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7203: Willful Failure to File Return, Supply Information, or Pay Tax: Evidence: Bank Records and Net Worth Increases

Part 5

 

[56-2 USTC ¶9804]The United States of America , Plaintiff-Appellee v. Sam Achilli, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 11575, 234 F2d 797, 7/31/56, Denying rehearing of CA-7 opinion, 56-2 USTC ¶9638, 1956 CCH ¶9638

[1939 Code Secs. 41 and 145(b)--similar to 1954 Code Secs. 446(b) and 7201 respectively]

Criminal prosecution for tax evasion: New issue raised on appeal: Felony v. misdemeanor under overlapping laws.--Taxpayer was convicted on three counts of an indictment charging attempts to evade the payment of income taxes for the taxable years 1946, 1947 and 1948 by filing, or causing to be filed, false and fraudulent income tax returns in violation of 1939 Code Sec. 145(b). He was sentenced on each count to serve two years in prison, the sentences to run concurrently. On appeal, the court reversed the conviction as to Count I and affirmed as to Counts II and III. Taxpayer could not raise the question for the first time that the charge alleging the felony defined in 1939 Code Sec. 145(b) contained the identical elements of the misdemeanor defined in 1939 Code Sec. 3616(a), and, hence, it was error for the trial court to impose a sentence greater than that prescribed for the misdemeanor. The overlapping of the two statutes was not a question of plain error affecting substantial rights, and rehearing was denied.

Rob ert Tieken, United States Attorney, John Peter Lulinski, Anna R. Lavin, Leon Kupeck, Chicago, Ill., H. Brian Holland, Joseph M. Howard, Washington, D. C., for plaintiff-appellee. Carl J. Batter, Washington, D. C., Frank J. Gagen, 29 So. LaSalle, Chicago , Ill. , for defendant-appellant.

Before MAJOR, LINDLEY and SWAIM, Circuit Judges.

LINDLEY, Circuit Judge:

Upon defendant's conviction on three counts of an indictment charging attempts to evade the payment of income taxes for the taxable years 1946, 1947 and 1948 by filing, or causing to be filed, false and fraudulent income tax returns in violation of 26 U. S. C. §145(b), (I. R. C. 1939), he was sentenced, on each count, to serve two years in prison, the sentences to run concurrently.

On appeal, we reversed the conviction as to Count I and affirmed as to Counts II and III. Defendant's petition for a rehearing is based, inter alia, upon arguments addressed to the sufficiency of the evidence to prove his guilt upon the net worth theory of proof. We think nothing is added thereby to the points raised and argued on appeal. We adhere to our judgment [56-2 USTC ¶9638] affirming the conviction as to the two counts.

[Felony v. Misdemeanor Under Overlapping Laws]

A rather troublesome question raised by the petition is one upon which defendant did not rely either in the trial court or before us on appeal, namely, that the sentence is invalid. As we have previously stated, the indictment charged three separate attempts to evade income taxes by filing false and fraudulent returns, a charge which has been repeatedly held to allege the felony defined in Section 145(b). ¹ See e.g. United States v. Beacon Brass Co., 344 U. S. 43 [52-2 USTC ¶9528]; United States v. Raub, 177 Fed. (2d) 312 (CA-7) [49-2 USTC ¶9422]; United States v. Rosenblum, 176 Fed. (2d) 321 [49-1 USTC ¶9314], cert. denied 338 U. S. 893 (CA-7). Defendant now contends, for the first time, that the charge contains the elements of the misdemeanor defined in 26 U. S. C. §3616(a), (I. R. C. 1939), ² that those elements and those of the felony are in all respects identical and that, therefore, it was error for the trial court to impose a sentence greater than that prescribed for the misdemenor by §3616(a).

The government admits that both §145(b) and §3616(a) apply to income tax returns and cover identical ground. It contends, however, that the government has the authority to elect under which statute it will proceed, or, alternatively, that the subsequent enactment, §145(b), repeals §3616(a) by implication.

Before reaching the merits of defendant's petition, we must determine whether the question can properly be raised at this late date. We think that it cannot. We say this advisedly, and do not purport to determine whether, were the question an open one, we would construe the conceded overlapping of the two statutes as a question of plain error "affecting substantial rights" and therefore noticeable "although * * * not brought to the attention of the trial court." Fed. Rules Crim. Proc. 52(b). We think that a determination that the question does not present such error is manifest in the recent pronouncements by the Supreme Court in Berra v. United States, 351 U. S. 131 [56-1 USTC ¶9480], which, at least, imply that the validity of a sentence under §145(b) must be challenged by an appropriate proceeding in the trial court.

[Question Raised for First Time on Appeal]

The indictment in Berra was in all material respects identical to that before us. At the close of all the evidence Berra requested an instruction "that a verdict of guilty of the 'lesser crime' under §3616(a) would be permissible." 351 U. S. at 132. Although the Court's decision affirming Berra's sentence is restricted to the narrow question whether that requested instruction was properly refused, the Court concluding that the refusal did not constitute error, the intendments of the opinion are much broader. The Court assumed, arguendo, that both §145(b) and §3616(a) applied and "covered the same ground." 351 U. S. at 134. It held, however, that the implication of such overlapping was a question of law for the court which had not been raised in the trial court and that "no such questions are presented here." 351 U. S. at 135 [56-1 USTC ¶9480].

Mr. Justice Black filed a dissenting opinion, in which Mr. Justice Douglas joined, stating that he would reverse the judgment, or at least remand the case to the district court "for resentencing under the misdemeanor statute, §3616(a)." 351 U. S. at 140. The dissent is based upon the postulate that the case presented an issue of plain error effecting substantial rights.

We can only conclude that the majority opinion in Berra inherently impels a determination that the question before us does not reflect plain error. Rule 52(b) was designed to reach errors of such a substantial nature that they would, if not corrected, result in a manifest miscarriage of justice. Brotherhood of Carpenters v. United States , 330 U. S. 395; United States v. Vasen, 222 Fed. (2d) 3, cart. denied 350 U. S. 834 (CA-7). Inasmuch as errors within the comprehension of the provisions of this rule are those of such a nature that they must be corrected to prevent a manifest injustice, it is incumbent upon a reviewing court to notice such error sua sponte although the issue presented is not raised on appeal. Screws v. United States , 325 U. S. 91, 107; United States v. Dressler, 112 Fed. (2d) 972 (CA-7); Lash v. United States , 221 Fed. (2d) 237 [55-1 USTC ¶9344], cert. denied 350 U. S. 826 (CA-1); Austin v. United States, 208 Fed. (2d) 420 (CA-5); Simmons United States v. Kemble, 197 Fed. v. United States , 206 Fed. (2d) 427 (CA-DC); Jonikas, 187 Fed. (2d) 240, cert. denied 344 U. S. 877 (CA-7).

In the face of this pronounced duty upon federal appellate courts, see Screws v. United States, supra, the Court in Berra took the position that the issue of the implication of the overlapping of §§ 145(b) and 3616(a) was not preserved because Berra had presented no proper challenge to the sentence to the trial court. As the dissenting Justices aptly observed, 351 U. S. at 137 [56-1 USTC ¶9480], the instruction which Berra requested advised the lower court of "petitioner's contention that the offense charged was not a felony but a misdemeanor." If the question was not preserved for review under the circumstances of that case, it certainly cannot be raised on this appeal in which there was no intimation of error below in the imposition of sentence or on appeal until the petition for rehearing was filed.

The petition is denied.

¹ "(b) * * *. Any person * * * who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution."

² "Whenever any person

"(a) FALSE RETURNS. Delivers or discloses to the collector * * * any false or fraudulent list, return, * * *, with intent to defeat or evade the * * * assessment to be made;

* * *

"He shall be fined not exceeding $1,000, or be imprisoned not exceeding one year, or both, at the discretion of the court, with costs of prosecution."

 

 

[56-2 USTC ¶9638] United States of America , Plaintiff-Appellee v. Sam Achilli, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 11575, October Term 1955, April Session 1956, 234 F2d 797, 6/5/56, Reversing in part, affirming in part, unreported Dist. Ct

[1939 Code Secs. 41 and 145(b)--similar to 1954 Code Secs. 446 and 7201]

Tax evasion: Evidence of increase in net worth: Prejudicial conduct of counsel.--In a prosecution for fraud Government counsel's overzealous advocacy of his cause could not be classified as misconduct requiring reversal of the conviction. Use of the net worth method of reconstructing income was competent to establish tax evasion, without determination by the Commissioner that use of such method clearly reflected income. Evidence obtained from books of a partnership of which the defendant was a member was not illegally seized, where the defendant consented to examination of the books by an individual who did not disclose that he was a Special Agent. The trial court did not err in refusing to admit the defendant's proffered evidence that some of his income consisted of funds embezzled from the partnership, since under applicable state law a partner could not be guilty of the crime of embezzlement because of his wrongful conversion of partnership funds. Moreover, even if there had been an embezzlement, the Government had allowed one-half of the partnership income as a deduction from net worth and the defendant could not contend that he had embezzled his own distributive share. Conceded error in the opening net worth statement for one year resulted in reversal of the conviction of tax evasion for that year.

Rob ert Tieken, United States Attorney, John Peter Lulinski, Anna R. Lavin, Leon Kupeck, Chicago, Ill., H. Brian Holland, Assistant Attorney General, Joseph M. Howard, Washington, D. C., for plaintiff-appellee. Carl J. Batter, Washington, D. C., Frank J. Gagen, 29 South La Salle St., Chicago, Ill., for defendant-appellant.

Before MAJOR, LINDLEY and SWAIM, Circuit Judges.

LINDLEY, Circuit Judge:

Defendant appeals from a judgment entered on a jury verdict finding him guilty on three counts of an indictment charging willful evasion of income taxes for the taxable years 1946, 1947 and 1948, in violation of Section 145(b) of the Internal Revenue Code of 1939, 26 U. S. C.

The Government employed what is commonly referred to as the net worth method of establishing deficiencies, proceeding on the theory that increases in the taxpayer's net worth over that at the beginning of the taxable year, plus nondeductible expenditures, constituted income to the taxpayer during that period unless satisfactorily explained. Employing this procedure the Government calculated the amount of defendant's net taxable unreported income during the indictment periods at $13,803.94 in 1946, $36,958.63 in 1947 and $20,623.18 in 1948. It offered evidence tending to prove that the income was derived from over-ceiling charges for automobiles sold by a co-partnership composed of defendant and one Gromer, doing business under the name and style of Highland Motor Sales, and Barney's Snooker Hall, owned by defendant until the latter part of 1946, and in interest on loans to various persons.

With respect to the operation of Highland , on the evidence the jury was justified in finding the following pertinent facts. During the three years, defendant, or his agents, made sales of automobiles at premium prices of about $600 per car above the OPA maximum price. The ceiling price of each car was entered upon the partnership books, and only this amount was reflected in the partnership returns. The black market premium was not recorded or reported. These premium sales seem to have been concealed from defendant's co-partner, Gromer; they were not reported in his individual income tax returns.

[Prejudicial Conduct of Counsel]

Defendant complains of some 19 remarks of counsel excerpted from the record, contending that misconduct of the United States Attorney requires a reversal of the judgment. The first was made during the course of reception of government testimony. Defendant's attorney objected to the use of certain records in the examination of a Government witness, asserting that they were admittedly false. The Government's attorney remarked, "And we are going to show they are false because you made them false." On objection, this remark was stricken.

The other 18 instances occurred during the course of final argument to the jury. Of these, objection was made to only two. "Counsel for the defense cannot as a rule remain silent, interpose no objections and after a verdict has been returned seize for the first time on the point that the comments to the jury were improper and prejudicial." United States v. Socony Vacuum Oil Co., 310 U. S. 150, 238. That principle must govern the sixteen asserted instances of misconduct, unless the remaining contentions disclose misconduct of a flagrant nature resulting in a pattern of prejudicial impropriety. We think no such pattern is shown.

We do not condone the prosecutor's unqualified statement that all defense witnesses were unwilling witnesses, responding only to subpoena. However, defendant's objection to the remark was sustained and the remark was stricken. And in addition to such curative action, the court instructed the jury that oral summation was no part of the evidence and was not to be considered in arriving at a verdict.

The second remark to which objection was taken related to the terms of a purchase contract. The Government introduced evidence showing that defendant had bought the entire interest of one Turpin, including the realty, equipment and stock of goods in the Red Lion, a local restaurant and bar, in 1945. In his closing argument the United States Attorney, in summing up defendant's beginning net worth, referred to this transaction as including a transfer of the capital stock of Red Lion, Incorporated, when, in fact, the agreement between Turpin and defendant included no reference to capital stock. Defendant's objection to this statement was overruled.

Although counsel's reference to the capital stock was unwarranted, it was an invited response to defense counsel's assertion and argument to the jury that the value of the corporate stock had been omitted from defendant's opening net worth statement. The record discloses the existence of a corporation known as Red Lion, Inc., of which defendant was an officer, and shows that the board of directors, in February, 1948, authorized and directed the officers of the corporation to enter into a lease with defendant of the premises on which Red Lion was located. We are directed to nothing of record which indicates when or by whom Red Lion, Inc., was incorporated, or who owned its corporate stock.

The Red Lion transactions are silent in this respect. Defendant's purchase agreement of the property recited that the seller, Turpin, agreed to convey the real estate, fixtures and stocks of liquors and goods to defendant in consideration of $18,400. In 1948, defendant transferred to one Fritzel an undivided 1/2 interest in all the chattels, fixtures, liquor and licenses. An attached schedule showed that the value of the stock of merchandise was $10,796.71 and that the sale price of 1/2 thereof was $5,398.30. Neither transaction alluded to corporate ownership of any of the property and each item was fully reflected in the Government's net worth computation.

Upon the capital gains schedule of defendant's 1948 tax return, notations as follows were entered with respect to an item listed as "Sales of stock in Red Lion": acquired 1945, at a cost basis of $4,673.18; sold 1948 at a sales price of $5,894.85. In cross-examination of Government's witness Weber, defense counsel interpolated "capital" into this entry immediately preceding the word "stock", and questioned him as to where the value of the "capital stock" was reflected upon the Government's computation of net worth at the beginning of the taxable periods. Counsel took the same approach in his summation to the jury, arguing that the cost base of this item, $4,673.18, should be set up as an asset omitted from the opening net worth computation. The context of the United States Attorney's argument shows conclusively that his reference to the value of the corporate stock as included in the $18,400 purchase price paid to Turpin was in response to the argument by defense counsel.

