Bank Records and Net Worth Increases
5 Page2
Finding
as we do that an essential element of the proof necessary to take this
case to the jury on the available funds and expenditures method was
lacking, and that the Court's charge incorrectly presented this theory
of proof to the jury, we must reverse the judgment below and remand it
for a new trial.
REVERSED
AND REMANDED.
1
See discussion of this point in Daniel Smith v.
United States
, supra.
2
Under the heading "The Government's Investigation of Leads,"
the Supreme Court in the Holland case says: "While sound
admin
istration of the criminal law requires that the net worth approach--a
powerful method of proving otherwise undetectable offenses--should not
be denied the Government, its failure to investigate leads furnished by
the taxpayer might result in serious injustice. It is, of course, not
for us to prescribe investigative procedures, but it is within the
province of the courts to pass upon the sufficiency of the evidence to
convict. When the Government rests its case solely on the approximations
and cricumstantial inferences of a net worth computation, the cogency of
its proof depends upon its effective negation of reasonable explanations
by the taxpayer inconsistent with guilt. Such refutation might fail when
the Government does not track down relevant leads furnished by the
taxpayer--leads reasonably susceptible of being checked, which, if true,
would establish the taxpayer's innocence."
3
Compare the case of William C. Bostwick v. United States of America,
5th Circuit, decided by us
January 20, 19
55 [55-1 USTC ¶9170], in which the Government gave full credit to
assets claimed by the accused in his extra-judicial statement to the
agents.
4
Although the work performed by accused first as a hotel porter and later
as a locker room attendant in a large country club does not of itself
bespeak a life of luxury, the testimony of the accused and his wife in
which she told of doing both household work and later beauty treatments
at the homes of the wives of the same patrons of the club, as well as
that of the substantial citizens who appeared as character witnesses for
Dupree, brings his testimony well within the field of plausibility that
they could have made very substantial savings, if that had been their
aim.
5
"Q. Mr. Weber, before we recessed, I was asking about the $20,000
item in '44. You said you knew about that. Will you tell us what you
know about that, please?
A.
I don't recall the exact date. It was either in '43 or '44, C. A. Dupree
came to any office--
Q.
Speak a little louder.
A.
I say C. A. Dupree came by my office and showed me two cashier's checks
for $10,000 each. And I asked him what the occasion was, and he told me
that his wife had saved that $20,000, dating back to his entrance into
the army in 1917; that she had saved all of his allotment checks and had
added to it income from work as a beauty operator and whatever other
work she would perform, until she had accumulated this $20,000; and it
was her intentions to establish a Negro orphanage."
6
26
U. S.
C. A. §41:
"General
Rule.
"The
net income shall be computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping
the books of such taxpayer; but if no such method of accounting has been
so employed or if the method employed does not clearly reflect the
income, the computation shall be made in accordance with such method as
in the opinion of the Commissioner does clearly reflect the income. If
the taxpayer's annual accounting period is other than a fiscal year as
defined in section 48 or if the taxpayer has no annual accounting period
or does not keep books, the net income shall be computed on the basis of
the calendar year."
[83-1
USTC ¶9299]The
United States of America
v. Lee Eugene Lenamond
U.
S. District Court, No. Dist. Tex., Dallas Div., CR 3-80-073-R,
12/28/82
[Code Sec. 7203]
Criminal penalties: Tax evasion: Evidence: Failure of government to
conduct adequate investigation.--The taxpayer's conviction for tax
evasion was set aside and his motion for acquittal was granted where the
government failed to conduct a full and adequate investigation of the
taxpayer's inventory figures and to follow leads that indicated the
figures were erroneous. The government's use of the bank deposits-cash
expenditures method was inappropriate. The use of the gross profit
percentage method would have revealed that the inventory figures were
too high and that, consequently, no substantial taxes were due from the
taxpayer.
Shirley
Baccus-Lobel, Assistant United States Attorney, Dallas, Tex. 75242,
Thomas D. Blondin, Department of Justice, Washington, D. C. 20530, for
plaintiff. Howard A. Weinberger, Ginsberg & Forman, 820
Hartford
Bldg.,
Dallas
,
Tex.
75201
, for defendant.
Memorandum
Opinion
BUCHMEYER,
District Judge:
The
defendant Lee Eugene Lenamond, was convicted of income tax evasion for
1973 and 1974. His prosecution was based upon the "bank
deposits-cash expenditures" method of proof. 1 Lenamond's
motion for acquittal presents this question:
Did
the government fail to conduct a full and adequate investigation, and
did it fail to follow reasonable leads, concerning the value of
Lenamond's business inventory--and, consequently, his business
deductions for "cost of goods sold" 2--for the
years 1973 and 1974?
Because
the government did not conduct a full and adequate investigation and did
not follow reasonable leads, despite inventory figures which were truly
astonishing, the bank deposits method of proof was not sufficient.
Therefore, the motion for acquittal is granted and Lenamond's conviction
is set aside.
The
Legal Principles.
At the conclusion of the government's case, and again at the end of the
evidence, the defendant moved for acquittal. Decision on this motion was
reserved, and the case was submitted to the jury. Fed. R. Crim. P.
29(b). Following the return of a jury verdict which found the defendant
guilty on both counts of tax evasion, the motion for acquittal was
timely renewed.
The
controlling legal principles concerning the "two traditional
indirect methods of proof" used by the government in income tax
evasion cases--the net worth analysis and the bank deposits-cash
expenditures method--are stated in United States v. Dwoskin [81-1
USTC ¶9416], 644 F. 2d 418 (5th Cir. 1981); United States v. Normile
[79-1 USTC ¶9151], 587 F. 2d 784 (5th Cir. 1979); and United States
v. Boulet [78-2 USTC ¶9628], 577 F. 2d 1165 (5th Cir. 1978)--and,
of course, in Holland v. United States [54-2 USTC ¶9714], 348 U.
S. 121 (1954). As discussed in Dwoskin:
"A
motion for acquittal must be granted 'when the evidence is such that a
reasonably minded jury must have a reasonable doubt as to the existence
of any element of the crime.' United States v. Slone, 601 F. 2d
800, 803 (5th Cir. 1979); United States v. Pinner [77-2 USTC ¶9706],
561 F. 2d 1203, 1207 (5th Cir. 1977). In evaluating a claim of
insufficient evidence according to this standard, we must consider the
evidence in the light most favorable to the government, Glasser v.
United States, 315 U. S. 60, 80, 62 S. Ct. 457, 469, 86 L. Ed. 680
(1942), resolving reasonable inferences and credibility choices in
support of the jury's verdict, United States v. Henderson, 588 F.
2d 157, 161 (5th Cir. 1979); United States v. Juarez, 566 F. 2d
511, 513 (5th Cir. 1978) . . .
"To
prove its case, the government relied upon circumstantial evidence
[there, a net worth analysis]. Since circumstantial evidence is to be
treated no differently than direct evidence, Holland v. United States
[54-2 USTC ¶9714], 348 U. S. 121, 140, 75 S. Ct. 127, 137, 99 L. Ed.
150 (1954), the test for judging the sufficiency of the evidence is the
same whether the evidence is direct or circumstantial, United States
v. Bright, 550 F. 2d 240, 242 (5th Cir. 1977); United States v.
Gomez-Rajos, 507 F. 2d 1213, 1221 (5th Cir.), cert. denied, 423 U.
S. 826, 96 S. Ct. 41, 46 L. Ed. 2d 42 (1975)." (644 F. 2d at 420.)
However,
in
Holland
, the Supreme Court warned that the net worth method of proof is
"so fraught with danger for the innocent that the courts must
closely scrutinize its use" (348
U. S.
at 125). This is equally true with respect to the bank deposits-cash
expenditures analysis. Accordingly, in Boulet, the Fifth Circuit
emphasized that both methods trigger special protections for the accused
and particularly careful scrutiny by the courts. 3
"We,
therefore, review the record '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.' Holland
v. United States [54-2 USTC ¶9714], 1954, 348
U. S.
121, 129, 75 S. Ct. 127, 132, 99 L. Ed. 150. The government must prove a
full and adequate investigation in a bank-deposits case just as it must
in a net-worth case. Holland v. United States, supra. 'Such
investigation must establish a guarantee of essential accuracy in the
circumstantial proof at trial as an element of the government's burden
of proving guilt beyond a reasonable doubt. . . .' United States v.
Slutsky, supra, 487 F. 2d at 840." (577 F. 2d at 1168.)
As
part of this duty to conduct "a full and adequate investigation in
a bank deposits case," the government may not disregard any
"explanations of the defendant reasonably susceptible of being
checked."
United States
v. Boulet, supra (577 F. 2d at 1169). As the Supreme Court held
in
Holland
:
".
. . When the Government rests its case solely on the approximations and
circumstantial inferences of a net worth computation, the cogency of its
proof depends upon its effective negation of reasonable explanations by
the taxpayer inconsistent with guilt. Such refutation might fail when
the Government does not track down relevant leads furnished by the
taxpayer--leads reasonably susceptible of being checked, which, if true,
would establish the taxpayer's innocence. When the Government fails to
show an investigation into the validity of such leads, the trial judge
may consider them as true and the Government's case as insufficient to
go to the jury." (348
U. S.
at 135-36) (emphasis added).
However,
a full and adequate investigation is required, not a "universal
probe." The government is not required "to perform the
impossible" (Dwoskin, 644 F. 2d at 423) . . . or "to
bay down rabbit tracks" and "follow a trail that might have
led nowhere" (Normile, 587 F. 2d at 786) . . . or to conduct
a "bacteriophobic search for error" (Normile, 587 F. 2d
at 787).
The
government's duty to investigate and to follow leads does apply to
omitted or understated deductions--particularly, in this case, to the
defendant's inventory and his business deductions for cost of goods
sold. This is evident from several cases, 4 including United
States v. Hall [81-1 USTC ¶9209], 650 F. 2d 994 (9th cir. 1981),
where the Ninth Circuit discussed this very question:
"Inventory
Cost:
Hall and Uranga argue that the Government's figures did not accurately
reflect their inventory cost, and consequently yielded inaccurate
figures for 'cost of goods sold.' Appellants point out that the cost of
goods sold is part of the Government's calculation of the business's
gross profit and directly related to the income of the business. Thus, inventory
valuation becomes an essential part of the Government's case.
"When
choosing to proceed against a defendant using the net worth or bank
deposits methods of proof, the Government assumes a special
responsibility of thoroughness and particularity in its investigation
and presentation. Holland, 348 U. S. at 135-36 . . . This
responsibility imposes the duty to, inter alia, accurately
establish the figures upon which the methods are based, and to
reasonably investigate leads which may reveal that the defendants
properly reported their income . . . Here, both this duty to investigate
and the duty to establish figures with reasonable certainty are
implicated by the Government's treatment of Hall and Uranga's inventory
valuation. In particular, the Government must show that it had
followed through on appellant Hall's prior notation suggesting that the
inventory figures used by the Government were too high. This is a
possible explanation for the apparent unreported income and may not be
overlooked by the Government." 650 F. 2d at 999-1000). (emphasis
added.)
After
a careful review of the evidence in this case (including the evidence
concerning the government's investigation and the defendant's
inventory), and after applying the legal principles just discussed, this
Court is convinced that the
Holland
protections have been violated--and that, consequently, the conviction
based upon the bank deposits method of proof must be reversed.
The
Investigation.
In July of 1975, Randell Choate, 5 an IRS field
agent, began a civil tax investigation of the defendant Lenamond--who
owned and operated an auto supply store in a low income area in Dallas,
Texas (Choate, p. 136; defendant's Exhs. 3-18). 6 This was the
first fraud investigation conducted by Choate (Choate, p. 61).
Over
the next 18 months, Choate (sometimes accompanied by other IRS agents)
had several meetings 7 with the
defendant Lenamond and with the CPA representing Lenamond (
Rob
ert Driegert), and completed a bank deposits-cash expenditures analysis.
Lenamond was very cooperative in the investigation and, with only one
exception, 8 supplied
Choate with all of the information he requested--although admittedly
Lenamond had no accounting experience or ability, had never "gotten
any advice on how to maintain books and records," and kept
"crummy" books (Choate, pp. 119, 122). 9
In
June of 1976, the investigation was converted to a joint criminal and
civil investigation (Choate, p. 82). On October 6, 1976, Choate held the
first cirminal investigation meeting with Lenamond--although he did not
give any notice of this meeting to the CPA representing Lenamond
(Choate, pp. 62-63). Lenamond still continued to cooperate.
The
investigation concluded in 1976, and it resulted in a recommendation
that Lenamond be indicted on income tax evasion charges for 1972, 1973,
and 1974. Although Lenamond had no substantial assets or expenditures
that pointed toward substantial unreported income--he lived in a $13,000
house in Pleasant Grove; he had no fancy clothes, expensive cars,
jewelry, stocks or bonds, hidden bank accounts, etc.; and he owed money
on a loan from his father (Choate, pp. 150-53)--he did withhold cash
from his daily business receipts for personal living expenses, for
payment of salaries, and for occasional payments of business expenses
(Choate, pp. 4-5). And, Choate's bank deposits-cash expenditures
analysis, indicated that Lenamond's bank deposits and cash expenditures
exceeded his reported gross receipts--specifically, that Lenamond may
have had unreported income of $28,631 in 1973 and $29,388 in 1974 (
Rob
ert S. Driegert transcript, pp. 33-34; see Govt. Exh. 52). 10
No
action was taken on this recommendation for over three years, and
limitations ran on the year 1972. Finally, on April 15, 1980--the last
day of the limitations period for 1973, and almost five years after
the investigation started--the defendant Lenamond was indicted for
income tax evasion in 1973 and 1974. The indictment charged that
additional taxes of $9,796.00 were due in 1973 and that an additional
$12,839.80 was due in 1974; at trial, the government reduced these
claims to $6,850.82 in 1973 and $9,233.72 in 1974 (see Govt. Exh. 52).
The
Inventory.
The only aspect of the government's bank deposits-cash expenditures
investigation that is under attack by the motion for acquittal concerns
the inventory at Lenamond's auto parts store.
The
defendant's 1973 income tax return reported a beginning inventory of
$40,884.00 and a year-end inventory of $71,864.00 (Govt. Exh. 2). The
defendant's 1974 return reported beginning and ending inventories of
$71,864.00 and $97,184.00, respectively (Govt. Exh. 3). However, the
defendant's purchases increased only 2% during this two-year period
when, according to the tax returns, inventory increased 138%. And,
the combined increase in inventory over the two-year period ($56,350) is
just slightly less than the amount of unreported gross receipts
($58,000) claimed by the government's bank deposits analysis (see Govt.
Exh. 52).
The
defendant contends that these "astonishing" inventory figures
were "arbitrarily arrived at by Mr. Lenamond in ignornace 11 of the tax
effect that inflated inventory figures had on his profit. (If ending
inventory is artificially inflated, then profits are artificially
inflated as well.)"--and that:
"The
figures themselves, comparing ending inventory which increased 138% [in
1973 and 1974] to purchases which increased 2%, sales which increased
13.7%, and cost of goods sold which decreased 12%, would have lead any
reasonable investigator to conclude that something was wrong in the
ending inventory figures."
