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The government's essential claim was that the unrecorded accounts served to mask large sums of money which constituted income to the partnership. The evidence showed that, while the cash on hand account was the principal stage at which the fraud was committed, the internal accuracy of that bookkeeping account nevertheless was preserved by a system of parallel entries. Thus, certain cash receipts deposited in the recorded accounts would not be posted in the cash on hand account; but subsequent deposits in the unrecorded accounts, in corresponding amounts, were duly noted in the cash on hand account. This, according to the government's evidence, resulted in appellants purporting to show that the amounts deposited in the unrecorded accounts had been properly recorded as income. ⁵

Appellants, on the other hand, while admitting the irregularities in the treatment of deposits in the unrecorded accounts, vigorously disclaimed the inference of fraud urged by the government. They contended that there was no evidence of any receipts not recorded as income in the cash on hand account and that, by charging as income the deposits in the personal accounts plus the total in the cash on hand account, the government had computed over $1 million in receipts twice, thus resulting in the alleged deficiency. Moreover, appellants argued that the government's own proof demonstrated the built-in inaccuracy in the cash on hand account which resulted in computations known by the government to be in error throughout.

The remainder of the evidence, particularly that bearing on the bases for the government's computations and the details of the cash on hand account, we discuss later in this opinion in connection with our consideration of the sufficiency of the evidence. The case was submitted to the jury on the bank deposits method. The jury found appellants guilty on all counts. This appeal followed.

II. Venue

Before turning to the sufficiency of the evidence, we shall consider a preliminary question raised by appellants: whether the district court erred in denying appellants' pretrial motion to dismiss for improper venue. The claim is that, while the returns involved in the instant indictment were prepared and signed in the Southern District of New York, they were filed at the IRS Regional Center at Albany in the Northern District of New York. Appellants contend that, since the offenses charged were not "committed" within the meaning of Fed. R. Crim. P. 18 ⁶ until the returns were filed at Albany, the prosecution should have been in the Northern District.

We disagree.

With respect to counts 1-3 charging appellants with making and subscribing to false partnership returns in violation of 26 U. S. C. §7206(1), the law in this Circuit is settled that venue properly lies where a false statement is prepared and signed, even though received and filed elsewhere, by operation of the "continuing offense" statute. ⁷ See, e.g., United States v. Miller, 246 F. 2d 486, 487-88 (2 Cir.), cert. denied, 355 U. S. 905 (1957). This in consonant with the view that the "statutory key verbs" control in determining venue. See United States v. Hagan [70-1 USTC ¶9258], 306 F. Supp. 620, 621-22 (D. Md. 1969) (Thomsen, Chief Judge). Here, the key words in the statute are "makes and subcribes" a false return--acts charged as having been done in the Southern District of New York. Venue accordingly was proper in that district.

We reach the same conclusion with respect to counts 4-9 charging wilful attempts to evade taxes in violation of 26 U. S. C. §7201. In United States v. Gross [60-1 USTC ¶9401] 276 F. 2d 816, 818-20 (2 Cir.), cert. denied, 363 U. S. 831 (1960), relying upon the continuing offense doctrine, we held that venue was proper in the district in which the returns forming the basis of the tax evasion charge had been prepared, even though they were signed and filed elsewhere.

That rationale is of equal force here. ⁸ In addition to the preparation of the returns in the Southern District, appellants signed them there. That provides a further significant contact and reinforces the Gross analysis. Moreover, while the indictment charged appellants with filing false returns, the offense here under consideration was the wilful attempt to evade their tax obligations. Under 18 U. S. C. §3237(a), venue will lie wherever the attempt to evade taxes was begun, continued, or completed.

We hold that the preparing and subscribing of the returns in the Southern District made venue in that district proper. ⁹

III. Sufficiency of the Evidence

(A) Adequacy of investigation

In utilizing the bank deposits method of proof, the government necessarily relied on circumstantial evidence. United States v. Doyle [56-1 USTC ¶9553], 234 F. 2d 788, 793 (7 Cir.), cert. denied, 352 U. S. 893 (1956). That imposes on us in reviewing the convictions below the duty of "bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method [as with the 'net worth' method] that is itself only an approximation." Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 129 (1954). In the context of this case, we direct our attention particularly to the adequacy of the foundation underlying the computations introduced by the government and the propriety of the investigation that led to those computations. We hold that the bank deposits method of proof in this case complied with the requirements of law and adequately supported the jury verdicts that resulted.

The requirement of a full and adequate investigation in a bank deposits case is based on the similar requirement 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. Kirsch v. United States [49-1 USTC ¶9274], 174 F. 2d 595, 601 (8 Cir. 1949). Once the government satisfies its burden of proving substantial deposits in excess of reported income, has given the taxpayer credit for properly claimed and otherwise allowable deductions, and shows that it has taken all reasonable steps to eliminate identifiable non-income items, the burden is then on the taxpayer to explain the remaining excess. United States v. Lacob [69-2 USTC ¶9616], 416 F. 2d 756, 760 (7 Cir. 1969), cert. denied, 396 U. S. 1059 (1970).

Having these requirements in mind, we must examine the adequacy of the government's investigation. The record shows that, as a result of the IRS' examination of the six bank accounts within appellants' control, it made the following analysis:

1. Checking account in name of "The Nevele" at Sullivan County National Bank.

With the exception of two unidentified items totalling some $2,000, every item of the total $1,661,639.38 deposited in this account during the three taxable years was analyzed. More than $1.5 million was identified as non-income. The remainder was charged as income.

2. Checking account in name of "The Nevele" at First National Bank and Trust of Ellenville.

Of the total $1,710,083.34 deposited in this account, more than $550,000 was identified as income to the Nevele. That figure comprised 788 individual items of which 678 were items under $1,000. The IRS' investigation of this account entailed an analysis of every item over $1,000 (with the exception of approximately $11,000), and a random analysis of items under $1,000. Only $13,456.78 of the total deposits was identified and eliminated as non-income.

3. Checking account in name of "The Nevele" at Ellenville National Bank.

In this, the major business account, more than $13 million was deposited during the three years in question. Of the items over $1,000, the IRS analyzed all but $4,000. In addition, of the items under $1,000 (all of which had a number encircled on the back of the checks), ¹⁰ some 769 were randomly analyzed. The result was the elimination of almost $3.8 million as non-income, the identification of over $800,000 as income, and the further charging as income of almost $7.5 million in unidentified items under $1,000. Some $1 million in currency deposited in this account was also charged as income.

4. Savings account in name of "Ben or Julius Slutsky" at Ellenville National Bank.

Of the total $996,297.82 deposited in this account, every item was identified. $19,500 was eliminated as non-income. The remainder was charged as income.

5. Checking account in name of "Julius or Alice Slutsky" at Ellenville National Bank.

Of the total $326,687.75 deposited in this account, every item was identified. More than $230,000 was eliminated an nonincome. The remainder was charged as income.

6. Checking account in name of " Alice Slutsky" at Ellenville National Bank.

Of the total $360,929.44 deposited in this account, every item was identified. More than $170,000 was eliminated as non-income. The remainder was charged as income.

In sum, of approximately $18 million in total deposits during the three years involved, more than $5.7 million was eliminated as non-income, ¹¹ and the remainder was charged as gross income for purposes of the bank deposits analysis. Of the total charged as income, almost $2.8 million was in specifically identified items. Almost $8.6 million, however, was in unidentified items, and a further $1 million was in currency. Appellants' principal attack on the sufficiency of the government's investigation focuses on this large sum of unidentified checks and currency charged as income.

The adequacy of a bank deposits investigation necessarily turns on its own circumstances. The reported cases indicate the kinds of factors that bear on the assessment of adequacy. The critical question is whether the government's investigation has been sufficiently adequate to support the inference that the unexplained excess in receipts was in fact attributable to currently taxable income. Holland v. United States, supra, 348 U. S. at 137. In proving its case, the government is not required to negate all possible non-income sources of the deposits, particularly where the source of the income is uniquely within the knowledge of the taxpayer. At the same time, however, the government may not "disregard explanations of the defendant reasonably susceptible of being checked". Id. at 138.

Thus, in United State v. Lacob, supra, the court upheld as adequate an investigation involving total deposits of $99,000 by a lawyer who specialized in personal injury claims with fees ranging from 20% to 331/3%. There "[o]f $39,356.33 of substantial checks deposited but not identified or explained, defendant was charged with income of $7,871.27, or 20%, because it was assumed, in the absence of other proof, that these were proceeds of cases. . . ." 416 F. 2d at 758. Similarly, in United States v. Procario [66-1 USTC ¶9263], 356 F. 2d 614 (2 Cir.), cert. denied, 384 U. S. 1002 (1966), where almost half of the total alleged professional receipts were in the form of deposits unidentified by the government, we said:

"The government relied on the fact that it excluded all possible dividends, on the small size and relative frequency of the deposits, similar to deposits and other income proven to be professional receipts, and on the fact that appellant had patients other than those whose payments were included in . . . the directly proven items of income. This was sufficient." 356 F. 2d at 618.

We hold that the government's investigation here was clearly sufficient under the particular circumstances of the case. ¹² Analysis of the nature of the business in which appellants were engaged revealed that most income items were in amounts under $1,000. Accordingly, the investigation included a detailed check of every item in an amount greater than $1,000, with very few specified exceptions. In addition, a random check of 1447 items in amounts less than $1,000 was made; and the analyzed items were found to constitute income in virtually every instance. Moreover, a further examination of the business accounts disclosed that almost every item in an amount under $1,000 was reflected by a check with a room number encircled on the back; according to the record, this specifically identified these items as guest receipts and therefore income. To hold the government to a stricter duty of investigation than it performed here would be to ignore both the "reasonableness" and "fairness" strictures that have been imposed; it would also result in an exercise in diminishing returns in terms both of the provision of relevant information to the fact-finder and of the protection of the rights of taxpayers.

Appellants' attack upon the sufficiency of the government's investigation appears further to have misconstrued the essence of the bank deposits method of proof. "[O]nce the Government proves unreported receipts having the appearance of income, and gives the defendant credit for the deductions he claimed on his return, as well as any others it can calculate without his assistance, the burden is on the defendant to explain the receipts, if not reportable income, and to prove any further allowable deductions not previously claimed." United States v. Lacob, supra, 416 F. 2d at 760 (emphasis added). Put another way, once the existence of unreported receipts is established, "the defendant remains quiet at his peril." Holland v. United States, supra, 348 U. S. at 139. Proof of the exact amount of the understatement is not required, United States v. Johnson [43-1 USTC ¶9470], 319 U. S. 503, 517 (1934); United States v. Pawlak, 352 F. Supp. 794, 796 (S. D. N. Y. 1972), nor is there any duty to negate all non-income sources of unreported receipts. United States v. Doyle, supra, 234 F. 2d at 794. Once the government showed that appellants' accounting system was such as to permit the non-disclosure of income, as well as the existence of substantial amounts of excess deposits which, after reasonable investigation, had the appearance of income, that was sufficient to warrant submitting the case to the jury.

We hold that the government adequately sustained its burden in this case.

(B) Opening Cash On Hand

As in a net worth case, Holland v. United States, supra, 348 U. S. at 132-35, an essential element of the government's burden of proof in a bank deposits case is to establish an accurate cash on hand figure for the beginning of the taxable year. If the taxpayer's deposits or other expenditures during the relevant year "came from a safety deposit box in a bank or from a hoard at home, obviously they are not 'income' when taken from their storage place and deposited in a checking account nor when spent." United States v. Frank [57-1 USTC ¶9675], 245 F. 2d 284, 287 (3 Cir.), cert. denied, 355 U. S. 819 (1957). Thus, the government must prove with reasonable certainty the amount of undeposited cash at the beginning of the year so that an appropriate amount may be subtracted from the total of deposits made during the taxable year. ¹³

In the instant case, the government alleged cash on hand at the beginning of 1965 of $78,688.84, a figure taken directly from the Nevele's general ledger. Appellants mount a two-tiered attack on the figure. First, they contend that the government's own proof demonstrated the inaccuracy of the cash on hand account in the Nevele's books--the source of the figure used--and that therefore the proper foundation for the resulting computation is lacking. Second, they argue that the government was informed by appellants of the source of the inaccuracy and that the failure to utilize that information violated the "leads" doctrine of Holland . ¹⁴ We hold that the record supports the use of the opening figure relied on by the government.

Appellants' essential contention is that the evidence showed the inherent unreliability of the cash on hand account in that the account was not properly credited when deposits were made in any of the three accounts not recorded in the Nevele's books. This resulted, according to appellants, in a double computation of large sums of money: once in the sum of deposits in those accounts and again in the use of the cash on hand account itself as an index of receipts. Whatever merit there might be in this contention if the government had relied solely on the figure in the cash on hand account to establish an opening cash on hand amount, the record clearly demonstrates sufficient corroboration to have warranted submission of the case to the jury.

First, as stated above, the proof adduced by the government which showed the manner in which appellants were able to conceal substantial sums of income alleged to have been unreported was sufficient to demonstrate that the integrity of the cash on hand account was maintained despite its use in the fraudulent scheme. Second, and of critical importance, independent evidence was introduced by which the validity of the figure shown in the cash on hand account could be tested. Specifically, the government demonstrated that in each of the years in question the deposits in the two principal business accounts during the first few days of the new year were consistent with the amount of cash indicated in the ledger account. And, finally, the cash on hand account figure was authenticated by the in-house investigation conducted by Nathan Frankel, an accountant retained by appellants subsequent to the commencement of the IRS audit. Frankel, it should be noted, had the additional benefit of full access to all of the Nevele's books and records, a privilege not afforded the government. ¹⁵

Accordingly, apart from making the opening cash on hand figure sufficiently reliable to allow the jury to consider the evidence, the factors enumerated above more than adequately negate appellants' contention that the government failed to follow up leads provided by appellants. The "leads" doctrine, as outlined in Holland v. United States, supra, 348 U. S. at 135-36, places on the government a duty of "effective negation of reasonable explanations by the taxpayer inconsistent with guilt"--a duty limited to the investigation of "leads reasonably susceptible of being checked, which, if true, would establish the taxpayer's innocence." Here, the leads furnished by appellants, such as they were, were not directed as much at the inaccuracy of the cash on hand account as against the alleged invalidity of the government's entire theory of tax evasion. In every practical sense, the ensuing investigation, which we hold to have been full and fair, consisted of a "tracking down" of the explanations offered by appellants. The essence of the government's investigation was a detailed study of the use of the cash on hand account. This led to the conclusion, bolstered by independent evidence, that the explanation offered by appellants was untrue. To require the government to do more would be to ignore the element of reasonableness embodied in the "leads" doctrine.

We hold that the government fully discharged its duty to investigate the leads furnished by the taxpayers, and that the resulting evidence was sufficient to establish with reasonable certainty the accuracy of the cash on hand figure used.