Each party was arguing for an inference not supported by the record. The accountant who prepared the 1948 return testified that the capital gains entries thereon were based upon the transaction between defendant and Fritzel. The word "stock" in that entry, therefore, takes its meaning from the contract of the parties to the transaction which, in this respect, purports to convey only a stock of merchandise in inventory. If counsel for the Government went outside the record in the respect noted, the excursion was in response to an opposing venture de hors the record by the defense. The error, in overruling the objection was inconsequential, especially in view of the instructions to which allusion has previously been made that oral summation is no part of the evidence.

Government counsel may, at times, have been an overzealous advocate. In most of these instances, his remarks went in without objection, as we have noted. When his argument to the jury is considered as a whole, we think that the excerpts extracted from context for our attention present for the most part nothing more than zealous advocacy, see Di Carlo v. United States, 6 Fed. (2d) 364, cert. denied 268 U. S. 706 (CA-2), and, in any event, that they can not be classified as misconduct requiring reversal. As we said in United States v. Doyle, No. 11528, decided May 23, 19 56 [56-1 USTC ¶9553], quoting from Malone v. United States, 94 Fed. (2d) 281, 288 [38-1 USTC ¶9032], cert. denied 304 U. S. 562 (CA-7): "Counsel have a right to make any argument based upon evidence proven in the case, or which may be reasonably inferred therefrom, and to make reply to that made by opposing counsel, and, in doing so, statements may be made which otherwise would be improper. Defendant's trial counsel evidently did not regard the argument as vicious or unfair as objection was made to one statement only * * *." We think the situation wholly unlike the instances of misconduct appearing in the cases relied upon by defendant. Berger v. United States, 295 U. S. 78; N. Y. Central R. Co. v. Johnson, 279 U. S. 310; Pierce v. United States, 86 Fed. (2d) 949 (CA-6); Volkmor v. United States , 13 Fed. (2d) 594 (CA-6).

[Net Worth Method of Reconstructing Income]

Defendant's contention that the net worth evidence was incompetent and inadmissible misconceives the purpose of the provisions of Section 41 of the Internal Revenue Code of 1939, 26 U. S. C. (1952) §41. He insists that, before the net worth method may be employed in any income tax case, Section 41 requires a determination by the Commissioner of Internal Revenue that use of that method "does clearly reflect the income" of the accused taxpayer; that the Commissioner did determine defendant's income for the indictment years by adjustments to the income reported, and that therefore, the net worth method of proof may not be employed in this prosecution, absent proof that the Commissioner has made the alleged requisite determination.

We think it clear that Section 41 has the limited purpose of insuring that, in an admin istrative deficiency assessment, the taxpayer's accounting method shall be employed by the Commissioner in the allocation of income and expense items between taxable years. Holland v. United States, 348 U. S. 121, 131 [54-2 USTC ¶9714]. But that section can have no application in a criminal proceeding which is not based and does not depend upon an admin istrative determination. Therefore, the cases dealing with the validity of admin istrative orders upon which defendant relies are inapposite. See e.g., Morgan v. United States, 298 U. S. 468; Brown v. Helvering, 291 U. S. 193 [4 USTC ¶1223]; Lucas v. American Code Co., 280 U. S. 445 [2 USTC ¶483]; Willapoint Oysters, Inc., v. Ewing , 174 Fed. (2d) 676, cert. denied 338 U. S. 860 (CA-9); Southern Garment Mfg. Assn. v. Fleming, 122 Fed. (2d) 622 (CA-DC).

These cases obviously have no application to this proceeding, based upon three counts of an indictment returned by a grand jury. It is wholly immaterial that the indictment was preceded by an admin istrative tax deficiency determination against defendant. Such proceeding was a civil matter, the validity of which must be determined civilly. Here the Government had the burden of proving the charges made in the indictment beyond a reasonable doubt, and, for this purpose, as in any other criminal prosecution, the admissibility of tendered evidence was to be determined by established rules of evidence. The question of admissibility is not affected by the fact, nature, or validity of a prior admin istrative determination touching the same subject matter.

The contention now made is not unlike that urged in Holland v. United States, 348 U. S. 121 [54-2 USTC ¶9714], that Section 41 restricts the Government's use of the net worth method of proof in criminal prosecutions to those cases where it is shown that the taxpayer has no books or that his books are inadequate, a contention rejected in this language at page 132: "To protect the revenue from those who do not 'render true accounts' the Government must be free to use all legal evidence available to it in determining whether the story told by the taxpayer's books accurately reflects his financial history." The legality of the net worth evidence is not affected by what the Commissioner has, or has not, done in a civil matter. To read such a restriction into Section 41 would thwart the intent of Congress. "The existence of unreported income may be proved by any practical method available in the circumstances of the particular case." United States v. Doyle, No. 11528, decided May 23, 19 56 (CA-7) [56-1 USTC ¶9553]; Davis v. United States, 226 Fed. (2d) 331, 336, cert. denied 350 U. S. 965 (CA-6) [55-2 USTC ¶9685].

Defendant argues also that the net worth method, as here employed, lacked probative value and should not have been presented to the jury. Government exhibit 280, the summary of the relevant net worth computations, showed an understatement of income for each of the taxable years as follows: for 1946, $13,803.94, for 1947, $36,958.63, and for 1948, $20,623.18. The probative value of this evidence is attacked, defendant asserting that certain specific assets were omitted by the Government in computing defendant's opening net worth and that other specific items were improperly included as assets in the net worth computation for the year 1948. To the extent that these contentions represent merely a suggestion that we weigh conflicting testimony, they fall within the postulate stated in United States v. Winston, 222 Fed. (2d) 323, 325 (CA-7), that "we must consider the evidence in the light most favorable to the Government and in the light of all reasonable inferences which the [jury] might draw from the evidence." United States v. Iacullo, 226 Fed. (2d) 788, 795, cert. denied 350 U. S. 966 (CA-7); United States v. Yager, 220 Fed. (2d) 795, cert. denied 349 U. S. 963 (CA-7). We can only conclude that the evidence supports the verdict; that we cannot say that the challenged evidence, as a matter of law, lacked probative weight sufficient to take the case to the jury.

The Government concedes the merit of defendant's contention that the value of a brick residence, which was sold by defendant in 1946, was erroneously omitted from the opening net worth computation. The capital gains schedule of defendant's tax return for the latter year states that that property was acquired by defendant in 1945 at a cost basis of $11,000. Since this is the only evidence of record with respect to the time when defendant acquired this property, the sum should, as the Government concedes, have been included as an asset in the computation of defendant's net worth as of December 31, 19 45. This omission, however, affects only Count I. Since the total unreported income for the year 1946 by the computation most favorable to the Government is an amount of approximately $13,800, only, we feel that this omission must have resulted in serious prejudice to defendant as to the charges of Count I. When employing the net worth method, the Government must prove, beyond a reasonable doubt, "that a substantial amount of tax liability has been willfully evaded." United States v. Doyle, 11528, decided May 23, 19 56 (CA-7) [56-1 USTC ¶9553]; Sasser v. United States, 208 Fed. (2d) 535 (CA-5) [54-1 USTC ¶9118]. The result of this omission was to interject into the proof as to Count I an erroneous figure which would reduce the evidence tending to prove "a substantial" evasion of tax liability to that which would support a maximum finding of willful evasion in an amount only slightly exceeding $2,800. The error accounts for almost 80% of the deficit shown by the Government's computation. We can only speculate as to whether the jury would have found a substantial evasion for that year. We think an error of this magnitude in a computative total of less than $14,000 necessarily prejudiced defendant. The judgment as to Count I is reversed.

The last mentioned item was fully reflected in the net worth computations going to the proof of the charges of Counts II and III; consequently, we think the other contentions of error in this respect are without merit.

Defendant asserts that certain oil well investment in the amount of $5,000, and the value of the capital stock of Red Lion, Inc., in the amount of $4,673.18 were erroneously omitted from the opening net worth computation. What we have said with respect to the Red Lion stock in reviewing the contention as to misconduct of Government counsel disposes of this item. The entries upon defendant's 1946 tax return which are said to support the assertion that defendant acquired "Capital stock" in 1945 were an obvious reference to a stock of goods in inventory. The record is silent as to the existence or ownership of Red Lion corporate shares. With respect to the oil well investments, the evidence is in conflict. The record contains positive testimony that defendant acquired these assets in 1947, and the jury could have resolved this question against defendant. The review of conflicting evidence is beyond the scope of our function.

[Items Included as Assets]

Defendant also objects to items included as assets in the closing net worth which allegedly were liabilities. There is, however, conflicting testimony with respect to each of them. We might well conclude our review on this note, but we think it wise to refer briefly to the evidence as to these transactions.

The first is a $12,000 item which grew out of a $35,000 cashier's check held by defendant at the end of the taxable year 1948. This check, issued by the Union National Bank and Trust Company of Elgin , was payable to defendant, his wife and one Gordon. The named persons signed a promissory note payable to Union in the amount of $23,000. In computing defendant's net worth at the close of 1948 the $35,000 check was included as an asset and the $23,000 note as a liability. Defendant contends that this computation does not reflect a related transaction in which defendant borrowed the $12,000 representing the difference between the Union note and the check from the First National Bank. The record includes positive testimony that Union issued the check on consideration of the $23,000 loan and $12,000 cash paid by defendant. Gordon testified that he supplied none of the funds for the purchase of the check and that the latter was used to relieve the obligation of the note. One witness testified that First National was a participant in this transaction to the extent of $12,000. The record clearly shows that Union recorded the transaction as a $23,000 obligation. Gordon testified that he had not executed a note in favor of First National, and no record of such a transaction was produced.

There was also a conflict of testimony with respect to a $7,500 transaction between defendant and one Affeld and another in which Gromer purchased a $15,000 cashier's check payable to defendant, which the latter endorsed and delivered to Gordon as a loan. Both transactions occurred in 1948. With respect to the Affeld transaction, there was a dispute as to whether the $7,500 represented a loan actually made or whether it was a mere commitment to pay on Affeld's account sums to the extent of $7,500 upon proper demand. This figure was set up as a closing net worth asset without a corresponding liability. With respect to the $15,000 check Gromer testified that he purchased it for defendant and delivered it to him. Defendant insists that there is no evidence that the check was purchased with defendant's funds. We have examined the record and believe there was sufficient evidence to submit to the jury upon each of these matters. There was substantial evidence which, if believed, supported the requisite finding that defendant willfully understated his income by substantial amounts in both 1947 and 1948, and that black market receipts received by him in the sale of automobiles were the likely source of his enhanced net worth.

[Evidence Illegally Seized]

Defendant insists further that the evidence obtained from the partnership books of Highland Motor Sales should have been excluded from evidence as illegally seized in violation of the Fourth Amendment. When the investigation began, Special Agent Weber and Revenue Agent Auld presented themselves at the office of Highland where they met defendant and asked that they be permitted to examine the partnership books. Defendant does not deny that he consented to their examination of the books, but argues that the evidence obtained should have been suppressed because Weber did not reveal that he was a Special Agent or disclose the purpose of the investigation. In this respect, Weber testified that when he met defendant at Highland, he identified himself as a Special Agent, displayed his credentials and asked to examine the books of the partnership; that defendant consented to the examination and directed his bookkeeper to supply any books and records which the agents wanted, and, that, thereafter, he sought and received the consent of defendant's co-partner that he might examine the books.

This argument is not essentially different from that advanced in Turner v. United States, 222 Fed. (2d) 926 [55-1 USTC ¶9489], cert. denied 350 U. S. 831 (CA-4), wherein defendants contended that evidence obtained from their books and records should have been suppressed, despite their consent to an examination of the books, for the reason that the investigating agents had not warned them that the evidence might be used in a criminal prosecution. The court there aptly stated, 222 Fed. (2d) at 931: "The agents made no investigation to which defendants did not consent. The bookkeeper was ordered by the defendants to show the books and records of the business to the agent; * * *. The evidence is silent as to whether Agent Forbes began the investigation as a routine examination to ascertain the civil liability of the defendants or intended from the beginning to search for evidence of crime. But even if the latter assumption be made, there was no violation of the taxpayer's constitutional rights. The relevant inquiry is always whether the taxpayer freely gives his consent, and as to that there is no dispute in this instance." This principle is cited with approval in Zacher v. United States, 227 Fed. (2d) 219 [55-2 USTC ¶9745], cert. denied 350 U. S. 993 (CA-8), and Eggleton v. United States, 227 Fed. (2d) 493 (CA-6) [56-1 USTC ¶9108], both evasion cases.

We note briefly defendant's charge that the trial court erred in denying, without a hearing, his motion to suppress this evidence, which was made prior to trial and supported by defendant's affidavit. We think, however, the duty of a trial court to afford a hearing upon such a motion is limited by the prayer of the motion. In this respect, defendant, in his affidavit, did not deny, but rather, at least tacitly, admitted that he consented to examination of the books, but says he did not know of Weber's official title of Special Agent. The only hearing requested was the production of manuals prescribing the duties of special agents. There was no showing to warrant the granting of a hearing, inasmuch as there was no offer to prove that the evidence was submitted to the agents other than with defendant's consent. Cf. Smith v. United States , 348 U. S. 147, 151.

The case is unlike United States v. Wolrich, 129 Fed. Supp. 528, in which there was evidence that the treasury agents secured defendant's consent upon the assurance that the investigation was merely routine, when in fact, they were seeking evidence of fraud for a criminal prosecution. There is no suggestion of deception such as the court condemned in Gouled v. United States, 255 U. S. 298. There is no suggestion of lack of consent as appeared in Fitter v. United States, 258 Fed. 567 (CA-2), and United States v. Brasley, 268 Fed. 59. The case of In re Subpoena Duces Tecum, 81 Fed. Supp. 418, involved compulsory acquisition of partnership records which were used in evidence against one of the partners. Here, both partners consented to the examination. Upon this record, we must conclude the evidence obtained from Highland 's books was properly admitted.

[Income from Embezzlement]

Defendant's remaining argument relates to the alleged defense of embezzlement. He contends that Gromer, his co-partner, filed a suit in 1951 for dissolution of the Highland partnership charging that defendant had embezzled partnership funds arising out of overceiling sales of automobiles. He asserts that the court erred in refusing to admit in evidence the stipulation of the parties settling that suit and in refusing to give defendant's tendered instructions relative to the defense of embezzlement. Argument on this phase of the appeal rests on the decision in Commissioner v. Wilcox, 327 U. S. 404 [46-1 USTC ¶9188], that moneys obtained by embezzlement do not constitute income to the embezzler. We think that decision is inapplicable to the case at bar and that the rulings of the court below were correct both as to the admission of evidence and as to instructions.