The
basic facts concerning IRS Agent Choate's investigation of the
defendant's inventory--or lack of investigation--are undisputed.
Choate determined that the defendant did take inventory yearly, but that
he made no itemized inventory list and kept no other inventory records.
Accordingly, Choate examined the CPA's work copy of the defendant's 1973
return (Choate, pp. 107-110). The ending inventory was first recorded as
$43,480--an increase of less than $3,000 over 1972. However, based upon
information given to the CPA by Lenamond, this was changed to $52,278,
and then increased a third time, to $71,873. Choate testified:
"Q.
And those crossed out parts have the effect of increasing Lee's taxable
income dramatically from what had been originally in there, do they not?
"A.
Yes, sir, it increases it.
"Q.
How?
"A.
By causing a larger ending inventory, decrease of goods sold and
increases gross profit.
"Q.
Any accountant knows that?
"A.
Yes, sir.
.
. .
"Q.
What is the effect of having an ending inventory go from 43 to 71
thousand dollars?
"A.
It would be to increase income by like 28 thousand.
"Q.
Didn't it ever occur to you, Mr. Choate, that Lee Lenamond might have
been telling you the truth when he said he couldn't possibly have made
that much money that the reason for it was that he had overstated his
ending inventory?
"A.
He never told me that he overstated his ending inventory.
"Q.
You never looked around for things that might help him only for things
that might hurt him, isn't that true?
"A.
I just looked at the records he had.
"Q.
And those records didn't alert you that something was wrong with the
inventory?
"A.
It looked like he was having problems determining what the inventory
was." (Choate, pp. 108-110) (Emphasis added). 12
Choate
also examined the defendant's tax returns for 1973 and 1974 (Govt. Exhs.
2, 3). They revealed that purchases "remained very constant"
during this period, increasing about 2% (Choate, pp. 113-14)--but that
the year-end inventory increased 138% (from $40,884 in 1972 to $71,864
in 1973 to $97,184 in 1974). This meant that something was drastically
wrong with the inventory figures. 13 Choate so
testified:
"Q.
From here to here purchases went up two percent, right?
"A.
Yes, sir.
"Q.
Okay. From here to here ending inventory went up 138 percent, can you
explain that to the ladies and gentlemen of the jury?
"A.
No, sir.
"Q.
There is no explanation for it, is there?
"A.
I cannot explain it, no, sir.
"Q.
At the same time the government says his sales were increasing?
"A.
Yes, sir.
"Q.
How can his sales be increasing if his purchases are remaining more or
less constant and the ending inventory, that is the goods he has left
over at the end of the year is increasing a 138 percent?
"A.
I don't know, sir.
"Q.
It can't happen, can it?
"A.
It doesn't appear to, sir.
"Q.
Something is wrong, isn't there?
"A.
Yes, sir.
"Q.
And something is wrong in Lee's favor, isn't it?
"A.
It would appear to be." (Choate, pp. 115-16) (emphasis
added).
Despite
this, Choate made no further investigation. He did not ever ask
Lenamond if a mistake had been made about the inventory (Choate, p.
119)--even though he knew that Lenamond had no accounting or bookkeeping
experience, had not graduated from high school until he was 22, 14 had no
professional help regarding his records, had made frequent mistakes on
his bookkeeping and bank deposits, had "crummy books," and had
a parts store in such a state of disarry (defendant's Exhs. 3-18) that
"there might be some difficulty" in taking inventory (Choate,
pp. 119-22, 163).
Choate
did ask Lenamond a compound question at the November 5, 1976 meeting:
could he "explain why he showed a substantial increase in inventory
in 1974 and why his cancelled checks lacked quite a bit equalling his
expenses claimed on his return for the year." (Choate, pp. 29-30,
37-38). However, Lenamond answered only the second part of this
question:
"A.
I believe we asked the question if he had any substantial increase in
inventory.
"Q.
That was November 5th, 1976, right?
"A.
Yes, sir, I believe so.
"Q.
And let me read what your memo reflects. 'Lenamond was again shown his
1974 income tax return which reflected a substantial increase in
inventory and purchases about 20 thousand dollars in excess of those
substantiated by checks. Lenamond stated the figures shown for purchases
on the return is correct and anything not substantiated by checks would
be cash purchases.' He didn't say a darn thing about his inventory, did
he?
"A.
No, sir.
"Q.
Y'all didn't question him about his inventory when he didn't answer your
two part question? You asked him two things, didn't you?
"A.
Yes, sir.
"Q.
You asked him about inventory and purchases, right?
"A.
Yes, sir.
"Q.
He answered you about purchases but he forgot to saying anything about
inventory?
"A.
Yes, sir.
"Q.
And you didn't ask him, you didn't follow up, you didn't want to know,
did you?
"A.
We didn't ask him any other questions, I don't believe." (Choate,
pp. 117-18).
Choate
conceded during testimony that he "just assumed the [inventory]
figures from 40 thousand to 71 thousand to 97 thousand dollars were
right"--"notwithstanding all the indications that [he] had
that they were wrong" (Choate, p. 133). And, by letter dated
June 11, 1976
, Agent Choate reported:
"No
inventory sheets are kept by Mr. Lenamond, but the inventory seems
proper for the two stores and any attempts by him to claim a lesser
amount could be overcome." 15
Even
after Lenamond's attorney, Donald J. Forman, advised IRS attorneys on
May 28, 1978
that there was an inventory problem--and that the inventory did not
appear to be kept at a fair market value 16--there was
no further investigation.
Choate
did attempt to explain that he accepted the defendant's inventory
figures because he had no way to check them: the defendant had no
inventory records or lists and "without such records it would be
impossible to disprove the stated inventory figures." (Choate, p.
181; Government's Opposition to Defendant's Motion for Judgment of
Acquittal, pp. 9-10). 17 However, he
admitted that he "probably would" have investigated the
inventory figures if the situation had been reversed--i. e., if the
ending inventory had decreased from $97,000 to $40,884 in two
years--since this would indicate that the taxpayer might be avoiding
income taxes by undervaluing inventory:
"Q.
In connection with the service as an internal revenue agent have you
ever had occasion to check a business that had undervalued its ending
inventory?
"A.
I don't believe I have sir. I can't remember.
".
. .
"Q.
Let's just say for a second that instead of the inventory increasing
from 40 to 71 to 97 it had decreased from say 97 down to 71 to 47. What
would the effect of that have been?
"A.
To reduce the increase or it would--it would increase his cost of goods
sold and decrease gross profit.
"Q.
Wouldn't you be immediately tipped off that something was wrong and
wouldn't you investigate that?
"A.
I probably would, I don't know, sir.
"Q.
Okay. Because it is your job to determine the correct amount of tax,
right?
"A.
Yes, sir.
"Q.
If somebody was decreasing their inventory they might not be paying the
correct amount of tax, correct?
"A.
That's a possibility.
"Q.
It would at least alert your suspicions?
"A.
Yes, sir." (Choate, pp. 178-79).
The
Holland
Consequences.
Under these facts and under Holland (348 U. S. 121), the
government had a duty to conduct a full and adequate investigation and
follow leads to determine whether or not Lenamond's inventory figures
were too high.
United States
v. Hall, 650 F. 2d at 999. The inventory figures were truly
anomalous: inventory could not increase 138% in two years, while
purchases increased only 2%--particularly at the very time when,
according to the government's bank deposits proof, the defendant's sales
were increasing by 12%.
IRS
Agent Choate knew this and he knew that something was wrong with the
inventory figures (Choate, pp. 115-16). 18 He knew
that the defendant "was having problems determining what the
inventory was" (Choate, p. 110). He knew that the defendant's store
was in such a state of disarray that "there might be some
difficulty" in taking inventory (Choate, p. 163). He knew that the
defendant was not sophisticated and had no professional help with his
records and "crummy books" (Choate, pp. 119-22). Despite these
"leads" 19--and
despite the additional, express "lead" concerning inventory
furnished by the defendant's attorney 20--the
government simply accepted the inventory figures, without any
investigation, "notwithstanding all indications . . . that they
were wrong" (Choate, p. 133).
It
was possible for the government to investigate the inventory figures, 21 and this
would not have been "a rabbit trail leading to nowhere" or
"a bacteriophobic search for error" (Normile [79-1 USTC
¶9151], 587 F. 2d 787). Agent Choate could have begun simply by asking
the defendant if the figures were too high; he never did so (Choate, p.
119). Nor did Choate interview the employees who helped take the
inventory; presumably, both David Lenamond and Ronnie Kelley would have
told Choate, as they testified at trial, that the inventory did not
increase substantially in either 1973 or 1974. Choate could have learned
from the CPA (Murray Hay) that he received such a small amount ($50-60)
for preparing Lenamond's tax returns, that he did not verify the figures
on them. And, since the defendant had cooperated fully in the
investigation, Choate could have even requested that an inventory be
taken in 1975 or 1976; this could have indicated whether the reported
1973 and 1974 figures were correct. 22
In
addition, Choate could have used an indirect method--the industry gross
profit percentage--to check Lenamond's inventory figures. Cf. Bernstein
v. Commissioner [59-1 USTC ¶9483], 267 F. 2d 879 (5th Cir. 1959).
Specifically, he could have determined the gross profit percentage of
similar businesses in the same area and time, with the same
merchandising policies--and then applied this percentage to the gross
sales of Lenamond in 1973 and 1974 in order to approximate his inventory
and his cost of goods sold for these years. 23 The
government has used this indirect method in other cases 24--but did
not do so here. 25
At
trial, the defendant's evidence demonstrated how the industry gross
profit percentage might have been applied if the Lenamond inventory
figures had been investigated. In particular:
.
. . David Lenamond, who had first-hand knowledge of the nature of his
father's business, and Jack Stoller, who had expert knowledge of similar
businesses in the same area and time, both testified that the
appropriate gross profit percentage for the defendant's business was
approximately 30 percent or less.
.
. . Dr. Kenneth Ferris, the defendant's expert, applied this 30% gross
profit percentage to Lenamond's sales in 1973 and 1974 (based upon the
government's allegations of gross receipts) in order to estimate the
inventory figures and the cost of goods sold deductions.
.
. . Dr. Ferris, then testified that, based upon his calculations, the
inventory figures were much too high and that, in fact, the defendant
overpaid his taxes for 1973 in the amount of $867.10 and underpaid his
taxes for 1974 in the amount of $588.24, so that the government owed
Lenamond $278.86 for the two year period. 26
Dr.
Ferris also testified that the defendant's gross profit margins for
previous years ranged from a low of 21.6% to a high of 24.2%--and thus
never reached the 30% "industry gross profit percentage" used
in his calculations--while, under the government's bank deposits
calculations reflected in the indictment, Lenamond would have had a
profit margin of 42.5% in 1973 and 40.6% in 1974.
The
government does not dispute the fact that this indirect method could
have been used to check the correctness of the Lenamond inventory
figures. It argues, however, that this percentage method is merely
"an estimation technique dependent on correct gross receipts, among
other variables, and does not compute specific inventories." But
the very method of proof upon which the government prosecuted the case
(bank deposits-cash expenditures) is an "estimation
technique"--and
Holland
warns lower courts about "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.
at 129).
United States
v. Boulet, supra (577 F. 2d at 1168).
The
government also contends that it was not obligated to use the industry
gross profit percentage analysis since the defendant admitted that
"all deductions" on his tax returns were correct. Yet, IRS
Agent Choate never asked Lenamond if the inventory figures were
mistaken--even though he knew that the inventory figures were anomalous
and that somthing was wrong with them. Therefore, any general statement
that deductions were correct did not negate the government's duty to
investigate the inventory figures--just as it could have done by various
means, including the gross profit percentage method. 27
Finally,
the government contests the 30% gross profit percentage used in the
calculations by defendant's experts. It argues that the jury could have
discredited the testimony of David Lenamond and found that 35% was the
correct figure 28--and that
cross-examination of Mrs. Sharon Lake Liddy (defendant's second expert)
established that a 35% gross profit margin would still result in "a
substantial tax due and owing" by the defendant. This argument,
too, is erroneous.
The
issue is not whether the profit margin was 30% or 35%; it is the total
failure of the government to use the industry gross profit percentage to
determine if the astonishing inventory figures were too high, or to
investigate them in any other manner. and, under Holland, when
the government fails to show an adequate investigation, the case should
not be submitted to the jury--and, when the government fails to track
down reasonable leads, "the trial judge may consider them true and
the government's case as insufficient to go to the jury" (348 U. S.
at 135-36).
The
Conclusions.
This is the very type of case contemplated by
Holland
. 29 The
government should have conducted a full and adequate investigation of
the astonishing inventory figures, and it should have followed leads
which indicated that the figures were erroneous. It did not do so.
Since
the investigation was not adequate, this case should not have been
submitted to the jury. In addition, since the government did not follow
reasonable leads, it is appropriate for this court to accept the
defendant's position that a proper investigation--including the use of
the gross profit percentage method--would have revealed that the
inventory figures were too high and that, consequently, no substantial
taxes were due for 1973 and 1974.
Accordingly,
the motion for acquittal is granted and the conviction of Lee Eugene
Lenamond is set aside. 30
1
". . . Under this method, all deposits to the taxpayer's bank and
similar accounts in a single year are added together to determine the
gross deposits. An effort is made to identify amounts deposited that are
non-taxable, such as gifts, transfers of money between accounts,
repayment of loans and cash that the taxpayer had in his possession
prior to that year that was deposited in a bank during that year. This
process is called 'purification.' It results in a figure called net
taxable bank deposits.
"The
government agent then adds the amount of expenditures made in cash, for
example, in this case, cash the taxpayer received from fees, did not
deposit, but gave to his wife to buy groceries. The total of this amount
and net taxable bank deposits is deemed to equal gross income. This is
in turn reduced by the applicable deductions and exemptions. The figure
arrived at is considered to be 'corrected taxable income.' It is then
compared with the taxable income reported by the taxpayer on his
return." United States v. Boulet [78-2 USTC ¶9628], 577 F.
2d 1165, 1167 (5th Cir. 1978).
2
A merchant selling goods is entitled to an income tax deduction for his
cost of goods sold. Normally, this deduction is computed by adding the
beginning inventory to purchases during the year to determine the goods
available for sale, and then subtracting the ending inventory. The
resulting figure is the "cost of goods sold" and is deducted
from the merchant's gross receipts to arrive at gross profit. Other
expenses are then deducted from the merchant's gross profit to determine
the net profit reportable on his income tax return. Internal Revenue
Code §§ 61, 62, and 63.
3
In Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121 (1954), the Supreme Court discussed a number of "dangers"
presented by the net worth method of proof, concluding:
"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 . . . 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 . . . 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.
at 129).