(C) Wilfulness

Appellants also challenge the sufficiency of the evidence of wilfulness. We hold that there was ample evidence to establish this essential element of the offenses charged. ¹⁶

The government was required to establish beyond a reasonable doubt that appellants acted wilfully and knowingly with the specific intent to evade their income tax obligations. United States v. Coblentz [72-1 USTC ¶9186], 453 F. 2d 503, 505 (2 Cir.), cert. denied, 406 U. S. 917 (1972). That means proof of a conscious, deliberate, purposeful act or omission, as opposed to an unconscious, unwilling, negligent or mistaken one. United States v. Platt [70-2 USTC ¶9719], 435 F. 2d 789, 793-94 (2 Cir. 1970) (§7203 violation); United States v. Berger [71-1 USTC ¶9387], 325 F. Supp. 1297, 1303 (S. D. N. Y. 1971), aff'd, [72-1 USTC ¶9329] 456 F. 2d 1349 (2 Cir.), cert. denied, 409 U. S. 892 (1972). It was further incumbent upon the government to establish intent by evidence independent of the understatement of income. Holland v. United States, supra, 348 U. S. at 139.

The proof of wilfulness in this case was clearly sufficient. In the evidence from which the jury was entitled to find intent to evade taxes was the consistent pattern of understating substantial sums of income, Holland v. United States, supra, 348 U. S. at 139; the withholding of material information from Levis, appellants' own accountant, United States v. Procario, supra, 356 F. 2d at 618; the withholding of material information from Agent Wood of the IRS, United States v. Rischard [73-1 USTC ¶9151], 471 F. 2d 105, 108-09 (8 Cir. 1973); and the resort to unorthodox accounting practices, including parallel entries, with deceptive results. United States v. Waller [72-2 USTC ¶9721], 468 F. 2d 327, 329 (5 Cir. 1972), cert. denied, 410 U. S. 927 (1973). See also Spies v. United States [43-1 USTC ¶9243], 317 U. S. 492, 499 (1943).

In short, the independent evidence of intent, aside from the fact of understatement, was sufficient to support the jury's verdict.

IV. Sentence

Appellants argue that, even if the proof was sufficient to support the guilty verdicts, the court erred in imposing cumulative sentences under Sections 7201 and 7206(1). We agree. Accordingly, we vacate the convictions and sentences imposed upon both appellants on the false filing counts (Counts 1, 2 and 3) which charged violations of Section 7206(1).

In United States v. White [69-2 USTC ¶9675], 417 F. 2d 89 (2 Cir. 1969), cert. denied, 397 U. S. 912 (1970), defendants similarly had been charged with violations of both Sections 7201 and 7206(1). Following the return of guilty verdicts under both sections, maximum cumulative fines were imposed on all counts. We reversed, saying that "the cumulative fines, insofar as they exceeded the maximum possible fine under the greater offense charged in §7201, constituted an unauthorized pyramiding of penalties." 417 F. 2d at 93. That view was premised on Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 349 (1965), where the Supreme Court held that Sections 7203 and 7207 are lesser-included offenses within Section 7201 in an appropriate case. Likewise, we held in White that "where proof of wilfully attempted evasion under §7201 also proves, as an incident to the wilful evasion, the preparing and subscribing of a fraudulent return [under Section 7206(1)], the specific form of fraudulent conduct merges into the inclusive fraud under §7201", thereby rendering improper a cumulation of penalties beyond the maximum authorized by Section 7201. 417 F. 2d at 94.

The government argues that White does not control here because in White the indictment involved only individual returns, whereas here the respective counts charge independent violations of individual and partnership returns. Unlike the unitary circumstances in White, the government urges "[s]igning a false partnership return (§7206(1)) is not a lesser included offense of personal tax evasion (§7201) because . . . the essential elements of each crime are different and each offense can be committed without committing the other."

The government's argument overlooks, however, the nature of a partnership return. ¹⁷ A partnership, unlike a corporation, is not in itself a taxable entity. The partners alone are liable as individuals for the income from their respective partnership shares, computed in addition to any other individual income. Commissioner v. Whitney [48-2 USTC ¶9354], 169 F. 2d 562, 564-65 (2 Cir.), cert. denied, 335 U. S. 892 (1948). The partnership returns, while required under the tax laws, are information returns only. 26 U. S. C. §6031 (1970). Equally important for present purposes, the offense of signing and filing a false partnership return is limited to the specific partner charged with those acts; neither the partnership nor the other co-partners are subject to punishment by reason of such offense. In short, we see no justification for treating the contemporaneous filing of a false partnership information return and a false individual return any differently from the filing of a false individual return alone. In each instance, where an indictment charges both tax evasion under Section 7201 and perjury under Section 7206(1), and the evidence at trial proves the latter as an incident of the former, "the specific form of fraudulent conduct [perjury] merges into the inclusive fraud charged under §7201." United States v. White, supra, 417 F. 2d at 94.

We therefore hold that the cumulation of penalties beyond the maximum authorized by Section 7201 is improper. The convictions of appellants on Counts 1, 2 and 3, charging the signing and filing of false partnership returns in violation of Section 7206(1), and the sentences imposed thereon, accordingly are reversed and vacated. ¹⁸

We have carefully considered the other claims of error raised by appellants, including the various charges of prejudicial error in the conduct and timing of the trial. We find them wholly without merit.

We affirm the judgments of conviction as to both appellants on Counts 4-9. We reverse and vacate the judgments of conviction and cumulative sentences imposed upon both appellants on Counts 1-3.

¹ The ensuing indictment, returned November 2, 1972, charged violations only with respect to the taxable years 1965-67. Alleged violations during the year 1964 were not included because of the running of the applicable statute of limitations.

² The Golden Gate Hotel was a separate partnership of appellants, the income of which was not involved in the instant indictment.

³ This method of analysis necessarily closely tracks the requirements of trial proof which we discuss in greater detail later in this opinion under Section III-A. See, e.g., United States v. Lacob [69-2 USTC ¶9616], 416 F. 2d 756, 759 (7 Cir. 1969), cert. denied, 396 U. S. 1059 (1970).

⁴ Count 1 charged Julius Slutsky with making and subscribing to a false partnership income return for the year 1965. Counts 2 and 3 charged Ben Slutsky with making and subscribing to false partnership income returns for the years 1966 and 1967. Counts 4, 5 and 6 charged Julius Slutsky with wilfully attempting to evade personal income taxes for the years 1965, 1966 and 1967. Counts 7, 8 and 9 charged Ben Slutsky with wilfully attempting to evade personal income taxes for the years 1965, 1966 and 1967.

⁵ This apparently is what confronted Agent Wood upon her initial discovery of the unrecorded accounts. According to her trial testimony, "[A]t that point it appeared that our review of the cash of the bill books and the deposits that were being recorded in the cash receipts books that at that point that this money had gone into income."

⁶ Fed. R. Crim. P. 18 provides:

"Except as otherwise permitted by statute or by these rules, the prosecution shall be had in a district in which the offense was committed. The court shall fix the place of trial within the district with due regard to the convenience of the defendant and the witnesses."

⁷ 18 U. S. C. §3237(a) (1970) provides:

"Except as otherwise expressly provided by enactment of Congress, any offense against the United States begun in one district and completed in another, or committed in more than one district, may be inquired of and prosecuted in any district in which such offense was begun, continued, or completed.

Any offense involving the use of the mails, or transportation in interstate or foreign commerce, is a continuing offense and, except as otherwise expressly provided by enactment of Congress, may be inquired of and prosecuted in any district from, through, or into which such commerce or mail matter moves."

⁸ Travis v. United States , 364 U. S. 631 (1961), is not to the contrary. While that case held that the alleged violation of 18 U. S. C. §1001 (making false statement) could be prosecuted only in the districts in which the affidavits had been filed, the decision surely was meant to be confined to the facts based on the unusual statute involved.

⁹ We further note the absence of any prejudice to appellants as the result of venue in the Southern District. Appellants do not claim that the prosecution there rather than in the Northern District created any difficulty in obtaining witnesses or documents, or indeed that any additional expense was incurred. Further, under 18 U. S. C. §3237(b), a person charged with violations of 26 U. S. C. §§ 7201 and 7206(1) may "elect to be tried in the district in which he was residing at the time the alleged offense was committed." In this case, that was the Southern District. We surmise that by bringing the action in the Southern District in the first instance the government avoided a likely motion to transfer under Section 3237(b).

¹⁰ Irving Greene, the Nevele's front office manager, testified that a cashier, upon receiving a check from a guest leaving the hotel, was instruced to write the guest's room number on the back of the check and encircle that number.

¹¹ In addition to the $5.7 million eliminated as the result of the government's own investigation, some $180,000 attributed to "leads" and $47,000 attributed to "guest returns" were also eliminated.

¹² Appellants' contention to the contrary is undermined to a significant degree by the testimony of Nathan Frankel, an accountant who conducted a two-year investigation of appellants' books after being retained by appellants. Frankel testified that he discovered even fewer non-income items than had the government. And significantly he did not check any of the reported accounts despite assistance by a staff of eight.

¹³ By the same token, the cash on hand at the end of the taxable year must be added to the sum of deposits to reflect the total income for that year. That procedure was followed by the government in this case.

¹⁴ At one time there was some doubt as to the applicability of the "leads" doctrine to a bank deposits case. In United States v. Procario [66-1 USTC ¶9263], 356 F. 2d 614, 617 (2d Cir.), cert. denied, 384 1002 (1966), for example, we noted the argument but found no need to resolve it upon the facts of that case. The contention that the "leads" doctrine should be confined to a net worth case is no longer tenable. See, e.g., United States v. Ramsdell [71-2 USTC ¶9627], 450 F. 2d 130, 133 (10 Cir. 1971); United State v. Stein [71-1 USTC ¶9209], 437 F. 2d 775, 778 (7 Cir.), cert. denied, 403 U. S. 905 (1971).

¹⁵ The government's pre-trial motion to require production of the books was denied on the ground of appellants' privilege against self-incrimination. United States v. Slutsky [73-1 USTC ¶9186], 352 F. Supp. 1105, 1108 (S. D. N. Y. 1972).

¹⁶ The burden of proof on the element of intent is similar for prosecutions under both Sections 7201 and 7206(1). See generally, United States v. Bishop [73-1 USTC ¶9459], -- U. S. --, -- (1973).

¹⁷ That the district court itself recognized the personal, as opposed to corporate, characteristics of this particular partnership is evident from its denial of the government's pre-trial motion to produce the partnership's records on the ground that the privilege against self-incrimination was held applicable. "Rather than an impersonal and detached business owned by absentees with all the aspects of a corporation, the Nevele hotel appears to be a personal family business, albeit large and successful." United States v. Slutsky [73-1 USTC ¶9186], 352 F. Supp. 1105, 1108 (S. D. N. Y. 1972).

¹⁸ There is some question as to the proper course that should follow our holding--i. e., whether we should vacate both the conviction and sentence on the improperly pyramided counts, or simply vacate the sentence imposed. In White, where fines and not prison terms were imposed, only the sentence was vacated. That procedure was criticized, however, in United States v. Rosenthal [72-1 USTC ¶9205], 454 F. 2d 1252, 1255 n. 2 (2 Cir.), cert. denied, 406 U. S. 931 (1972). There, noting the "collateral consequences of convictions", it was concluded that vacation of the conviction on the lesser count was also required. We agree with that approach, viewing the "collateral consequences" as particularly troublesome in a lesser-included offense case where such characterization necessarily presumes that Congress did not intend two punishments for the same crime. See also United States v. Newman [72-2 USTC ¶9719], 468 F. 2d 791, 796 (5 Cir. 1972).

Here, as in Rosenthal, moreover, "[t]here is no occasion to remand for resentencing since it is plain that the conviction[s] on the lesser included offense[s] did not lead the judge to impose a heavier sentence on the [§7201 counts] than he otherwise would." 454 F. 2d at 1256.

Appellant Ben J. Slutsky was sentenced to three-year terms of imprisonment on each of counts 2 and 3 and to five year terms of imprisonment on each of counts 7, 8 and 9, all prison sentences to run concurrently; and he was fined $5,000 on each of counts 2 and 3, $10,000 on each of counts 7, 8 and 9, all fines being cumulative.

Appellant Julius Slutsky was sentenced to a three-year term of imprisonment on count 1 and to five-year terms of imprisonment on each of counts 4, 5 and 6, all prison sentences to run concurrently; and he was fined $5,000 on count 1, $10,000 on each of counts 4, 5 and 6, all fines being cumulative.

"The net result of our vacating the convictions and sentences of both appellants on counts 1, 2 and 3 is that the remaining effective sentence for appellant Ben J. Slutsky is five years imprisonment and a $30,000 fine; that for appellant Julius Slutsky is five years imprisonment and a $30,000 fine.

 

 

[72-1 USTC ¶9103] United States of America , Plaintiff-Appellee v. Guido Anthony Penosi, Defendant-Appellant

(CA-5), U.S. Court of Appeals, 5th Circuit, No. 31,151, 452 F2d 217, 12/8/71 , Aff'g an unreported District Court decision

[Code Secs. 446, 7201 and 7203--Result unchanged by '69 Tax Reform Act]

Crimes: Failure to file returns: Tax evasion: Reconstruction of income: Expenditures method: IRS investigation of non-taxable sources of income.--Taxpayer's conviction on four counts of failure to file income tax returns and four counts of wilful evasion of income tax was affirmed. The government proved that taxpayer's expenditures did not come from tax exempt sources. Further, the government agent's investigation into possible non-taxable sources of income that taxpayer might have was sufficient where the agent interviewed friends and relatives of taxpayer and checked with financial and governmental institutions at both the present and former residences of the taxpayer.

Rob ert W. Rust, United States Attorney, Marsha L. Lyons, Assistant United States Attorney, Miami, Fla., Johnnie M. Walters, Assistant Attorney General, Meyer Rothwacks, Joseph H. Reiter, Department of Justice, Washington, D. C. 20530, for plaintiff-appellee. Daniel H. Greenberg, 40 Exchange Pl. , New York , N. Y., for defendant-appellant.

Before THORNBERRY, MORGAN and CLARK, Circuit Judges.

MORGAN, Circuit Judge:

Guido Anthony Penosi appeals his conviction for failure to file personal income tax returns and for wilful tax evasion. After considering all the assignments of error, we affirm the conviction.

Penosi was charged in an eight-count indictment with tax violations in the years 1964, 1965, 1966 and 1967. Four counts of the indictment alleged failure to file tax returns for each of these years in violation of 26 U. S. C. §7203, ¹ and the other four counts charged wilful evasion of income tax for the same years in violation of 26 U. S. C. §7201. ² At the trial before a jury the government introduced undisputed evidence that Penosi enjoyed income which, if derived from taxable sources, would be subject to taxation as follows:

                  Taxable Income           Tax Due

1964 ....             $ 7,853.70         $1,450.74

1965 ....              11,313.81          2,109.04

1966 ....              17,096.70          3,567.08

1967 ....              18,382.63          2,562.95

Using the expenditure method of proof the government established these figures by presenting real and testimonial evidence of Penosi's cash disbursements during the years in question and then subtracting any expenditures made out of accumulated funds or non-taxable sources.

