount disclosed on his tax
returns and those of his wife for each year from 1942 to 1948, both
inclusive. Taxpayer's objection that the Government failed to establish
a definitive starting point was held not substantiated by the evidence.
His claim that for several years he kept a million in currency in suit
cases was viewed with considerable doubt. Gambling activities pointed to
a source of inordinate income during the taxable years. The inference
that the expenditures were of money from unreported taxable income was
held to be one which a reasonable person could draw from the evidence.
James
E. Burns, Henry W. Howard,
111 Sutter Street
,
San Francisco
,
Calif.
, for appellant. Lloyd H. Burke, United States Attorney, John Lockley,
Jr., San Francisco, Calif., for appellee.
Before
ORR and FEE, Circuit Judges, and JAMES M. CARTER, District Judge.
FEE,
Circuit Judge:
Lewis
was indicted in three counts for attempting willfully and knowingly to
defeat and evade income taxes by filing in each instance a false and
fraudulent return: (1) understating his income in the amount of
$187,817.22 for the year 1947, the return showing a tax due of $2,018.10
when actually $145,761.90 was due, (2) understating the income of his
wife for the same year by $185,757.38, the return showing $2,884.55 due,
whereas $146,189.40 was actually due, and (3) understating income and
taxes of husband and wife for the year 1948, the return setting forth an
income of $115,153.66 and a tax due of $53,113.62, while the true income
was $308,099.51 and the tax due thereon $199,834.82.
[The
Facts]
The
trial was before a jury. Defendant made various motions, the gist of all
of which is that the government had not proved its case by evidence
relevant to net worth and expenditures. The government introduced
evidence tending to prove income by showing that defendant had spent,
invested or loaned $1,604,608.71 from 1942 to 1948, and that he had
available from earnings, gifts, repayment of loans and all other
disclosed sources a total of $771,615.65 during these same years. There
was also evidence which tended to show that, allowing all adjustments
for capital gains and other increases, defendant had net taxable income
greatly in excess of the amount disclosed on his tax returns and those
of his wife for each year from 1942 to 1948, both inclusive. The sources
of income were probed, namely: defendant's many legitimate businesses
and also his considerable involvement in gambling. It was also shown
that defendant kept no records of his gambling operations, loans,
investments or sources of income. Records of such transactions kept by
other persons for their own purposes tended to establish the accuracy of
the contentions of the government. The inference that the expenditures
were of money from unreported taxable income was one which a reasonable
person could draw from this evidence. The jury obviously did draw this
inference and convicted defendant. Their deliberations were probably
assisted by defendant's explanation of the discrepancy between
unreported income and established outgo. Defendant testified he had a
million in currency acquired prior to the years in question. He
explained he kept this hoard in suitcases.
The
criticism of the defendant is that the government did not attempt to
show either for the year 1947 or the year 1948, the two years in which
the defendant was charged with evasion, (1) that the records from which
his tax returns were prepared were inadequate for that purpose, (2) what
the net worth of defendant was at the beginning of both of those years,
or (3) that defendant had a source of income for those years other than
that reported.
[Opinion]
The
appeal seems to have been prosecuted in order to take advantage of any
change in the attitude of the Supreme Court upon the net worth and
expenditure approach in such cases. This matter has now been laid at
rest by the recent opinions announced by that court.
The
claim is made that the case at bar is to be distinguished from such
cases on the ground that the unreported income here does not come from
the "same disclosed sources as produced the taxpayer's reported
income". Holland v. United States, 348
U. S.
121, 126 [54-2 USTC ¶9714]. As we have been admonished, this case is
reviewed bearing constantly in mind the difficulties that arise when
circumstantial evidence is the chief weapon of a method which is in
itself only an approximation. In the past, such has been the policy of
this Court in relation to these cases.
In
this case at the outset, the absence of personal records is a
circumstance of considerable weight. Men who have large financial
interests do not normally in this day and age fail to have records. This
is one of the stock criteria which a jury may take into consideration
when determining whether the intent is fraudulent or no. The records
here were not appropriate to the business in which he was engaged. It
was not a case of inadequacy for defendant either kept no books at all
or destroyed or concealed those which he had kept. The "net
worth" method of approach was developed to meet just such a
situation, in order that skillful concealment should not present a
barrier to a different form of proof.
Defendant
makes a point about his co-operation with the investigative officers in
furnishing documents and records, including checks, and complains that
the record does not show intent or willfulness by the admitted omission
of certain items of income. The intent of defendant was in issue, and
the fact of specific fraudulent intent was found by the jury under
appropriate instructions which are not challenged. There was evidence to
support the finding.
The
difficulty of convincing a jury of the existence of substantial amounts
of cash not considered in the net worth computation is mentioned. But
here the explanation of defendant that for several years he kept a
million in currency in suitcases throws considerable doubt either on his
veracity or upon his common sense. Of course, the lack of records is of
great importance here. There were no documents to indicate that
defendant had acquired such a sum of money in years prior to his income
statements introduced in evidence, or even to show these returns were
false for years as to which the statute of limitations had passed. The
gambling activities of defendant point plainly to a source of inordinate
income. If there were not a complete absence of records, some evidence
might have been obtained showing these profits were obtained in some
other year. A phenomenon closely allied to this discussion is the
failure of defendant to prove the time and methods of acquisition of his
suitcase hoard.
[Definitive
Starting Point]
There
is objection because the government did not establish a definitive
starting point. But there is no doubt a point was chosen and, if
accepted by the jury, was sufficient. The weight of the objection was
that it was established only by admission of defendant in an attempt to
get the agents to make a compromise of a previous deficiency in tax.
However, this admission was corroborated by the circumstances under
which it was made. Defendant offered to settle a liability of
approximately $4,000.00 by payment of $1,500.00 in installments. He
accompanied this with an affidavit that his total assets amounted to
about $10,000.00. It seems this particular admission cannot be
reconciled with c