4
See United States v. Keller [75-2 USTC ¶9729], 523 F. 2d 1009
(9th Cir. 1975);
United States
v. Shavin [63-2 USTC ¶9584], 320 F. 2d 308 (7th Cir. 1963),
cert. denied, 375
U. S.
944 (1963); and Beck v. United States [62-1 USTC ¶9227], 298 F.
2d 622 (9th Cir. 1962), cert. denied, 370
U. S.
919 (1962). See also United States v. Fowler, 605 F. 2d 181 (5th
Cir. 1979).
5
A transcript of Choate's testimony at trial has been prepared; it will
be cited in this opinion as "Choate, pp. --" (although these
page numbers will, of course, differ from those in the transcript on
appeal).
6
For a period of time beginning in 1971, the defendant owned a second
auto supply store in
Plano
,
Texas
, which was operated by his son, Nolan Lenamond, but which never made a
profit.
7
The meetings included those held on
March 17, 1976
, on
May 19, 1976
, on
October 6, 1976
, on
November 5, 1976
and on
November 23, 1976
. Choate prepared memoranda of these meetings and, when called to
testify at trial, had little independent recollection of the meetings,
and had to refresh his memory by reading from the memoranda (Choate, pp.
67-68).
8
Although not relevant to this motion for acquittal, the government did
contend that Lenamond promised to provide a "spiral notebook,"
but never did, and that this constituted evidence of wilfulness. This
issue was hotly contested, and was fairly presented to the jury, but
Choate did concede that Lenamond "stated consistently that he
couldn't find this spiral notebook," and that Choate never had
"any evidence or any facts . . . that [Lenamond] destroyed it"
(Choate, pp. 123, 163). It was also undisputed that the defendant
offered several boxes full of purchase tickets, cash tickets, sales
invoices, etc.--containing the same information that had been recorded
in the spiral notebook--but that Choate chose not to examine these
because it would be too time consuming. In particular, Choate testified:
"Q.
You know if you had gone over the spiral notebook there would be nothing
in the spiral notebook that wasn't in the seven boxes of purchases or
sale tickets, don't you?
"A.
There shouldn't be.
"Q.
All right. You never even bothered to look at the sales tickets, did
you?
"A.
I couldn't.
"Q.
Why couldn't you?
"A.
Because of the time restraints of trying to look at each ticket.
"Q.
Mr. Choate, the Government is trying to send this man to jail for ten
years, isn't that worth enough of your time to look at those tickets?
"A.
It wasn't that time because I wasn't in the criminal
investigation." (Choate, pp. 104-05).
9
Lenamond did not testify at trial. However, Dr. Murray--a clinical
psychologist who specialized in learning disability disorders and who
had examined the defendant--testified that Lenamond had a 6th grade
reading comprehensive level and a 7th or 8th grade math comprehensive
level; that he made "systematic errors" in simple arithmetic;
and that, "in his opinion, Lenamond could not complete IRS tax
forms anymore than any 11-12 year old." Lenamond, who was 22 when
he graduated from high school, paid a CPA (Murray Hay) $50-60 to prepare
his 1972 and 1973 returns and paid a bookeeper (Loretta Holbrook) $25-30
to prepare his 1974 returns.
10
These figures were approximations. In the indictment, they were changed
to alleged unreported income of $26,997 in 1973 and $31,016 in 1974. At
trial, the government's proof claimed unreported income of $29,838 in
1973 and $31,205 in 1974 (Govt. Exh. 52).
11
The defendant did not testify at trial. His son, Nolan Lenamond--who ran
the Plano store and who helped the defendant take inventory--testified
that he did not know "that having too high an inventory was going
to result in too high of profits."
12
The CPA who made these different entries on the work copy of the 1973
return testified that Lenamond "said he reworked his inventory very
carefully and that made a mistake and this was the correct
figure"--but the CPA never asked to see the inventory records and
never checked the inventory himself (Murray Hay, pp. 19-22).
13
And, it drastically reduced the defendant's business deduction for cost
of goods sold, and increased his income taxes, as shown by this partial
table used during Choate's cross-examination:
1972 1973 1974
Purchases ....... $182,000 $178,000 $187,000
Ending Inventory .. 41,000 72,000 97,000
Cost of Goods Sold .. 183,000 146,700 161,000
14
See footnote 9.
15
Affidavit of Howard A. Weinberger, dated
June 19, 1980
(submitted with Defendant's Motion to Set Aside Jury Verdict and Enter
Judgement of Acquittal).
16
The evidence established that some of the inventory had been valued at
the retail sales price or the jobber sales price, instead of cost, but
that this was corrected before the 1973 return was filed (see footnote
12 and testimony of Murray Hay and Nolan Lenamond).
17
Another IRS agent who testified at trial as an expert witness (
Oldham
) agreed that something was wrong with the inventory figures, but said
there were "no leads he could have followed."
18
The defendant's expert witness, Dr. Kenneth Ferris, testified that any
auditor or accountant who did not know that the Lenamond inventory
figures were erroneous would have been negligent--and that any
reasonable accountant would have investigated the inventory figures as
part of an audit.
19
The duty to investigate "leads" is merely part of the
government's duty to conduct a full and adequate investigation. Thus,
even if the matters just discussed were not considered "leads"
under
Holland
, the government still had a duty--because of them--to
investigate the Lenamond inventory figures. See United States v.
Boulet [78-2 USTC ¶9628], 577 F. 2d 1165, 1168 (5th Cir. 1978) (the
"government must prove a full and adequate investigation in a bank
deposits case just as it must in a net worth case"); United
States v. Hall [81-1 USTC ¶9209], 650 F. 2d 994, 999 (9th Cir.
1981) (the government had both the "duty to investigate and the
duty to establish figures with reasonable certainty" because of the
taxpayer's notation that the inventory figures were too high).
20
Contrary to the government's arguments, the attorney's statements about
the inventory did constitute a "lead" under Holland
(see testimony of IRS Agent Douglas Fortney) . . . it was "timely
furnished" since the statement was made more than two years before
trial . . . and, as discussed above, it was a "lead reasonably
susceptible of being checked." Moreover, the government had a duty
to investigate the astonishing inventory figures irrespective of whether
the attorney's statements constituted a "lead." See footnote
19.
21
IRS Agents are, in fact, instructed to investigate inventory figures in
net worth cases where the taxpayer claims the figures on the return are
too high. Paragraph 424.9(4) of the Special Agent's Handbook, 5 CCH
Internal Revenue Manual, states:
".
. . To resolve this, the investigating officers should try and
corroborate the inventory figures shown on the taxpayer's returns by
admissions of the taxpayer, statements of employees who took the
inventory, copies of inventory records, etc."
Although
this instruction applies to the value of inventory in net worth cases,
it is just as relevant to the value of inventory in a bank deposits-cash
expenditures investigation. United States v. Boulet [78-2 USTC ¶9628],
577 F. 2d 1165, 1168 (5th Cir. 1978).
22
The government contends that "there was no reasonable way [it]
could have calculated defendant's ending inventories for the years 1973
and 1974, without his assistance." Yet, since the government
did not investigate the inventory figures, it never asked for the
defendant's assistance--even though he had cooperated throughout the
investigation. See footnote 8.
23
Dr. Kenneth Ferris, the defendant's expert, described this indirect
method--and testified that it was appropriate to use it to compute cost
of goods sold when inventory records are missing or inaccurate.
24
Apparently, this method was used in the trial in United States v.
Normile [79-1 USTC ¶9151], 587 F. 2d 784 (5th Cir. 1979)
(Defendant's Response to Government's Opposition to Post-Trial Motions,
p. 4). And, paragraph 427.11 of the Special Agent's Handbook, 5 CCH
Internal Revenue Manual, states that although the gross profit
percentage method "is not a prime method of proof and by itself
would be of very little value in criminal cases," this percentage
method "is very useful for test checking; for corroborating
the results obtained by some other means of proof such as . . . bank
deposits . . ." (emphasis added)
25
If the situation had been reversed--i. e., if the Lenamond inventory had
decreased from $97,000 to $40,884 in two years--the government
could have used the industry gross percentage profit method to determine
if the inventory had been undervalued in order to avoid taxes (Choate,
pp. 178-79). Cf. Thor Power Tool Co. v. Commissioner [79-1 USTC
¶9139], 439
U. S.
528 (1979).
26
Defendant also presented similar testimony and calculations from another
expert witness, Mrs. Sharon Lake Liddy (who had served as an IRS field
agent for 5 years).
27
A taxpayer may introduce evidence of his own improperly computed cost of
goods sold to show both a lack of a tax deficiency and lack of
willfullness in civil and criminal fraud cases. See Jenkins v. United
States [63-1 USTC ¶9289], 313 F. 2d 624 (5th Cir. 1963); Lee v.
United States
[72-2 USTC ¶9652], 466 F. 2d 11 (5th Cir. 1972); and United
States v. Kramer, 447 F. 2d 210 (2d Cir. 1971).
28
The 35% figure is not based upon a comparison of similar businesses, but
upon "the relationship of the cost of goods sold and gross receipts
reported on the 1973 return." Thus, it would be reliable only if
the anomalous inventory figures are correct. It was undisputed that the
defendant's gross profit margin in prior years never exceeded 24.2%
(testimony of Dr. Kenneth Ferris).
29
Compare the investigation in this case with those discussed in United
States v. Boulet, supra (577 F. 2d 1165); United States v.
Slutsky [73-2 USTC ¶9733], 487 F. 2d 832 (C. A. 1977), cert.
denied, 416 U. S. 937 (1974); and United States v. Normile, supra
(587 F. 2d 784).
30
Because of this action, it is not necessary to consider the two
additional matters raised by the defendant--that a new trial should be
granted because of possible jury misconduct and because of alleged
errors in the jury charge.
[55-1
USTC ¶9437]Harry H. Blumberg, Appellant v.
United States of America
, Appellee
(CA-5),
In the United States Court of Appeals for the Fifth Circuit, No. 15146,
222 F2d 496,
May 13, 19
55
Appeal from the United States District Court for the Southern District
of Florida.
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7202]
Criminal prosecution: Tax evasion: Admissibility of evidence:
Excessive participation by trial court judge.--In reversing a
district court conviction of willfully attempting to evade income taxes
for 1946 and 1947, the circuit court held that prejudicial error was
committed when the district judge participated too much in the trial and
when he admitted evidence of prejudicial nature which showed only
expenditures, after the government had stated that it would rely upon
the "specific omissions" theory of guilt. It was also error
when the judge then refused to instruct the jury upon the taxpayer's
theory, supported by certain evidence, that such expenditures were made
from prior accumulated capital, rather than from current income. The
district judge was found to have asked "too many questions"
and to have made "too many interruptions", with the result
that the jury must have considered him "as interested in the case
on the side of the prosecution." It was not material to the theory
on which the case was tried to introduce evidence having to do with
moneys taken by taxpayer's wife to New York and with large expenditures
made by them in launching an elaborate wedding party in a New York hotel
to celebrate the marriage of their daughter to the son of a prominent
New York banker. The circuit court also held, however, that taxpayer's
books and records had not been secured from him in violation of his
constitutional rights, and that the district judge had properly ruled
that the quality of the accounting services furnished to taxpayer during
the two years in question was not a proper matter for opinion evidence.
Claude
Pepper, Arthur B. Cunningham, Philip T. Weinstein,
Miami
,
Fla.
, for appellant. Vernon W. Evans, Jr., Assistant United States Attorney,
Tampa
,
Fla.
, James L. Guilmartin, United States Attorney,
Miami
,
Fla.
, for appellee.
Before
HUTCHESON, Chief Judge, and DAWKINS, District Judge.
HUTCHESON,
Chief Judge:
Convicted
of willfully attempting to defeat and evade federal income taxes owing
for the calendar years 1946 and 1947, in violation of Section 145(b), 26
U. S. C., defendant, appealing from the judgment imposing a fine of
$20,000 and an imprisonment of three years, is here insisting that the
trial was attended with prejudicial error and the judgment may not
stand.
The
government did not rely in this case upon the net worth and expenditures
method of proof, and the defendant did not below, he does not here,
dispute the fact that for the years in question he did not report the
income which the government witnesses testified was received by him in
those years and not reported. On the contrary, conceding that there were
omissions and that he is civilly liable for the deficiencies caused
thereby, he defended below, and defends here, on the ground that the
omissions were not willful, and he was, therefore, not guilty of the
crimes charged. 1
[Reversible
Errors]
In
support of his insistence that the judgment must be reversed for the
errors assigned, appellant presents six questions for our decision. 2 For the
reasons hereafter stated as briefly as may be as to each, we are of the
clear opinion: that the first, second, fourth and fifth questions should
be answered in the negative, and of the equally clear opinion that the
third and sixth questions should be answered in the affirmative; and
that these errors were greatly prejudicial and require a reversal.
While
appellant has briefed with thoroughness and presented with vigor and
apparent confidence each question raised, he has devoted a larger
portion of his brief to a discussion of the first, second and third
questions, presenting the claimed errors in: (1) holding that
appellant's books and records had not been secured from him in violation
of his rights under the Fourth and Fifth Amendments; (2) not submitting
to the jury under an appropriate instruction, whether they were so
secured; and (3) admitting irrelevant but highly prejudicial evidence of
expenditures and the refusal of special charges made necessary thereby.
[Production
of Books]
We
take up the errors presented by the first and second questions to say
that we agree with counsel's general propositions, that compulsory
production of a taxpayer's books and records for the purpose of use in a
criminal prosecution would be violative of constitutional protection
against self incrimination, and have many times said so. Cf. White v.
U. S.
, 194 Fed. (2d) 215 [52-1 USTC ¶9204]. We are convinced, however,
that the record, including the testimony of the defendant himself,
contains no evidence supporting the claim made on this appeal, that the
examinations made of him, his books and records were conducted without
his consent, and the books and records themselves were obtained from him
not voluntarily but by coercion. On the contrary, we think the record is
inconsistent with any other theory than that the defendant voluntarily,
indeed without reservations of any kind, discussed the matter of his tax
liability frankly and fully with the government agents in an effort to
reach an agreement as to, and obtain a settlement of that liability.
It
is true that there was no express disclosure made that a purpose in
obtaining the evidence was to proceed criminally against him. On the
other hand, though defendant had undoubtedly hoped, and may have
believed, that no criminal prosecution was intended, there was no
representation made to him that the information sought was only for
purposes of settling his civil liability. Under these circumstances, we
think: that there was no obligation on the agents to inform him that the
matters inquired about might be used in a criminal proceeding; that it
was no breach of his constitutional rights not to so "inform
him" and that the matters propounded as error under this question
are not such.
[Opinion
Evidence]
Passing
the third question for the moment and taking up the fourth, the claimed
error in refusing to allow an expert witness to give his opinion as to
the character of the accounting services which had been rendered to the
appellant during the years in question, we think little need be said
about it other than that if the exclusion of the proffered testimony was
error, it did not deprive the defendant of substantial evidence making
the action prejudicial, and, in the second place, we think the court was
correct in ruling that the matter, on which the opinion of the witness
was tendered, the quality of the accounting services furnished to
appellant during the two years, was not a proper matter for opinion
evidence.