Defendant sought to introduce the stipulation in the course of the cross-examination of plaintiff's witness Gromer, and to cross-examine the witness with respect to the 1951 lawsuit. The court ruled that this evidence was beyond the scope of proper cross-examination. Gromer was not called as a defense witness, and no attempt was made to introduce evidence as to a defense of embezzlement in defendant's case in chief. This, we believe, brings this question within our holding in United States v. Bender, 218 Fed. (2d) 869 [55-1 USTC ¶9142], cert. denied 349 U. S. 920, that the control over the orderly presentation of evidence resides in the sound discretion of the trial judge.

In any event, the defense of embezzlement, under the Wilcox rule, has no application to the case at bar, since under Illinois law defendant cannot be guilty of the crime of embezzlement because of his wrongful conversion of partnership funds to his own use. I. R. S., c. 38, §208. The postulate, supported by the Illinois decisions interpreting this statute, is that one having a property interest in funds in his possession is not guilty of embezzlement if he wrongfully appropriates the whole fund to his own use. People v. Ehle, 273 Ill. 424, 112 N. E. 970; People v. O'Farrell, 247 Ill. 44, 93 N. E. 136; McElroy v. People, 202 Ill. 473, 66 N. E. 1058. A necessary element of the crime of embezzlement is the existence of an absolute property right in someone other than the alleged embezzler. McElroy v. People, supra.

Thus, in McElroy, defendant, a commission salesman, was convicted upon an indictment charging her with the embezzlement of the proceeds of certain sales. Inasmuch as it appeared from the evidence that defendant was entitled to deduct her commissions from the proceeds of such sales before paying over the balance to the prosecuting witness, the court reversed the conviction saying, 202 Ill. at 475-476: "By this statute, in order to constitute the crime of embezzlement the fraudulent conversion must be of the property of another. If the plaintiff had a right to deduct her commissions from the gross amount collected, then to that extent the money belonged to her,--that is, she and the company owned the gross sum jointly. The law is, that where a defendant has an interest in the property or money alleged to have been fraudulently converted to his or her own use there can be no conviction of the crime of embezzlement."

In Ehle, the conviction of embezzlement rested upon proof that defendant, as attorney for Burns, had settled a claim possessed by the latter, had deposited the check therefor in his own bank account and had checked the sum out for his own personal use. The court stated the applicable rule as follows, 273 Ill. at 432: "* * * in agent would not be guilty of embezzlement if such agent had an interest in or part ownership of the funds involved, or until an accounting had been had and a demand and refusal to pay the amount due from such agent to his principal." The conviction was reversed, the court saying, 273 Ill. at 433: "If he took the suit independently for himself he was clearly entitled to fees, and he was not liable to indictment for embezzlement of this money, or to disbarment, until after a demand had been made upon him for the amount and a tender made of his reasonable fees and expenses. But no demand was ever made."

People v. O'Farrell, 247 Ill. 44, 93 N. E. 136, furnishes a good illustration of the application of this principle. O'Farrell was agent for one Vickerage to collect the rents from a hotel and also to negotiate its sale. The indictment charged that O'Farrell had embezzled both the sums collected as rents and those received from one Colgrove, in effecting the sale of the real property. It appeared that O'Farrell's agency, in each instance, grew out of separate contracts. The first provided that he was to deduct his commissions from funds collected as rent and to remit the net fund to Vickerage. The agency contract for the sale of the hotel provided that O'Farrell was to receive a commission for the sale of the property, but made no provision for his retention of his commission out of the funds received for the sale. The court held there was no embezzlement of the rent funds since O'Farrell had an interest therein, but affirmed the conviction because of his conversion of the sale proceeds in which he had no interest.

Before embezzlement can arise, the funds in the hands of a fiduciary must be held under an absolute obligation to remit them to another, but taking of the whole of a fund cannot constitute embezzlement, if the fiduciary has an interest in it and a duty only to account to another for his distributive share thereof. This is a fair summary of the law of Illinois as established by the cases interpreting an act in all relevant respects identical to §208. See also People v. Becker, 414 Ill. 291, 111 N. E. (2d) 491.

Defendant had an undistributed one-half interest in the partnership funds in question. His duty to Gromer was that of accounting for the latter's distributive share, and defendant could not be guilty of embezzlement, at least until an accounting had been sought by Gromer and refused. No accounting was sought since 1951.

Even if this were an embezzlement of Gromer's distributive share of such black-market partnership income, the Government took the precautionary measure of allowing one-half of this partnership income as a deduction from net worth. We do not understand defendant's contention to be that he embezzled his own distributive shares. Unless such an absurd result were contended, embezzlement, in any event, is removed from the case.

A vague assertion is made that someone connected with Highland may have embezzled the black-market funds belonging to both partners. The difficulty with this argument is that the record is wholly devoid of any such evidence. Insofar as the instructions rejected by the trial court may have been grounded upon such a contention, they were properly refused. It was incumbent upon defendant to assert and prove such embezzlement if he wanted to rely upon such a defense. He is not entitled to instructions resting upon mere speculative assertions manufactured wholly from this air.

As to Count I the judgment is reversed. As to Counts II and III it is affirmed. Inasmuch as identical prison sentences were imposed upon each count, and inasmuch as all sentences, expressly, are to be served concurrently, our reversal of the judgment of conviction upon a single count does not necessitate a new trial.

 

 

[56-1 USTC ¶9338]Louis P. Lutfy, Appellant v. United States of America , Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 14,630, 230 F2d 643, March 6, 19 56

Appeal from the United States District Court for the District of Arizona.

[1939 Code Sec. 145--corresponding 1954 Code Sec. 7201]

Income tax evasion: Income reconstructed under net worth method: Sufficiency of bill of particulars.--In trial by jury, taxpayer, a practicing physician, was convicted on all five counts of an indictment charging income tax evasion for himself, his wife, or both, for the years 1946-1948, the income having been evenly divided between husband and wife in Arizona, a community property state. The Government relied largely upon the net worth method to prove its case. The court holds that the Government was warranted in using the net worth method since, although no false entries were found in the books, there was evidence that the records were inadequate and did not reflect the true income. Taxpayer did not substantiate his contention that a part of the net worth increase in the taxable years was from loans and gifts from his wife's mother. No gift tax returns had been filed. The bill of particulars filed by the Government at taxpayer's request is held to have given notice of the intention to show tax evasion through improper deductions, and introduction of evidence to that end, over objection, and the denial of motions to strike were not reversible errors.

Parker & Muecke, Darrell R. Parker, Phoenix , Ariz. , for appellant. Jack D. H. Hays, United States Attorney, Rob ert O. Roylston, Mary Anne Reimann, Assistant United States Attorneys, Tucson , Ariz. , for appellee.

Before DENMAN, Chief Judge, and POPE and LEMMON, Circuit Judges.

[Income Tax Evasion]

LEMMON, Circuit Judge:

Appellant was convicted on all five counts of an indictment charging income tax evasion under 26 U. S. C. A. Sec. 145(b), covering income taxes for himself or his wife, or for both, for the years 1946, 1947 and 1948. This appeal follows those convictions.

Appellant is a practicing physician. Count I alleges that on March 15, 19 47, he willfully and knowingly attempted to defeat a large part of the income tax owing by him to the United States for the calendar year of 1946 by filing with the Collector a false and fraudulent income tax return wherein he stated that his net income for that year, computed on the community property basis, was $2,309.91 and that the amount of tax owing thereon was $248.88; whereas, as he well knew, his net income for said calendar year, computed on the community property basis, was $10,168.11, and that he owed a tax thereon in the sum of $2,239.44.

Count II alleges that on the same date, the appellant, who during the calendar year of 1946, was married to Bertha A. Lutfy, willfully and knowingly attempted to defeat and evade a large part of the income tax owing by her to the United States for the calendar year 1946, by filing with the Collector a false and fraudulent return for her, stating therein that her net income for that calendar year, computed on the community property basis, was $2,309.91, and that the amount of tax owing thereon was $153.88; whereas, as he well knew, the said net income, computed on the community property basis, was $10,168.11, and that the income tax due thereon was $2,077.80.

Count III alleges that appellant, on March 1, 19 48, filed a false and fraudulent return for himself, wherein he stated his net income, computed on the community property basis, was $4,177.19, and the tax due was $626.03; whereas, as he well knew, his net income for that calendar year was $13,293.16, and the tax due was $3,349.76.

Count IV alleges that appellant, on March 1, 19 48, filed a false and fraudulent return for his wife, wherein he stated that her net income, computed on the community property basis, was $4,177.18 and the tax due was $521.53; whereas, as he well knew, her net income for that calendar year was $13,293.16 and the tax due was $2,931.53.

Count V alleges that appellant on February 8, 19 49, willfully and knowingly attempted to defeat and evade a large part of the income tax due by him and his wife by filing a false and fraudulent joint return for himself and wife for the calendar year 1948, stating their net income for that year to be $18,453.62, and the tax due thereon to be $3,265.36, whereas he then and there well knew that the net income for that year was $32,790.65 and that the tax owing was $8,198.22.

[Net Worth Method]

The appellee relied largely upon the net worth method to prove its case.

Appellant specifies several errors. Most are interrelated.

The first relates to the sufficiency of the evidence to meet the standards of proof to support conviction of income tax evasion based on the net worth theory.

December 31, 19 45, was used by the appellee as the starting point in compiling the net worth statement. It embraced bank deposits and cash on hand. The appellee's evidence showed that appellant on or about November 24, 19 44, converted to cash Government bonds in the amount of $14,195.12, and that in 1944 his mother repaid to him $4,400 which he had previously lent her. It is claimed no attempt was made to ascertain what happened to these two amounts and therefore they furnished no basis for corroborating appellant's statement concerning cash on hand. But the inference is clear that these sums were a part of the $58,337.20 established by the appellee as the net worth at the starting period.

The net worth statement showed appellant purchased 6 parcels of real estate in 1944 and 1945, and that the cash from the bonds was deposited in appellant's bank account in 1944. It could, therefore, be concluded that the $18,000 was not on hand at the starting point.

It is asserted that the introduction of tax returns for prior years was prejudicially erroneous. This procedure has been approved as showing the financial history of the taxpayer. ¹ The returns showed that except for 1935, 1939 and 1941, when $82.56, $7.33 and $44.57, respectively, were paid, no tax was paid from 1934 to 1943.

Appellant asserts that a regular set of books was kept by him and that consequently a case was not presented which would permit resort to the net worth theory. No false entries were found. But there was evidence that the records were inadequate and did not reflect the true income. ² We conclude that the United States was warranted in resorting to the net worth method and that the trial court properly received evidence in support thereof.

Mention is made by appellant of $3,200 received on a loan, which it is claimed is not reflected in the Government's calculations. But he had stated that he had received no loans other than from an insurance company and the Government agent could find no evidence of such a loan. There was clearly a conflict in the evidence regarding this transaction and the jury could, as it undoubtedly did, resolve the conflict against appellant.

Mrs. Lutfy's brother testified that substantial gifts were made from time to time to her by their mother. No gift tax returns had been filed with the Collector and the jury was not bound to decide in conformity with this testimony.

Complaint is made that the investigators for the appellee ignored assets in the form of life insurance, which it is claimed had cash values, the principal sum of which policies aggregated approximately $45,000. However, there is no evidence that appellant obtained loans against these policies or that they were surrendered for cash during the period involved in this prosecution. These policies were therefore immaterial, except insofar as this evidence was corrobative of the net worth computations.

[Bill of Particulars]

A "Motion for Bill of Particulars" was filed by the appellant on April 20, 19 53. On April 24, 19 53, the appellee filed a bill of particulars. On May 4, 19 53, when the appellant's motion came up for hearing, the appellant announced that the requested bill of particulars had been supplied. On December 15, 19 53, the appellee filed an amended bill of particulars, and on December 23, 19 53, the Court ordered that the proposed amended bill of particulars be filed as "the Bill of Particulars". On January 25, 19 54, the appellant filed a motion for "Further Particulars", to which the appellee replied, on February 8, 19 54, by furnishing such "Further Particulars". On the same day, the District Court ordered that the appellant's "Motion for Bill of Particulars" (sic) be "stricken from the calendar subject to reinstatement upon three days' notice to the United States Attorney."

It is asserted that nowhere in these bills was claim made that the appellant willfully took improper deductions or improperly computed depreciation reserves, and that evidence to that end, introduced over objection, and the denial of motions to strike the same constitute reversible errors. That the appellee gave notice in the bills of its intention to show tax evasion through improper deductions is stated in paragraph 1 of the appellee's "Reply to Defendant's Motion for Further Particulars" in this language: "All non-deductible personal expenses taken as business deductions have been disallowed". In its bill, notice was sufficiently given by the appellee that the depreciation would be considered in arriving at the net worth during the period in question. The substantial rights of the appellant were not prejudiced by permitting this evidence.

Appellant was fairly and impartially tried. The Court's instructions to the jury were comprehensive and correct. We find no error affecting the substantial rights of appellant. The judgment must therefore be, and it is Affirmed.

¹ Holland et ux. v. United States , 348 U. S. 121, 99 L. Ed. 127 [54-2 USTC ¶9714]; Friedburg v. United States, 348 U. S. 142, 99 L. Ed. 140 [54-2 USTC ¶9713]; Smith v. United States, 348 U. S. 147, 99 L. Ed. 143 [54-2 USTC ¶9715].

² R. Dale Moser, appellant's accountant, testified "I would say there were errors in the bookkeeping"; the books "did not reflect the true income."

 

 

[55-1 USTC ¶9416]Michael Campodonico, Appellant v. United States of America , Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 14,089, 222 F2d 310, April 27, 19 55

On appeal from the District Court of the United States for the Northern District of California.

[1939 Code Sec. 145(b)--substantially unchanged in 1954 Code Sec. 7201]

Criminal prosecution: Net worth method: Likely source of unreported income.--Since appellant kept no books the Government had a right to resort to the net worth increase-expenditures method. The Government's evidence relating to the beginning net worth and the increase in net worth supported the judgment of the trial court. Proof of a likely source of appellant's unreported income is sufficient, and in the case of an admitted gambler the likely source would be winnings from gambling.

[1939 Code Sec. 145(b)--substantially unchanged in 1954 Code Sec. 7201]

Criminal prosecution: Defenses: Denial of constitutional right to a speedy trial.--Appellant urged that a year and 2 months from the beginning of the trial to the pronouncement of judgment was a denial of his constitutional rights. This complaint is without merit because many legal questions were involved in this case. Moreover, appellant did not press the trial court for a quick decision.