In support of its assertion that Penosi's income derived from taxable rather than non-taxable sources, the government called Agent Dennis J. Jaster to the witness stand. Jaster testified that in his capacity as special agent for the Internal Revenue Service he conducted an intensive investigation in an effort to determine the source of Penosi's expenditures. The investigation covered all banks, brokerage houses, and relevant court records in the immediate area of Penosi's present home in Miami Beach , Florida , and in New York City where Penosi had resided previously. Agent Juster also contacted credit bureaus and various friends and relatives of Penosi. However, in every instance the investigation failed to reveal any sizable assets held by Penosi prior to the 1964 tax year or any other non-taxable sources of income such as loans, gifts, bequests, etc. In fact, no one contacted by Jaster, including Penosi's relatives, was able to state exactly what Penosi did for a living.

At the close of the government's case Penosi presented no evidence but argued to the jury that the government failed to meet its burden of proving that the expenditures came from taxable income. The jury disagreed and returned a verdict of guilty on all eight counts. The district judge then imposed a sentence totalling three years and nine months.

On appeal Penosi contends that under this court's decision in Marcus v. United States, 5 Cir. 1970, [70-1 USTC ¶9213] 422 F. 2d 752, the government is required to pinpoint a taxable source of income in order to sustain a conviction for tax evasion. Appellant's interpretation of Marcus is misplaced. In that case we held that the government did not prove its case by showing only that the defendant had yearly expenditures in excess of $600.00. In addition, we held the government must establish, either directly or inferentially, that the expenditures were made from a taxable source of income.

Proof of a taxable source may take several different forms according to the nature of the defendant's financial activities. The most obvious method of proving a taxable source would be to present evidence of the precise origin of the income, for example, a cancelled check by which a certain employer paid a defendant for services rendered.

However, when such evidence is not available, the government must resort to other methods of proof. In this type of case the government has to establish at the outset what was not shown in Marcus v. United States , supra, that is, the defendant's net worth at the beginning of the time period in which he allegedly failed to file a tax return. Requiring the government to show an opening net worth is simply a requirement that the government prove to a reasonable certainty that the income expended did not spring from prior accumulations or earnings for which the defendant would not be liable in taxes.

Next, the government has the burden of proving that the expenditures did not come from other non-taxable sources such as gifts, loans, bequests, or favorable law suit verdicts. Since this is actually a burden to negate certain possible facts, the government may meet the burden by producing evidence of an investigation which uncovered no sources of non-taxable income. Again, in Marcus v. United States , supra, there was no investigation showing that the expenditures were not made from tax exempt funds.

Thus, in cases where direct evidence of taxable sources is lacking, the government must negate the sources of non-taxable income by establishing an opening net worth and then showing, by investigation or otherwise, an absence of additional non-taxable sources. In this manner the government carries its burden of presenting evidence from which the trier of fact might reasonably conclude to the exclusion of all other reasonable hypotheses at the expenditures came from taxable sources. ³ The decision in Marcus v. United States , supra, applied this test and properly reversed the conviction for the reason that the government failed to negate non-taxable sources:

"If there is no established figure showing the source from which expenditures during the year can be made, or the complete lack of such source, then there is no relevance to proof of expenditures during the year, no matter how large they may be." (Emphasis supplied). 422 F. 2d at 755.

Quoting from Dupree v. United States, 5 Cir. 1955, [55-1 USTC ¶9169] 218 F. 2d 781.

In conclusion then, the requirement that the government establish a taxable source does not mean, as appellant argues, that the exact origin of the expenditures must be put into evidence and proved beyond a reasonable doubt. The requirement means only that the government must prove that the expenditures did not come from tax exempt sources.

Turning to the case at hand, we find that the government met its burden of proof by establishing the very two elements which were not established in Marcus v. United States , supra. Agent Jaster testified that he found Penosi's opening net worth to consist of but one mortgaged automobile, and that he discovered no other sources of non-taxable income. Applying the standards outlined above, this was all the government was required to prove to sustain the jury's verdict.

Penosi's next contention is that the evidence was insufficient to support his conviction because the investigation was not thorough enough to rule out all the non-taxable sources of income that Penosi might have in places other than the Miami Beach and New York City areas. We find no merit in this argument. Once expenditures are established, the government cannot be expected to conduct an exhaustive nationwide investigation when the defendant supplies no relevant leads as to where he got the money he admittedly spent. See Holland v. United States, 1954 [54-2 USTC ¶9714] 348 U. S. 121. Under the circumstances of this case, the government agent did enough to carry the burden of proof when he interviewed friends and relatives and checked with financial and governmental institutions at both the present and former residences of the defendant.

Nothing we have said is meant to imply that Penosi had the burden to supply information to the government or to testify in court concerning the source of his expenditures. The burden of proving a taxable source remained on the government throughout the trial. But when the results of the investigation were put into evidence, the government established a prima facie case, and by remaining silent, Penosi took the risk that the jury would believe the government's witnesses the find him guilty. As the Supreme Court stated in Holland v. United States , supra, the defendant who remains silent in a prosecution for tax evasion often does so "at his peril":

"But where relevant leads are not forthcoming the government is not required to negate every possible source of non-taxable income, a matter peculiarly within the knowledge of the defendant. . . .

"Nor does this rule shift the burden of proof. The government must still prove every element of the offense beyond a reasonable doubt though not to a mathematical certainty. The settled standards of criminal law are applicable to net worth cases just as to prosecutions for other crimes. Once the government has established its case, the defendant remains quite at his peril."

348 U. S. at 138, 139. ⁴

We have carefully considered each of appellant's other contentions and find them without merit.

The judgment of the district court is therefore in all respects.

AFFIRMED.

¹ Section 7203 of Title 26, U. S. C.:

"Any person required under this title to pay any estimated tax or taxes, or required by this title or by regulations made under authority thereof to make a return (other than a return required under authority of section 6015), keep any records, or supply any information, who willfully fails to pay such estimated tax or taxes, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 1 year, or both, together with the costs of prosecution."

² Section 7201 of Title 26, U. S. C.:

"Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment 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."

³ This Circuit's standard for testing the sufficiency of circumstantial evidence has been well-delineated. See, e.g., Vick v. United States, 5 Cir. 1964, 216 F. 2d 228; Davis v. United States, 5 Cir. 1971, -- F. 2d -- No. 29779, June 9, 1971 and United States v. Willoz, 5 Cir. 1971, -- F. 2d -- No. 28642 & 30037, October 19, 1971 .

⁴ In Holland , the government was able to demonstrate a likely source of taxable income which was not shown in the case at bar. However, four years after Holland , the Supreme Court granted certiorari in United States v. Massei, 1958, [58-1 USTC ¶9326] 355 U. S. 595, to state in a brief per curiam that it had not meant to imply that proof of a likely source was a necessity in such cases. If the trier of fact finds guilt, the test on appellate review turns upon the sufficiency of the evidence under the circumstantial evidence test (See footnote 3).

 

 

[71-2 USTC ¶9751] United States of America , Appellee, v. Louis Rifkin, Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 71-1411, 451 F2d 1149, 11/17/71 , Affirming unreported District Court decision

[Code Sec. 7201--Result unchanged by '69 Tax Reform Act]

Crimes: Tax evasion: Bank deposits and expenditures method: Government's obligation to investigate leads: Hearsay testimony before grand jury: Refused testimony: Pretrial notes of special agent: Prejudiced juror: Colloquy of trial judge and prosecutor.--The Court found that the Government properly established that a pharmacist failed to report large sums of cash under the bank deposits and expenditures method of proof. The Government did investigate all leads which had any substance and there was more than sufficient proof to support a finding against the taxpayer. The taxpayer's contentions that the indictment should be dismissed on the grounds that (1) the evidence before the grand jury was essentially hearsay testimony, (2) the trial court refused to hear testimony from a bank employee who would have testified that a flood may have destroyed many records of previous safe deposit boxholders, (3) the Government failed to produce at pre-trial some notes of the special agent involving statements of the taxpayer, (4) the jury deliberated after the trial judge had been advised that one of the jurors had traded at the taxpayer's pharmacy, and (6) colloquy of the trial judge and prosecutor at various times were prejudicial, were rejected.

Whitney North Seymour, Jr., United States Attorney, Elliot G. Sagor, Peter F. Rient, Assistant United States Attorneys, New York, N. Y., for appellee. Louis Bender, 225 Broadway, New York , N. Y., for appellant.

Before FRIENDLY, Chief Judge, CLARK, Associate Justice, ^* and KAUFMAN, Circuit Judge.

Mr. Justice CLARK:

Appellant stands convicted by a jury on a five-count indictment charging him with attempts to evade payments of substantial portions of his income taxes for the calendar years 1961 through 1963, inclusive, by the filing of false and fraudulent joint income tax returns (Counts one through three); and with the evasion of corporate income taxes of Vim Chemists 134 Inc., of which he was the sole stockholder and president, for the corporate fiscal years ending March 31, 19 62 and 1963 (Counts four and five); all in violation of 26 USC §7201. Six errors are claimed on this appeal: (1) Insufficient evidence to prove income tax evasion on the theory adopted--i. e., the bank deposits and expenditures method of computation; (2) abuse of grand jury process on the ground that only hearsay testimony was produced before the grand jury; (3) refusal of the trial judge to permit the appellant to counter prosecution evidence that his wife had no safe deposit box at a named bank by presenting as a surrebuttal witness an official of the bank who would testify that a flood had destroyed some of the bank's records as to safe deposit boxholders; (4) failure of the prosecution to produce at pre-trial some notes of the Special Agent covering conversations with appellant's tax counsel as to the facts of the case; (5) error in permitting the jury to continue deliberations after it had advised the trial judge that one of the jurors had traded at appellant's pharmacy; and (6) colloquy of the trial judge and prosecutor at various times in the case which was prejudicial; and a question of the prosecutor--later stricken--as to a sales tax investigation by the City of New York. We have carefully considered each of the points--as well as the totality of the trial--and have concluded that there is no ground for reversal. The judgment, therefore, is affirmed.

I. Appellant, a pharmacist, was the sole stockholder and president of Vim Chemists 134 Inc., which operated a pharmacy at No. 2 Broadway in Manhattan from 1960 to 1965. ¹ Both appellant's personal income tax returns and the corporation's income tax returns were prepared by an accountant who also prepared the corporation's formal books of account, using daily cash receipts sheets and check book stubs furnished to him monthly.

The Government's investigation of appellant began in December, 1962, as an audit of his 1961 joint return, notice of which was given on February 7, 19 63. Appellant's accountant contacted the Internal Revenue Agent, and they met in April, 1963, to conduct the audit. Soon thereafter the Agent began a check of appellant's brokerage account. Tax counsel for appellant then contacted the Agent, and the latter requested him to furnish all records of appellant's income, stock purchases and other financial transactions and sources of funds. On September 27, 19 63, the same tax counsel reported to the Agent that the money for appellant's stock purchases, save one that had been financed from his checking and savings account, came from a cash inheritance of some $65,335 from his father. According to the attorney, appellant's father had given the cash to appellant in a paper bag in 1957 or 1958. Appellants was to distribute the cash after his father's death--"since he was the most educated one in the family, and the father could trust him, he relied on him to distribute it equally between the balance of the family." Appellant, his counsel continued, kept the money in the bag from 1957 or 1958 until the father's death on May 11, 19 61, when he opened it and found $65,335 in cash. At the close of the interview, the appellant's counsel showed the agent a copy of an estate tax return for the father which was filed on September 6, 19 63, and pointed out that the amount in Schedule C of the return was the same as the amount in the paper bag.

Appellant's tax file, as well as that of Vim Chemists, was then referred to the Intelligence Division of the IRS, and a Special Agent took over the investigation. The Division uncovered that during the period January 1, 19 61 through February 11, 19 63, appellant and his wife made 122 deposits in savings and brokerage accounts, and purchased stocks, bonds and an automobile. The stock purchases totalled $65,355.75 and were made by cash, through teller's checks purchased at banks for cash by appellant's wife or employees of Vim Chemists, as well as by personal checks. The employees testified that they often received packages of cash from appellant, standing behind the counter at the pharmacy at the time, with instructions to purchase teller's or cashier's checks at the bank, payable to the name of the person designated on the outside of the packages [a broker], and to return them to appellant. Although appellant's wife testified that she always brought the cash to appellant for the stock purchases from a lock box, the evidence showed that the employees would perform these transactions earlier in the day than when the wife came to the pharmacy. In addition, other teller's checks were purchased by appellant's wife for cash from other banks. The bond purchases totalled $23,342 and were made at nine different banks, some from different banks on the same day. All of the bonds were issued to appellant's wife and himself.

The Government tried the case on a bank deposit and expenditure method of proof and contended that the purchases of stocks and bonds came from cash drained off from the cash receipts of the pharmacy and unreported on either the corporation or the personal tax returns. They estimated that some 16 percent of the pharmacy receipts were involved. During the nearly twenty-six month period in question, appellant's and his wife's deposits and expenditures allegedly exceeded his take-home pay as reported on their joint returns by $87,578.

Appellant's wife testified that she purchased the bonds at various times from funds given to here by her mother before her mother's death in 1950. She claimed these gifts were in cash, one being for $10,000 and others ranging from $50 to $1,500, all of which she put in a lock box. She also received the balance of a bank account of her mother's which was in the amount of $2,709.20.

Appellant's wife also testified about the "cash hoard." She said that after appellant's father died in 1961, he took his father's metal box from his father's apartment. At their home appellant opened the box and took out a paper sack containing money. He counted it--$65,355 in twenties, fifties and hundreds--and told her to put it in the lock box which she did not next day.

Appellant's sister, Helen, also testified about the cash hoard. She said that her father had a metal box which he kept in his closet and in which he kept large sums of money and family papers; that she had seen a paper bag--a grocery kind of bag--in which he kept the money; that at a family gathering before his death, her father told the family that everything in the box was to go to appellant, except some personal effects of the family; and that after her father's death, she saw appellant and his wife leave with the metal box.

The Government's evidence showed that the bond and stock purchases began a short time after appellant became the sole owner of the pharmacy and that they continued regularly, though intermittendly, until the notice of tax audit of February 7, 19 63; that the purchases then tapered off to a few isolated transactions; that there was a discrepancy in the statements made by the appellant's tax counsel to the Revenue Agent and the testimony at trial of other witnesses, especially about the time appellant had received the cash from his father; that the $2709.20 balance appellant's wife received from her mother's bank account was the approximate cost of three stock issues that were purchased in her name about a year later; that all the remaining stock was in the appellant's name; that the appellant's wife had also purchased $23,342 of bonds which was more than the cash she had received from her mother; that $22,000 of the stock purchased by appellant was bought before the death of the father and prior to the date when appellant's wife and sister testified that the cash hoard was delivered. In addition, the Government has checked the Social Security earnings record of appellant's father, discovering that in only two of the twenty-three years, 1937 through 1960, inclusive, had the father earned as much as $3000. His total wages during the whole period were only $30,000.