When
it comes to the fifth question, counsel's statement and argument thereon
make it clear that the matters presented under it are more relevant to
the general claims of error under the sixth question, the undue
intervention of the court in the course of the trial and the prejudice
to the defendant arising thereout, than to any particular benefit, of
which the claimed restrictions on the particular cross examination had
deprived the defendant.
Referring,
therefore, to the sixth question, so much of the discussion under the
fifth as properly relates to it, and considering the fifth question only
as a complaint that defendant was deprived of particular information, we
do not believe that a sufficient showing is made of a truly harmful
result in the sense of depriving defendant of information to which he
was entitled. We do think, though, that treating the interruptions dealt
with as matter in point under the sixth general question, they do tend
to support the complaint there made.
[Evidence
of Expenditures]
Coming
now to the third question, whether the admission, over defendant's
objection, that it was not material to the theory on which the case was
tried, of evidence having to do with moneys taken to New York by
defendant's wife and with large expenditures made by them in launching
an elaborate and expensive wedding party in a New York hotel to fitly
celebrate the marriage of their daughter and the son of a prominent New
York banker, was erroneous and prejudicial, we have no hesitancy in
saying that it was, and that the erroneous admission was emphasized,
exaggerated and made greatly more prejudicial 3 by the
refusal of the court to give defendant's requested charges Nos. 15 and
16, or some similar charge.
The
government's attempted avoidance of the error of admitting this highly
prejudicial evidence by the statement that the evidence was not offered
to prove that these expenditures were of money which had not been
reported by defendant or that they represented the concealment or
evasion of income tax on income over and above the amounts testified to
and admitted by the defendant as proper deficiencies, but that they were
admissible on the issue of willful intent, does not mitigate, indeed it
greatly aggravates the error and resultant injury.
Under
the theory upon which the case was tried, that specifically accounted
for income had been reported, a theory which the defendant himself
conceded to be true, no legitimate purpose could have been served by the
proof that the defendant's wife took to New York in a hand satchel
$30,000 in cash and deposited part of it in the bank of the man whose
son was marrying her daughter, and that they had a tremendous wedding in
one of the big hotels in the town at the cost of many thousand dollars.
With that evidence before the jury, and no corrective charge given in
respect of it, there was no possibility of defendnat's securing an
unprejudiced consideration by the jury of his claim that the omissions
were due to oversight rather than intention. In addition, with no
instruction given them in the matter, the jury is bound to have thought
that this money was additional income which had been concealed and not
reported.
The
government points, as precluding that conclusion, to a statement in the
record made by it, that it was not claiming that this was additional
income because it couldn't prove it. This statement, however, when taken
in connection with the argument of the United States Attorney about the
wedding and the money spent, 4 made the
matter more greatly prejudicial because the jury, without adequate
instruction, could well have taken it upon themselves to say,
"Well, whether the government can prove where it came from or not,
we know it was hidden and unreported money, and we are going to convict
the defendant because of it." Subject to this objection, also, is
the testimony that on that trip, part of the money that was taken up,
$10,000, was loaned by the wife to defendant's brother-in-law.
It
was error to admit the evidence, it was error to refuse the charges, and
for these errors the judgment must be reversed.
[Trial
Judge's Actions]
As
to the sixth specification of error, it is sufficient to say that, while
the judge gave a fair charge and generally conducted the trial of the
case with care and patience, it is quite plain that he did participate
too much in its trial, he did ask too many questions, he did make too
many interruptions, and that things said and done by him must inevitably
have had the effect, to an extent at least, of having the jury consider
him, as was in effect said by another United States Attorney in another
case, as interested in the case on the side of the prosecution. Cf. Steele
v.
United States
, 5th Cir., [55-1 USTC ¶9438] this day decided.
We
do not say that a district judge must ask no questions and must never
take an active part in the eliciting of testimony. It is certainly true,
though, that a judge must not only be impartial and disinterested, but
must also appear so.
Finally,
it is far better for the trial judge to err on the side of abstention
from intervention in the case rather than on the side of active
participation in it, especially when the major part, if not all of his
interruptions and interventions, though by chance rather than by design,
are, or seem to be, on, or tending to be on, the side of the government.
5
The
judgment is REVERSED and the cause is REMANDED for further and not
inconsistent proceedings.
1
This is how appellant states the matter in his brief:
"The
evidence upon which the appellant was convicted consisted of proof of
the receipt by the appellant in 1946 and 1947 of certain monies from the
sale of fruit and for the rental of property, which monies had not been
reported as income in his 1946 and 1947 income tax returns and/or those
of his wife for the same years. The returns themselves were prepared by
a firm of public accountants upon information submitted by appellant's
bookkeeper.
"The
appellant's defense was that he had never, at any time, intended to
defeat or evade his income taxes for the years in question; that he
thought that he had given a deposit slip or other memorandum of all
payment of money to his bookkeeper; that he had hired outside
accountants to check the work of his bookkeeper; that no entries had
been made in these books by appellant; that not one witness, including
appellant's bookkeeper and accountants, had ever been told to hide,
conceal, falsify or omit any of appellant's financial transactions; that
the use of cash was customary in appellant's type of business; that
appellant's bookkeeper and accountants, by their own admissions, made
numerous errors in the appellant's books; that appellant's bookkeeper
had actual knowledge of certain receipts of money which she had not
entered into the books of appellant in the belief that such receipts
were being reported directly to appellant's accountants; and that
appellant's bookkeeper would not have known how to enter a cashed check
on the books of the appellant."
2
"First Question: Did the Court err in holding that appellant's
books and records had not been secured from him in violation of his
rights under Amendments IV and V to the Constitution?"
"Second
Question: Where the trial court admitted conflicting evidence as to
whether or not appellant's books and records had been obtained from him
in violation of his constitutional rights, did the trial court err in
refusing to give the jury an appropriate instruction, when requested by
appellant, permitting the jury to reject and evidence found to be so
obtained?"
"Third
Question: In a trial for the felony of tax evasion, where the government
stated that it would rely upon the specific omissions theory of proof in
establishing its case, was it error for the trial court (1) to admit
evidence of a peculiarly prejudicial and inflammatory nature which
showed only expenditures, and then (2) to refuse to instruct the jury
upon appellant's theory, supported by adequate evidence, that such
expenditures were made from prior accumulated capital rather than from
current income?"
"Fourth
Question: Did the trial court err in refusing to allow an expert
witness--who had heard all of the evidence adduced at the trial, and who
had been appellant's accountant prior to and subsequent to the years
charged--to testify as to the accounting services which had been
rendered to the appellant during the years charged?"
"Fifth
Question: Did the trial court err in unduly restricting appellant's
counsel in his cross examination of the government agent who was chief
prosecution witness?"
"Sixth
Question: Did the trial court err (1) by participating excessively
during the trial of the case in a manner which was prejudicial to the
appellant, and (2) by interrupting one of appellant's counsel during the
close of his summation to the jury and erroneously attributing to such
counsel a mis-statement of a material fact?"
3
Hartman v.
United States
, 215 Fed. (2d) 386 [54-2 USTC ¶9522] and our cases of Jones v.
United States, 164 Fed. (2d) 398 [47-2 USTC ¶9402] and Ford v.
United States, 210 Fed. (2d) 313 [54-1 USTC ¶9233].
4
"Now in regard to this wedding up in
New York
. A man is entitled to have any kind of a wedding he wants to for his
daughter. He can spend $8500 or $85,000. That's his business. But it no
longer remains his business when he has to do it by committing fraud on
his government, because those were all concealed transactions; carrying
currency in a bag; that was concealed for a purpose, because he didn't
want anybody to know that he had that money. Now, if he spent $8500 on a
wedding, or, it don't make any difference what he spent, but it was
money that was income that should have been reported on his books from
all the reasonable inferences that can be drawn from the evidence. The
reason it was introduced in evidence here became material because it was
paid out of the
New York
bank account. The
New York
bank account was admitted in evidence as showing large dealings in large
sums of currency with no explanation of its source, so it was admissible
in evidence. Then the hotel bill at the Waldorf Astoria, the wedding
party bill was admitted in evidence because it showed on its face that
they had received $1000 and $8000 payments, and on the
New York
bank account ledger sheet is an $8000 check, corresponding in time to
$8000 payment to the hotel. So they are tied in together. So they are
tied in together and therefore the wedding bill was admitted in
evidence."
5
Gomila v.
United States
, 146 Fed. (2d) 372; and Adler v. U. S., 185 Fed. 464-472, Hunter
v.
U. S.
, 62 Fed. (2d) 217, 220, Williams v.
U. S.
, 93 Fed. (2d) 685, Berkovitz v.
U. S.
, 213 Fed. (2d) at 470-71-72 [54-1 USTC ¶9425], cited and discussed
in it.
[52-2
USTC ¶9540]
United States of America
v. Mechael Caserta, Appellant
(CA-3),
In the United States Court of Appeals for the Third Circuit, No. 10,817,
199 F2d 905,
November 21, 19
52
Appeal from the United States District Court for the Eastern District of
Pennsylvania.
Criminal penalties: "Expenditure method" of reconstructing
income: Procedure.--Taxpayer was convicted by a jury on charges of
filing false and fraudulent income tax returns for 1948 and 1949 under
Code Sec. 145(B). He had kept no records and his income was
reconstructed by the "expenditure method." In denying a new
trial, the District Court held that the method employed was proper and
that there was no error in the trial procedure. The court, however, held
that the "expenditure method" was inaccurate, since both cash
withdrawals and cash purchases were added to income and, presumably, the
same items may have been included twice. The court also held that the
reading, against the taxpayer's objection, of portions of his selective
service question-naire was reversible error. Taxpayer's objections to
the insufficiency of the evidence, the denial of his expert witness's
testimony, the disallowance of sufficient cross-examination of the
government's witness, the allowing of evidence of taxpayer's other
offenses, and the denial of a bill of particulars were without merit.
Accordingly, the District Court's decision was reversed and remanded.
Jacob
Kossman,
1325 Spruce Street
,
Philadelphia
7,
Pennsylvania
, for appellant. Thomas J. Curtin, Assistant
United States
Attorney
,
U. S.
Courthouse,
Philadelphia
7,
Pennsylvania
.
Before
MARIS, GOODRICH and STALEY, Circuit Judges.
Opinion
of the Court.
By
GOODRICH, Circuit Judge.
This
is an appeal from a conviction for income tax evasion under 26
U. S.
C. §145(B). 1
I.
The prosecution was confronted here with a situation not unusual in
income tax prosecutions. If the taxpayer had done what he was legally
required to do, keep a record of his income and expenditures, the case
would be comparatively easy. The question then would be the accuracy of
the records kept. The taxpayer here involved kept no records. How is his
violation of income tax obligation to be proved? 2 In the
effort to ascertain a non-bookkeeping taxpayer's liability, many cases
have discussed the requirements which must be met on the so-called net
worth theory. 3 This theory
is in effect that if a taxpayer's net worth has increased during a given
period in an amount greater than his reported income for that period,
there must be a discrepancy in his income tax return and payment.
An
outgrowth of this net worth method is the "expenditure" test
involved in this case. The theory of it is simple, though its
application may become difficult. It sharts with an appraisal of the
taxpayer's net worth situation at the beginning of a period. He may have
much or he may have nothing. If, during that period, his expenditures
have exceeded the amount he has returned as income and his net worth at
the end of the period is the same as it was at the beginning (or any
difference accounted for), then it may be concluded that his income tax
return shows less income than he has in fact received. Of course it is
necessary, so far as possible, to negative nontaxable receipts by the
taxpayer during the period in question. The cases show, however, a
rather surprising rule that when the discrepancy between increased net
worth and reported income is shown, the burden of explanation shifts to
the taxpayer, at the same time repeating the usual criminal law rule
that the burden throughout a criminal case is upon the prosecution. 4 We do not,
however, get into this particular ramification in the case under
discussion, for the prosecutor offered proof negativing receipts for
nontaxable sources such as gifts, inheritance and so on. 5
The
expenditure method of proof of income received judicial approval in United
States v. Johnson, 319
U. S.
503 [43-1 USTC ¶9470], 517 (1943). We think that with this case as a
foundation some of the vacillation apparent in Courts of Appeals
opinions 6 with regard
to proof in tax evasion cases should now be disregarded.
[What
Constitutes Expenditure]
What
constitutes expenditure? The natural answer is: What a man spends, of
course. How does one show expenditures? If a man has a bank account and
puts everything he receives into the account, his expenditures are
pretty well shown by what he spends it for in checking it out. But
suppose he withdraws from his bank account a sum in cash, a check made
payable to himself or an impersonal payee. Does that show expenditure?
It may well do so if we proceed on the ordinary assumption that people
do not draw money from bank accounts unless they are going to spend the
money for something. On the other hand, suppose a man writes a check to
"cash" for $500. and the same day buys an overcoat for $100.
and a suit of clothes for the same amount. Now what do we charge him
with, an expenditure of $700.? If cash withdrawals from a bank account
are to be treated as cash receipts to a person, surely it is incorrect
to charge individual items for which he has paid cash to his list of
expenditures unless it is shown that the cash bank withdrawals had
nothing to do with the individual items. Otherwise, a man doubles his
taxable income when he writes a check for "cash" and spends
the money he gets from his bank. This would be a very happy way of
increasing one's income if it could be done.
[Withdrawals
and Purchases Charged]
All
of this seems so obvious that we have had difficulty in believing that
the government's case proceeded on a different theory here. But the
record does show that this defendant was charged, in the evidence
tending to show what his income was, with both cash withdrawals and cash
purchases. It was not shown that the cash withdrawals did not go for
cash purchases. 7 Furthermore,
it is denied, even on appeal, that this was an incorrect method.
The
trial judge told the jury that they must not duplicate items. We do not
think this is enough in the case at bar in view of the testimony just
quoted.
[A
Fundamental Error]
What
has just been said demonstrates such fundamental error that defendant is
entitled to a new trial.
II.
Defendant in the court below and again here presses the point that the
evidence is not sufficient to sustain a conviction. With this we
disagree. A verdict of guilty was sustainable if the jury believed the
prosecution's witnesses and disbelieved those of the defendant.
[Expert
Testimony]
III.
The defendant also complains that he was not allowed to produce an
expert witness to controvert the expert witness for the Government. The
decisions have gone a great distance in allowing expert witnesses to aid
a jury in these prosecutions for income tax violations. 8 The reason
is pretty clear. By their very nature and cases are full of complicated
figures. An expert's testimony helps the jury understand the problem
even though the final responsibility for answering the questions
involved remains with them. 9
But
if the government is to be permitted to endeavor to establish a
taxpayer's criminal responsibility through expert testimony, the
privilege of combatting that testimony by expert testimony on his side
is open to the defendant. This is a matter of common fairness and common
sense. The difficult question is the initial one, namely, whether the
subject is a suitable one for expert testimony. That being decided
affirmatively, it follows that, as in other cases, the testimony of one
expert may be matched against that of another.
The
defendant's proffer of his expert was calculated to confuse the judge.