Willens & Boscoe, Donald D. Boscoe, Stockton, Calif., Emmet J. Seawell, Sacramento, Calif., for appellant. H. Brian Holland, Assistant Attorney General, Washington, D. C., Lloyd H. Burke, United States Attorney, Clyde Maxwell, Internal Revenue Service, San Francisco, Calif., Thomas J. Sullivan, Internal Revenue Service, Los Angeles, Calif., for appellee.

Before MATHEWS, HEALY and LEMMON, Circuit Judges.

LEMMON, Circuit Judge:

Unlike many other trapped tax-evaders, the appellant does not maintain, like Abimelech of Gerar, that "In the integrity of my heart and innocency of my hands have I done this". ¹ With his admitted record of gambling, bootlegging, embezzlement, perjury, and prostitution, such a protestation of purity would hardly be convincing.

On the contrary, the appellant relies upon such technical defenses as these:

"The case at bar is not a proper case in which to apply the net worth theory as it did not clearly and accurately establish by competent evidence the net worth of the appellant for any one of the tax years in question, nor did it produce evidence that excluded all possible sources of taxable income from which any increase of net worth and the excess expenditures could have been derived."

"A strict interpretation of corroboration requirements for circumstantial evidence when used to establish a beginning net worth has been established" by four Supreme Court cases.

Our task, then, is to examine these and similar finespun arguments with the requisite amount of dispassionate judicial calm.

1. Statement Of The Case

The indictment, in five counts, charged violations of 26 U. S. C. A. §145(b), which punishes "Failure to collect and pay over tax, or attempt to defeat or evade tax". Count One alleged that, for the year 1946, the appellant filed a fraudulent joint income tax return for his wife and himself, understating their income tax by $11,730.98. Count Two made similar allegations regarding the appellant's separate return for 1947, charging an understatement of $2,237.47. Count Three dealt with the wife's tax for 1947, alleging that he filed a fraudulent return for her showing the tax due to be $2,317.97 less than the correct amount. In Count Four, it was alleged that the appellant's joint return for 1948, for himself and his wife, was fraudulently $488.52 less than the correct amount. Count Five alleged that the appellant fraudulently understated the joint income tax of his wife and himself for 1949 by $4,775.94.

The appellant waived a jury trial on May 13, 19 52, when the taking of testimony began. On May 14, 19 52, at the close of the appellee's case, the appellant moved for a judgment of acquittal. The trial was continued in order that briefs might be submitted and that the appellant's motion might be considered by the Court. On August 8, 19 52, the trial judge denied the motion for acquittal, and the appellee reopened its case in chief by putting on another witness. The appellant renewed his motion for acquittal, which was denied. The case was continued to September 5, 19 52, for final argument.

On June 13, 19 53, the trial judge filed a "memorandum and order" adjudging the appellant guilty on each of the five counts, and fixing July 3, 19 53, as the date for "judgment and sentence". On July 17, 19 53, the appellant filed a motion in arrest of judgment, alleging that the Court was "without jurisdiction of the offense and the defendant, in that the defendant has been deprived of a speedy trial in violation of the Sixth Amendment . . ." This motion was denied. On the same day, the Court sentenced the appellant to eighteen months' imprisonment and fined him $5,000 on Count One, and sentenced him to eighteen months' imprisonment on Count Two, the sentences to run concurrently. No sentence was imposed as to Count Three, and the appellant's motion for acquittal was granted as to Counts Four and Five.

In view of the appellant's argument, to be discussed hereafter, based upon the Sixth Amendment, the chronology of the trial has been given somewhat fully.

2. The Appellee's Evidence

It is hornbook law that even in a criminal case tried to the court, an appellate tribunal will consider the evidence most favorably to the prosecution and will resolve all reasonable intendments in support of the verdict or the judgment. ² In the instant case, however, our task is further simplified by the fact that the appellant put no witnesses upon the stand but presented his case in the form of certain stipulations that need not be rehearsed here.

The appellee's case, then, may be briefly summarized as follows:

From 1943 or 1944 to May, 1947, the appellant was a bouncer, floor man, and substitute manager of a gambling house in Stockton , California . We have already referred to some of his other activities.

His income tax returns for 1945 to 1949, inclusive, were prepared by Mrs. Eva M. McNabb, his employer's bookkeeper.

Chester R. Taynton, an Internal Revenue Agent, investigated the appellant's income tax liabilities. He asked for the appellant's books and records, but was given none. The appellant said that he kept no books. The Revenue Agent then attempted to assemble information with respect to the appellant's net worth. He found no evidence of any cash on hand at the end of 1945, but discovered that at the end of 1946 the appellant had cash on hand amounting to $23,247.25. The appellant's entire assets as of December 31, 19 45, totaled $10,525.00.

Taynton examined the public records, inquired at all local banks, and made an audit of the Capitola Liquor Store, in which the appellant had a one-half interest.

The Internal Revenue Agent testified that the appellant said "his personal living expenses ran around $60 a month, and the Bureau's records of taxes paid showed $166.76 in 1946, $143.74 in 1947, $804.73 in 1948, and $295 in 1949".

For the year 1946, the increase in net worth was $34,296.67; for 1947, it was $23,140.77; for 1948, the gain was $6,297.08; and for 1949, the increase was $20,190.78.

In his reply brief, the appellant challenges the appellee's statement "that appellant was well known as a gambler during the years involved". Says the appellant:

"Consider this bald statement in the light of the testimony of all the Government witnesses that he is not a gambler." (Italics is the appellant's)

The foregoing statement is grossly erroneous. Rosario Mandalari testified that he played cards with the appellant for money.

When Revenue Agent Taynton asked the chief of police of Stockton "if he could give me any information on Mike Campodonico, . . . he said, 'Mike Campodonico, oh, yes--a pimp and a gambler'."

Taynton asked the appellant "where he got all the money to buy all the assets when he hadn't reported that much income", and the latter replied that "he made it gambling"--that "he was a gambler".

[Tax Attorney's Testimony]

Wareham Seaman, a tax attorney, retained by the appellant, testified concerning a meeting held in his office on May 4, 19 50, at which Shirley S. Atkin, a Special Agent of the Intelligence Unit of the Bureau of Internal Revenue; Taynton, Seaman, and the appellant were present. At that conference the appellant made a sworn statement which, at a meeting held in Seaman's office on May 31, 19 50, the appellant refused to sign "because it did not represent the truth". Atkin requested that the appellant make another statement that would be the truth, but the appellant, according to Seaman, "stated that he would not make this statement, upon my advice".

During the cross-examination of Seaman, counsel for the appellant announced that the attorney-client privilege was being "waived completely".

Thereupon Seaman gave some illuminating testimony relative to the appellant's four separate and distinct explanations for "The entire increase in his assets for the years '46 to '49". The conflicting versions or "positions" were given to Seaman, his own lawyer:

1. "Well, as originally reported to me, and as stated in the statement of May 4, he stated that his income had been accumulated prior to [1943]. It had been accumulated from, as I said, gambling and prostitution, bootlegging . . . Going back, as I recall, as far as in the twenties. . . . That was his first position."

2. "As I recall, his next position was that he had accumulated all but $45,000, or approximately that, up until 1943, and that was from embezzled funds subsequent to '43; any increase since that was from embezzled funds."

3. "As I recall, his third position was that all of it had been accumulated from embezzled funds.

"Q. Not just the forty-five?

"A. Just the forty-five."

4. "I believe his final position on that was that the $40,000 had come from other than embezzled funds.

"Q. From what source?

"A. Gambling, from gambling.

"The Court. During what period?

"The Witness. From '43 on."

From the foregoing, it is clear that the appellant did not heed Mrs. McNabb's advice: "Never lie to your doctor or your attorney."

3. The Appellee Presented Substantial Evidence Of A Beginning Net Worth For The Appellant, As Well As Evidence Of His Assets And His Expenditures For 1946 And 1947

As we have seen the appellant kept no books. In such a situation the appellee had a right to resort to the net worth increase-expenditures method of arriving at the appellant's income tax liability. In Holland v. United States, 1954, 348 U. S. 121, 129 [54-2 USTC ¶9714], the Supreme Court, while recognizing the "pitfalls inherent in the net worth method", was careful to add that the "pitfalls" cannot be said to "foreclose its use."

"Evidence of unexplained funds or property in the hands of a taxpayer establishes a prima facie case of understatement of income. It is then incumbent on the defendant to overcome the logical inferences to be drawn from the facts proved." United States v. Hornstein, 7 Cir., 1949, 176 Fed. (2d) 217, 220 [49-2 USTC ¶9326].

In the instant case, the appellant has wholly failed "to overcome the inferences to be drawn from the facts proved."

The appellant relies heavily upon the case of Calderon v. United States, 9 Cir., 1953, 207 Fed. (2d) 377, 378 [53-2 USTC ¶9579], quoting therefrom at some length and declaring that it "alone is sufficient authority to reverse the case at bar." The Calderón case, however, was reversed by the Supreme Court on December 6, 19 54, 348 U. S. 160 [54-2 USTC ¶9712].

We have carefully examined the record relating to the appellant's assets and expenditures for the years in question, summarized above, and we find that the appellee's evidence relating to the beginning net worth and the increase in net worth supported the judgment of the trial court.

The appellee "is not required to prove a negative or to refute all possible speculation as to the source of the appellant's asserted funds." Gariepy v. United States , 6 Cir., 1951, 189 Fed. (2d) 459, 463 [51-1 USTC ¶9318], and cases cited. The Gariepy case is cited in an annotation in 97 L. Ed. 71.

Nor need the appellee "prove with mathematical certainty the precise, amount of unreported, taxable income." Jelaza v. United States , 4 Cir., 1950, 179 Fed. (2d) 202, 203 [50-1 USTC ¶9149], and cases cited.

The appellant is inconsistent in his statements as to whether the appellee is required to establish a possible or a probable source of the taxpayer's income under the present-worth system. On one page of his reply brief, the appellant says:

"It is significant that Counsel for the Government has failed to name one case dispensing with the requirement of a probable source of income, and has chosen instead to rely upon isolated statements in the above authorities cited, in which a possible source of income was established." [Italics supplied]

On the next page, however, the appellant relaxes his requirement to a possible source of income:

"It is submitted that had the Government known that the law requires the Government to establish a possible source of income, this prosecution would never have been undertaken." [Italics supplied]

Finally, in the very next paragraph, the appellant goes back to the "probable" test:

"It appears from the brief of the Government in this case that there is no substantial disagreement as to the requirement in a net worth case that: (1) A satisfactory beginning net worth must be established; and (2) that a lucrative business or calling must also be proven [sic], to establish a probable source of taxable income." [Italics supplied]

[Proof of a Likely Source]

Be that as it may, the correct rule is authoritatively laid down in Holland v. United States , supra, 348 U. S. at pages 137-138:

"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."

A careful scrutiny of the transcript in this case convinces us that the appellee has adduced adequate "proof of a likely source" from which the trial judge "could reasonably find that the net worth increases sprang." In the case of an admitted and notorious gambler the "likely source" would be winnings from gambling. And it is too well settled to require citation of authority that such winnings constitute taxable income.

In four decisions handed down by the Supreme Court on December 6, 19 54, lucid semaphores have been set up for the guidance of lower federal courts in the determination of income tax cases in which the taxpayer's non-existent or imperfect bookkeeping makes necessary a recourse to the present-worth method in arriving at his tax liability. In addition to the Calderón and Holland cases, already referred to, our highest tribunal has given us illuminating decisions in Friedberg v. United States, 348 U. S. 142 [54-2 USTC ¶9713], and in Smith v. United States, 348 U. S. 147 [54-2 USTC ¶9715]. The importance of these four cases is emphasized in a per curiam decision handed down by the Supreme Court itself on January 10, 19 55, appearing in 348 U. S. 904 [55-1 USTC ¶9139].

It is quite apparent that the appellant is not pleased with at least two of the foregoing decisions, since he devotes five pages of his supplemental brief to a categorical statement of their alleged "isolated apparently conflicting statements." In addition, the appellant labels as "Disturbingly incomprehensible" the statement in United States v. Calderón, supra, 348 U. S. , at page 165, that "we must search for independent evidence which will tend to establish the crime directly, without resort to the net worth method."

It is easily understandable that the appellant should be "disturbed" over Calderón. It damaged his argument considerably when, as we have seen, it reversed this Court's decision in that case--a decision upon which the appellant had relied so heavily that he cited or quoted from it five times in his briefs!

Be that as it may, those four decisions are now the law of the land. We believe that in the instant case the appellee has met the standards there laid down. There is in the record ample corroboration of the appellant's damaging admissions.

4. The Trial Court's Delay In Pronouncing Judgment Did Not Cause It To Lose Jurisdiction

The appellant specifies as error the lower court's denial of "appellant's motion in arrest of judgment upon the grounds that the Court had lost jurisdiction to pronounce judgment therein in that the appellant had been denied a speedy trial in violation of the Sixth Amendment to the Constitution of the United States ."

It is urged that "a year and two months from the beginning of a criminal trial lasting only twelve to fourteen hours, to the pronouncement of judgment, is utterly unfair and a denial of one's rights," etc.

Rule 48(b) of the Federal Rules of Criminal Procedure reads as follows:

"If there is unnecessary delay in presenting the charge to a grand jury or in filing an information against a defendant who has been held to answer to the district court, or if there is unnecessary delay in bringing a defendant to trial, the court may dismiss the indictment, information or complaint."

The appellant was indicted on November 26, 19 51, and was brought to trial on May 3, 19 52. That is not an inordinate delay.

The gravamen of the appellant's plaint, however, relates, as we have just said, to the lapse of time from the beginning of the trial to the pronouncement of judgment.

The appellant refers to four decisions as supporting his contention. Three of them are not in point: the delay occurred after a conviction by a jury or a plea of guilty. In the instant case, the delay occurred before the Court handed down its judgment of conviction. And even in two of those three cases, the convictions were affirmed. The fourth case, Pinkussohn v. United States, 7 Cir., 1937, 88 Fed. (2d) 70, 71, certiorari denied, 1937, 302 U. S. 702, was indeed tried to the Court, and the judgment was delayed for six months. But Pinkussohn does not aid the present appellant: the conviction was affirmed. The Circuit Court of Appeals did, however, deplore "the long delay that elapsed before the simple case with few or no legal questions involved, was disposed of."

In the instant case, it could hardly be said that there are "few or no legal questions involved," when the parties have filed five briefs in this Court and the Supreme Court has found it advisable to hand down four simultaneous decisions on the vexing subject of present worth alone.