II. Appellant's chief contention is that the trial court should have granted his motion for acquittal at the close of the government's case on the grounds that the prosecution did not investigate leads as to the sources of the funds appellant deposited and expended. We hold that the motion for acquittal was properly denied. Assuming, without deciding, that in a case of this type ² it is necessary for the Government to investigate "leads" where the information is even more readily available to the defendant, the Special Agent did investigate all leads which had any substance. For example, in response to the $65,335 inheritance claim, he determined that the father earned only $30,000 over 23 years, that no estate had been admin istered and that no New York State estate tax return had been filed. He also checked into the bank account which had been left to Mrs. Rifkin, as well as Mrs. Rifkin's alleged lock box. See United States v. Nunan [56-2 USTC ¶9876], 236 F. 2d 576, 586 (2d Cir. 1956), cert. denied, 353 U. S. 912 (1957); Buttermore v. United States [50-1 USTC ¶9228], 180 F. 2d 853, 855 (6th Cir. 1950). While self-employed income was not directly negated, the charge of the court cured any defect in this regard.

Appellant insists that there is no direct evidence that any cash was taken from the pharmacy receipts and invested in the stocks and bonds. This is true, but there was more than sufficient circumstantial proof to support the jury's determination in this regard under clearly proper instructions. The jury also rejected appellant's claim that the pharmacy could not stand such a financial drain without bankruptcy.

Nor is there any substance to the contention that the prosecutor destroyed his case when he admitted that appellant may have received some money from his father. This is somewhat of an exaggeration of the prosecutor's statement in his summation that the father may have had "ordinary cash that any of us keep around the house."

The appellant's second argument on appeal is that the trial court should have dismissed the indictment on the grounds that the evidence before the grand jury was solely hearsay testimony. In United States v. Liebowicz, 420 F. 2d 39, 42 (2d Cir. 1969), we stated that dismissal of the indictment might be considered

[i]f the grand jury is misled into thinking it is getting eye-witness testimony from the agent whereas it is actually being given an account whose hearsay nature is concealed . . . [or] if the defendant could show that there is a high probability that with eyewitness rather than hearsay testimony the grand jury would not have indicted.

Here the Special Agent appearing before the grand jury explained the sources of his testimony, and the appellant has not put forward any evidence which, if introduced, would create a probability, high or otherwise, that the grand jury would not have indicted if eyewitnesses had been summoned.

Appellant's third contention is that it was error for the trial court to refuse to hear testimony, on the last day of the trial, from an employee of the Boro Branch of the Manufacturer's Trust Company. Appellant claims that this witness, only recently located, would have testified that the branch had suffered a flood which destroyed many records on previous safe deposit box holders. In this manner, appellant contends, he might have demonstrated that his wife had a safe deposit box at the Boro branch, even though existing records did not idicate this. In light of the fact, however, that Mrs. Rifkin had testified on the previous day that she was "pretty certain" that her alleged safe deposit box was in the Bay Ridge Savings Bank, it is clear that appellant exaggerates the probative effect of this refused testimony. Although it might have been better to allow the witness to testify, especially in light of the offer of the defense counsel to have the time required for such testimony to be deducted from that allowed for his summation, we find no prejudicial error in the trial court's ruling on this point.

Appellant also complains of the admission in evidence of a conversation between the Internal Revenue Agent and appellant's tax attorney. He says that the Government's failure to turn over the notes of the conversation pursuant to a pre-trial request precluded its admission. We think not. The discovery request did not include statements by tax counsel, but was limited to those of the appellant. Nor could the appellant be surprised or disadvantaged since the defense must have been well aware of the statement and did not ask for a continuance or otherwise indicate surprise. Indeed, the tax counsel had been active in the case and was attending court. Moreover, his statements were basically in agreement with appellant's own pre-trial ones. Finally, the trial judge has wide discretion in this area, and we cannot say that he abused it here. See 8 Moore 's Federal Practice §16.04[3].

We need not pause long to discuss the remaining points raised by appellant. Obviously, the juror who indicated to the jury during its deliberations that he had made purchases at the pharmacy was not disqualified by such happenstance. Mikus v. United States , 433 F. 2d 719, 723-724 (2d Cir. 1970). The mere fact of purchases alone shows no bias. See United States v. Haynes, 398 F. 2d 980, 984 (2d Cir. 1968), cert. denied, 393 U. S. 1120 (1969). Moreover in the light of the trial judge's strong admonitions to the jury, we see no error. We note also that appellant made no objection whatever until his motion for new trial after conviction. We cannot, at this late date, say that a new trial is required. See United States v. Porth, 426 F. 2d 519 (10th Cir.), cert. denied, 400 U. S. 824 (1970); Little v. United States, 331 F. 2d 287 (8th Cir.), cert. denied, 379 U. S. 834 (1964). The claimed error as to the prosecutor's inquiry with regard to the city's investigation of the payment of sales taxes was not only never answered, but the question itself was stricken, and the jury instructed to disregard it. The appellant also disagrees with some of the trial judge's statements during the trial. As we read the record, the judge was dispassionate and alert to the appellant's rights and was eminently fair in his appraisal of the contentions of the parties. Since we find no error, the judgment is affirmed.

^* United States Supreme Court, retired, sitting by designation.

¹ The corporation previously had operated a pharmacy at 134 East 59th Street during which period a Mr. Goldfarb was sole owner of all of its stock and its president. On moving to Broadway in 1960. Mr. Goldfarb sold the appellant, who was an employee of the pharmacy at the 59th Street location, fifty per cent of the stock of Vim Chemists 134 Inc. Three months after moving to No. 2 Broadway, Mr. Goldfarb sold the remaining shares of Vim Chemists to appellant.

² In a tax evasion prosecution based on the "net worth and expenditure method," the government must effectively negate "reasonable explanations by the taxpayer inconsistent with guilt" and follow-up those leads which are "reasonably susceptible of being checked, [and] which, if true, would establish the taxpayer's innocence." United States v. Holland [54-2 USTC ¶9714], 348 U. S. 121, 135-36 (1954).

 

 

[71-1 USTC ¶9209] United States of America , Plaintiff-Appellee v. Nathan Stein, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 18296, 437 F2d 775, 2/9/71 , Affirming unreported District Court decision

[Code Sec. 7201--Result unchanged by '69 Tax Reform Act]

Crimes: Attempt to evade or defeat tax: Reconstruction of income: Bank deposits method: Evidence.--The taxpayer was convicted of tax evasion, proof of which was based on the bank deposits method of reconstructing income. The evidence sufficiently demonstrated the existence of substantial unreported income.

Stanley Miller, United States Attorney, Indianapolis, Ind., Johnnie M. Walters, Assistant Attorney General, Richard B. Buhrman, Department of Justice, Washington, D. C. 20530, for plaintiff-appellee. Philip R. Melangton, Jr., 120 E. Market St. , Indianapolis , Ind. , for defendant-appellant.

Before DUFFY, Senior Circuit Judge, FAIRCHILD and PELL, Circuit Judges.

PELL, Circuit Judge:

Defendant Nathan Stein was indicted in two counts for wilfully attempting to evade and defeat federal income taxes due and owing for the calendar years 1962 and 1963, in violation of Section 7201 of the Internal Revenue Code of 1954, 26 U. S. C. §7201. Following a trial by jury, Stein was found and adjudged innocent as to the 1962 count but guilty as to the 1963 count. The court imposed a fine of $2500 plus costs and a prison sentence of one year. From this judgment and sentence defendant has appealed.

[Facts]

Defendant had been engaged in the business of buying and selling meat at wholesale in Indianapolis , Indiana , since 1956. He employed an accountant to keep his books and prepare his tax returns, both on a cash basis. The accountant worked with sales figures supplied by Stein which the accountant did not independently verify. Stein was a calendar year taxpayer.

Revenue agents first examined defendant's books in March 1964, and a special agent was assigned to the case in May 1964. The agents reconstructed defendant's income for 1963 on the bank deposits method. From his total deposits plus cash expenditures equalling $394,668.11, they subtracted $18,428.12 in non-income deposits. After subtracting defendant's cost of goods sold, a gross profit from business of $78,747.08 remained. From this was subtracted his operating expenses, as well as various exclusions, exemptions and deductions, leaving a taxable income figure of $40,545.13. Defendant's return for 1963 reported his taxable income as $1,833.90, an alleged understatement of nearly $39,000.

The bank deposit method of proving the understatement was followed exclusively by the government at trial. Any possibility of direct proof of defendant's income was eliminated when his sales invoices were allegedly destroyed by a fire of undetermined origins in his office during April 1965, nearly a year after the beginning of the investigation. Defendant testified that before the fire he had offered these invoices to the revenue agents but that they had not yet sought to examine them at the time of their destruction.

The government offered direct evidence of wilfulness in the testimony of Stein's former employee, Gerald Waterman. Over defendant's objection based on remoteness, Waterman testified that in 1962 he had a conversation with Stein in a restaurant during which Stein told Waterman that he, Stein, would have no hesitancy, with the assistance of his accountant and attorneys, about "cheating the Government as well as I would cheat anybody else, which includes my help, my customers."

On cross examination, Waterman admitted that he had not referred to this conversation in a signed statement given to revenue agents and that the only conversation mentioned in that statement was one in the presence of two other employees. Both of these employees denied knowledge of any such conversation. Defendant denied the conversation with Waterman. It was shown that Waterman had previously brought a suit against defendant which was dismissed and that he had applied for the 10% reward from the Internal Revenue Service.

The government rested on the basis of the bank deposit computation and Waterman's testimony.

[Taxpayer's Argument]

Stein testified that in 1962 he had included $9,000 in year-end accounts receivable in his ending inventory, thus reducing cost of goods sold and increasing gross profits. He did not report the collection of these receivables in 1963 on the basis that he had already paid tax on them in 1962. There would not seem to be double taxation here since the 1962 ending inventory was carried forward as the 1963 opening inventory.

At the end of 1963, defendant's accounts payable would have exceeded his receivables and produced a negative inventory figure under his method of accounting. Defendant, assertedly feeling that some year end inventory had to be shown, solved the problem by not reporting collections of nearly $15,000 in receivables made during the last week of 1963, thus leaving this amount as ending inventory to be carried forward. Stein also instructed his accountant to post every expenditure after December 24, 19 63 into 1964.

Defendant further sought to show the existence of over $9,000 in non-income deposits to his bank accounts during 1963 which had not been previously reported to the investigating agents.

The government conceded an additional $4,600 of unreported income was due to good-faith accounting errors.

Thus, defendant sought to show that approximately $37,500 of the $39,000 understatement was due to non-income deposits and to good-faith errors and misconceptions of proper accounting techniques.

Defendant also introduced a computation of his income based on the net worth method. By this computation, his taxable income for 1963 was approximately $4,000 rather than the $40,545 alleged by the Government.

Finally, defendant presented evidence intended to show good faith and lack of wilfulness. His 1963 return was apparently filed after he was aware of the pending investigation. He gave his full cooperation to the investigating agents. There was no evidence of a double set of books. No hidden bank accounts were discovered. No unreported sources of income were shown. Of the four years subject to investigation, only two led to prosecution and only one to conviction.

[Guilt Beyond a Reasonable Doubt]

Defendant's primary contention on this appeal is that the evidence was insufficient to prove his guilt beyond a reasonable doubt. We cannot agree. Of course, we do not weigh the evidence nor determine the credibility of witnesses. Given the verdict of guilty, we must consider the evidence in the light most favorable to the government's position. Glasser v. United States , 315 U. S. 60, 80 (1942).

In tax evasion cases, a not uncommon attribute seems to be a lack of precise and clear recordation and documentation. The case before us is no exception. Whether the scarcity, murkiness or ambiguity of supporting data in any particular case is purposeful or merely inadvertent is no doubt often a matter to which the trier of fact gives some determinative consideration. In the trial forum there is the opportunity to observe and evaluate credibility. We, faced only with a cold record, must ordinarily given our credibility to resolutions of fact which follow the opportunity of direct observation available to, and presumably availed of by, the trier of fact.

[Government's Use of the Bank Deposits Method]

Defendant first argues that the government's use of the bank deposit method was insufficient to show substantial unreported income in 1963. While unexplained deposits in excess of reported income is not alone proof of unreported income, it is "a rather convincing circumstance in support of the charge." Malone v. United States [38-1 USTC ¶9032], 94 F. 2d 281, 287 (7th Cir. 1938), cert. den. 304 U. S. 562. "Of course, proof under the bank deposit theory is circumstantial in nature, but we know of no reason why such deposits may not be considered in determining income, when there is no evidence that they represent anything other than income." United States v. Doyle, [56-1 USTC ¶9553], 234 F. 2d 788, 793 (7th Cir. 1956), cert. den. 352 U. S. 893.

However, Stein asserts that in the instant case there was no proof that all non-income items had been eliminated from the government's computation. Of course, the same could be said of any bank deposit case. But the record is clear that the agents made a thorough study of all leads provided by defendant and in every case gave defendant the benefit of the doubt in eliminating possible non-income items. No more is required. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 135-36 (1954).

[Non-income Eliminations]

Defendant also complains that all the non-income eliminations were based on a brief interview in which he attempted to recall non-income items merely by looking at a column of figures representing his deposits. However, nothing prevented defendant from giving the matter additional careful thought and contacting the agents as he thought of other items.

Further, this privilege of adducing proof of additional items of non-income character continued into the trial. Even at this late stage when Stein certainly must have been aware of the seriousness of that with which he was confronted, and conceding the credibility of his trial proofs, he was able to account for only another $9,000 in non-income items to reduce the $39,000 understatement of income. There is no requirement that the government establish the exact amount of unreported income, as proof of a substantial sum will suffice. United States v. Johnson [43-1 USTC ¶9470], 319 U. S. 503, 517 (1943); United States v. Chapman [48-1 USTC ¶9312], 168 F. 2d 997, 1001 (7th Cir. 1948), cert. den. 335 U. S. 853.

[Taxpayer's Net Worth Proof]

Defendant further complains that the government's bank deposit proof was not corroborated by a net worth proof. However, we, like other circuits, have previously sustained convictions where the only proof of unreported income was a bank deposits analysis. United States v. Mansfield [67-2 USTC ¶9586], 381 F. 2d 961 (7th Cir. 1967), cert. den. 389 U. S. 1015. See also United States v. Procario [66-1 USTC ¶9263], 356 F. 2d 614 (2d Cir. 1966), cert. den. 384 U. S. 1002; United States v. Moody [64-2 USTC ¶9873], 339 F. 2d 161 (6th Cir. 1964); Hoyer v. United States [55-1 USTC ¶9518], 223 F. 2d 134 (8th Cir. 1955); Holbrook v. United States [54-2 USTC ¶9640], 216 F. 2d 238 (5th Cir. 1955), cert. den. 349 U. S. 915; Graves v. United States [51-2 USTC ¶9431], 191 F. 2d 579 (10th Cir. 1951); and Stinnet v. United States [49-1 USTC ¶9217], 173 F. 2d 129 (4th Cir. 1949), cert. den. 337 U. S. 957.