He offered the expert for a number of purposes and certainly among them
was involved a criticism of the government's legal theory. The court
properly told counsel that the law of the case was for the judge and not
for an expert witness. On the other hand, the defendant was entitled to
an expert witness on any points on which the prosecution was entitled to
the use of expert testimony. We think it likely that the defendant did
not get as much as he was entitled to although repeated reading of his
offer and the colloquy which accompanied it still leaves doubt as to the
nature and scope of the offer and extent of the judge's denial.
[Cross-Examination
Proper]
IV.
Defendant complains that his counsel was unduly restricted on a
cross-examination of the government's witness. This point was no merit.
Good latitude was allowed by the trial judge in the cross-examination
which was pressed far beyond the limits of the patience of most human
beings whether on a bench or not. The scope of cross-examination is in
general subject to the trial judge's discretion although in a criminal
case he must be careful not to restrict it unduly. There was no such
restriction here.
V.
Complaint is also made of another ruling in connection with the
testimony of the government's expert. He had a memorandum in his hand
which he used to refresh his memory while testifying. Counsel for the
defendant was refused the right to have the jury see this memorandum. We
doubt whether this objection is sufficient on which to found a reversal
if that were the only thing there was in the case. A reading of Wigmore,
however, will show that the refusal to let the jury see the memorandum
was incorrect. It is to be pointed out that this is not an instance of
what Wigmore calls "past recollection recorded" in which the
memorandum itself is admissible as evidence to prove what is said
therein. A writing used to refresh the memory of the witness does not,
itself, become evidence for the party whose witness uses the memorandum.
His evidence is the testimony which he gives in court. But the
memorandum which he uses to refresh his own recollections at the time of
testifying is something that counsel for the other side can see upon
demand and which the jury is entitled to see for whatever effect it may
have upon the testimony given by the witness who has been aided by the
document. This is fully discussed in Wigmore on Evidence, Sections
762-765 (3d. ed. 1940).
[Evidence
of Other Offenses]
VI.
Another complaint of the defendant is that the government introduced
evidence of other offenses. This testimony was to the effect that the
defendant had paid fines for the violation of state laws on two
occasions. The defendant now says that this was erroneous and cites the
well-known rule to the effect that a man is not to be convicted of one
crime by evidence showing that he has been convicted of another. That
was not the reason for the use of the testimony in this case. The
prosecution was endeavoring to show what the defendant spent his money
for. It might have been theater tickets, it might have been automobiles
(as it was), or a boat (as it was) or paying it out to the
Commonwealth
of
Pennsylvania
in fines. If part of defendant's income was spent for this purpose the
government may show it as part of the picture of defendant's
expenditures which it was required to make. 10 There is
nothing to the defendant's point.
VII.
Defendant claims error in the refusal of the trial judge to compel the
prosecution to give him a bill of particulars prior to trial. What has
been said by our brethren in the Seventh Circuit applies to the
situation here. In United States v. Chapman, 168 F. 2d 997 (7th
Cir. 1948) the court pointed out that in a case in which the government
proposed to use the expenditure theory, the most that the defendant
could be entitled to prior to trial was the fact that the prosecution
was to proceed upon this theory. The absence of more particularized
information was due to the defendant's failure to keep the records he
was required to keep and that fault could not be charged to the
prosecution. The same reasoning applies here. The defendant now knows
all the government knows about the theory of the case and nothing
further regarding the bill of particulars can come into it.
The
earlier decisions in this circuit, with regard to bills of particulars
in such cases, are predicated upon quite a different factual background.
11 It should
be remembered also that the granting of a bill of particulars is largely
left to the discretion of the trial judge. 12
VIII.
Finally, the defendant complains about the reading, against his
objection, of portions of his selective service questionnaire. It is not
necessary for us to discuss the purpose for which this evidence was
introduced. We will assume that it was relevant testimony if otherwise
competent.
This
point bothered the trial judge who discussed it in his opinion. See 104
Fed. Supp. 661. The questionnaire involved here contained at the bottom
a statement to the effect that the information was confidential except
for certain specified uses by the government. 13 We think it
is a matter of importance that this assurance to registrants that the
information they give is to be treated as confidential should be kept in
good faith unless the registrant, himself, consents to its disclosure.
It has been uniformly held that a third party cannot compel the
production of these questionnaires unless the registrant consents. 14 Now it is
true that there is a regulation which permits the disclosure and
examination of such information to the employees of the local board,
medical advisory board and so on ending up with the phrase "proper
representatives of the state director of selective service or the
director of selective service,
United States
attorneys and their duly authorized representatives." 32 Code Fed.
Reg. §605.32 (1943), as amended, §1606.32(a)(4) (Rev. 1951).
It
is argued from this that since the
United States
attorney may read a registrant's questionnaire he may introduce it in
evidence in a trial in which the
United States
is the prosecutor. If this were a case involving alleged violation of
selective service law we might be forced to accept the argument. The
same would be true if a man were being prosecuted for perjury for false
statements in his questionnaire. See 32 Code Fed. Reg. §1606.35(a). But
this case does not involve either one. It is a trial on an entirely
separate matter. Just because the United States attorney can look at a
piece of paper and get information from it certainly does not mean that
he may bring it into court and show it to a jury in any criminal case. 15 We think it
may prove highly injurious to the operation of the selective service
system if a registrant's confidential information is to be spread far
and wide at the wish of local prosecutors. The admission of the
questionnaire in this case was error.
The
defendant has made other points on this appeal but we do not discuss
them because they are too trivial to be worth it. It is obvious from the
foregoing that we are compelled to order a new trial. We do so with
reluctance. The government had ample evidence to sustain the conviction.
The trial judge conducted the case with great patience in spite of the
fact that he was subjected to continuous annoyance by the bad court room
manners of the counsel for the defendant.
The
judgment of the district court is reversed and the case remanded for
further proceedings consistent with this opinion.
1
"Any person required under this chapter to collect, account for,
and pay over any tax imposed by this chapter, who willfully fails to
collect or truthfully account for and pay over such tax, and any person
who willfully attempts in any manner to evade or defeat any tax imposed
by this chapter or the payment thereof, shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, be fined not more than $10,000, or imprisoned for not more than
five years, or both, together with the costs of prosecution."
2
Under section 41 of the Internal Revenue Code ". . . if no such
method of accounting has been so employed, or if the method employed
does not clearly reflect the income, the computation [of net income]
shall be made in accordance with such method as in the opinion of the
Commissioner does clearly reflect the income . . ."
3
Brodella v.
United States
, 184 Fed. (2d) 823 (6th Cir. 1950) [50-2 USTC ¶9477]; Bell v.
United States, 185 Fed. (2d) 302 (4th Cir. 1950), cert. denied 340
U. S.
930 (1951) [50-2 USTC ¶9499]; United States v. Fenwick, 177 Fed.
(2d) 488 (7th Cir. 1949) [49-2 USTC ¶9448]; Bryan v. United States,
175 Fed. (2d) 223 (5th Cir. 1949) [49-1 USTC ¶9322], affirmed 338
U. S.
552 (1950) [50-1 USTC ¶9140]; United States v. Chapman, 168 Fed.
(2d) 997 (7th Cir. 1948) [48-1 USTC ¶9312], cert. denied 335
U. S.
853 (1948).
4
See Schuermann v.
United States
, 174 Fed. (2d) 397 (8th Cir. 1949) [49-1 USTC ¶9281], cert. denied
338
U. S.
831 (1950), rehearing denied 338
U. S.
831; cases cited note 3 supra.
5
The prosecution introduced evidence that the defendant had never filed
an income tax return prior to 1945, and that he had told the
investigating tax agent that he borrowed no money prior to 1944, held no
money belonging to others, and received no gifts or inheritance of any
kind. Evidence was also introduced to show that defendant claimed his
wife and mother-in-law as dependents and that they contributed nothing
to defendant's available resources.
6
In United States v. Fenwick, and in Bryan v. United States,
note 3 supra, the court stated that when the government relies on
increased net worth and expenditures in excess of reported income it
must produce evidence that excludes all other possible available sources
from which additional funds expended could have been derived. This rule
was limited in
Bell
v.
United States
, Schuermann v.
United States
, and Brodella v.
United States
, supra notes 3 and 4, the courts there being unwilling to impose on
the government an "impossible burden of proof" in cases
proceeding on the expenditure or net worth theories.
7
In computing the defendant's taxable income the government included the
face amounts of checks drawn to "cash" totaling $2,850 during
1948, and $742.60 during 1949. It also included cash payments of $1,900
for a boat, $300 to the Clerk of Court, $783.10 to General Motors,
$1,319.98 to the Powell-Gardner Buick Co., and many others. The
investigating revenue agent testified that in cases where he had been
able to trace the proceeds of a check drawn to "cash" into an
identifiable cash purchase, the resulting depulication was eliminated.
Where tracing proved impossible, however, and where an analysis of the
respective dates and amounts of the checks and cash purchases showed no
discernable pattern, duplication was assumed not to exist and both
checks and purchases were included. The following are excerpts from the
trial transcript:
"Q.
(by defense counsel on cross-examination). Can you state for a fact that
Mr. Caserta did not use any of these cash withdrawals in payment of the
cash expenditures . . . for the years 1946, 1947, 1948, and 1949,
wherever they occur?
"A.
(by the investigating revenue agent). No, sir, I cannot state that as a
fact.
"Q.
In your tax assessment or analysis, then, you did not credit the cash
withdrawals against the cash expenditures; is that correct?
"A.
No, sir.
"Q.
Were you able to relate or trace these cash withdrawals to any other
cash expenditure not listed by you?
"A.
If I didn't list it, Mr. Kossman, I guess I couldn't have traced it to
that."
*
* *
"Q.
Now, in determining his income for the year 1947 did you add the cash
payment of $50 fine that he had made, and other cash items, $226.50,
$29.75 for his wife, $10. to the church, and I think that is
all--$306.27. Did you add that to the $4,800 [checks drawn to cash] in
order to arrive at his expenditures; is that correct?
"A.
(by another internal revenue agent). That is correct."
8
United States v. Johnson, 319
U. S.
503, 519 (1943);
United States
v. Augustine, 189 Fed. (2d) 587, 589-90 (3rd Cir. 1951).
9
See Wigmore, Evidence §1923 (3d ed. 1940), cited by this court in
United States
v. Augustine, supra. In United States v. Johnson, supra,
the Supreme Court said that testimony of an expert witness regarding the
defendant's income and expenditures did not invade the province of the
jury where all the evidence so testified to was before the jury and the
jury could not have been misled into thinking they had to accept such
testimony as determinative of the issue of tax liability.
10
In general see Wigmore, Evidence, §§ 215, 216 (3d ed. 1940). As
applied to prosecutions for income tax violations see O'Brien v.
United States, 51 Fed. (2d) 193 (7th Cir. 1931) [1931 CCH ¶9474],
cert. denied 284
U. S.
673; Capone v. United States, 51 Fed. (2d) 609 (7th cir. 1931) [2
USTC ¶786], cert. denied 284
U. S.
669; United States v. Commerford, 64 Fed. (2d) 28 (2d Cir. 1933)
[1933 CCH ¶9255], cert. denied 289
U. S.
759.
11
In Singer v.
United States
, 58 Fed. (2d) 74 (3rd Cir. 1932) [1932 CCH ¶9188] we held it error
to dismiss defendant's motion for a bill of particulars to explain the
allegations in the indictment of unreported "income from
partnership" and "other income." The result there was the
introduction at the trial of extensive evidence of income not properly
attributable to the defendant, with consequential prejudice to him even
though it was later stricken. Most of the cases require the prosecution
to give a bill of particulars to explain an indictment which alleges the
source of income, e.g., "sales," "rent," United
States v. Hall, 52 Fed. Supp. 798 (D. Conn. 1943), or to explain the
fact that the flgures alleged in the indictment do not conform with the
defendant's books, United States v. Empire State Paper Corp., 8
Fed. Supp. 220 (S. D. N. Y. 1934). No such elements exist here.
12
Wong Tai v.
United States
, 273
U. S.
77 (1927).
13
"Family Status and Dependents (Confidential except as to names and
addresses)." Information as to earnings is also marked
"confidential."
14
4
Moore
's Federal Practice 1168-1169 (1950 ed.); Gray v. Bernuth, Lembcke
Co., 8 F. R. D. 358 (E. D. Pa. 1948); Federal Life Ins. Co. v.
Holod, 30 Fed. Supp. 713 (M. D. Pa. 1940).
15
5 U. S. C. §139(b)(a) provides that if information obtained in
confidence by a Federal agency is released by it to another agency, all
the provisions relating to unlawful disclosure of any such information
shall apply to all personnel of the second agency.
[75-2
USTC ¶9654]
United States of America
, Plaintiff-Appellee v. Charles A. Esser, Defendant-Appellant
(CA-7),
U. S. Court of Appeals, 7th Circuit, No. 74-1997, 520 F2d 213,
8/12/75
, Affirming unreported District Court decision
[Code Sec. 7201]
Crimes: Tax evasion: Miscellaneous defenses.--A veterinarian was
properly convicted of willfully evading income taxes for three years. An
IRS agent was not required to warn him of his Constitutional rights at
an interview that was conducted two days before the case was referred to
the Intelligence Division. The government was not required to prove the
exact date of each offense alleged in the indictment. It was permissible
for the government not to introduce, in this bank deposits theory case,
all the deposit slips pertaining to the bank account, since it showed
that some were unreliable and others unavailable. Moreover, the trial
court did not err in permitting the testimony of a summary witness, and
it properly refused the veterinarian's instruction regarding bank
deposits. The government presented sufficient evidence to prove
willfulness and it properly refused to disclose certain survey material.
James
R. Thompson, United States Attorney, Gary L. Starkman, Guy P. Seaberg,
Assistant United States Attorneys, Chicago, Ill., for
plaintiff-appellee. Joel Murray,
Rob
ert J. Butler,
69 W. Washington St.
,
Chicago
,
Ill.
, for defendant-appellant.
Before
CASTLE, Senior Circuit Judge, BAUER, Circuit Judge, and EAST, Senior
District Judge. *
BAUER,
Circuit Judge:
Appellant-defendant,
Dr. Charles Esser, a verterinarian, was indicted on three counts of
willful evasion of income taxes for the years 1967, 1968 and 1969 in
violation of 26 U. S. C. §7201. 1
I.
Were Miranda Warnings Required
at the Outset of the Investigation?
In
the latter part of 1969, Phillip M. Smith was an auditor in the Field
Audit Division of the Internal Revenue Service. On
August 26, 19
69 he called Dr. Esser to arrange a meeting at his animal hospital on
September 4, 19
69 for the purpose of examining his books and records relative to a tax
audit for the year 1967. At that meeting he examined appellant's books
and records for the tax years 1967-1968 and observed that the total
deposits in Dr. Esser's bank accounts exceeded his stated income for the
years 1967 and 1968 by approximately $57,000 in 1967 and $34,000 in
1968. When questioned about the discrepancy, defendant could think of no
explanation for the excess deposits.