Finally, the appellant does not deny that he did not demand a speedy trial, but contents himself with observing that--

"It certainly would have been an inappropriate act for the appellant to have brought mandamus to compel a Court to render its decision, especially so, since nearly all of the remarks of the Court in reference to the sufficiency of the evidence were favorable to the appellant."

If the appellant deemed it the better strategy not to press the trial court for a quick decision, he cannot now complain when the delayed judgment happens to have gone against him!

It is will settled in this Circuit that "The constitutional guaranty of a speedy trial is a personal right which may be waived by failure to assert it. Collins v. United States , 9 Cir., 157 Fed. (2d) 409." ³

We know of no Constitutional, statutory, or judicial pronouncement that forbids a busy court from taking ample time to ponder involved and troublesome questions of law and of fact before handing down a decision. Speedy justice does not mean hasty justice.

5. Conclusion

The appellee's agents made a painstaking effort to reconstruct the appellant's net worth increase and expenditures for the crucial years of 1946 and 1947. The means that they employed and the results at which they arrived have already been adumbrated herein. The minutiae of the investigations need not be detailed.

It was not necessary for the appellee to put upon the witness stand a parade of professional gamblers--or wise!--to affirm that on such and such a night they lost so many dollars to the appellant. His associates were not of the type that would volunteer information to the Government. Their reluctance, however, affords no reason why the appellant's responsibility for a loss to the federal fisc should go unwhipped.

The judgment is affirmed.

¹ GEN. 20:5.

² Pasadena Research Laboratories v. United States , 9 Cir., 1948, 169 Fed. (2d) 375, 380, certiorari denied, 335 U. S. 853-854, and Norwitt v. United States, 9 Cir., 1952, 195 Fed. (2d) 127, 134 [52-1 USTC ¶9252], certiorari denied, 344 U. S. 817.

³ Danziger v. United States , 9 Cir., 1947, 161 Fed. (2d) 299, 301, certiorari denied, 1947, 332 U. S. 769. See also Daniels v. United States, 9 Cir., 1927, 17 Fed. (2d) 339, 344, certiorari denied, 1927, 274 U. S. 744-745; Iva Ikuko Toguri D'Aquino v. United States, 9 Cir., 1951, 192 Fed. (2d) 338, 349-350, certiorari denied, 1952, 343 U. S. 935.

 

 

[55-1 USTC ¶9439] Arnold McGrew, Appellant v. United States of America , Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 15188, 222 F2d 458, May 13, 19 55

Appeal from the United States District Court for the Northern District of Georgia.

[1939 Code Sec. 145(b)--substantially unchanged in 1954 Code Sec. 7201]

Criminal prosecution: Net worth method: Preliminary questions.--On the authority of Holland v. U. S., the Appeals Court rejected defendant's contention that the Government did not make the preliminary proof that (1) the taxpayer had no books; or (2) refused to produce them; or (3) the books did not clearly reflect his income; and (4) the circumstances were such that the net worth method did reflect his income with reasonable accuracy and certainty.

Criminal prosecution: Willful intent: Sufficiency of evidence.--There was ample evidence for a finding by the jury that the discrepancy between income reported and income received was the result of a willful intent to evade the taxes.

Criminal prosecution: Function of jury.--The jury had the right to accept the Government's evidence in part and reject the claims of the defense in part.

Horace E. Richter, LaGrange , Ga. , M. Neil Andrews, Atlanta , Ga. , for appellant. James W. Dorsey, United States Attorney, Atlanta , Ga. , for appellee.

Before HUTCHESON, Chief Judge, HOLMES, Circuit Judge, and DAWKINS, District Judge.

PER CURIAM:

Charged in four counts with wilfully attempting, in violation of Sec. 145(b), 26 U. S. C., to defeat and evade a large part of his income taxes for the year 1946, involving more than two-thirds of the claimed deficiencies, and the years 1947, 1948, and 1949, each involving much smaller amounts, defendant was acquitted on Count One and convicted on Counts Two, Three and Four. Sentenced on each of the three counts to pay a fine of $7500 and to serve three years, the sentences to run concurrently, defendant, appealing therefrom is here attacking the judgment and sentence on three general grounds.

[Reasons for Appeal]

The first ground, under which most of his propositions are put forward and argued, presents the claim: that the government did not make the necessary preliminary proof that (1) the taxpayer had no books; or (2) refused to produced them; or (3) the books did not clearly reflect his income; and (4) the circumstances were such that the net worth method did reflect his income with reasonable accuracy and certainty; and that, therefore, an acquittal should have been directed.

Whatever may have been thought to be the state of the law as to these propositions before the decision in Holland v. United States, 348 U. S. 121 [54-2 USTC ¶9714], and the companion cases decided on the same day came down, the decisions in these cases have made it clear that if they ever were tenable, they are no longer so.

The second ground of attack is that the requirement of Spies v. United States, 317 U. S. 492 [43-1 USTC ¶9243], and cases decided under its authority, such as Jones v. United States, 164 Fed. (2d) 398 [47-2 USTC ¶9402], and Spriggs v. United States, 198 Fed. (2d) 782 [52-2 USTC ¶9454], that willfulness is an essential element of the offense and must be shown, was not met.

The third ground is the broad one, that the evidence was insufficient to convict the defendant of the offenses charged, and his motion for acquittal should have been granted.

[Willful Intent]

The first of these two grounds either misapprehends the nature and effect of the Spies and following decisions as to the proof required to show willfulness, or of the evidence adduced in this case. For it is clear, we think, that if the evidence of the government as to the defendant's net worth was accepted by the jury and the explanation tendered by the defense of the sources of that net worth was rejected by them, there was ample basis in the evidence for a finding by the jury, under the charge of the court to which no exception was taken, that the discrepancy between income reported and income received was the result of a willful intent to defeat and evade the taxes.

The third ground, which in its generality embraces the claimed inadequacy in the proof of willfulness, put forward as the second ground for reversal, and the inadequacy in the proof of an excess of income over that reported, is no better taken. It is true that the jury did reject the large claim of discrepancy between initial and concluding net worth claimed by the government for the year 1946, and that to the extent of the rejection the jury did sustain the defense that at the beginning of that year defendant did have a much larger net worth than the government was willing to accord to him as of that time. It is further true that this finding in defendant's favor should, and no doubt, as shown by the colloquy in the record at the time when the sentence was first imposed, will, when the final determination of the proper sentence is made, have its full weight with the court in determining both the extent and nature of the offending, and the over-all considerations which should enter into and influence the sentencing.

When it comes, however, to the much more modest claims of the later years, the jury, as it had a right to do under the evidence, accepted, at least in part, the government's evidence and, at least in part, rejected the claims of the defense. We are, therefore, unable to agree with defendant's contention that a verdict should have been directed in his favor and that the judgment must be reversed.

No error appearing, the judgment is AFFIRMED.

 

 

[55-1 USTC ¶9262]Frank Vloutis, Appellant v. United States of America , Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 14975, 219 F2d 782, March 2, 19 55

Appeal from the United States District Court for the Eastern District of Louisiana.

[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7202]

Tax evasion: Proof by net worth increase: Admissibility of evidence: Court's instructions.--Taxpayer was convicted on four counts charging tax evasion under 1939 Code Sec. 145(b). He assigned as principal errors in the trial as follows: (1) the erroneous use of the net worth theory when there was no showing that the partnership books and records were inadequate or false, (2) the inadmissibility or incompetency of certain evidence to prove his net worth, (3) the insufficiency of the evidence to substantiate the Government's calculation of his net worth, (4) the erroneous charge to the jury as to intent and the insufficiency of the evidence to prove intent, and (5) complaints from special charges given and others refused. All of such assignments of errors were overruled by the Appeals Court except (a) that certain evidence admitted in connection with one of the businesses was prejudicial to taxpayer's rights where there was a comparison of only gross receipts and net profits of two of taxpayer's businesses in an attempt to show an understatement of profits of one of them, (b) that offenses charged upon returns reported on the community property basis were not sufficiently supported, there being no evidence to connect taxpayer with the filing of his wife's return, and therefore he should have been acquitted on two counts charging him with "filing and causing to be filed" her returns, and (c) that one of the instructions to the jury was prejudicial although not ground for acquittal. Accordingly, taxpayer was entitled to a new trial on the remaining counts.

Douglas W. McGregor, Houston, Tex., and Rob ert Weinstein, Philip D. Rittenberg, Fred Bronfin and Henry F. Yoder, all of New Orleans, La., for appellant. George R. Blue, United States Attorney, M. Hepburn Many, Assistant United States Attorney, and G. Harrison Scott, all of New Orleans , La. , for appellee.

Before HUTCHESON, Chief Judge, BORAH, Circuit Judge, and DAWKINS, District Judge.

DAWKINS, District Judge:

This is an appeal from a conviction, fine and sentence to twelve months' imprisonment on each of four counts charging appellant with willful evasion of income taxes for the years 1944 and 1945 under Section 145(b) of the Internal Revenue Code. The United States undertook to prove its case by the use of the net worth method. Many of the issues raised here were discussed in one or more of the four decisions recently handed down by the Supreme Court ¹ wherein it laid down the broad principles governing the trial and review of cases based upon that theory. In Holland , after the Court had pointed out the dangers inherent in this method of proving a crime, it was said:

"While we cannot say that these pitfalls inherent in the net worth method foreclose its use, they do require the exercise of great care and restraint. The complexity of the problem is such that it cannot be met merely by the application of general rules. Cf. Universal Camera Corp. v. Labor Board, 340 U. S. 474, 489. Trial courts should approach these cases in full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute. Charges should be especially clear, including, in addition to the formal instructions, a summary of the nature of the net worth method, the assumptions on which it rests, and the inferences available both for and against the accused. Appellate courts should review the cases, bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation." 348 U. S. 129.

It is with this admonition in mind that we approach the present appeal.

[The Facts]

In order to focus the issues in their proper perspective, it is necessary to relate certain background facts, taken primarily from the testimony of one of the Internal Revenue agents. Appellant is an elderly man who reads and writes with difficulty, if at all. For many years he has been in the bar and restaurant business in one form or another in the City of New Orleans . During the time with which the Government's evidence was concerned, appellant was a partner in the Old Gem and the Kit Kat restaurants. He and one Spahos were equally interested in the Kit Kat. In the Old Gem partnership, one Baffes owned fifty percent, while appellant and Spahos each owned twenty-five percent. In 1945 appellant's interest in the Old Gem was increased to twenty-eight and one-half percent and that of Spahos was reduced to twenty-one and one-half percent; and appellant acquired an additional three percent interest in the Kit Kat from Spahos.

Appellant apparently had little or nothing to do with the internal operation of the Old Gem and was present at the establishment rarely, if at all, during its business hours. One of the Government witnesses testified it was his understanding and observation that appellant was only a "floor man" at the Kit Kat and apparently had little to do with the financial operations of the business. One Koningh was the bookkeeper for both businesses, and prepared the partnership as well as the individual tax returns for the partners. There is nothing in the record to show that appellant had anything to do with the preparation and keeping of the records of either business, and he presumably relied entirely upon the bookkeeper. He and his wife filed separate returns on the community property basis.

In June 1946 an Internal Revenue agent and an investigator for the Intelligence Unit called upon the bookkeeper for the stated purpose of checking the tax records of the two businesses. They were given "100% cooperation" by the bookkeeper and by the partners, with full and complete access to all of the records of both businesses. After a preliminary check of these records, during which they discovered certain discrepancies between the day-book record of receipts and the journal to which day-book entries were posted, they undertook an investigation for the purpose of discovering the assets owned by the three partners. It is indicated by the testimony of the agents that the partners were not informed of this phase of the investigation. On July 29, 19 46, the two investigators had appellant and his bookkeeper appear at the office of the Bureau, placed appellant under oath and propounded 117 questions concerning his financial affairs, all of which appellant attempted to answer in full co-operation with the investigators.

There followed another period of outside investigation and on August 16, appellant was again put under oath and asked 131 questions, one of which was: "How much, Mr. Vloutis, was your net worth at December 31, 19 41? Try to reflect and give me a figure as nearly as you think?" (Italics supplied.) Appellant's immediate response was: "I don't recall, I don't remember." Later, in response to another such question, he said, "I must have had about $40,000 or $50,000 at that time." Thereafter, in their questioning, the agents more or less assumed that appellant had bound himself to $40,000 cash on hand as of that date.

On the basis of the work of these two investigators, appellant's prior tax returns and his two unsigned statements, the Government prepared a net worth statement for appellant as of December 31, 19 41, through 1945. This statement showed annual increases in net worth (as calculated therein) well in excess of the income reported in 1944 and 1945. The indictment, trial and conviction followed.

Neither of the other partners was indicted, nor was the bookkeeper. The latter was used as a witness for the Government solely for the purpose of identifying certain documents introduced into evidence; and his cross-examination was restricted upon objection by the Government to matters relating only to the documents he identified--the theory being that "he is not the Government's witness." At this point, it may be observed that throughout the trial, the judge allowed the Government rather wide latitude in its order of proof and in the substance of its evidence, notwithoutstanding frequent and vigorous objections by appellant.

[Assignments of Error]

Appellant assigns fifteen specifications of error; but the view we take makes consideration of some unnecessary. The crucial specifications are condensed and stated as follows: (1) the erroneous use of the net worth theory when there was no showing that the partnership books and records were inadequate or false; (2) the inadmissibility or incompetency of certain evidence introduced by the Government to prove appellant's net worth; (3) the insufficiency of the evidence to substantiate the Government's calculation of appellant's net worth; (4) the erroneous and incomplete charge to the jury, especially as to intent, and the insufficiency of the evidence to prove intent; and (5) complaints arising from some special charges given and others refused. These errors were all raised by timely objections, by motions for acquittal and by an alternative motion for new trial.

[Use of Net Worth Theory]

I.

The record shows that in their investigation prior to the indictment, the revenue agents discovered certain errors or inconsistencies in the books of the two partnerships, which were apparently corrected upon request. During the trial these facts were revealed by Government witnesses; but on the whole, there was no evidence specifically showing material false or inadequate entries in the books. Relying upon Section 41 of the Internal Revenue Code and expressions in cases cited, ² appellant contends that such a showing is a condition precedent to the use of the net worth theory.

The Supreme Court, however, has resolved the precise question against this contention. In Holland, supra, it was held that Section 41 relates only to the method of accounting used by the taxpayer in his records and could not properly be construed to require proof of false or inadequate bookkeeping as a foundation for the use of the net worth theory. The Court said:

"To protect the revenue from those who do not 'render true accounts,' the Government must be free to use all legal evidence available to it in determining whether the story told by the taxpayer's books accurately reflects his financial history." 348 U. S. 132.