Furthermore, this record is not completely without corroborating evidence. Stein introduced a net worth analysis which, with proper adjustments for omitted assets and for liabilities to family members not substantiated except by defendant's self-serving testimony, shows unreported income of over $9,000. Thus is certainly an amount substantial enough to establish the fact of unreported income.

We find it significant that while Stein complains of the government's reliance on the circumstantial evidentiary proof of bank deposits, a substantial aspect of his own defense was predicated on a net worth analysis, itself only circumstantial evidence, rather than a direct proof that the amount determined by the bank deposit method included other non-income items.

Insofar as Stein assayed at direct proof some of this at least would seem to have been sufficiently ambiguous as to have been questionable to the jury. An investment firm account executive, for example, testified that he could not say "for certain" that the exhibits in evidence were all of the checks paid by his firm to Stein in the years in question.

Stein also contends on appeal that the figure deducted as repayment of loans from one Profeta was not complete; however, the record reveals that while Profeta, a government witness, had lost most of his checks, the government brought out in his testimony the total number and amount of these checks.

[Variables In Net Worth Method]

Further, it must be noted that the net worth analysis exhibit put into evidence by Stein contains some variables such as year end value of securities which, of course, does not necessarily represent the amount of money invested therein during the course of the preceding year. Also, the government challenges the validity of the net worth analysis as it included trade accounts payable which the government asserts have no place therein as Stein was on a cash basis. While we have some difficulty in understanding why in preparing a financial statement, which is what the net worth analysis exhibit was, all liabilities including trade accounts payable should not be included, nevertheless, as we have already said, this exhibit was merely a different type of circumstantial evidence and the jury obviously chose to find it did not achieve persuasive credibility.

Finally, the government in preparing its bank deposit analysis, accepted Stein's affidavit as to the amount of business and living expenses paid by the defendant by cash rather than check. These expenses amounted to almost $15,000 and constitute some indication of a cash flow outside of money actually deposited in banks.

[Fraud v. Good-Faith Misunderstanding]

Thus, we conclude that there was ample evidence showing the existence of substantial unreported income. However, defendant next maintains that there was insufficient evidence to establish that this failure to report income was the product of fraud rather than good faith misunderstanding. The jury had before it the same accounting explanations and the same evidence of good faith that defendant now presses upon us. It also had before it Waterman's testimony as direct evidence of wilfulness. We cannot now ignore its assessment of this conflicting evidence and its conclusion based thereon that defendant did act wilfully.

Defendant next asserts that the government's case was deficient in that there was no proof of the amount of tax paid by defendant in 1963 making it impossible to determine whether any tax remained due and owing. We agree with the government that the gist of the offense charged in the indictment was evasion of tax assessment rather than evasion of tax payment. See Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 354 (1965). Thus, the amount actually paid was irrelevant and the government was required to show only that defendant attempted to evade the assessment by fraudulently understating his taxable income on his return. We have previously found that the government met this burden.

Defendant further objects that venue was not proved. We find ample evidence in the record to indicate that the return was filed in Indianapolis , Indiana , within the Southern District of Indiana where defendant was prosecuted.

[Instructions to Jury]

Stein further claims error in the trial court's instruction that capital losses incurred during 1963, should be added to any increase in net worth. In part, the defendant claims that the jury was in effect instructed to add the sum of $13,125.54. This figure, however, represented the capital loss carry-over available to defendant at the end of 1963 and consisted mainly of losses incurred by him prior to 1963. The instruction did not tell the jury to add this amount but only "any capital losses incurred during the year if any." This clearly limited the amount to $514.95.

Secondly, the defendant contended that the instruction was incorrect inasmuch as whether capital losses should be added to any increase in net worth was a disputed fact. Even if defendant were correct that this instruction was erroneous, any error would be non-prejudicial in light of the fact that his capital losses for 1963 amounted to $514.93. The addition of this amount in a case of this magnitude would be insignificant.

Defendant next alleges error in the denial of his motion to strike the testimony of Waterman as too remote. The trial court has broad discretion in such matters. Mitchell v. United States [54-2 USTC ¶9449], 213 F. 2d 951, 958 (9th Cir. 1954), cert. den. 348 U. S. 912 (1955). The record reveals careful consideration of the motion by the trial court and we find no abuse of discretion in its denial.

[Limitation on Scope of Cross Examination]

Defendant challenges various rulings of the trial court as unduly limiting the scope of cross-examination of government witnesses. Again, this is an area where the trial court has "traditionally wide latitude," United States v. Allegretti, 340 F. 2d 254, 258 (7th Cir. 1964), cert. den. 381 U. S. 911 (1965), and 390 U. S. 908 (1968), and the record reveals nothing which we find to be an abuse of that discretion.

Defendant's final objection is to the admission of government's Exhibits 43 and 44, the summaries of the government's bank deposits reconstruction of his income and tax liability. All of the substantial challenges advanced by defendant to the use of such summaries have been long since considered and rejected by the Supreme Court, Holland v. United States , supra, 348 U. S. at 130-32 and United States v. Johnson, supra, 319 U. S. at 519-20, and require no further discussion here.

Other contentions of Stein, not expressly dealt with herein, have been considered and found without merit. Accordingly, the judgment of conviction and sentence must be affirmed.

Affirmed.

 

 

[69-2 USTC ¶9616] United States of America , Plaintiff-Appellee v. Seymour J. Lacob, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 16747, 9/4/69, Aff'g an unreported District Court decision

[Code Sec. 7201]

Crimes: Income tax evasion: Bill of particulars: Bank deposits-expenditures method: Self-incrimination: Due process: Evidence.--The taxpayer's conviction on one count alleging income tax evasion was affirmed. At trial, the government was not permitted to exceed a limiting effect of its bill of particulars; the bank deposits-expenditures method of reconstructing income was properly used; the taxpayer was not compelled to testify in violation of his constitutional privilege against self-incrimination; the exclusion of taxpayer's cancelled checks as exhibits was proper; and six other alleged trial errors did not deprive the taxpayer of due process of law.

Thomas A. Foran, United States Attorney, Chicago , Ill. , for plaintiff-appellee. Anna R. Lavin, 53 W. Jackson Blvd. , Chicago , Ill. , for defendant-appellant.

Before SWYGERT and CUMMINGS, Circuit Judges, and MORGAN, District Judge. ¹

MORGAN, District Judge:

Defendant was tried on Count III of an indictment charging income tax evasion for the calendar year 1960. ² He was found guilty by a jury and has prosecuted this appeal from the judgment of conviction.

Defendant is a lawyer who specialized in personal injury claims. While he was represented by his present counsel in the proceedings prior to trial in this case, he chose to defend himself at the trial and his counsel of record was permitted to withdraw.

The indictment charged a false and fraudulent return, in violation of 26 U. S. C. §7201, reporting taxable income of $8,329.70 with a tax of $1,765.72, while defendant's correct taxable income was $30,146.15 with a tax of $9,528.69.

The Government proved by records of two banks, without dispute, that defendant deposited slightly over $99,000 in 1960. It was stipulated that in 1960 defendant received 69 case settlement checks from 29 different insurance carriers totaling $38,322.89. $36,000 of that amount was identified among the deposits to defendant's bank accounts. $1,475 was proved to have been received but not deposited. Records of the Illinois Industrial Commission, received in evidence, disclosed 22 cases handled by defendant on which checks were issued in 1960, and $17,100 from those sources was traced into defendant's bank accounts. Checks for $1,477 from these latter sources were proved to have been received but not deposited.

An Internal Revenue Service accounting expert testified that he made a bank deposit analysis and various computations from the material in evidence. Deposits of $14,569.90 were eliminated and not considered as unreported income because they represented salary which was reported and small, and unidentifiable, checks. Also, deposits of $5,415.12 were eliminated as transfers from other accounts. Deposits of currency were also eliminated. Since the defendant received a fee of 331/3% of personal injury settlements, defendant was charged with income of $6,206.90 on $18,620.89 of deposits of identified personal injury settlement checks and $491.67 on the $1,475 of personal injury settlements received but not deposited. Since the fee on workmen's compensation settlements was 20%, defendant was charged with income of $3,420 on the $17,100 of identified workmen's compensation settlement check deposits and $295.40 on the $1,477 workmen's compensation settlement checks which were not deposited. Of $39,356.33 of substantial checks deposited but not identified or explained, defendant was charged with income of $7,871.27, or 20%, because it was assumed, in the absence of other proof, that these were proceeds of cases and that his fee was the lower of the two fee bases used.

Defendant's 1960 taxable income was then recomputed by adding these items to the identified income shown on the return, allowing personal deductions and exemptions as claimed on the return and deducting $1,483 for bar association dues, filing fees, etc., which had not been claimed by defendant on his original return. This computation resulted in finding taxable income of defendant for 1960 of $25,131.64, with a tax due of $7,286 against the $1,765 returned, or an unreported tax for 1960 of $5,521. ³

Defendant's efforts at proof of a defense were somewhat abortive. A judge of the Circuit Court of Cook County, Illinois, was not able to testify to defendant's good reputation for truth and veracity in the community in which he resided, and two attorneys who did so thought that he lived in a community other than his place of residence as shown on his income tax return. Defendant sought to have his wife identify checks which he had made out, and, upon Government objection, the court did not permit her to do it, so the defendant took the stand to identify them himself. Based upon defendant's admissions that many of such checks covered expenditures which were charged to and, ultimately at least, paid by clients, and that he couldn't relate them directly to case files or other records, and upon Government objection that no proper foundation had been laid for their admission without invoices, files or book records showing that they were business connected expenses actually borne by defendant, the trial court excluded all the checks except some few to which such objection was not raised and for which defendant was given credit. A Certified Public Accountant was not permitted to testify about, or analyze, the checks which had not been admitted into evidence. Defendant testified that the checks which were excluded did represent expenses of his law practice for 1960 and that his expenses that year totaled more than his income. Accordingly, he argued that he had no net law practice income in 1960, and hence had reported none because he said he was advised that it was not necessary to detail the actual income and expenses.

As grounds for reversal, defendant urges that the Government was permitted to exceed a limiting effect of its Bill of Particulars to the defendant's prejudice; that the "bank deposit theory" employed in the Government's evidence was misused and may not, consistent with constitutional guarantees to the defendant, be the basis of a conviction; that the defendant was compelled to testify in violation of his constitutional privilege against self-incrimination; that by excluding his cancelled checks as exhibits, the trial court effectively denied defendant any jury consideration of his defense; and that six other alleged trial errors deprived defendant of due process of law.

There is no merit to defendant's first argument that the Government should have been limited to proving the items of unreported income specified in its Bill of Particulars, or to a specific-item method of proof, because the method or theory of proof to be relied upon by the Government was neither asked by the defendant nor stated by the Government and, in its Bill of Particulars, the items listed were clearly stated to be a "partial" list of payments made by "some" of the insurance companies which made payments to defendant in 1960. If this were not in compliance with the trial court's order under Rule 7(f) F. R. C. P., the defendant should have sought more complete particulars at that time, and certainly failure to do so may not change what is stated to be partial into a complete list to which the Government is thereafter limited in its proof. Nothing in United States v. Neff, 3 Cir., 212 F. 2d 297, or United States v. Glaze, 2 Cir., 313 F. 2d 757, cited by defendant, even suggests the contrary or amounts to holding that disclosure of some specific items of unreported income in a Bill of Particulars prevents the Government from employing thereafter a bank deposit, a net worth, or some other additional theory of proof, which it has in no sense renounced, as part of its case.

It is also clear that the Government's employment here of the so-called "bank deposit theory" of proof of unreported income was correctly applied without any violence to defendant's rights. The plan of proving the existence of a business and the practice of making of deposits of business income into a bank account or accounts, and then adjusting total deposits thereto to avoid inclusion of transfer, redeposits, deposits otherwise explained, etc., and giving credit for ascertainable expenses, deductions and exemptions, has been long recognized. Morrison v. United States, 4 Cir., [59-2 USTC ¶9657] 270 F. 2d 1, cert. den. 361 U. S. 894; Gleckman v. United States, 8 Cir., [35-2 USTC ¶9645] 80 F. 2d 394, cert. den. 297 U. S. 709. The law is likewise clear that, once the Government proves unreported receipts having the appearance of income, and gives the defendant credit for the deductions he claimed on his return, as well as any others it can calculate without his assistance, the burden is on the defendant to explain the receipts, if not reportable income, and to prove any further allowable deductions not previously claimed. United States v. Hornstein, 7 Cir., [49-2 USTC ¶9326] 176 F. 2d 217; United States v. Bender, 7 Cir., [55-1 USTC ¶9142] 218 F. 2d 869, cert. den. 349 U. S. 920; Elwert v. United States, 9 Cir., [56-1 USTC ¶9423] 231 F. 2d 928. The cases cited by defendant are not inconsistent with these principles and the trial court's instruction adopting these principles was thoroughly sound. The defendant here was not called upon to come forward with evidence to rebut a presumption as proscribed in Barrett v. United States, 5 Cir., 322 F. 2d 292, but had the opportunity to prove any additional allowable deductions he might have had to offset proven income or to explain why what appeared to be income was not. Here it should be noted that almost two-thirds of the income charged to defendant was, in fact, proved by the specific-item method. It should be noted also, as the Government points out, that Barrett was reversed by the Supreme Court sub nom. United States v. Gainey, 380 U. S. 63, and hence is depreciated as persuasive authority.

Defendant argues as a paramount point that he was compelled to testify in violation of his constitutional right not to do so. This point is completely without merit, especially when viewed in relation to his completely voluntary and unsworn "testimony" while handling his own defense throughout the trial. As such, he told his life story, as well as his whole defense that he had no profit from his law practice, in his opening statement to the jury, frequently promising the judge to prove his statements by evidence later. This was not done to any substantial degree, but there is no question on this record that the jury had the benefit of defendant's theory of defense and assertions of the "facts" from his view-point from his own lips, repeatedly, long before he took the stand. In his examination and cross-examination of witnesses, defendant also frequently "testified" by unsworn statements purporting to be facts. This amounts to voluntary testimony and a waiver of the constitutional privilege not to testify. Redfield v. United States, 9 Cir., [63-1 USTC ¶9345] 315 F. 2d 76. See, also, U. S. ex rel. Miller v. Follette, 2 Cir., 397 F. 2d 363.