Some
time between
September 4, 19
69 and
October 1, 19
69 Smith obtained from Special Agent Gorege Stern of the Internal
Revenue Service, Intelligence Division, a list of prepared questions
which he used in a subsequent interview of Dr. Esser on
October 1, 19
69. Although he had never used the form in a civil audit before, he was
familiar with the nature of the questions which it contained and knew
that the answers to those questions could bring to light any possible,
reasonable explanation for the apparent discrepancies discovered on
September 4. Smith stated that the information elicited from the use of
the form could be utilized in a civil case, and noted that he would have
asked most of the questions included in the questionnaire anyway, but
employed it to make sure that he didn't forger anything. At the October
1 meeting Dr. Esser told Smith that he had on hand an amount of money
acquired shooting dice in 1944 and 1945, but indicated that it was
hidden, and its location would not be disclosed. Dr. Esser also stated
at this time that the hidden amounts of money were not deposited in his
bank accounts. At no time did Agent Smith advise defendant of his
constitutional rights.
Smith
first referred the case to the Intelligence Division on
October 3, 19
69, two days after the interview with Dr. Esser. He was not contacted by
any member of the Intelligence Division of the Internal Revenue Service
regarding a criminal tax fraud investigation of Dr. Esser at any time
prior to that referral. He was first contacted by Special Agent Stewart
J. Hoak of the Intelligence Division approximately two or three weeks
after the initial referral.
Defendant
claims that all evidence relating to Revenue Agent Smith's
October 1, 19
69 interview of defendant should be suppressed, because Smith did not
give any Miranda warnings to defendant prior to that interview.
That interview occurred prior to the referral of defendant's case to the
Intelligence Division. The trial court denied defendant's motion to
suppress. In our opinion the district judge was correct.
Under
this Court's decision in United States v. Dickerson [69-2 USTC ¶9556],
413 F. 2d 1111, 1117 (7th Cir., 1969), Miranda warnings are only
required in noncustodial tax investigations "at the inception of
the first contact with the taxpayer after the case has been transferred
to the Intelligence Division." This was done in the instant case.
The first contact with defendant after transfer of the case to the
Intelligence Division was Special Agent Hoak's interview of defendant on
November 21, 19
69. At the inception of that interview, Hoak advised the defendant of
his constitutional rights. Defendant does not challenge the sufficiency
of these warnings.
Relying
on a footnote in United States v. Habig [69-2 USTC ¶9557], 413
F. 2d 1108 (7th Cir. 1969) appellant suggests that since Agent Smith had
some suspicion that a criminal fraud may have been involved he had for
all purposes began the criminal investigation thus making Miranda
warnings mandatory. We cannot agree since the record discloses no
indication of unreasonable delay or collusion between Smith and any
Intelligence Agent. Consequently the motion was properly denied.
II.
Must the Government Prove the Exact Date of Each Offense Alleged in the
Indictment?
Court
I of the indictment charged that on or about
April 15, 19
68, defendant willfully and knowingly attempted to evade income tax due
for the year 1967, by filing a false income tax return. Court II of the
indictment charged that on or about
April 15, 19
69, defendant willfully and knowingly attempted to avade income tax due
for the year 1968, by filing a false income tax return. Court III of the
indictment charged that on or about April 15, 1970, defendant willfully
and knowingly attempted to evade income taxes due for the year 1969, by
filing a false income tax return. Accordingly defendant argues that
since the offense charged in each court of the instant indictment is
committed at the time the return is filed, and since each count of the
indictment specifically charges the date on or about which defendant
filed each return, the government must at least prove that each offense
charged was committed on or about a date in close proximity to the date
charged in the indictment, and on or about a date before the indictment
was returned and within the statute of limitations.
With
regard to this claim the defendant stipulated that he had filed the
returns, and that the Internal Revenue Service had received them. Each
of the returns showed on its face that it was dated in April of the year
following the tax year, and defendant identified the returns as having
been signed by him on the dates indicated. In the absence of any
evidence to the contrary, the trial court concluded that the jury could
properly infer that the returns were filed on or about the dates
charged.
III.
In a Bank Deposits Theory Case Must the Government Introduce Into
Evidence All of Defendant's Transactions in the Deposit Account?
Appellant
argues that the trial court should have granted motions for judgment of
acquittal based upon the government's failure to conduct a thorough
examination and analysis of defendant's bank deposits. We do not accept
appellant's argument and find that the trial judge had sufficient
grounds for denial of the motion for acquittal.
I.
R. S. Agent Hoak testified that deposit slips and underlying items of
deposit are customarily introduced to demonstrate the nature of the
deposits. However, in this instance it was virtually impossible to
introduce the deposit slips due to their poor quality, unreliability,
and unavailability. The government introduced the bank statements and
pass books as the most reliable evidence available. Though appellant
attempted on cross-examination to establish that the slips and items
were capable of retrieval, the question was left as one of fact for the
jury.
Defendant
argues also that the bank deposits theory requires an analysis of the
bank deposit items themselves. He contends that the government's duty to
specifically identify and analyze the defendant's deposit slips and the
underlying items is mandated by the "bank deposits cases"; and
that failure to do so is fatal to the government's case. On examination
the authorities reveal no such duty.
These
cases establish that the bank deposits theory requires the government to
prove that the defendant was engaged in an income producing business and
that regular deposits of funds having the appearance of income were in
fact made to bank accounts during the course of business. United
States v. Lacob [69-2 USTC ¶9616], 416 F. 2d 756 (7th Cir. 1969); United
States v. Stein [71-1 USTC ¶9209], 437 F. 2d 775 (7th Cir. 1971); United
States v. Morse [74-1 USTC ¶9228], 491 F. 2d 149 (1st Cir. 1974).
The total deposits figure serves as the starting point for further
analysis of the taxpayer's account. The government must do everything
that is reasonable and fair under the circumstances to identify any
non-income transactions and deduct them from total deposits. Further,
all proper deductions and credits must be subtracted. United States
v. Slutzky [73-2 USTC ¶9733], 487 F. 2d 832 (2nd Cir. 1973).
However, the government's investigators are not obliged to track down
every conceivable lead offered by the taxpayer to justify the non-income
designation of a particular item.
After
the government proves that deposits having the appearance of income were
made the defendant has the burden to explain as far as possible the
deposits. With this done the jury is entitled to infer that the
difference between the balance of deposited items and reported income
constitutes unreported income. 2
The
record herein supports the conclusion that a full investigation of
various transactions underlying defendant's deposits was conducted, and
that all reasonable steps were taken to identify and deduct non-income
items such as inter bank transfers and repayment of loans. The evidence
showed that defendant admitted to the agents that he deposited his
business receipts into his bank accounts. Further, the bank statements
introduced into evidence, particularly the statements from the business
checking account, showed regular deposits having the appearance of
business receipts. The record is replete with testimony regarding the
determination and crediting of non-income items to the total deposits.
In our opinion the evidence was more than sufficient to support the
verdict below.
IV.
Did the trial court err in permitting the testimony of a summary
witness?
Appellant
seeks to attack the testimony of the government's summary witness
predicated on the argument heretofore decided; that the deposits proof
was insufficient. The nature of a summary witness' testimony requires
that he draw conclusions from the evidence presented at trial. In the
instant case the record shows that the summary witness relied only upon
the evidence received during the trial and that he was available for
full cross-examination. Consequently the evidence was properly admitted
for the jury's consideration and the judge properly denied defendant's
motion.
The
use of a summary witness in a bank deposits case was recently reaffirmed
by this Court in
United States
v. Stein, supra. Summary testimony does not allow the witness to
invade the province of the jury as defendant argues. In United States
v. Doyle [56-1 USTC ¶9553], 234 F. 2d 788 (7th Cir. 1956), the need
for and validity of a summary testimony was upheld, so long as:
"The
sources from which the figures were obtained and the calculations
prepared were in evidence [and the defendant could enjoy] ample
opportunity to cross-examine the auditor fully as to all of those
details and as to the evidentiary sources from whence they came"
234 F. 2d at 794.
In
short, the government proved by clear, reliable evidence that defendant
had enormous bank deposits and that after deducting all non-income
sources of deposits, the business receipts far exceeded the amounts
shown on his income tax returns. This evidence was more than sufficient
to support the jury verdict below.
V.
Did the government present sufficient evidence to show that defendant
willfully engaged in criminal conduct?
Appellant's
argument that the government failed to prove an essential part of the
charge, i. e., willfulness, lacks merit. Admittedly there was no
evidence in this case of the classic indicia of fraud, e.g., duplicate
books and hidden accounts. The government however did in our opinion
present evidence sufficient to allow the jury to find that defendant
engaged in a pattern of understating income for three consecutive years.
Willfulness
may be inferred from conduct which would have the effect of misleading
or concealing such as a continual pattern of under-reporting income. See
Spies v. United States [43-1 USTC ¶9243], 317
U. S.
492 (1942); Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121 (1954); United States v. Bishop [73-1 USTC ¶9459], 412
U. S.
356 (1973). Defendant argues that there must be some type of independent
evidence, i. e., dual bookkeeping, secret accounts, testimony as to
intent, to prove willfullness and that it cannot be inferred from the
defendant's conduct. In general we agree that in almost every case there
must be some independent evidence to corroborate the willful intent that
is either inferred or shown by the defendant's actions. However, in a
case such as this wherein the facts demonstrate a clear intent to
mislead over a period of years, where the evidence is overwhelming, we
think the jury could reasonably infer that the defendant's actions were
willful.
VI.
Was the government's survey material that type which must be disclosed
under Brady v.
Maryland
?
Appellant's
arguments regarding the survey of defendant's customers can be broken
down into three separate claims. The first is that governmental counsel
misrepresented the nature of the evidence at the pre-trial conferences
which took place on or about July 1, 1974. The second is that the
defendant was prejudiced because the government failed to product
xeroxed copies of the customer's responses to the survey. The third is
that the government's references to the survey in closing argument was
improper because it was not in evidence.
Defendant
claims that government counsel misrepresented the results of the
Internal Revenue Service customer survey by stating that it showed
insignificant discrepancies between the actual receipts and reported
receipts. On January 23, 1974 the government filed its statement of
compliance with Rule 2.04 listing the documents turned over to the
defense. The servey was not turned over, and the government explicitly
represented that "it has no material that fits within the scope of
Local Rule 2.04(a) 2-6. The government did not turn over the results of
the survey because it was its opinion that the material was not
favorable to the defense. This opinion was borne out at trial in our
hindsight view.
On
March 15, 1974 the government made clear in open court that the survey
was originally conducted with a specific items case in mind, but that it
had been discarded when the proof evolved into a bank deposits case. The
government pointed out that it had no intention of using the survey at
trial. Further it was stated that the information contained in the
survey would be considered 3500 material if the authors of the responses
were ever to take the stand. The implication of this was against clear:
the survey was not Brady material and thus was not exculpatory to
the defendant. These representations were made in response to a motion
for discovery by defendant's then attorney, Mr. Warren L. Schmidt. They
were a matter of record when defendant's trial attorneys came into the
case In addition, Mr. Schmidt had told trial counsel about the survey
and was present at trial.
At
the conferences which occurred on or about
July 1, 1974
, Assistant United States Attorney Nash stated for the second time that
the government did not intend to use the survey evidence at trial
because it was insignificant to the presentation of the bank deposits
case, and because the survey itself would have constituted inadmissible
hearsay. Counsel for the defendant understood him to say that the
discrepancies which were revealed by the survey were insignificant, an
apparent misunderstanding which they imply led to their conclusion that
the survey was in fact favorable to the defendant, thus accounting for
its elicitation from Agent Hoak on cross-examination.
The
defense did not demand that the government turn over the material under Brady
or, alternatively subpoena the survey for use in its case in chief.
Instead, defendant's counsel chose to elicit the damaging testimony on
cross-examination of one of the government's primary witnesses. The only
conceivable explanation for this tactic is that counsel made an
unfortunate mistake in not apprising himself of the precise nature of
the survey results before eliciting it on his client's behalf. However,
the government cannot be held responsible for a defense tactic which
happens to strengthen the prosecution's case.
Defendant
claims that the government failed to provide photo copies of the written
responses to the survey. However the record and the supplementary
affidavits establish that the survey was tendered and ultimately turned
over to the defendant.
At
the time the results of the survey were disclosed by Agent Hoak on
cross-examination, the government indicated that defendant was welcome
to the survey and agreed to produce it in court. At this time counsel
for the defendant did not specifically request that the information be
turned over.
On
the following day of trial, October 18, the government appeared in court
with the summary and the letter responses upon which the summary was
based. Defendant objected to the government's attempt to introduce this
evidence by re-opening the direct examination of Agent Hoak. At this
time the government again explained that it had had no intention of
using this survey in the presentation of its case, but felt obliged to
produce it to offset the adverse inferences which defendant had raised
concerning its absence. The court ruled that the government could
introduce the survey on rebuttal. Ultimately, however, neither the
survey nor the patient responses were introduced into evidence by either
of the parties.
In
the afternoon of the same day, October 18, defendant's counsel made a
"demand" for the survey in court. Counsel for the government
indicated that the survey was being copied and would be provided to
defendant as promptly as possible. The court suggested at this time that
the details of the turnovers be concluded privately by the parties. At
an informal meeting which took place outside the courtroom later in the
day, the government counsel came away with the impression that defense
counsel indicated that he would be satisfied with the summary itself
since the information contained in it would simply be duplicative of the
information contained in the customer responses. However, counsel denies
making this representation in his affidavit. In the evening of the same
day, October 18, counsel for the government met with the defendant's
attorneys in the reception room of the United States Attorney's Office,
where photo copies of the 25 page summary were turned over to the
defense.
On
Sunday, October 20, defense counsel called Mr. Nash and requested the
450 letter responses. Mr. Nash indicated that it would be impossible to
get reproduction of these responses completed on Sunday but that he
would attempt to get them copied on Monday. During the course of the
next week defense counsel inquired on three occasions outside the
courtroom whether the government had had the opportunity to complete the
copying process. Mr. Nash indicated that the process was 95% completed
and that counsel could pick them up at any time. The copies were not
picked up.
The
survey was not mentioned or referred to in open court during the entire
week of October 21, until late Friday, October 25, during the
presentation of motions at the close of all testimony. At that time
defense counsel called the court's attention to the fact that the letter
responses had not yet been turned over although receipt of the summary
itself was acknowledged. The court observed that since the requests for
"summary" or "survey" may well have been confused
there was no indication that the government was withholding anything
intentionally from the defense. The defense did not request that the
court order production of the responses at this time, nor had it made
such a request for a formal order at any other time during the trial.
It
is apparent that all reasonable attempts were made to accommodate the
defendant in his less than urgent requests for the survey data. If for
some reason undisclosed in this record defendant indeed desired the
copies, he could have formally requested an order from the court prior
to the close of testimony. His failure to do so gives rise to a strong
inference that defendant's "need" for these items was an
afterthought.