Whatever may have been the ruling of lower courts in previous cases involving this question, we are bound by the latest decision of the Supreme Court and must hold that there is no merit in appellant's contention.

[Admissibility of Evidence]

II.

For the purpose of organizing this opinion, several separately argued questions have been condensed into the second specification stated above. Since they all relate to the admissibility or competency of certain evidence, they will be discussed consecutively.

We have previously mentioned the two "question and answer" statements taken from appellant during the investigation. Although these statements were never signed by appellant, they were properly authenticated by a revenue agent who was present at the interviews and by the stenographer who recorded them. There was considerable discussion between counsel and the court during the trial over whether or not there had been discussions at the interviews which were not recorded by the stenographer; but appellant has abandoned any contentions he might have had in that connection. He does, however, assign two errors concerning these statements.

First, he argues that neither the statements nor the records which were obtained directly from appellant were admissible because he was not warned in advance that a criminal prosecution was imminent. He makes the same contention against the entire testimony of one of the investigating agents (Vivian) for the reason that his testimony was based upon information obtained from appellant's disclosures and records without advice of the latter's constitutional rights against self-incrimination.

Appellant admits, as he must under the evidence, that he was advised of his rights when the two formal statements were taken. However, he points out that the investigations were nearly complete at that time and that he, his partners and the bookkeeper had all "cooperated" fully before the warning was given. Since the evidence shows that this investigation was begun and conducted by agents from the fraud section of the Collector's office and from the Intelligence Unit, appellant argues that it was carried on from the beginning with the ultimate purpose of prosecution and he was, in effect, enticed into providing evidence against himself in ignorance of his rights.

No doubt, the taxpayer who is called upon to assist revenue agents in an investigation or audit of his income accounting is placed in a very difficult, if not impossible, captionposition--especially when a suspicion of fraud or evasion prompts the investigation. The taxpayer has the legal duty to keep records and file returns, and the Government has the right and the duty to check those records and returns. If he refuses to cooperate and remains silent, the taxpayer runs the risk of having incorrect inferences drawn from whatever facts the agents discover; and his attitude certainly does not lessen the suspicion. On the other hand, if he cooperates and converses freely with skilled investigators, he may be, and usually is, furnishing evidence for use against himself in a subsequent criminal prosecution. However, this is not to say that there is upon the Government an affirmative duty to warn a taxpayer at the beginning of an investigation, the breach of which would render inadmissible any evidence so obtained. In Montgomery v. United States , 203 Fed. (2d) 887 [53-1 USTC ¶9336], we held that such evidence was admissible even where the agents specifically told the taxpayer they were making a routine check in a purely civil matter. We said:

"We do not think the circumstances under which the statements of the defendant and of his wife, and the cancelled checks and documents, were obtained were sufficient of themselves to require that that evidence be excluded on the ground of being involuntary as a matter of law, or to require that the Government's Exhibit No. 20 based in part upon such testimony be not admitted in evidence. All of those circumstances were matters which went to the weight or credibility of the testimony thus obtained."

See also Smith v. United States , supra, note 1; and Sasser v. United States , supra, note 2.

The other contention against the admissibility of appellant's statements is based upon the argument that there was no independent evidence establishing the corpus delicti. It therefore raises a question as to the sufficiency of the evidence to corroborate portions of the statements and will be discussed later.

[Bank Deposits]

Appellant also objected to the Government's evidence concerning his bank deposits, withdrawals and year-end balances for certain periods during the prosecution years and prior thereto. His argument is that such evidence was inadmissible because it was an attempt to use "the bank deposit theory" which cannot be employed in a prosecution based upon the net worth theory. The principal contention here is that the Government had previously stated it could not produce evidence of other sources of income than the two partnerships in which appellant was interested, and that it attempted to imply other sources by resorting to bank deposits as proof of income greater than that reported. We are convinced that the Government here was not attempting to use two separate theories for the calculation of appellant's actual income. Most of the references to bank transactions and balances during the period covered by the net worth computations properly formed a part of the Government's proof in attempting to build up and substantiate its calculations, or to indicate certain discrepancies in the books of one of the businesses. We find nothing improper in the admission of such evidence where it clearly relates to and forms a part of the factual ingredients of the Government's case and has probative value; indeed, the proper revelation of appellant's financial history and the computation of his worth required that all financial transactions be checked, including banking transactions. However, some of the Government's evidence had no relation to this permissible inquiry. By two witnesses, whose testimony on the subject covers several pages in the record, the Government disclosed the year-end balances of appellant's (and his wife's) bank accounts for each year all the way back to 1920. In argument, counsel seek to justify the admission of such evidence with the contention that the accounts were "analyzed" and presented to the jury for the purpose of showing available funds were slim during the period when appellant implied he was saving his store of cash. We cannot agree. In the first place, we are unable to perceive the probative value of bank records generally to disprove the accumulation of cash kept in outside places. More important, and dispositive of the issue, it is our opinion that the year-end balance of a bank account, standing alone, is a fact which has absolutely no necessary connection with the amount of money available, or even deposited, during the year. When the Government used only that figure for the years prior to the prosecution period and when the balances for the consecutive years were announced at length in rapid succession, it forcefully presented to the jury meaningless evidence with the expressed purpose of impressing the jurors with the belief there was relatively little money available for accumulation. Such evidence was not admissible in that form and was clearly prejudicial to appellant.

[Use of Returns]

Appellant further objected to the introduction of his income tax returns for the years 1942 and 1943 and of a Form 899, which was a compilation or summary of his tax history on file with the Collector. He argues that these documents are admissible only to attack the credibility of a taxpayer who takes the stand in his own defense, not to prove net worth. In addition, he contends that since Form 899 is only a summary of information contained in the returns of a taxpayer, it should not have been admitted without supporting proof to establish what connection appellant had with the returns it purported to summarize.

Since one of the essential steps in establishing the beginning net worth of a taxpayer is to determine as nearly as possible the amount of undisclosed cash he may have had on hand, the courts have consistently allowed evidence of prior tax history as an element in the proof of the taxpayer's net worth. Holland v. United States, supra; Sasser v. United States, supra; Leeby v. United States, 8 Cir., 192 F. 2d 331 [51-2 USTC ¶9497]; Schuermann v. United States, 8 Cir., 174 F. 2d 397 [49-1 USTC ¶9281]. The very best evidence of prior tax history is the returns filed by the taxpayer himself. Appellant's objection to their use therefore was properly overruled.

The objection to Form 899, however, raises a more difficult problem. The agent who identified this form stated that all of appellant's original returns (other than those produced) had been destroyed. He related the procedure employed in the office of the Collector as follows: When a return is filed an index card is made of that return and assessment records are developed. Unless the returns are actively under investigation, they are destroyed; and later the index cards are microfilmed and disposed of. Microfilms running back to the year 1916 are kept permanently. In preparing the Form 899, an agent reviews the microfilm to determine the account number of the taxpayer's return. He then goes to the assessment records and determines what tax was assessed and the date. He prepares Form 899 as a summary of the years in which returns were filed and the amount of tax assessed for such years. The witness testified that this information was contained on the Forms 899 for appellant and his wife which were introduced in evidence.

In effect, then, the Government introduced a document which represents to the jury figures and information written down by a person other than the witness and taken from records which themselves were taken from the original return. While such evidence is not as free from doubt as would be the returns themselves, it appears that they are prepared from the official records in the Collector's office and pursuant to the regular order of business in that office. Manifestly, such a system was developed to solve the tremendous problem of handling the millions of returns filed each year and we think that the procedure used is sufficient to protect a defendant from any substantial danger of misrepresentation. While we have found no cases in which the use of Form 899 as such was mentioned, it appears that the courts have allowed agents testifying as witnesses to summarize their findings from records on file in the Collector's office. See Leeby v. United States , supra; and Schuermann v. United States , supra. Under the circumstances, we cannot say that the trial court abused his discretion in admitting the Forms 899 into evidence.

[Separate Businesses Compared]

The last specification dealing with admissibility of evidence relates to the testimony of the Government witness Roussel, wherein he compared the profits of the two businesses in which appellant was interested. In response to direct questions, Roussel took the partnership returns filed for each business for the years 1942 through 1945 and made an "analysis". He stated only gross receipts and the reported net profit for each business for each year, and specifically called attention to the fact that in each year the gross receipts of the Kit Kat exceeded those of the Old Gem but that the Kit Kat reported less net profit than the Old Gem. Appellant vigorously objected that the testimony was irrelevant and prejudicial. The Government states here that the evidence was offered to show "the possibility or likelihood" that all of appellant's income was not being reported, and argues that this comparison was only an additional item of circumstantial evidence in its chain of proof which was properly admitted.

The Old Gem was primarily a saloon or lounge, but also had an oyster and snack or short-order service. The Kit Kat was primarily a restaurant in which meals were served, although there was a bar and drinks were served in the dining room. Though they had some common characteristics and common partners, they were in reality different types of business. Before any comparison of their net profits could even approach significance, there would have to be detailed evidence that they had similar inventory requirements, similar overhead expenses, similar operating costs--in short, competent evidence to show that the percentage of net profit from gross receipts in each business should be approximately the same. Here there was only a comparison of gross receipts and net profits which was completely meaningless. The testimony was clearly irrelevant and was offered for the stated purpose of implying intentional understatement of the Kit Kat profits. In a net worth prosecution the evidence is almost wholly circumstantial, and the jury must necessarily draw inferences therefrom in order to reach any conclusion. To allow evidence which can support only a meaningless conclusion, such as the comparison allowed here, clearly prejudices the rights of the defendant.

[Sufficiency of Evidence]

III.

Appellant's contentions as to the sufficiency of the evidence are raised by four specifications of error which were briefed and argued separately. He contends: (1) that there was not sufficient corroboration of his extrajudicial statements to prove the corpus delicti; (2) that since the offenses charged are based upon returns reported on the community property basis, the evidence is insufficient because it does not reveal the net worth of his wife; (3) that the testimony of the agent Roussel was made up almost entirely of the witness' conclusions not supported by evidentiary facts; (4) generally, that the facts proved by the Government and contained in appellant's statements do not support the net worth calculations made by the Government. In connection with the second point just listed, appellant argues that there is no proof whatsoever that he had anything to do with the returns filed by Mrs. Vloutis and he should have been acquitted on the two counts which charged him with "filing and causing to be filed" her returns.

Dealing first with the latter point, we find ourselves in agreement with the appellant--that there is no evidence to connect him with the filing of his wife's return. There is evidence to the effect that appellant's bookkeeper prepared the returns from the information furnished by appellant and from the books kept by the two partnerships; and, to that extent, such evidence shows appellant participated in or "caused" the preparation of his wife's return. However, we think this point is controlled by our decision in Benham v. United States, 215 F. 2d 472 [54-2 USTC ¶9574], where we said:

"While the returns show on their face that the joint community income of the husband and wife was determined and divided in half for tax purposes, that fact alone does not suffice to establish that the husband either filed or caused to be filed the wife's separate return. That return was not signed by the husband, but was signed by the wife and by the accountant who prepared it, and the evidence is entirely consistent with the theory that they were the only ones responsible for its filing. The husband's erroneous records may have accounted for the errors in the wife's return, but the crime was not complete until the return was filed, and to be guilty under the fourth count the husband must either have filed his wife's return or have caused it to be filed. There is no evidence that he did either."

Cf. Rubenstein v. United States , 10 Cir., 214 F. 2d 667 [54-2 USTC ¶9545].

Appellant's motions for acquittal should have been granted as to counts two and four.

The other contentions all relate to the sufficiency of the evidence to establish the validity of the Government's net worth calculations and thereby to prove the offenses charged beyond a reasonable doubt. Though we have already found reversible error on other points, it is necessary to pass upon these questions in order to determine whether appellant is entitled to a new trial or acquittal. Of course, the calculations made in these cases are only as sound as the investigation is complete, because the method assumes that the annual increases in net worth are attributable to taxable income received during the year. If the taxpayer had had non-taxable income (from loans, gifts, bequests or tax-free interest for example) with which he could have acquired the assets, the premise upon which the calculations are based falls; and the calculations are meaningless. Likewise, since the prosecution is limited to the specific period charged in the indictment, the foundation of the structure collapses if the taxpayer had on hand at the beginning of the period sufficient undisclosed funds to acquire the assets listed, whatever the source of those funds. Because the prosecution is based upon assumptions and is proved almost entirely by circumstantial evidence, the courts must closely study the evidence to see that the Government has been fair in its presentation of the evidence and to be certain that the jury would be justified in concluding the underlying assumption sound.

[Essential Proofs]

In doing so, we must bear in mind the dangers involved to the taxpayer, which are ably summarized by the Supreme Court in Holland ; but we are also bound by the teachings of the decisions in Holland and the three companion cases which lay down the basic tests against which the Government's evidence is to be measured. The Government must prove every element of the crime beyond a reasonable doubt; but if it does so, the defendant "remains quiet at his peril." The Government must investigate all relevant leads furnished by the taxpayer which might explain his acquisition of assets; but it is not required to negate every possible source of non-taxable income. Any statements by the accused used in the prosecution must be corroborated; but corroboration may be found in "independent evidence to bolster the confession itself" or in independent evidence concerning the accused's conduct "during the prosecution period, which tends to establish the crime of tax evasion without resort to the net worth computations." Smith v. United States, supra.

Here, according to the testimony of Government witnesses, investigators determined the amount of money appellant had reported as income in all the prior years by checking his tax history back to 1918. They checked the records of all banks and investment brokers in New Orleans and vicinity as well as the mortgage, conveyance and court records, for the purpose of determining all of the assets appellant and his wife had of record on December 31, 19 43. They then took the two previously mentioned statements from appellant, who told them he had no money or property outside New Orleans . When appellant told them he must have had around $40,000 in cash on December 31, 19 41, they went back to that date in making their calculations.

They found records showing savings and checking accounts in three banks, mortgage loans made by appellant to others in varying amounts, purchases of stocks and bonds, real estate transactions and life insurance purchases. The data produced by this investigation were then "analyzed" and a composite net worth statement was prepared, purporting to show appellant's net worth on December 31 of each year, 1941 through 1945. The statement showed no unrecorded cash at the beginning of any year, but listed as assets all bank balances (including appellant's virile share of the partnership balances), mortgage notes, appellant's portion of the partnership inventories, real estate and the cash surrender values of life insurance policies. No liabilities were shown except a reserve for depreciation. Annual increases in the net worth resulted, to which were added income taxes and life insurance premiums paid, and from which were deducted non-taxable interest, increase in cash surrender value of insurance, increase in inventories and the standard deduction. The resulting figure was shown as the "corrected net income" which was substantially greater than "income reported".