Defendant then took the stand as a witness when his wife was not permitted to testify about his checks which he had made out and collected for use as evidence of expenses. He identified the checks and testified as fully as he could about what they had been issued for as expenses of his law practice in 1960. The cross-examination of defendant, which he contends went beyond the scope of the direct testimony, was concerned with why the checks hadn't been produced before, how they could be directly related to his law practice, that they represented expenses actually borne by the clients, etc. Defendant's constitutional privilege was not asserted with respect to any question, and we do not believe that it was violated by questions on cross-examination here, nor do we believe that defendant was compelled to testify in any way by the Government or the trial court. His right not to testify did not destroy the large deposits proved by the Government nor permit him to offset them by incompetent evidence. The dilemma of letting the Government evidence go unexplained and without offset, or attempting to offset them by his own testimony, which apparently was all he had, was no doubt a difficult choice, but it was clearly a choice available to the defendant. The fact that he chose to testify and his story didn't stand up very well before the jury, after cross-examination, is hardly grounds for reversal of his conviction.

Defendant's argument that exclusion of most of his cancelled checks from evidence denied him jury consideration of his defense is frivolous.

It is clear that most of them were excluded because no proper foundation had been laid to relate them to the case. All they tended to prove was that defendant spent this money in 1960, but this is vastly different from constituting evidence that such expenditures were proper offsets against his law practice revenue in the computation of taxable income for 1960. The record is clear that it would have been highly prejudicial to the Government to admit the checks which were excluded if the jury believed they had probative value as proof of law business expenses to be offset against the receipts proved. They had no such value without much more precise connection with the law practice through invoices, files, book records, etc., none of which was offered. The defendant simply cannot offer several hundred cancelled checks, claim they all represent his law business expenses, and have them admitted into evidence as such. The bulk of them were clearly properly excluded by the trial court on the Government's objection of no proper foundation. See Anderson v. United States , 8 Cir., 369 F. 2d 11, cert. den. 386 U. S. 976. Any lack of opportunity for the jury to consider the defense with regard to these checks was due to defendant's failure to relate them to the case under the rules of evidence.

Defendant's final argument that he was denied due process of law embraces six alleged errors of the trial judge during the trial.

The first is that the judge did not comply with Title 18 U. S. C. §3500 (Jencks Act). As stated on page 28 of Defendant's Brief, after the IRS agent in charge of the case had stated on cross-examination that he had recommended criminal prosecution of defendant in a written report, defendant asked for production of that report. The Court was advised by Government counsel that "any statements concerning the defendant" had been furnished, ⁴ and declined to order the production of the entire report which was represented by the Government to be "twenty-some volumes." The defendant objected stating, "I feel that I am entitled to all written memos by him regarding my case to the Internal Revenue, and why we are here today." Clearly, defendant sought more of the Government files than Jencks Act statements, and he made no request for an in camera inspection of the alleged twenty volumes or any part thereof. It is the Government's contention that such material did not constitute a "statement" under §3500, and the two opinions of this court in United States v. Keig support that view. (See [64-2 USTC ¶9563] 334 F. 2d 823, as well as 320 F. 2d 634.) Where the Government has furnished what it believes are the required statements, and where the defendant's ostensible goal is to obtain the written recommendation of the witness rather than a factual statement, and especially in the absence of a clear motion or request that he do so, supported by reason, we do not conceive it the duty of the trial judge, under Title 18 U. S. C. §3500, to peruse the entire multi-volume file or report of the "agent in charge" in a case such as this to determine what part or parts may relate to the subject matter of his testimony. Such accumulated file or overall report may not be assumed to be a "written statement" within the meaning of §3500(e)(1) on any assumption that he has adopted it or the case wouldn't be in court. We hold that the action of the trial judge here did not violate his duty under the law relating to furnishing defendants with statements of Government witnesses.

We find no merit whatsoever in defendant's contention that he was prejudiced because the Government elicited evidence that he did not turn over his records or answer questions. He cites cases dealing with such proof in relation to the Fifth Amendment right not to testify which are wholly inapposite here in view of defendant's testimony as treated above. Likewise, we find no merit in defendant's suggestion that the court's sustaining of a Government objection to the question, "Does the Government, the Internal Revenue, have some kind of blacklist for anybody who may testify against them?", of a former Internal Revenue employee who said he was reluctant to testify without checking his position with regard to conflict of interest. The record makes abundantly clear that this question by defendant was objectionable as leading his own witness, and highly prejudicial as such. Defendant did not pursue the matter in any other manner at the trial, and it is hardly to be assumed that this witness or any other would have testified to any such "blacklist" when the word "list" was used only by defendant himself and the witness clearly explained that his own concern was simply possible conflict of interest.

Defendant's fourth alleged trial court error is the admission of Government summary sheets into evidence with caption "Total Net Unreported Income," which is called "irreparable prejudice." While the observation in Lloyd v. United States, 5 Cir., [55-2 USTC ¶9665] 226 F. 2d 9, 17, cited by defendant is thoroughly sound, that such sheets should be factual and should not be encumbered unnecessarily with impressive conclusionary captions, it is noted that six such captions possibly so characterized in that case were held not to be reversible error. We do not think the captions here were any more conclusionary or impressive than required to make the summaries understandable. It is noted that they were amply justified by the testimony which laid the foundation for their admission.

Defendant sought to impeach, through reputation evidence, a private lawyer who testified for the Government about his association with defendant. Another lawyer, who said he knew them both. Testified for defendant that defendant's reputation was good for "honesty, integrity, veracity," and was then asked by defendant, "If I asked you the very same questions regarding * * * (the government witness) * * *, what would your answers be?" The court sustained Government objection to the question, and defendant asserts here that this deprived him of the opportunity of impeaching a chief witness against him. Again defendant did not pursue the matter further at the trial, by other questions or otherwise; and it is apparent that the trial court's ruling was correct on the one question asked because "the very same questions" could not be applied to someone else with intelligible results. On its face it is more than one question, and what it embraces by way of knowledge of the witness concerning the reputation of the other person, place of residence of the other person, etc., is incomprehensible. Defendant's failure to follow up with other efforts to make the point cannot render improper a proper ruling by the trial judge. This is true, even assuming, as defendant argues, that he should have been permitted to elicit reputation evidence by way of impeachment of a Government witness. We do not need to decide that question in this context, and we do not decide it, because the trial court simply did not deny defendant such an opportunity by a proper ruling on objection to one clearly improper question.

Defendant's final point is that plain error resulted from a question by Government counsel on cross-examination of one of defendant's reputation witnesses whether he had heard of defendant's indictment for grand theft at a time which was five months after the indictment in this case. The trial judge sustained defendant's objection to the question, it was not answered by the witness, and, on defendant's request, the judge instructed the jury to disregard the question. Defendant did not ask for a mistrial at the time, but argues now that he was so unfairly prejudiced by the question in the eyes of the jury as to have required a mistrial and here to require reversal for a new trial. It is argued that this is especially true in view of the testimony of one of defendant's clients who testified that he had not been informed by defendant of, or received the proceeds of, a case settlement. We do not agree.

It appears that the client mentioned was called by the Government to prove specific income to defendant in 1960, as were other clients, either in person or by stipulated testimony. The client testified that he did not know about or receive his share of his case settlement, but on cross-examination that impression was corrected when defendant produced a letter from himself to his client reporting settlement and offering distribution, which letter had been returned to defendant by the post office marked "Unclaimed." This must certainly also have tended to discredit other statements by the witness concerning defendant's failure to keep him informed.

Regardless of whether the question concerning subsequent indictment was proper or not, as the Government argues it was on the basis of Michelson v. United States, 335 U. S. 469, this court has held, even where a motion for mistrial was made and denied by the trial court, that where there is also clear evidence of defendant's guilt, prompt action by the trial court in striking and instructing the jury to disregard prejudicial testimony of a post-arrest statement by defendant precludes reversal, which would have to be based on an assumption that the jury decided the case on evidence which was stricken rather than the sound evidence before it. United States v. Becera-Soto, 7 Cir., 387 F. 2d 792, cert. den. 391 U. S. 928. Assuming that the question would be prejudicial if allowed to stand without proper limiting instruction to the jury, there is ample evidence here that defendant wilfully failed to report substantial income for the year 1960, the trial court did promptly instruct the jury to disregard the question objected to, which was not answered, defendant made no motion for a mistrial at the time, and there appears less basis here than in Becera-Soto to assume that the unanswered question could have affected the jury verdict sufficiently to justify reversal.

The cases cited by defendant on this point are inapposite in that they all involve actual testimony or other evidence which was not stricken.

We have found no error in this record in any wise sufficient to justify reversal of the judgment of conviction.

It is accordingly AFFIRMED.

¹ Judge Morgan is sitting by designation from the Southern District of Illinois.

² The trial court required the Government to elect one of four counts for trial.

³ Five checks paid to defendant in 1960 for services as a saxophonist in an orchestra, but not shown on his return, were also received into evidence.

⁴ Pursuant to court order, this was done on the day before the Government witness testified, which goes beyond the requirements of §3500 for defendant's convenience (Tr. p. 96).

 

 

[35-2 USTC ¶9416]William D. Chadick, Appellant, v. United States of America , Appellee

(CA-5), United States Circuit Court of Appeals for the Fifth Circuit, No. 7689, 77 F2d 961, Decided May 31, 19 35, Cert. denied, 296 U. S. 609, 56 S. Ct. 126

Appeal from the District Court of the United States for the Western District of Texas.Where certain bank records supported by the testimony of witnesses and the plaintiff's admission disclose the receipt of unreported income, the court held that the plaintiff had intentionally and wilfully omitted a part of his income from his 1929 income tax return as charged in the indictment. It is no defense that the omitted income was derived from unlawful transactions. Affirming unreported District Court decision.

Before BRYAN, FOSTER, and HUTCHESON, Circuit Judges.

BRYAN, Circuit Judge:

Appellant Chadick was convicted upon an indictment which charged him with attempting to evade, in violation of 26 USCA §2146(b), part of the income tax imposed by law upon the net income which he received in the year 1929. He reported a net income for that year of approximately $10,000 which he paid. The Government, upon the basis of an examination which it caused to be made of his deposits in several banks, contends that he owed it an additional tax of over $10,000; but as many items of deposit may not have represented income we adopt Chadick's contention that the only items in dispute are four which appear on deposit slips purporting to show deposits of $4,000 on January 9, 19 29; of $3,696.05 on January 28; of $4,000 and $1,606 on February 25, in the Edinburg State Bank & Trust Co. Each of these deposit slips was authenticated by the signature of the president or cashier of the bank, except that no such signature appears on the second deposit of $4,000, but it was identified by the handwriting upon it. We eliminate from further consideration the purported deposit of $1,606, because Chadick stated to an income tax agent that it represented a county warrant which he bought at par on which he made no profit. This leaves for consideration in determining whether additional income taxes were due as alleged only the two $4,000 items and the one for $3,696.05, which admittedly Chadick did not account for in his income tax return, and which he does not claim to have omitted by mistake. If, therefore, the Government succeeded in proving that these three amounts, totalling $11,696.05, were received by Chadick, the jury were authorized to find that he intentionally and wilfully attempted to evade the payment of a part of his income tax as charged in the indictment.

The Government introduced in evidence the three original deposit slips above described, and three checks corresponding in dates and amounts, drawn on the Edinburg bank, payable to cash, and signed, "W. L. Pearson by A. A. Sangster." Those checks were paid, cancelled, and charged to Pearson's account by the bank. None of them bore any endorsement. It was proven that $3,696.05, the amount shown on one check and one deposit slip, was 11/4% of three county warrants or estimate checks, also admitted in evidence, drawn in November and December 1928 on the treasurer of Hidalgo County, Texas, by the county clerk and countersigned by the county auditor, and payable to W. L. Pearson & Co. out of the road district fund for work done under contract upon the public roads. The Government introduced in evidence also a number of similar checks drawn during the year 1928 by Pearson on the Edinburg bank, payable to cash, and an equal number of deposit slips in favor of Chadick corresponding in dates and amounts with such checks; and several warrants issued by Hidalgo County payable to W. L. Pearson, and thereby made it appear that these deposit slips corresponded exactly with checks drawn by Pearson, payable to cash, and were uniformly 11/4% of the various county warrants or so-called estimate checks. Prior to and during the years 1928 and 1929 W. L. Pearson & Co. receiver approximately ten million dollars upon road and other public contracts which it had with Hidalgo County . It is the theory of the Government that W. L. Pearson & Co., in order to obtain contracts for public works and to get its estimates approved, paid bribe money, usually referred to by the witnesses as "commissions," to a number of county officials, including the sheriff, county auditor and all the members of the board of county commissioners. W. L. Pearson, president and principal stockholder of the company, testified that from time to time he drew out of the company's, and placed in his own individual, account the amounts, aggregating between $600,000 and $700,000, which were to go to the bribe takers, and then either personally or through his agent A. A. Sangster, drew his personal checks payable to cash according to lists furnished by A. Y. Baker, who combined in himself the positions of sheriff, political boss, and president of the Edinburg bank, and delivered those checks to Baker for distribution to himself and his fellow-grafters. Chadick was a member of the board of county commissioners and kept an account at the Edinburg bank. His individual ledger sheets were missing, as were those of Baker and several other county officials, but the original deposit slips made out in his favor were found among the bank's records, and duplicate deposit slips were sent to him regularly along with his cancelled checks. Two bank clerks testified that Baker occasionally withdrew money from Chadick's account, evidencing such withdrawals by debit tickets which were placed among Chadick's cancelled checks. One of these clerks finally went so far as to say that Baker drew out of Chadick's account as much as he put into it. Chadick did not take the stand, but according to the testimony of Pollock, an internal revenue agent who interviewed him concerning his income tax returns, he made no such claim as that Baker had withdrawn any money from his bank account; but on the contrary admitted receiving the benefit of money which Baker had deposited for him, and said he could not explain deposits to his credit in the Edinburg bank of some $70,000 in 1928 and some $11,000 in 1929, unless those deposits represented money received from Baker. Pollock further testified that Chadick, although he denied receiving money from Pearson, admitted that he knew the money Baker deposited to his credit in the Edinburg bank had some connection with the Pearson contracts. Tinkler, county auditor, testified for the prosecution that during 1928 and 1929 he received money on the Pearson contracts through Baker, the commissions being evidenced by deposit slips in the Edinburg bank after Baker had deposited the money there to his credit. Brooks, one of the county commissioners, testified that he received what he thought amounted to 1% of the estimates, but according to his statement he resigned in January 1928 and was paid directly by Pearson. Hollingsworth, bookkeeper in the Edinburg bank, and Gardner, the bank's cashier, both called as witnesses by the prosecution, were each asked on cross-examination whether in 1929 there were any irregularities in the management of the bank's affairs, or in the keeping of its records. The only criticism Hollingsworth had to offer was that the ledger sheet of the county road district was changed and rewritten, and Gardner criticized only the handling by Baker of the account of the road district in 1928. Neither of these witnesses testified as to any irregularity which could possibly affect any matter now under investigation. Baker and Sangster died before the trial.

Chadick contends that none of the documentary evidence, consisting of deposit slips, Pearson's checks, and county road warrants, was admissible in evidence. As to all the deposit slips he argues that they were not properly authenticated, did not come from the proper custody, and were not shown to have been authorized by him, and that the presumption of regularity which ordinarily attached to bank records was overthrown by testimony disclosing irregularities. As to the Pearson checks he says that Pearson's testimony concerning them was hearsay. The county road warrants are objected to because they were all issued in 1928. In addition he contends that all the evidence, whether documentary or oral, relating to the year 1928 was inadmissible, because it had no tendency to show the amount of income received by him in 1929.