Defendant's
third claim with regard to the survey is that the government's reference
to it during the course of closing argument was improper because the
survey was not in evidence. The facts do not support this claim. In its
closing argument the government restricted its observations to the
defendant's opening statement and to the cross-examination testimony of
Special Agent Steward Hoak.
In
his opening statement defendant's counsel referred to the survey when he
represented to the jury that his cross-examination of Agent Hoak would
destroy any government attempt to prove a specific item of unreported
income. The subject was thus opened up in the first moments of trial.
Subsequently, the defense forced Agent Hoak to testify on
cross-examination at some length concerning the nature of the survey
results. The subject was thus placed into evidence. The remarks of
counsel were before the jury and the testimony of Hoak was in evidence,
and it was to those statements that the evidence alone that the
government responded in closing argument. Government counsel carefully
prefaced his references to the survey results by pointing out that they
were based entirely on what "Agent Hoak said", and carefully
limited his remarks to the evidence already adduced. He did not go
beyond that testimony.
Finally,
it should be noted that this was not a close case. The unexpected survey
testimony certainly did not help the defense, but even without it the
evidence was overwhelming that the defendant committed the offense
charged. The discrepancies were large, they took place over a period of
years, and the defendant failed to explain them. Defense counsel in this
case made a tactical decision which did not detract nor contribute to
the outcome of the case to any great degree. On this issue at the very
most there was a misunderstanding here. The government could not breach
its obligations with regard to the survey, when it had no such
obligations. Consequently, in our opinion, the trial judge decided the
question properly.
VIII.
Did the Trial Court Err in Refusing the Defendant's Instruction
Regarding Bank Deposits.
Defendant
contends that the district court erred in not giving his requested
Instruction No. 17 which read:
"The
bare fact standing alone, that a man has deposited sums of money in a
bank does not prove that he owed income tax on those amounts."
The
instruction was refused because the court determined at the instruction
conference that it did not accurately reflect the theory of the defense
as claimed. In response, counsel stated that his theory of defense was
that cash earned, received or accumulated prior to the tax years in
question was not income attributable to those years. With some
modification, the court drafted and gave an instruction to this effect,
in spite of the court's observation that the defendant had failed to put
in any evidence of cash received in prior years.
In
view of counsel's own statement regarding the nature of his defense, and
the "loan repayment" evidence which he introduced, it is
apparent that Instruction No. 17 would have been misleading to the jury
if given. In the present case, the government had established
substantially more than "deposited sums of money standing
alone". Furthermore, the defendant's case as presented did not
support his claim to the court that the refused instruction embodied
defendant's "most elemental and essential theory of defense."
The instruction was properly denied.
Accordingly
it is the decision of this Court that the conviction should be affirmed.
AFFIRMED.
*
The Honorable William G. East, Senior District Judge, District of
Oregon, is sitting by designation.
1
26
U. S.
C. §7201 states as follows:
"Any
person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payments thereof shall, in addition to
other penalties provided by law, be guilty of a felony and, upon
conviction thereof, shall be fined not more than $10,000, or imprisoned
not more than 5 years, or both, together with the costs of
prosecution."
2
At trial, the government introduced evidence, primarily in the form of
bank statements, that defendant made bank deposits of $125,448.44 in
1967, $125,716.85 in 1968, and $155,189.34 in 1969. Excluding all other
sources for these deposits and giving defendant credit for all business
expenses claimed, defendant's net business profits far exceeded the
amount shown on his return:
Year
Net Profits Per
Government's Net Profit
Year Evidence Per Return
1967 .... $48,092.22 $ 6,873.28
1968 .... $48,913.31 $15,231.41
1969 .... $56,817.40 $34,595.43
The government also showed that substantial amounts of federal income
tax were due on the unreported business profits.
The
government explained in detail the method employed to analyze the
defendant's bank deposits during the hears in qeustion. Total deposits
were determined by examination of the defendant's bank statements. From
that total, all interbank deposits, re-deposits of cash, proceeds of
inheritance and gifts and all other nontaxable sources of income were
deducted.
[87-2
USTC ¶9422]
United States of America
, Plaintiff-Appellee v. Amos
Davenport
, Defendant-Appellant
(CA-7),
U.S. Court of Appeals, 7th Circuit, 86-2488,
7/15/87
, 824 F2d 1511, Affirming an unreported District Court decision
[Code Secs.
7201 and 7203 --Result unchanged by
the 1986 Tax Reform Act]
Crimes: Tax evasion: Failure to file: Jury selection: Sufficiency of
evidence: Instructions to jury.--A steel worker was properly
convicted on one count of tax evasion and five counts of willful failure
to file. He was properly denied the right to pretrial inspection of the
lists of potential jurors. It was sufficient that the public has access
to prior jury lists on a monthly basis from the office of the district
clerk. Moreover, the evidence was sufficient--bank records showed that
he had sufficient income to require the filing of returns, and the
filing of three false W-4 Forms in 1980 supported the tax evasion count
for that year. Finally, the jury instructions adequately apprised the
jury of the defendant's theory that he was innocent because he had
relied on advice given by an attorney.
Andrew
B. Spiegel, 77 W. Washington,
Chicago
,
Ill.
60604
, for plaintiff-appellee. Anton Valukas, United States Attorney, Sharon
Jones, Assistant United States Attorney, 219 S. Dearborn St., Chicago,
Ill. 60604, for defendant-appellant.
Before
WOOD, JR., POSNER, and MANION, Circuit Judges.
WOOD,
JR., Circuit Judge.
Defendant
tax protestor, Amos David Davenport, was charged in Counts One, Two, and
Three with tax evasion for the years 1980, 1981, and 1982, in violation
of 26 U.S.C. §7201 (1982), and in
Counts Four through Eight with willful failure to file his tax returns
for the years 1980 through 1984, in violation of 26 U.S.C. §7203 (1982). At the
conclusion of a jury trial the district court granted defendant's motion
for judgment of acquittal on tax evasion Counts Two and Three. The jury
convicted the defendant on the remaining counts. 1
Three
issues are raised: (1) did the defendant have the right to inspect and
copy the records maintained by the district clerk concerning selection
of prospective jurors; (2) was the government's evidence sufficient; and
(3) was the jury properly instructed.
I.
FACTUAL BACKGROUND
The
defendant worked full time on an hourly basis for the same steel company
for about twenty years. For the taxable years involved, 1980 through
1984, the defendant's annual gross income varied from approximately
$28,000 to $33,300. For the prior years for which the defendant was not
charged, 1976 through 1979, the defendant filed his tax returns, but for
the years involved in this case he did not. In March 1978 when the
defendant filed his 1977 federal income tax return he showed some signs
of becoming, as he eventually did, a tax protestor. With his return he
enclosed a letter to the Internal Revenue Service ("IRS") in
which he explained how he was computing his taxes:
Nowhere
in the instruction booklet could I find a computation table that ideally
conforms to my particular demands. * * * Ex-President Richard M. Nixon
and cohorts has had access to such a table apparently, in that he based
his taxes on less than one half of one percent .005 percent. * * * This
is the formula I am basing my taxes on since the Constitution of the
United States of America requires that taxes be levied equal to all.
Based
on his self-serving analysis of the Constitution the defendant then
requested a refund of $3840.62 from the taxes that had been withheld in
accordance with the Form W-4 he had filed with his employer on which he
had claimed three exemptions.
Two
years later in March 1980 the defendant filed a new Form W-4 on which he
merely claimed to be "Exempt" from withholding, which resulted
in no federal taxes being withheld by his employer for that year. For
some reason the defendant was not satisfied, as manifested two months
later by his filing another Form W-4, again claiming to be exempt, and
by filing yet another Form W-4 in December of that year on which in
addition to his claim of being exempt he advised the IRS that he was a
full-time student. In January 1981 he again filed a new Form W-4
claiming 31 allowances, a sizeable number for a full-time student. This
reduced the defendant's income tax to a minimal sum. He filed a
considerably greater number of Forms W-4 than he did tax returns.
In
March 1985 the United States Attorney for the district, as a polite
gesture, had hand delivered to defendant's home a letter that advised
the defendant and his wife that the grand jury was very interested in
their tax paying behavior and suggested that they file tax returns. The
defendant's response was not considered by the United States Attorney to
be adequate. The defendant advised the United States Attorney that prior
to receiving the government's letter he and his wife had done a lot of
research and studying on the subject of income tax and that they were
continuing their research. Perhaps that "studying" was what
the defendant had reference to when he claimed to be a full-time
student. In any event he got himself indicted.
At
trial an IRS Revenue Agent, Richard Lexby, testified as an expert
witness in determining income and computing the resulting income tax
liability. His testimony established that the defendant was required to
file tax returns for the pertinent years because the defendant's gross
income exceeded $6400. Revenue Agent Lexby explained that the
defendant's gross income filing requirement of $6400 was computed by
adding the exemption allowed for a married couple filing jointly to the
individual exemptions for the defendant, his wife, and his daughter.
The
defendant did not testify in his own behalf. Only one witness did, John
Hyde of Hammond, Indiana, who described himself as a businessman and an
Illinois and Indiana lawyer, but who had practiced only off and on since
1952. In general Mr. Hyde testified that he and the defendant attended
various meetings sponsored by Citizens for Just Taxation during 1980,
and thereafter he conversed with the defendant about tax law. His
theory, as Mr. Hyde said he explained to the defendant, was that the
income tax is a tax on net receipts after deduction of all expenses, and
that wages were therefore not income. Further, he advised the defendant
that the tax laws did not apply to him, but only to those working for
the government or to officers in corporations. In addition Mr. Hyde
stated to the defendant that 98 percent of federal reserve notes are
"bogus." The defendant liked what he heard. However, on
cross-examination Mr. Hyde admitted that he also advised the defendant
that there were cases that had held to the contrary, that wages were
income and that the defendant risked criminal prosecution if the
defendant followed his advice. At least that much of Mr. Hyde's advice
to the defendant was absolutely correct. 2
II.
ISSUES
A.
Jury Lists
The
defendant sought the right prior to trial to inspect and copy all the
records maintained by the district clerk concerning the selection of
prospective jurors pursuant to section 1867(f) of the Jury Selection and
Service Act ("Act"). 28 U.S.C. §§1861-1869 (1982). 3
The
defendant's motion to inspect jury lists without supporting affidavit
relied on the authority of Test v. United States, 420 U.S. 28
(1975), and defendant's sixth amendment rights. The defendant sought in
particular the completed "Juror Qualification Questionnaires so
that a meaningful review of the potential jurors can be conducted by the
Defendant." 4 The
defendant alleged that the jury selection plan had the effect of
systematically excluding from the master lists disproportionate numbers
of students, blacks, people with Latin surnames, and citizens who are
not registered to vote. As an example defendant claimed that in one
Chicago
ward in a particular primary election only 103,000 of the 257,000
Hispanics eligible to register to vote had in fact registered. 5 The
defendant recognizes the validity of using voter registration lists as a
primary source for selecting prospective jurors, but argues that the
lists must be supplemented from other sources. The defendant also relies
on the general policy statement in section 1861 of the Act that all
citizens shall have the opportunity to be considered for jury service in
the district courts, and the provisions in section 1863(b)(2) that the
plan shall prescribe other sources of names in addition to voter lists
where necessary to foster that policy.
We
discussed similar issues in United States v. Gometz, 730 F.2d 475
(7th Cir.) (en banc), cert. denied, 469 U.S. 845 (1984). In Gometz
we considered the fact that although there was only a 30 percent return
to the clerk's office of juror qualification forms mailed to registered
voters, the response generated over 4000 qualified people for the jury
wheel. Gometz had objected to the small numbers of blacks in the wheel
and even argued that persons marked by a certain type of personality,
those who are "anti-authoritarian" and therefore would ignore
the system, would also be excluded. We held, however, that it is the
size of the sample which is significant rather than its ratio to the
population from which it is drawn that determines whether the method is
satisfactory. The Act, we hold, does not require that prospective jurors
be conscripted to satisfy some rigid and unrealistic formula.
The
jury plan for the Northern District of Illinois does have a provision in
compliance with the Act that at such time as the court may find that the
use of other prospective juror sources is necessary to foster the policy
of the Act the court may direct that other sources be used. It is left
to the court to determine the other sources whenever that need may
arise. The defendant, however, is not satisfied because the other
possible sources are not identified in the plan itself. The defendant
claims that over 20 percent of the persons who are eligible for jury
duty are not registered voters and are therefore excluded, thereby
making the use of other sources necessary.
Test
v.
United States
, 420
U.S.
28, 30 (1975), holds that a criminal defendant has an essentially
unqualified right to inspect jury lists. That brief three-page opinion
does not fully resolve the present case although the defendant has
attempted to cast his motion in a Test context. The court of
appeals in Test had not addressed the issue although the district
court had denied the motion to inspect the lists. The Supreme Court
remanded the case to give the defendant the opportunity to inspect the
jury lists so that he might attempt to support his challenge to jury
selection procedures. No documents were involved in Test other
than jury lists. Test does not hold that completed juror
questionnaires must be made available to defendants in addition to jury
lists. Neither party has claimed in the present case that the government
had access to the questionnaires, while the defendant did not.
Prior
jury lists on a monthly basis are available as a public record in the
clerk's office. Defendant has shown no reason why those lists would not
be adequate for his purposes. If the system is not working in accordance
with the Act's requirement the available lists could be of use in
establishing an alleged deficiency. Defendant has not demonstrated why
other records besides those available jury lists might be required.
The
Act itself, in section 1867(f), provides that the contents of records or
papers used by the clerk shall not be disclosed unless those records'
contents are shown to be "necessary" for the preparation of a
motion to claim, under section 1867(a), that there has been a
"substantial failure to comply" with the Act. The defendant
has not shown why more is needed than what is already available or why
the statutory prohibition of disclosure needs to be breached. Neither
has the defendant set forth any "substantial failure to
comply." Even if defendant's speculation is correct about those
persons who are not adequately represented on the voter registration
lists no substantial failure would exist. There is no need to search for
and use other sources. Voter lists take in a cross section of the
community of sufficient magnitude to satisfy the Act in the absence of
some particular circumstance or scheme undermining the worthy purposes
of the Act. The defendant claims nothing of that sort, only that the
voter registration lists do not have enough names from certain
categories, particularly Hispanics. The jury lists already available to
defendant could have been used to try to show some substantial Hispanic
disparity. Relying merely on names might not always be completely
accurate for that purpose, but what was available was not used here.
Defendant
is making a claim that appears to us to lack any bona fide basis, a
frivolous exploration. What defendant really desires, and what he
particularly asked for in his motion, were the juror questionnaires
completed and returned to the clerk. Those questionnaires contain
prospective jurors' home addresses and other personal information. To
give the defendant an absolute right of routine access to all materials
would be an amendment of the Act. The defendant may be seeking those
forms as an aid for voir dire examination purposes, but that is not the
purpose of the questionnaires. If these completed judicial jury forms
were released to defendants generally there would exist the possibility
of substantial abuse of the information the forms contain, which could
have serious consequences for individual jurors and the system. 6
B.