Appellant's complaints against this evidence all relate to the failure of the Government to give him credit for any undisclosed cash on hand at the beginning of the prosecution period. While he has presented them separately and more elaborately, we interpret his arguments, in effect, to be: since there was no evidence to show any separate net worth of Mrs. Vloutis (or to negative its existence), and since the evidence clearly shows that there were leads furnished to the Government pointing to cash on hand at the beginning of the period, Roussel's testimony that there was and could have been no such cash was clearly an erroneous conclusion which invaded the province of the jury; therefore, there was not sufficient independent evidence to corroborate appellant's unsigned statement referring to $40,000 as of December 31, 19 41; hence it follows that without the proper foundation of a substantiated beginning net worth, the Government's evidence does not prove the offenses charged beyond a reasonable doubt.

It is true that the Government agents did not interview Mrs. Vloutis, as they probably should have done to get a complete picture. However, the record shows that their investigation was conducted and data sought in the names of both appellant and his wife, none of which revealed any evidence of property owned by Mrs. Vloutis other than that included in the computation. Further, we think the summary of her tax history negatives the possibility of her having accumulated any substantial separate estate, especially when coupled with appellant's disclosures in his statement. He told the agents that he had access to no funds other than from his businesses, investments and safety deposit box; and he stated that not even his wife knew how much money was in the box. We think this evidence was sufficient to substantiate the refusal to include any other assets as to net worth of Mrs. Vloutis, and to require appellant to bring forth any evidence to the contrary, including his wife's testimony. See Ford v. United States, 5 Cir., 210 F. 2d 313 [54-1 USTC ¶9233].

[Attack on Evidence]

In attacking the testimony of the witness Roussel, appellant refers to the opinion of this Court in Demetree v. United States, 207 F. 2d 892 [53-2 USTC ¶9646], wherein we discussed at some length the dangers involved in allowing such testimony; and we think that the instant case illustrates the type of situation described there. The background has been stated, but we should add here that the investigation upon which Roussel based his testimony was conducted primarily by agent Vivian from the Collector's office and agent Cooney from the Intelligence Unit. Cooney died prior to the trial; and although Vivian testified, he admitted facts to indicate he was somewhat inexperienced at the time he was working on the case and to show he had resigned about a year later to enter the insurance business. Roussel, who had not been involved in the investigation itself, testified as an "expert" who had either prepared or was explaining the technical bases for the net worth computations. Under vigorous cross examination, he admitted he did not know how much cash appellant had at the beginning of the prosecution period, but stated he had not shown any cash because he had no evidence to reveal any and didn't believe appellant had any. He went further to say that appellant had told the investigators of $40,000 cash as of December 31, 19 41, and even if there had been such a fund, it would have been spent for the assets acquired up to December 31, 19 43 (the beginning date). Appellant urges that it is upon these "conclusions" and his own statement about the $40,000 that the verdict must rest--that by ignoring other evidence and stating these "conclusions", Roussel testified to the ultimate fact sought by the Government.

In Friedberg v. United States, supra, Note 1, the Supreme Court passed upon a point similarly stated and held that the statements by the witness were not conclusions, for the reason that the witness was "upon petitioner's insistence, 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 re-direct was only that which had already been introduced at the trial." 348 U. S. 145. Here, however, there is serious doubt that the point can be so easily resolved. It should be noted that the investigators never did ask appellant how much cash he had on December 31, 19 43. The Government's own evidence showed the following purchases or transactions by appellant: November 15, 19 43, bonds in the amount of $5,571.26; December 14, 19 43, bonds in the amount of $5,000.00; January 1, 19 44 (the very first day of the prosecution period), bonds in the amount of $5,610.92; January 10, 19 44, loan to a friend of $3,000.00; during the month of January, 1944, United States bonds in the amount of $3,825.00; February 15, 19 44, stock in the amount of $1,800.00; April 13, 19 44, bonds in the amount of $6,152.30. The records of the investment company (which the Government examined) and the testimony of one of its brokers (whom the Government interviewed) showed that of the amounts listed, totaling $30,959.48, at least $23,291.48 was paid in cash. The investment broker further testified that in December, 1943, and again early in 1944, he went with appellant to the latter's bank box; that he saw therein several large brown envelopes; that appellant opened two envelopes on each occasion and extracted cash with which to buy stocks or bonds.

Certainly, then, there was evidence to indicate to the Government that appellant had some undisclosed cash on hand as of December 31, 19 43. How much he had was, of course, a fact to which only he could testify; but in the face of such evidence as the Government uncovered in its investigation, we think portions of Roussel's testimony were impermissible conclusions which invaded the province of the jury.

This is not to say, however, that appellant should have been acquitted on counts one and three as a matter of law. On the contrary, we think there was sufficient evidence without the inadmissible portions of Roussel's testimony which, if believed, would support a conclusion that appellant materially understated his income during the prosecution period. Even though the evidence clearly shows there was some cash on hand at the beginning of the period, it was still for the jury to determine whether there was enough to account for the sizeable increases in net worth.

It is necessary to comment only briefly on the question of corroboration of appellant's statements. While we are doubtful that appellant intended to bind himself to the figure of $40,000 in his statements, or even that he understood himself to be so bound, we think there is sufficient independent evidence to constitute corroboration. Smith v. United States, supra; United States v. Calderon, supra. The circumstances under which the statements were taken, and the weight of the disclosures made therein were matters for the jury's consideration.

[Instructions to the Jury]

IV.

The attack on the charge to the jury is centered around those portions thereof which related to the question of intent, and appellant complains chiefly about expressions which have been discussed and disapproved in previous cases. See Spies v. United States, 317 U. S. 492 [43-1 USTC ¶9243]; Hartman v. United States, 8 Cir., 215 F. 2d 386 [54-2 USTC ¶9522]; Berkovitz v. United States, 5 Cir., 213 F. 2d 468 [54-1 USTC ¶9425]; Wardlaw v. United States, 5 Circuit, 203 F. 2d 884 [53-1 USTC ¶9335]. Particular emphasis is placed upon remarks such as: "x x x If the defendant knew that he had enjoyed an income in excess of that reported and that he ought to pay the tax thereon, obviously his failure so to do was willful and for an evil purpose, and the purpose was evil in that he wanted to escape and evade a tax which he knew he was obligated to pay." ³ (Italics supplied); and "x x x It would present a somewhat startling situation if the defendant, charged by law with the duty of filing a return, could sign and file a false return made to defraud the Government and escape punishment by disclaiming knowledge of that which he has sponsored. x x x he must be held to know that which it is his duty to know, and which he solemnly promulgated; x x x." ⁴

[Intent]

While we are of the opinion that the charge as a whole was so worded as to lessen the effect of the quoted remarks, yet we are constrained to hold their inclusion to be error for the reasons discussed in the cited cases. We realize it is difficult to construct a sound charge on the question of intent in such cases as this, where the specific intent must be inferred from circumstantial evidence of conduct, for it must give the Government full benefit of all such evidence and at the same time make clear to the jury the distinction between filing a false return and the specific intent to evade tax. Still, that distinction must be made, as pointed out in Spies v. United States , supra; and the inclusion of unequivocal remarks which amount to presumptions against the taxpayer must be avoided. If the evidence discloses circumstances from which honest mistake can be inferred as well as willful evasion, the charge should be expressed in such a manner as to make it clear that the jury is free to determine the question of intent either way in the light of those circumstances. We think there were such circumstances here and that the quoted remarks were prejudicial to appellant's chances of having the jury conclude he was ignorant of any understatement and therefore free of the specific intent required.

However, we do think there was ample evidence to support the jury's contrary conclusion had the matter been submitted under proper instructions. They could have been unwilling to believe appellant was or could have been as ignorant of his financial affairs as he implied, and there was plenty of evidence from which the necessary intent could be inferred. Appellant was not entitled to acquittal on this ground.

Otherwise, we think the charge considered as a whole was sufficient properly to present all the issues to the jury. Nonetheless, in view of the dangers involved in this type of prosecution and the mandate previously quoted from the opinion of the Supreme Court in Holland, we are constrained to suggest, for the guidance of the trial court, that there should be included in the charge a more comprehensive and unified "summary of the nature of the net worth method, the assumptions on which it rests, and the inferences available both for and against the accused."

V.

Appellant also contends that the trial judge improperly granted seven special charges requested by the Government and erroneously modified one charge requested by him. Without lengthy quotation, it is sufficient to state that while there is some repetition, we find no reversible error in the action attacked.

For the reasons assigned, the conviction is reversed and the matter is remanded, with instructions to grant appellant's motion for acquittal on counts two and four and his motion for a new trial on counts one and three.

REVERSED AND REMANDED.

¹ 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].

² Among such cases are Bryan v. Commissioner, 5 Cir., 209 Fed. (2d) 822 [54-1 USTC ¶9189], and Sasser v. United States, 5 Cir., 208 Fed. (2d) 535 [54-1 USTC ¶9118].

³ This is similar to charges found to be erroneous in Wardlaw and Berkovitz, cited above.

⁴ This statement was contained in a special charge granted at the request of the Government, which was attempting to nullify appellant's implied defense that he was not familiar with the financial affairs of the two partnerships and relied wholly upon his partners and the bookkeeper. It is therefore similar in meaning and effect to charges declared erroneous in Berkovitz and Hartman, cited above.

 

 

[55-1 USTC ¶9169]C. A. Dupree, Appellant v. United States of America , Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 14659, 218 F2d 781, January 20, 19 55

Appeal from the United States District Court for the Western District of Texas.

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

Criminal prosecution for fraud: Proof of expenditures in excess of available funds.--A conviction for tax evasion, based on proof that the taxpayer's expenditures for the years in question exceeded the funds that were available to him, was reversed for failure of the Government to establish the amount of available funds at the beginning of each of the years in question, 1946-1949, to establish available funds as of January 1, 19 40, the year from which it sought to construct its comparison between available funds and expenditures, and to exclude by affirmative evidence sources of available funds which were nontaxable. Furthermore, the instructions to the jury improperly presented the theory of proof. It is not necessary for the Government to prove that the taxpayer's books and records are inadequate, however, before it can offer proof of available funds and expenditures.

John D. Cofer, Austin, Tex. G. Hume Cofer, Austin , Tex. , for appellant. Bradford F. Miller, Assistant United States Attorney, San Antonio, Tex., C. F. Herring, United States Attorney, San Antonio, Tex., for appellee.

Before HOLMES and TUTTLE, Circuit Judges, and ALLRED, District Judge.

TUTTLE, Circuit Judge:

This is an appeal from a conviction of the accused below in an income tax fraud case in which the government based its prosecution on circumstantial evidence which it considered met the standards required to make out a case on the available funds and expenditure method of proof. Appellant complains of error in the charge of the trial court, in the lack of sufficient evidence of available assets at the starting point, and in the rejection of evidence tendered by him to show absence of intent to do wrong.

The accused was indicted, tried and convicted on six counts under 26 U. S. C. A. 145(b) of wilfully filing false and fraudulent income tax returns for the years 1946, 1947, 1948 and 1949. In the years 1948 and 1949 they were joint returns filed by the accused and his wife; in 1946 and 1947 the accused is charged with having filed false returns for himself and separate returns for his wife.

The government showed discrepancies in the reporting of income from interest in small amounts by comparison of appellant's returns with records of the bank that made the collection for him, but the principal case relied upon by the government was that during the years in question the accused's expenditures greatly exceeded the funds that were available to him, taking into consideration his known assets at the beginning of each year.

We have delayed decision of the appeal until we could have the benefit of the opinions of the Supreme Court in the four cases decided December 6, 19 54. Holland v. United States, 23 L. W. 4024 [54-2 USTC ¶9714]; Friedberg v. United States, 23 L. W. 4032 [54-2 USTC ¶9713]; Smith v. United States, 23 L. W. 4020 [54-2 USTC ¶9715]; United States v. Calderon, 23 L. W. 4029 [54-2 USTC ¶9712].

[Supreme Court Decisions]

Although the four cases just decided by the Supreme Court involved prosecution on the increase in net worth method, much of what is said there is applicable to a prosecution in which the Government undertakes to prove that the taxpayer knowingly and willfully attempted to defeat and evade a large part of his income tax by showing that expenditures during the prosecution years in question exceeded the taxpayer's available funds.

We consider equally applicable to this type of case the observation by the Supreme Court in the Holland case, supra:

"The net worth method, it seems, has evolved from the final volley to the first shot in the Government's battle for revenue, and its use in the ordinary income-bracket cases greatly increases the chances of error."

We also consider equally applicable to a case like the one at bar the mandate of the Supreme Court in the same case stated as follows:

"While we cannot say that these pitfalls inherent in the net worth method foreclose its use, they do require the exercise of great care and restraint. The complexity of the problem is such that it cannot be met merely by the application of general rules. Cf. Universal Camera Corp. v. Labor Board, 340 U. S. 474, 489. Trial courts should approach these cases in the full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute. Charges should be especially clear, including, in addition to the formal instructions, a summary of the nature of the net worth method, the assumptions on which it rests, and the inferences available both for and against the accused. Appellate courts should review the cases bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation."

["Available Funds"]

The need for care in defining the terms and expounding the theory of this method of computation is clearly borne out by an analysis of the proof offered in this case. The words "available funds" are words that have an ordinary meaning and when used in relation to a computation to show that more money was spent than was "available" it would seem that it would require a listing of all the assets of the taxpayer at the beginning of the period. Here, however, the words "available funds" were used in three different senses--by Government counsel, by the Government's expert witness, whose computations were admitted in evidence, and by the Court.

Government counsel asked the witness if he had computed an opening net worth for 1940--five years before the prosecution years. The witness answered that he had, based on questioning the accused, and he itemized assets specified by the accused totaling approximately $49,500, which he identified, and then added that the accused stated that he also had "bank accounts" and a piece of property at 830 Arthur Street, Houston, Texas, to which he assigned no cost or value. He also said that at his first interview with the accused when he obtained this information, the accused also told him that he had accumulated cash savings of approximately $70,000, later stated by him to be from $65,000 to $80,000.

The Government sought to commence its computation of excess of expenditures over available funds by starting January 1, 19 40. In spite of the testimony as to these available assets as of January 1, 19 40, the Government's computations which were introduced in evidence did not include a single dollar of the listed items totalling some $49,500 or of the claimed cash accumulations.