The deposit slips were genuine, as it appears they were made out in the regular course of business by bank officials. The evidence, while circumstantial, was sufficient to authorize the jury to conclude that they were made out by Baker with Chadick's authority pursuant to a plan agreed upon for the distribution of money received from Pearson. The jury were not bound to accept the testimony of the bank clerk that Baker withdrew money deposited by him to Chadick's credit, but clearly it was within their province to reject that testimony and to accept instead Pollock's testimony, according to which Chadick admitted receiving money deposited by Baker to his credit, and never once suggested that Baker had appropriated any of it to his own use. Chadick, who should have known of any withdrawals by Baker when he received his bank statements, made no claim to the revenue agent that the full amount of the deposit of $11,696.05 in the Edinburg bank, here directly involved, was not income to him. The deposit slips furnished prima facie evidence that the bank received the amounts appearing thereon, and they are in no way discredited by the circumstance that Chadick's individual ledger sheets were missing. It ought not to be assumed that the missing ledger sheets of Chadick's account would fail to correspond with the deposit slips as to money deposited. The fact, if it were a fact, that the ledger sheet of the county road district was changed or rewritten cannot possibly be held, at least in the absence of proof of fraud, to impeach Chadick's bank account. Pearson's checks, payable to cash as they were, and unendorsed, would not, standing alone, have constituted proof of the payment of any sum to Chadick, but when identified with the deposit slips and the county warrants they help to prove the Government's contention, not only that Baker received them for distribution, but also that the amounts thereof corresponded exactly with the amounts placed to his credit and with "the cent percent" of the estimates which it is claimed he received. There is nothing in the contention that Pearson's testimony was hearsay. He used the checks which Sangster signed in his name merely to refresh his memory as to the amounts which had been paid out of his personal account. The county road warrants issued in November and December of 1928 were admissible in evidence, because the aggregate amount thereof was used as a basis for calculating the amount of Pearson's check and the deposit slip for $3,696.05 placed in January 1929 to Chadick's credit in the Edinburg bank. We are therefore of opinion that error cannot successfully be assigned on the admission of any documentary evidence relating to transactions entered into in 1929. The deposit slips, checks, and county warrants, relating to 1928, bore the same relation to each other and to Chadick's income as did those of 1929. We think they were admissible to corroborate Pearson's testimony as to the corrupt agreement, and to show also that Chadick's motive in not reporting his illegal gains was to keep as secret as possible the fact that he was receiving income which it was a criminal offense to accept. The testimony of Brooks and Tinkler that they accepted bribe-money from Pearson and Baker, while it was corroborative of Pearson's testimony, in our opinion should not have been allowed to go to the jury. The fact that they accepted bribe-money was no evidence that Chadick did. But, in the light of all the facts and circumstances, we think the error was harmless. Evidence for the prosecution disclosed beyond any reasonable doubt that in 1929 Chadick received from Pearson through Baker $11,696.05, and that no part of that amount was subject to deduction, since all the credits to which he was entitled were deducted from his original income tax return; that Chadick admitted that he had receive money from Baker, and had not reported any of it as income; and that when asked by the revenue agent for an explanation he did not claim to have omitted unintentionally any income from his report. Upon this undisputed evidence, and without giving any weight whatever to the testimony of Brooks and Tinkler, the conclusion is unavoidable that Chadick intentionally and wilfully omitted from his income tax report for 1929 a part of his net income, as charged in the indictment. It is, of course, no defense that the part so omitted was income derived from unlawful transactions.

The judgment is affirmed.

HUTCHESON, Circuit Judge, specially concurring:

I concur in the view of the majority that the trial was without reversible error, and that the judgment should be affirmed.

I particularly concur in their view that if the testimony of Brooks and Tinkler that they accepted bribe money was subject to the objection urged against it, and should not have been allowed to go to the jury, the error in admitting it was harmless. But I disagree with their view that the admission of this testimony was error. I think it was relevant and admissible as tending to prove both the agreement for the distribution of graft money, and its carrying out as a circumstance in the chain connecting Chadick with income received and wilfully not reported.

 

 

[54-2 USTC ¶9714]Marion L. Holland and Ethel E. Holland, Petitioners v. United States of America

In the Supreme Court of the United States , No. 37. October Term, 1954, 348 US 121, 75 SCt 127, December 6, 19 54

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

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

Tax evasion: Criminal prosecutions: Proof by net worth increase.--The Court upheld the conviction of the taxpayer and his wife of tax evasion, proof of which was based on increase in net worth. In upholding the conviction, the Court disagreed with the taxpayer's contention that the use of the net worth method must be confined to cases where the taxpayer keeps no books or where his books are inadequate. The Court also held that the jury was justified in rejecting the taxpayers' claim that they had considerable cash stored away, which the Government failed to take into account in determining the opening net worth. Although the Government introduced no direct evidence to the contrary, the Government relied on the inference that no one with considerable cash on hand would have undergone the financial hardship and privation that the taxpayer and his wife endured during the period prior to determination of the opening net worth. Finally, the Court held that the Government did not have to negative all possible nontaxable sources of the alleged net worth increases, particularly where it was established that the disclosed business of the taxpayers was capable of producing much more income than was reported and in a quantity sufficient to account for the net worth increases.

Peyton Ford, Sumner M. Redstone, Ford, Bergson, Adams, Borkland & Redstone, of counsel, 918 16th Street, N. W., Washington, D. C., Anthony F. Zarlengo, of counsel, 505 Symes Building, Denver, Colo., H. D. Reed, of counsel, Frank A. Bruno, of counsel, 515 Majestic Building, Denver, Colo, for petitioners. Simon E. Sobeloff, Solicitor General, H. Brian Holland, Assistant Attorney General, Marvin E. Frankel, Ellis N. Slack, David L. Luce, Joseph M. Howard, David R. Urdan, Special Assistants to the Attorney General, for respondent.

CLARK, Justice:

Petitioners, husband and wife, stand convicted under §145 of the Internal Revenue Code ¹ of an attempt to evade and defeat their income taxes for the year 1948. The prosecution [54-1 USTC ¶9177] was based on the net worth method of proof, also in issue in three companion cases ² and a number of other decisions here from the Courts of Appeals of nine circuits. During the past two decades this Court has been asked to review an increasing number of criminal cases in which proof of tax evasion rested on this theory. We have denied certiorari because the cases involved only questions of evidence and, in isolation, presented no important questions of law. In 1943 the Court did have occasion to pass upon an application of the net worth theory where the taxpayer had no records. United States v. Johnson, 319 U. S. 503 [43-1 USTC ¶9470].

[Use of Net Worth Method in Proving Tax Evasion]

In recent years, however, tax-evasion convictions obtained under the net worth theory have come here with increasing frequency and left impressions beyond those of the previously unrelated petitions. We concluded that the method involved something more than the ordinary use of circumstantial evidence in the usual criminal case. Its bearing, therefore, on the safeguards traditionally provided in the admin istration of criminal justice called for a consideration of the entire theory. At our last Term a number of cases arising from the Courts of Appeals brought to our attention the serious doubts of those courts regarding the implications of the net worth method. Accordingly, we granted certiorari in these four cases and have held others to await their decision.

In a typical net worth prosecution, the Government, having concluded that the taxpayer's records are inadequate as a basis for determining income tax liability, attempts to establish an "opening net worth" or total net value of the taxpayer's assets at the beginning of a given year. It then proves increases in the taxpayer's net worth for each succeeding year during the period under examination and calculates the difference between the adjusted net values of the taxpayer's assets at the beginning and end of each of the years involved. The taxpayer's nondeductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the Government claims the excess represents unreported taxable income. In addition, it asks the jury to infer willfulness from this understatement, when taken in connection with direct evidence of "conduct, the likely effect of which would be to mislead or to conceal." Spies v. United States , 317 U. S. 492, 499 [43-1 USTC ¶9243].

Before proceeding with a discussion of these cases, we believe it important to outline the general problems implicit in this type of litigation. In this consideration we assume, as we must in view of its widespread use, that the Government deems the net worth method useful in the enforcement of the criminal sanctions of our income tax laws. Nevertheless, careful study indicates that it is so fraught with danger for the innocent that the courts must closely scrutinize its use.

One basic assumption in establishing guilt by this method is that most assets derive from a taxable source, and that when this is not true the taxpayer is in a position to explain the discrepancy. The application of such an assumption raises serious legal problems in the admin istration of the criminal law. Unlike civil actions for the recovery of deficiencies, where the determinations of the Commissioner have prima facie validity, the prosecution must always prove the criminal charge beyond a reasonable doubt. This has led many of our courts to be disturbed by the use of the net worth method, particularly in its scope and the latitude which it allows prosecutors. E.g., Demetree v. United States , 207 Fed. (2d) 892, 894 (1953) [53-2 USTC ¶9646]; United States v. Caserta , 199 Fed. (2d) 905, 907 (1952) [52-2 USTC ¶9540]; United States v. Fenwick, 177 Fed. (2d) 488 [49-2 USTC ¶9448].

But the net worth method has not grown up overnight. It was first utilized in such cases as Capone v. United States, 51 Fed. (2d) 609 (1931) [2 USTC ¶786] and Guzik v. United States, 54 Fed. (2d) 618 (1931) [1931 CCH ¶9681], to corroborate direct proof of specific unreported income. In United States v. Johnson, supra, this Court approved of its use to support the inference that the taxpayer, owner of a vast and elaborately concealed network of gambling houses upon which he declared no income, had indeed received unreported income in a "substantial amount." It was a potent weapon in establishing taxable income from undisclosed sources when all other efforts failed. Since the Johnson case, however, its horizons have been widened until now it is used in run-of-the-mine cases, regardless of the amount of tax deficiency involved. In each of the four cases decided today the allegedly unreported income comes from the same disclosed sources as produced the taxpayer's reported income and in none is the tax deficiency anything like the deficiencies in Johnson, Capone or Guzik. The net worth method, it seems, has evolved from the final volley to the first shot in the Government's battle for revenue, and its use in the ordinary income-bracket cases greatly increases the chances for error. This leads us to point out the dangers that must be consciously kept in mind in order to assure adequate appraisal of the specific facts in individual cases.

[Difficulties Involved in Using Net Worth Method]

1. Among the defenses often asserted is the taxpayer's claim that the net worth increase shown by the Government's statement is in reality not an increase at all because of the existence of substantial cash on hand at the starting point. This favorite defense asserts that the cache is made up of many years' savings which for various reasons were hidden and not expended until the prosecution period. Obviously, the Government has great difficulty in refuting such a contention. However, taxpayers too encounter many obstacles in convincing the jury of the existence of such hoards. This is particularly so when the emergence of the hidden savings also uncovers a fraud on the taxpayers' creditors.

In this connection, the taxpayer frequently gives "leads" to the Government agents indicating the specific sources from which his cash on hand has come, such as prior earnings, stock transactions, real estate profits, inheritances, gifts, etc. Sometimes these "leads" point back to old transactions far removed from the prosecution period. Were the Government required to run down all such leads it would face grave investigative difficulties; still its failure to do so might jeopardize the position of the taxpayer.

2. As we have said, the method requires assumptions, among which is the equation of unexplained increases in net worth with unreported taxable income. Obviously such an assumption has many weaknesses. It may be that gifts, inheritances, loans and the like account for the newly acquired wealth. There is great danger that the jury may assume that once the Government has established the figures in its net worth computations, the crime of tax evasion automatically follows. The possibility of this increases where the jury, without guarding instructions, is allowed by take into the jury room the various charts summarizing the computations; bare figures have a way of acquiring an existence of their own, independent of the evidence which gave rise to them.

3. Although it may sound fair to say that the taxpayer can explain the "bulge" in his net worth, he may be entirely honest and yet unable to recount his financial history. In addition, such a rule would tend to shift the burden of proof. Were the taxpayer compelled to come forward with evidence, he might risk lending support to the Government's case by showing loose business methods or losing the jury through his apparent evasiveness. Of course, in other criminal prosecutions juries may disbelieve and convict the innocent. But the courts must minimize this danger.

4. When there are no books and records, willfulness may be inferred by the jury from that fact coupled with proof of an understatement of income. But when the Government uses the net worth method, and the books and records of the taxpayer appear correct on their face, an inference of willfulness from net worth increases alone might be unjustified, especially where the circumstances surrounding the deficiency are as consistent with innocent mistake as with willful violation. On the other hand, the very failure of the books to disclose a proved deficiency might indicate deliberate falsification.

5. In many cases of this type, the prosecution relies on the taxpayer's statements, made to revenue agents in the course of their investigation, to establish vital links in the Government's proof. But when a revenue agent confronts the taxpayer with an apparent deficiency, the latter may be more concerned with a quick settlement than an honest search for the truth. Moreover, the prosecution may pick and choose from the taxpayer's statement, relying on the favorable portion and throwing aside that which does not bolster its position. The problem of corroboration, dealt with in the companion cases of Smith v. United States, post, p. --, and United States v. Calderon, post, p. --, therefore becomes crucial.

6. The statute defines the offense here involved by individual years. While the Government may be able to prove with reasonable accuracy an increase in net worth over a period of years, it often has great difficulty in relating that income sufficiently to any specific prosecution year. While a steadily increasing net worth may justify an inference of additional earnings, unless that increase can be reasonably allocated to the appropriate tax year the taxpayer may be convicted on counts of which he is innocent.

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

With these considerations as a guide, we turn to the facts.

[Conviction in Trial Court]

The indictment returned against the Hollands embraced three counts. The first two charged Marion L. Holland, the husband, with attempted evasion of his income tax for the years 1946 and 1947. He was found not guilty by the jury on both of these counts. The third count charged Holland and his wife with attempted evasion in 1948 of the tax on $19,736.74 not reported by them in their joint return. The jury found both of them guilty; Mrs. Holland was fined $5,000, while her husband was sentenced to two years' imprisonment and fined $10,000.

The Government's opening net worth computation shows defendants with a net worth of $19,152.59 at the beginning of the indictment period. Shortly thereafter, defendants purchased a hotel, bar and restaurant, and began operating them as the Holland House. Within three years, during which they reported $31,265.92 in taxable income, their apparent net worth increased by $113,185.32. ³ The Government's evidence indicated that, during 1948, the year for which defendants were convicted, their net worth increased by some $32,000, while the amount of taxable income reported by them totaled less than one-third that sum.