Sufficiency of the Evidence
The
defendant's motion for judgment of acquittal at the close of the
government's case was allowed only as to Counts Two and Three, which
were tax evasion charges for the years 1981 and 1982. The district judge
found the government's proof insufficient to show that the defendant was
not entitled to the 31 allowances the defendant claimed on his new Form
W-4 filed in January 1981. 7 However, the
district court denied the defendant's motion as to Count One, which was
the tax evasion charge for the year 1980. On the Form W-4 filed for that
year the defendant claimed to be exempt because he was a full-time
student, whereas it was clear he was still regularly employed as he had
been for prior years at the steel company.
The
defendant claims that the trial judge should also have allowed his
motion as to Count One because the Form W-4 in question, on which the
defendant claimed to be a full-time student, was dated
December 18, 1980
, and was therefore only in effect a few weeks until the end of the
year, or no later than
January 18, 1981
, at which time the defendant filed a new Form W-4 on which he claimed
the 31 allowances. That argument is of no moment because the Form W-4
filed on December 18, 1980, was the third false Form W-4 the defendant
had filed for that year and obviously was a part of his scheme to avoid
paying taxes for that year.
The
defendant also claims that there was reasonable doubt that he had a
substantial tax liability for 1980. This argument is based on the claim
that he could have been entitled to additional deductions, if itemized,
above the standard deduction and that those unknown deductions are
hidden in his extensive use of cash. Subtracting the $1538.32 withheld
in taxes by the defendant's employer in 1980 Revenue Agent Lexby
calculated a tax deficiency owing of $3358.68. Revenue Agent Lexby gave
the defendant credit for any possible deductions that could have been
itemized.
Our
standard of review of a sufficiency of the evidence claim has long been
recognized to be that we will affirm the conviction if after viewing all
of the evidence, along with reasonable inferences in the light most
favorable to the government, there is substantial evidence supporting
the verdict, Glasser v. United States, 315 U.S. 60, 80 (1942), or
if there is at least some evidence from which a jury could find guilt
beyond a reasonable doubt, United States v. Redwine, 715 F.2d
315, 319 (7th Cir. 1983), cert. denied, 467 U.S. 1216 (1984).
It
is equally clear that to sustain a conviction for income tax evasion the
government must prove beyond a reasonable doubt: (1) an affirmative act
constituting an evasion or attempted evasion of the payment or
collection of taxes; (2) the existence of a substantial tax deficiency;
and (3) that the defendant acted willfully. Sansone v. United States
[65-1
USTC ¶9307 ], 380 U.S. 343, 351 (1965); United States v.
Foster [86-1 USTC ¶9327 ],
789 F.2d 457, 459 (7th Cir.), cert. denied, 107 S.Ct. 273 (1986).
Defendant
contends mainly that the government did not establish the existence of a
substantial tax deficiency. Revenue Agent Lexby testified that he
analyzed the bank account records of the checking account into which the
defendant deposited his steel company paychecks. This analysis revealed
the defendant's extensive use of cash. The records showed total deposits
of $133,000 from 1980 to 1984 from which well over half was withdrawn by
the defendant in the form of checks made out to cash, all in amounts of
$100 or more. The defendant also purchased two automobiles and made the
car payments all in cash.
In
response to Revenue Agent Lexby's analysis the defendant argues that he
had some excess unidentified deductions he was entitled to claim which
were unaccounted for by Revenue Agent Lexby; but the defendant's
argument is all theoretical. The government easily showed the amount of
the defendant's wages from his employer. Some cancelled checks were
introduced to help substantiate legitimate deductions, an example being
the defendant's real estate taxes. This type of legitimate deduction
generally may also include such things as medical expenses, charitable
contributions, casualty losses, and interest, among others. The
defendant's other tax records in evidence showed no claim for excess
itemized deductions in prior years. The evidence as a whole was
sufficient to preclude any significant possibility that the defendant
had excess deductions that he would have been entitled to claim if he
had itemized them. His specific deductions were below the standard
deduction for which he was given credit.
It
is neither necessary nor reasonably practicable to require the
government to prove that there are no other conceivable deductions of
any sort to which the defendant might be entitled in the absence of some
indication that they may in fact exist. To require otherwise would force
the government to trace all the miscellaneous payments the defendant had
made. If other than theoretical deductions actually existed, the
defendant had a self-help opportunity to prove the existence of the
deductions, an opportunity he chose not to take. United States v.
Lacob [69-2
USTC ¶9616 ], 416 F.2d 756, 759-60 (7th Cir. 1969), cert.
denied, 396
U.S.
1059 (1970).
There
have been many greater tax deficiencies resulting from tax evasion which
we see on appeal, but the little more than $3000 in taxes the defendant
evaded paying will amply suffice for the purpose. United States v.
Cunningham [83-2 USTC ¶9730 ],
723 F.2d 217, 231 (2d Cir. 1983) (holding additional tax of $2617 to be
substantial), cert. denied, 466 U.S. 951 (1984); United States
v. Siragusa [71-2
USTC ¶9730 ], 450 F.2d 592, 595-96 (2d Cir. 1971) (holding
taxes due of $900, $2209, and $3956 over three years to be substantial),
cert. denied, 405 U.S. 974 (1972).
C.
Instructions
The
defendant lastly complains that the district court improperly instructed
the jury on the element of willfulness and on his corresponding defense
that he had a good faith misunderstanding of the law. He claims that the
district court improperly modified his theory-of-defense instruction. In
addition the defendant argues that the district court committed error
when it refused to give his lesser-included-offense instruction
pertinent to Counts One and Four, arguing that failure to file is a
lesser included offense of tax evasion. It is not new law that jury
instructions are reviewed as a whole and not merely on the basis of
"one single paragraph, sentence, phrase or word." United
States v. Lang, 644 F.2d 1232, 1240 (7th Cir.), cert. denied,
454 U.S. 870 (1981).
The
jury was fully and correctly instructed on the "willful"
requirement as a voluntary, intentional violation of a known legal duty.
United States v. Pomponio [76-2 USTC ¶9695 ],
429 U.S. 10, 12 (1976). 8 The
defendant did not object to that instruction.
The
jury was then instructed on the defendant's theory of his defense to the
effect that he claimed to have relied in good faith on attorney Hyde's
advice and therefore what he did was not willful. 9 We find no
fault with that instruction as it relates to reliance on the advice of
an attorney. United States v. Baldwin [62-2 USTC ¶9644 ],
307 F.2d 577, 579 (7th Cir. 1962), cert. denied, 371 U.S. 947
(1963); United States v. Samara [81-1
USTC ¶9220 ], 643 F.2d 701, 703 (10th Cir.), cert.
denied, 454 U.S. 829 (1981).
Next,
the district judge instructed the jury on the meaning of good faith
which causes the defendant to question, as have others, 10 the
validity of our decision in United States v. Moore [80-2 USTC ¶9627 ],
627 F.2d 830 (7th Cir. 1980), cert. denied, 450 U.S. 916 (1981).
Moore
defines our view of a defendant's good faith reliance on an attorney's
advice. The advice need not be legally correct, but the defendant must
honestly and reasonably believe that the advice was correct and
therefore relied on it. The instruction, the defendant argues, in
requiring that his alleged misunderstanding of the law be
"reasonable," strips the mens rea requirement from the
Internal Revenue Code in direct conflict with United States v.
Murdock [3 USTC ¶1194 ], 290 U.S.
389 (1933), implicitly overruled on other grounds, Murphy v.
Waterfront Commission, 378 U.S. 52, 77, 80 (1964); United States
v. Bishop [73-1 USTC ¶9459 ],
412 U.S. 346 (1973); and United States v. Pomponio [76-2 USTC ¶9695 ],
429 U.S. 10 (1976).
We
do not read Murdock as requiring instructions different from
those given. Murdock was a case in which the defendant declined
on the basis of self-incrimination to answer questions when summoned
before an IRS agent, and he was therefore prosecuted for willfully
failing to supply information. Murdock explains that
"willfully" is not used in the revenue acts so that "a
person, by reason of a bona fide misunderstanding as to his liability
for the tax, as to his duty to make a return, or as to the adequacy of
the records he maintained, should become a criminal by his mere failure
to measure up to the prescribed standard of conduct." 390
U.S.
at 396. As a result the
Murdock Court
held that the defendant was entitled to the benefit of a good faith and
actual belief instruction. In the present case similar instructions were
given.
In
Bishop it was held that "willfully" means as much when
used in a misdemeanor revenue statute as when used in a felony revenue
statute. It embodies an element of mens rea, bad purpose, or evil
motive, to "separate the purposeful tax violator from the
well-meaning, but easily confused, mass of taxpayers." 346
U.S.
at 361. We see no serious conflict between the instructions given and
the Bishop holding.
Pomponio
holds that "willfully" in the revenue code context
"simply means a voluntary, intentional violation of a known legal
duty." 429
U.S.
at 12. In addition it holds that no additional good faith instruction
need be given. The defendant in the present case, however, got both.
We
have previously considered cases that disagree with Moore, United
States v. Phillips [85-2 USTC ¶9745 ],
775 F.2d 262, 264 (10th Cir. 1985), and United States v. Aitken [85-1 USTC ¶9209 ],
755 F.2d 188, 191-93 & n.2 (1st Cir. 1985), which are good
expressions of a contrary view. But we again decline for the purposes of
this case to abandon
Moore
. See
United States
v. Sato, 814 F.2d 449, 451 (7th Cir. 1987); United States v.
Thomas [86-1
USTC ¶9354 ], 788 F.2d 1250, 1255 (7th Cir.), cert.
denied, 107 S. Ct. 187 (1986). In United States v. Bressler [85-2 USTC ¶9646 ],
772 F.2d 287, 291 n.2 (7th Cir. 1985), cert. denied, 106 S. Ct.
852 (1986), we explained that "[t]he reasonableness requirement is
intended to give the jury a method by which they can distinguish between
a bona fide misunderstanding of the law and obdurate refusal to
acknowledge (present in so many tax protester cases) what the law indeed
does require."
Id.
The jury needs to be able to take reasonableness into account for that
purpose.
The
defendant also finds fault with the theory-of-defense instruction, which
was a modification of the instruction he offered. The modification
eliminated misstatements of the law and the excess language that was
already covered by other instructions. The jury was instructed that it
was defendant's theory that he did not report his income because he was
acting upon the legal advice of attorney Hyde. The instructions as a
whole fully, adequately, and correctly advised the jury of the law it
was to apply.
Even
if the defendant's preferred instructions had been given, the jury still
would have been entitled to convict the defendant. He had paid taxes on
his wages in the past and he knew how to use the Form W-4. It was
obvious that the defendant was no full-time student, but at most was a
self-described part-time student only studying ways to avoid paying his
taxes. His lawyer, upon whose advice the defendant claims he relied,
admitted on cross-examination that he advised the defendant that he was
running the risk of criminal prosecution if the defendant followed his
tax advice. In addition the defendant advised the IRS that he was going
to apply the Nixon tax formula, as he saw it, in preference to what he
understood to be the formula required by the IRS. He claimed on his
Forms W-4 to be exempt, but he was aware that he was not exempt from
paying taxes merely because he would rather not pay. His extensive use
of cash, a practice common among tax evaders, was not for mere
convenience. Moreover, he did receive correct legal advice in a letter
from the United States Attorney advising him to pay his taxes to avoid
indictment but he ignored that advice to this end.
The
defendant also argues that his conviction on Counts One, tax evasion for
1980, and Four, willfully failing to file a return for 1980, should be
reversed because the district court refused to give a
lesser-included-offense instruction. That refusal was correct because
the one is not the lesser included offense of the other. They are
separate and distinct offenses and conviction of both does not violate
the double jeopardy clause. We have recently so held. United States
v. Foster [86-1
USTC ¶9327 ], 789 F.2d 457, 460 (7th Cir.), cert. denied,
107 S.Ct. 273 (1986). The elements are different in each of the separate
crimes and the jury was separately instructed as to both offenses which
were separately charged. The jury could have found the defendant guilty
of neither, one, or both, and it chose both. This distinguishes Sansone
v. United States [65-1 USTC ¶9307 ],
380 U.S. 343, 344, 349-50 (1965), because in that case only the greater
offense was charged, not both the lesser and the greater.
Defendant's
guilt was firmly established before a jury properly instructed.
Therefore the defendant's conviction is
AFFIRMED.
APPENDIX
Following is an excerpt from the direct testimony of defense witness
John Hyde, a lawyer admitted to practice in
Indiana
and
Illinois
:
A.
So he [the defendant] said, can you explain it to me, John? I said,
well, it will take a little while, you got a half an hour. He said, oh,
yeah, take--got a lot of time.
So
I told him--oh, he said I have been doing some interesting reading
about--in the Bible. He says, Leviticus calls for a system of honest
weights and measures or just weights and measures. I don't know which
the word was. And he said, you know, also the Bible speak [sic] of money
as the fruit of the earth, substances from the earth. And that's why we
use gold and silver.
Now,
I knew--I said, well you view it from the standpoint, Dave, that the
gold and silver are used because they are honest and the politicians
can't create them. But I think there is another more significant point
about why gold and silver got to be used as money instead of printing
press paper.
And
I said--he said, what's that? And I said, well, it's the fact that gold
and silver from the beginning of history of mankind have been used for
trading purposes. And the reason that they have been used for trading
purposes is because everbody [sic] knows their value. Nobody questions
what an ounce of gold is worth. And that bears on the issue of what is
good money, Dave, because money is merely a substitute for some other
kind of consideration in a bargain and sale or a trade of any kind.
I
says, now, you have got--this is basic, you have got to understand, if
you are going to use this defense or use--or act upon this information,
Dave, you got to understand the principles.
Everything
that people do with each other, all the business they conduct, are
essentially trades. And in every trade, the principal [sic] motivating
both parties is that they believe they are getting as much from the
other guy as they are giving to him.
In
other words, what is swapped in every trade is equal in value.
Now,
if you are going to substitute money, instead of giving a person a pig
for a fur coat, you are going to give him $20 for the fur coat, then
that $20 has got to have the same value as a pig. It can't be a chimera,
it can't be an illusionary value. It has got to be real solid value. So
that's why gold and silver make good money. Because you can substitute
them and the guy that takes the gold knows he is getting something just
as valuable as anything else he might have gotten in the world. So he
makes the deal.
Q.
Did you explain to Mr. Davenport how that would affect the question of
income tax?
A.
Yeah, well, he asked me that question. He says, yeah, but John, that's
not the money. How does that affect a person's income tax status? I
said, that's basic. Your income tax is a tax not on value, but on excess
value. What do you--you mean profit and gain, John? Yes, that's exactly
what I mean. An income tax is not a tax on gross receipts. It's a tax on
net receipts after deduction of all expenses.
I
said, so the question of whether you have received anything, received
value that can constitute a profit or a gain, gets right down to the nub
of what the heck is value. Money of gold and silver has unquestioned
value.
Now,
in order to compute profit or gain, you have to compare the difference
between two separate transactions, each transaction consisting of an
equal exchange.