In explanation of this computation the Government's witness testified that in making up his entries for "available funds" he used the term in the sense of "reported income" per tax returns. Thus the sources that were available to the taxpayer on January 1, 19 40, from which he could make expenditures subsequent to January 1, 19 40, and which were not disclosed in his report of income in his successive tax returns, were apparently ignored. A careful analysis of the computation does show that "available funds per return" were adjusted by adding a small withdrawal of bank balances under the heading "From Decrease in Bank Accounts." It is probable that other slight adjustments were made that give some effect to a small part of the taxpayer's opening net worth or available funds in the sense ordinarily used, but such computations as were testified to and as were included in the Government's principal exhibit were highly confusing to anyone not familiar with the technical use of the terminology employed by the Government's witness. For example, the witness listed the small bank balance increase of the accused amounting to $373.76, as well as a small increase of $1.82 in his wife's account, under the heading of "Expenditures" for 1940, instead of listing them under "available funds." In the same manner he listed a mortgage of $1205 owned by Dupree as an "expenditure." The witness also included as "expenditures" all increases in bank accounts--a very substantial item during the first five year period. On careful analysis of the Government's method of proof, this treatment of increase in bank accounts can be understood but the treatment of items in the oral testimony before the jury and in the Government's written computation introduced as its principal documentary proof of its case under terminology quite the opposite of the usual meaning of the terms employed, places on the trial court an unusual burden to clarify the issues, as pointed out by the Holland case, supra.

Having discussed some of the problems presented to the trial court and to the accused by the Government's method of developing its case, we now turn to the appellee's contentions that these problems were solved incorrectly and to his prejudice.

[Elements of Proof]

The first element that must be established in this type of prosecution is what funds are available to the taxpayer at the opening date of the prosecution year. In this respect it is similar to a so-called "net worth" case. It there is no established figure showing the source from which expenditures during the year can be made, or the complete lack of such a source, then there is no relevance to proof of expenditures during the year, no matter how large they may be. See Bryan v. United States , 5th Cir., 175 Fed. (2d) 223 [49-1 USTC ¶9322].

The second element that must be shown is the "available funds" acquired during the year, as disclosed on the income tax return filed for the year, since "expenditures" matching such funds indicate only what would be expected of a taxpayer who filed a correct return.

In order to prove a failure to report the full amount of income by the use of this particular method, the Government must then show "expenditures" during the year in excess of the two items mentioned above, i. e., available funds at the beginning of the year and funds becoming available during the year and which were reported on the tax return.

The Government has still a further burden in this type of case. It is elementary that there are sources of funds that make their receipt nontaxable to the recipient. The Government, in proving its prima facie case must therefore exclude such sources of available funds by affirmative evidence.

The trial court below properly charged that each prosecution year must stand alone, and that the Government must prove opening available funds for each year; for, obviously in a prosecution for the year 1946, there would be a complete failure of proof unless the excess expenditures shown were shown to have come from income received during 1946 instead of being expenditures in 1946 of accumulations from prior years, or even if unreported income for 1945 or prior years.

Recognizing fully, as we do, the difficulty of carrying the burden of proving the elements of such a case, it is still our duty to test the evidence on which this case was permitted to go to the jury over the objection of the defendant against the requirements here stated. In applying this test we find that the Government did not establish the first element of this computation. It did not establish the opening available funds as of January 1, 19 46; nor did it establish this figure as to any of the subsequent years.

The Government did not even establish available funds as of January 1, 19 40, the year from which it sought to construct its comparison between available funds and expenditures. The Government's brief says: "The best summarization of the evidence in the case is found in Government Exhibits 46, 47 and 52." These exhibits are headed respectively: "46 (P. 1) Computation of Net Available Funds as Reflected by the Income Tax Returns Filed by Clarence A. and Anna Dupree During the Years 1940 Through 1945; (P. 2) Analysis of Expenditures as Compared to Available Funds (1940-45); 47 (P. 1) Computation of the Available Funds as Reflected by the Income Tax Returns Filed by Clarence A. and Anna Dupree During the Years 1946 Through 1949; (P. 4) Analysis of Expenditures as Compared to Available Funds (1946-1949); 52 Computation of the Excess of Expenditures Over Available Funds 1940-1949."

Not a single dollar is shown as of January 1, 19 40 on this exhibit as available funds as such. By a careful study of the testimony and of the exhibits it is apparent that, under the heading "Available Funds," sub-heading "Decrease in Bank Accounts,--San Jacinto Natl. Bank," a bank balance of $378.91 is shown. This was on hand January 1, 19 40. Also, under the heading "Expenditures" and sub-hearing "Increase to Bank Accounts--City National Bank-checking," a bank balance of $363.76 is entered, and under Union National Bank $1.82 is entered, and that these balances were on hand on January 1, 19 40. So, too there is entered as an "Expenditure" in 1940 under the heading. "Net Mortgage Increase" $1205. From the testimony of the witness Patterson it is clear that this item was on hand on January 1, 19 40. As well as we have been able to ascertain from a careful analysis of the record these are the only assets owned by the defendant or his wife that are given effect in setting up their initial available funds, and some of these are shown as "Expenditures" on the Government's exhibit instead of as "Available funds." To be sure, when the total of expenditures is arrived at in this same exhibit for the years 1940-1945, these figures are subtracted rather than being added to the entries of the other years, but a more confusing method of showing opening available funds would be hard to devise.

[Proof of Absence of Other Funds]

The principal lack of the Government's proof, however, is that it does not purport to exclude all other available funds. This is merely proof, confusingly presented, that on January 1st the Duprees did have available funds in the amount of $363.76 in one bank, $1.82 in another and $378.91 in another, and one mortgage owned by them in the face amount of $1205 on January 1, 19 40.

The only other evidence of the absence of other assets owned by the taxpayer on January 1, 19 40, is the testimony of the same Government witness, Gamel, who had been a special agent and who had worked up the case, as to two interviews which he had with Dupree. In these interviews, according to Gamel, Dupree listed specific property having a cost of some $49,500 and an indebtedness on a business real estate mortgage of $14,000, and also stated that he had "bank accounts" and a specified piece of real estate not valued, and had in addition a sum of cash accumulated over the years since he was a boy in 1910 of from $65,000 to $80,000, estimated by him on the first statement to be $70,000. He also stated that his wife, who had worked for some twenty-five years, had cash, the amount of which however was not estimated by him. There was nothing in the statement by the accused to the effect that the items mentioned included all of his assets and there was no effort made by the Government to show, as a part of its case, what savings the wife had or that she had none.

Assuming, although not deciding, that the extra-judicial statement made by appellant to the Government agent would have been admissible over timely objection by him, ¹ we can nevertheless consider it here because it was not objected to below. However, the effect that was given to the statements of the accused in the Government's presentation of its case, seems to be unprecedented in this type of prosecution. Ordinarily in a net worth prosecution the Government gives effect to disclosed assets or discharges its duty as set forth in the Holland case, supra, to track down "leads reasonably susceptible of being checked." ²

Here the Government in the presentation of its case merely ignored the claim of assets made by the taxpayer as testified to by the witness Gamel. ³ Having introduced evidence in the nature of statements by the accused that he had specified assets of a cost in excess of $49,500, plus a lot which he later sold for $6,000, plus bank accounts which were not identified, and having proved by a bank employee that the accused also owned a mortgage debt for $1205, and that the accused and his wife had bank accounts in his bank totalling approximately $800, the Government sought to build up a discrepancy between available resources and expenditures between January 1, 19 40 and December 31, 19 45, by showing (1) substantial personal spendings and (2) increases in five categories of assets--bank balances, purchase of U. S. Savings Bonds, purchase of U. S. Treasury Notes, increase in mortgages owned, and purchase of real estate, without attempting to account for any possible rearrangement of assets as to the $49,500 or for a penny of the $65,000 to $80,000, which appellant claimed he had on hand, or for any savings of his wife.

Having shown by this method an increase of $135,000 of his holdings or spendings over the amount shown by his income tax returns as being available (ignoring, as we have pointed out, whatever assets Dupree had on January 1, 19 40, other than three or four items mentioned by him in his later tax returns), the prosecution then entered into the proof of the "expenditures" in the years 1946, 1947, 1948 and 1949, which were the basis of the prosecution.

The only justification which the Government could have had for ignoring the value of the assets claimed by appellant on January 1, 1940, was that Government counsel must have thought his contentions were incredible. However, none of the type of proof which was used by the Government in disproving the existence of the cash fund discussed in the Holland case, was brought to bear here. On the other hand, there is some substantiation of appellant's contention in the fact that it was undisputed that he had worked hard and lived frugally for many years during which, he testified without dispute, he had averaged $200 to $300 per month, that he had owned and operated a moving picture theater, that his wife had been a beauty shop operator and owner, ⁴ and that the couple owned a home which cost them in excess of $14,000 in the 1930's, and that he acquired his dance hall in 1939 with an equity of some $11,000 in the real estate. There is the further circumstance that in February, 1944, they made a gift of $20,000 to a Negro orphanage and in 1945 made a gift of $11,000 to a college in Houston . Possibly the most significant circumstance is that the Government witness Weber, who is the accountant who had made out the appellant's tax returns all during the 1940-1949 period, testified that Dupree showed him two $10,000 cashier's checks in February, 1944, with which to make the orphanage gift, and he told Weber then that his wife had saved this money. ⁵ This was at a time when there was apparently no apprehension by Dupree of a tax fraud investigation. As a further indication of lack of tax consciousness, it is interesting to note that these two gifts were made in such a manner that only about $6,000 out of a total of $31,000 was deductible for tax purposes; whereas, if the gifts had been spread over the years in which the Government's computations extend, there would have been a reduction in net income for the period of some $24,000.

The above circumstances are cited to indicate that the contention of the accused as to the existence of substantial available assets at the beginning of the computation period is not without its persuasive aspects.

The Court having overruled defendant's motion for an acquittal on the completion of the Government's case, the defendant then put on his proof which did not materially change the complexion of affairs, except that he insisted he had saved practically every dollar he had made until he went into business; that this was possible because both he and his wife worked where they had their meals and many of their clothes given them. The wife testified that she too had saved for some 25 years of their married life since she started working as a beauty operator and later as the owner of a beauty shop and that her earnings were substantial. She also testified that she gave the $20,000 to the Negro orphanage out of her savings accumulated prior to 1940.

With the testimony of the witnesses all in, the defendant again moved for a directed verdict of acquittal, which was denied, and the Court proceeded to charge the jury.

[Jury Instructions]

Among the specifications of error complained of by the defendant is that part of the charge of the Court relating to the available funds and expenditures method of proof. The particular part of the charge complained of was:

"In an expenditures case, attention is focused on the difference between the taxpayer's available funds as of the beginning of the prosecution year, as compared to the expenditures made during that year. This difference, if any, is presumed to be net income if certain conditions have been established by the evidence beyond a reasonable doubt to obtain. They are, one, that there is evidence of a source or sources of income to account beyond a reasonable doubt for the expenditures, if any; and, who, that there is a fixed starting point at which the taxpayer's financial condition has been by the evidence affirmatively established beyond a reasonable doubt."

This charge was not adequate in the circumstances of this trial. In the first place the theory of available funds expounded by the Government's principal technical witness, and as portrayed by his computations admitted in evidence, was quite different from that charged by the Court, in that in these computations the taxpayer's "available funds as of the beginning of the prosecution year" were not shown; rather, the computations showed only "available funds per return." The charge was therefore not adjusted to the evidence or the Government's theory of proof. There is also merit in the defendant's complaint to the Court's charge that the difference between available funds as of the beginning of the year and the expenditures made during the year is presumed to be net income if the other conditions mentioned have been established beyond a reasonable doubt. If it is to be assumed that these conditions had been established, there would still not be a presumption that the difference was net income, because one of the conditions was that there was a "source or sources of income to account beyond a reasonable doubt for the expenditures, if any." Since the jury had a perfect right to find that the source of such expenditures was from the sale of other assets or from accumulated savings, the Court in effect charged that an excess of expenditures over initial available funds was presumed to prove the existence of net income even if the jury was satisfied that the source of such excess of expenditures was of a nature which is not income under the Internal Revenue Code.

Moreover, while we do not need to decide expressly that the trial court can never charge a presumption against an accused unless such presumption is specifically created by statute, it is undoubtedly the better practice to tell the jury that such a difference, under proper definition, is evidence of additional net income.

Here we find that the Government's proof in support of its excess of expenditures theory lacked the essentials of adequate proof of opening available funds at the beginning of the entire period and lacked it at the beginning of any one of the prosecution years. Bryan v. United States , 5th Cir., 175 Fed. (2d) 223 [49-1 USTC ¶9322].

We also hold that the Court erred in giving the charge above over the stated objection of appellant's counsel.

The other questions raised by this appeal are largely answered by the series of Supreme Court decisions mentioned in the fourth paragraph of this opinion, and the trial court will have their guidance on the further disposition of this case, as we have had in our consideration of it.

[Adequacy of Books and Records]

There is one contention, however, that is made by appellant, which because of an apparent misconception by some Courts, should be further dealt with in the light of the Supreme Court's opinion in the Holland case, supra. This contention is raised by appellant's fourth specification of error in which he complained of the Court's refusal to submit to the jury the question as to whether defendant's books were adequate and accurate and in not instructing the jury not to consider the available funds and expenditures method if they found defendant's books to be adequate, or had a reasonable doubt thereof. This contention stems from the erroneous belief that Section 41 of the Internal Revenue Code restricts proof in a criminal case to certain formalized methods unless the Government first proves that the books and records kept by the taxpayer are themselves incorrect. ⁶

The Supreme Court rejected this proposition and although the case before the Court was a net worth case, the language of the opinion is equally applicable to a case prosecuted on the available funds and expenditures method of proof. Section 41 relates to the computation of income by particular accounting methods in order that true income can be related to a particular taxable year. As the Court says:

"The provision that the 'net income shall be computed . . . in accordance with the method of accounting regularly employed in keeping the books of such taxpayer,' refers to methods such as the cash receipts or the accrual method, which allocate income and expenses between years. United States v. American Can Co., 280 U. S. 412, 419 [2 USTC ¶487]. The net worth technique, as used in this case, is not a method of accounting different from the one employed by defendants. It is not a method of accounting at all, excet insofar as it calls upon taxpayers to account for their unexplained income . . .."

A prosecution for income tax evasion is not an effort by the Government to compute income tax at all. It is an effort by the Government to prove that the taxpayer failed to compute it honestly. There is nothing in this Section nor in any other applicable statute that restricts the Government in the method of proving this fact if it exists. On this point the Court says:

". . . To protect the revenue from those who do not 'render true accounts,' the Government must be free to use all legal evidence available to it in determining whether the story told by the taxpayer's books accurately reflects his financial history."