Use of Net Worth Method Where Books Are Apparently Adequate

As we have previously noted, this is not the first net worth case to reach this Court. In United States v. Johnson, supra, the Court affirmed a tax-evasion conviction on evidence showing that the taxpayer's expenditures had exceeded his "available declared resources." Since Johnson and his concealed establishments had destroyed the few records they had, the Government was forced to resort to the net worth method of proof. This Court approved on the ground that "to require more . . . would be tantamount to holding that skilful concealment is an invincible barrier to proof," 319 U. S. , at 517-518. Petitioners ask that we restrict the Johnson case to situations where the taxpayer has kept no books. They claim that §41 of the Internal Revenue Code, ⁴ expressly limiting the authority of the Government to deviate from the taxpayer's method of accounting, confines the net worth method to situations where the taxpayer has no books or where his books are inadequate. Despite some support for this view among the lower courts, see United States v. Riganto, 121 Fed. Supp. 158, 161, 162 [54-2 USTC ¶9531]; United States v. Williams, 208 Fed. (2d) 437, 437-438 [54-1 USTC ¶9122]; Remmer v. United States, 205 Fed. (2d) 277, 286 [53-1 USTC ¶9421], judgment vacated on other grounds, 347 U. S. 227 [54-1 USTC ¶9274], we conclude that this argument must fail. The provision that the "net income shall be computed . . . in accordance with the method of accounting regularly employed in keeping the books of such taxpayer," refers to methods such as the cash receipts or the accrual method, which allocate income and expenses between years. United States v. American Can Co., 280 U. S. 412, 419 [2 USTC ¶487]. The net worth technique, as used in this case, is not a method of accounting different from the one employed by defendants. It is not a method of accounting at all, except insofar as it calls upon taxpayers to account for their unexplained income. Petitioners' accounting system was appropriate for their business purposes; and, admittedly, the Government did not detect any specific false entries therein. Nevertheless, if we believe the Government's evidence, as the jury did, we must conclude that the defendants' books were more consistent than truthful, and that many items of income had disappeared before they had even reached the recording stage. Certainly Congress never intended to make §41 a set of blinders which prevents the Government from looking beyond the self-serving declarations in a taxpayer's books. "The United States has relied for the collection of its income tax largely upon the taxpayer's own disclosures. . . . This system can function successfully only if those within and near taxable income keep and render true accounts." Spies v. United States , 317 U. S. , at 495. To protect the revenue from those who do not "render true accounts," the Government must be free to use all legal evidence available to it in determining whether the story told by the taxpayer's books accurately reflects his financial history.

Establishing a Definite Opening Net Worth

We agree with petitioners that an essential condition in cases of this type is the establishment, with reasonable certainty, of an opening net worth, to serve as a starting point from which to calculate future increases in the taxpayer's assets. The importance of accuracy in this figure is immediately apparent, as the correctness of the result depends entirely upon the inclusion in this sum of all assets on hand at the outset. The Government's net worth statement included as assets at the starting point stock costing $29,650 and $2,153.09 in cash. ⁵ The Hollands claim that the Government failed to include in its opening net worth figure an accumulation of $113,000 in currency and "hundreds and possibly thousands of shares of stock" which they owned at the beginning of the prosecution period. They asserted that the cash had been accumulated prior to the opening date, $104,000 of it before 1933, and the balance between 1933 and 1945. They had kept the money, they claimed, mostly in $100 bills and at various times in a canvas bag, a suitcase, and a metal box. They had never dipped into it until 1946, when it became the source of the apparent increase in wealth which the Government later found in the form of a home, a ranch, a hotel and other properties. This was the main issue presented to the jury. The Government did not introduce any direct evidence to dispute this claim. Rather it relied on the inference that anyone who had had $104,000 in cash would not have undergone the hardship and privation endured by the Hollands all during the late 20's and throughout the 30's. During this period they lost their café business; accumulated $35,000 in debts which were never paid; lost their household furniture because of an unpaid balance of $92.20; suffered a default judgment for $506.66; and were forced to separate for some eight years because it was to their "economical advantage." During the latter part of this period, Mrs. Holland was obliged to support herself and their son by working at a motion picture house in Denver while her husband was in Wyoming . The evidence further indicated that improvements to the hotel, and other assets acquired during the prosecution years, were bought in installments and with bills of small denominations, as if out of earnings rather than from an accumulation of $100 bills. The Government also negatived the possibility of petitioners' accumulating such a sum by checking Mr. Holland's income tax returns as far back as 1913, showing that the income declared in previous years was insufficient to enable defendants to save any appreciable amount of money. The jury resolved this question of the existence of a cache of cash against the Hollands , and we believe the verdict was fully supported.

As to the stock, Mr. Holland began dabbling in the stock market in a small way in 1937 and 1938. His purchases appear to have been negligible and on borrowed money. His only reported income from stocks was in his tax returns for 1944 and 1945 when he disclosed dividends of $1,600 and $1,850 respectively. While the record is unclear on this point, it appears that during the period from 1942 to 1945 he pledged considerable stock as collateral for loans. There is no evidence, however, showing what portions of this stock Mr. Holland actually owned at any one time, since he was trading in shares from day to day. And, even if we assume that he owned all the stock, some 4,550 shares, there is evidence that Mr. Holland's stock transactions were usually in "stock selling for only a few dollars per share." In this light, the Government's figure of approximately $30,000 is not out of line. In 1946 Holland reported the sale of about $50,000 in stock, but no receipt of dividends; nor were dividends reported in subsequent years. It is reasonable to assume that he sold all of his stock in 1946. In fact, Holland stated to the revenue agents that he had not "fooled with the stock market" since the beginning of 1946; that he had not owned any stocks for two or three years prior to 1949; that he had saved about $50,000 from 1933 to 1946, and that in 1946 he had $9,000 in cash with the balance of his savings in stocks. ⁶ The Government's evidence, bolstered by the admissions of petitioners, provided convincing proof that they had no stock other than the amount included in the opening net worth statement. By the same token, the petitioners' argument that the Government failed to account for the proceeds of stock sold by them before the starting date must also fail. The Government's evidence fully justified the jury's conclusion that there were no proceeds over and above the amount credited to petitioners.

The Government's Investigation of Leads

So overwhelming, indeed, was the Government's proof on the issue of cash on hand that the Government agents did not bother to check petitioners' story that some of the cash represented proceeds from the sales of two cafés in the 20's; and that in 1933 an additional portion of this $113,000 in currency was obtained by exchanging some $12,000 in gold at a named bank. 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, ⁷ 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 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 insufficient to go to the jury. This should aid in forestalling unjust prosecutions, and have the practical advantage of eliminating the dilemma, especially serious in this type of case, of the accused's being forced by the risk of an adverse verdict to come forward to substantiate leads which he had previously furnished the Government. It is a procedure entirely consistent with the position long espoused by the Government, that its duty is not to convict but to see that justice is done.

In this case, the Government's detailed investigation was a complete answer to the petitioners' explanations. Admitting that in cases of this kind it "would be desirable to track to its conclusion every conceivable line of inquiry," the Government centered its inquiry on the explanations of the Hollands and entered upon a detailed investigation of their lives covering several states and over a score of years. The jury could have believed that Mr. Holland had received moneys from the sale of cafés in the twenties and that he had turned in gold in 1933 and still it could reasonably have concluded that the Hollands lacked the claimed cache of currency in 1946, the crucial year. Even if these leads were assumed to be true, the Government's evidence was sufficient to convict. The distant incidents relied on by petitioners were so remote in time and in their connection with subsequent events proved by the Government that, whatever petitioners' net worth in 1933, it appears by convincing evidence that on January 1, 19 46, they had only such assets as the Government credited to them in its opening net worth statement.

Net Worth Increases Must Be Attributable to Taxable Income

Also requisite to the use of the net worth method is evidence supporting the inference that the defendant's net worth increases are attributable to currently taxable income.

The Government introduced evidence tending to show that although the business of the hotel apparently increased during the years in question, the reported profits fell to approximately one-quarter of the amount declared by the previous management in a comparable period; ⁸ that the cash register tapes, on which the books were based, were destroyed by the petitioners; and that the books did not reflect the receipt of money later withdrawn from the hotel's cash register for the personal living expenses of the petitioners and for payments made for restaurant supplies. The unrecorded items in this latter category totaled over $12,500 for 1948. Thus there was ample evidence that not all the income from the hotel had been included in its books and records. In fact, the net worth increase claimed by the Government for 1948 could have come entirely from the unreported income of the hotel and still the hotel's total earnings for the year would have been only 73% of the sum reported by the previous owner for the comparable period in 1945.

But petitioners claim the Government failed to adduce adequate proof because it did not negative all the possible nontaxable sources of the alleged net worth increases--gifts, loans, inheritances, etc. We cannot agree. The Government's proof, in our view, carried with it the negations the petitioners urge. Increases in net worth, standing alone, cannot be assumed to be attributable to currently taxable income. But proof of a likely source, from which the jury could reasonably find that the net worth increases sprang, is sufficient. In the Johnson case, where there was no direct evidence of the source of the taxpayer's income, this Court's conclusion that the taxpayer "had large, unreported income was reinforced by proof . . . that [for certain years his] private expenditures . . . exceeded his available declared resources." This was sufficient to support "the finding that he had some unreported income which was properly attributable to his earnings . . ." United States v. Johnson, 319 U. S. , at 517. There the taxpayer was the owner of an undisclosed business capable of producing taxable income; here the disclosed business of the petitioners was proven to be capable of producing much more income than was reported and in a quantity sufficient to account for the net worth increases. Any other rule would burden the Government with investigating the many possible nontaxable sources of income, each of which is as unlikely as it is difficult to disprove. This is not to say that the Government may disregard explanations of the defendant reasonably susceptible of being checked. But where relevant leads are not forthcoming, the Government is not required to negate every possible source of nontaxable income, a matter peculiarly within the knowledge of the defendant. See Rossi v. United States , 289 U. S. 89, 91-92.

The Burden of Proof Remains on the Government

Nor does this rule shift the burden of proof. The Government must still prove every element of the offense beyond a reasonable doubt though not to a mathematical certainty. The settled standards of the criminal law are applicable to net worth cases just as to prosecutions for other crimes. Once the Government has established its case, the defendant remains quiet at his peril. Cf. Yee Hem v. United States , 268 U. S. 178, 185. The practical disadvantages to the taxpayer are lessened by the pressures on the Government to check and negate relevant leads.

Willfulness Must Be Present

A final element necessary for conviction is willfulness. The petitioners contend that willfulness "involves a specific intent which must be proven by independent evidence and which cannot be inferred from the mere understatement of income." This is a fair statement of the rule. Here, however, there was evidence of a consistent pattern of underreporting large amounts of income, and of the failure on petitioners' part to include all of their income in their books and records. Since, on proper submission, the jury could have found that these acts supported an inference of willfulness, their verdict must stand. Spies v. United States , supra, at 499-500.

The Charge to the Jury

Petitioners press upon us, finally, the contention that the instructions of the trial court were so erroneous and misleading as to constitute grounds for reversal. We have carefully reviewed the instructions and cannot agree. But some require comment. The petitioners assail the refusal of the trial judge to instruct that where the Government's evidence is circumstantial it must be such as to exclude every reasonable hypothesis other than that of guilt. There is some support for this type of instruction in the lower court decisions, Garst v. United States, 180 Fed. 339, 343; Anderson v. United States , 30 Fed. (2d) 485-487; Stutz v. United States , 47 Fed. (2d) 1029, 1030; Hanson v. United States , 208 Fed. (2d) 914, 916 [54-1 USTC ¶9127], but the better rule is that where the jury is properly instructed on the standards for reasonable doubt, such an additional instruction on circumstantial evidence is confusing and incorrect, United States v. Austin-Bagley Corp., 31 Fed. (2d) 229, 234, cert. denied, 279 U. S. 863; United States v. Becker, 62 Fed. (2d) 1007, 1010; 1 Wigmore, Evidence (3d ed.), §§ 25-26.

Circumstantial evidence in this respect is intrinsically no different from testimonial evidence. Admittedly, circumstantial evidence may in some cases point to a wholly incorrect result. Yet this is equally true of testimonial evidence. In both instances, a jury is asked to weigh the chances that the evidence correctly points to guilt against the possibility of inaccuracy or ambiguous inference. In both, the jury must use its experience with people and events in weighing the probabilities. If the jury is convinced beyond a reasonable doubt, we can require no more.

Even more insistent is the petitioners' attack, not made below, on the charge of the trial judge as to reasonable doubt. He defined it as "the kind of doubt . . . which you folks in the more serious and important affairs of your own lives might be willing to act upon." We think this section of the charge should have been in terms of the kind of doubt that would make a person hesitate to act, see Bishop v. United States, 107 Fed. (2d) 297, 303, rather than the kind on which he would be willing to act. But we believe that the instruction as given was not of the type that could mislead the jury into finding no reasonable doubt when in fact there was some. A definition of a doubt as something the jury would act upon would seem to create confusion rather than misapprehension. "Attempts to explain the term 'reasonable doubt' do not usually result in making it any clearer to the minds of the jury," Miles v. United States, 103 U. S. 304, 312, and we feel that, taken as a whole, the instructions correctly conveyed the concept of reasonable doubt to the jury.

Petitioners also assign as error the refusal of the trial judge to give instructions on the wording of the criminal statute under which they were indicted, even though the judge fully and correctly instructed the jury on every element of the crime. The impossibility of pointing to any way in which defendants' rights were prejudiced by this, assuming it was error, is enough to indicate that the trial judge was correct, see United States v. Center Veal and Beef Co., 162 Fed. (2d) 766, 771. There is here no question of the jury's duty to apply the law to the facts. That operation implies the application of a general standard to the specific physical facts as found by the jury. The meanings of standards such as willfulness were properly explained by the trial judge in no greater particularity than necessary, and thus the jury's function was not invaded.

In the light of these considerations the judgment is affirmed.

¹ 26 U. S. C. §145. Penalties. "(b) Failure to collect and pay over tax, or attempt to defeat or evade tax. Any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony . . ."

² Friedberg v. United States, post, p. -- [54-2 USTC ¶9713]; United States v. Calderon, post, p. -- [54-2 USTC ¶9712]; Smith v. United States, post, p. -- [54-2 USTC ¶9715]. Because of the extensive factual backgrounds they require, and the significant differences in the problems they present, the cases are treated in separate opinions.

³ This is a corrected figure taking into account certain nontaxable income and nondeductible expenses of defendants.

⁴ 26 U. S. C. "Part IV--Accounting Periods and Methods of Accounting. §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; . . ."

⁵ As of this time, petitioners' liabilities were listed as $12,650.50.

⁶ "Q. In other words, to summarize this whole thing: you had a net worth of $157,000 at January 1, 19 46, which consisted of $104,000 which you had since December 22, 19 33, and the balance of $9,000 in currency, and your investment in securities--or the value of your securities.

"A. Yes." [R. 303.]

⁷ This Court will formulate rules of evidence and procedure to be applied in federal prosecutions where it appears necessary to maintain "proper standards for the enforcement of the federal criminal law in the federal courts." McNabb v. United States , 318 U. S. 332, 341.

⁸ The record indicates that the income of the hotel as reported for 1946 was approximately 121/2% of that reported by the previous owner in 1945; in 1947 the ratio was 12%; and in 1948 it was 26%.