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7203: Willful Failure to File Return, Supply Information, or Pay Tax: Books and Records

 

[81-2 USTC ¶9732] United States of America v. Roger J. Quigg

U. S. District Court, Dist. Vt., Criminal No. 80-41-1, 1/5/81

[Code Sec. 7602]

Examination of books and witnesses: Subpoena issued to foreign bank: Consent of taxpayer compelled: Self-incrimination: Federal court jurisdiction.--In a criminal prosecuting of the taxpayer for evasion of federal income taxes, the court issued an order compelling the taxpayer to execute a consent form permitting the disclosure of bank records concerning his accounts at a Bahamian branch of a Canadian bank. Such an order did not violate the taxpayer's Fifth Amendment right against self-incrimination because the bank records were neither private nor testimonal in nature. Further, service on the bank's New York agency gave the Federal count jurisdiction over the bank's headquarters and branches located outside the United States because the bank was "in" the United States for purposes of service of process for a subpoena under Rule 17(e) of the Federal Rules of Criminal Procedure.

Opinion and Order

COFFRIN, District Judge:

This is a criminal prosecution of Roger Quigg on charges that he evaded federal income taxes. On November 21, 1980, in response to an application by the government, this court issued a trial subpoena ordering the Canadian Imperial Bank of Commerce (Canadian Imperial) to produce records of any account maintained by defendant at Candian Imperial since 1972. The subpoena is addressed to "any authorized officer" at Canadian Imperial's agency located in New York City and was served on an assistant accountant at the New York agency. On December 18, 1980, the court entered an order for the production of documents pursuant to F. R. Crim. P. 17(c) requiring Canadian Imperial to produce a portion of the records on December 30, 1980, in order to make them available to the government in advance of trial. The production date was extended to December 31, 1980, to permit counsel for the bank to respond to the order and has been extended still further pending disposition of certain motions concerning the subpoena.

Canadian Imperial is a large bank based in Toronto ; it has approximately 1,700 branches and agencies located in all parts of the world. Some twelve of these branches, including a wholly-owned trust company subsidiary are located in the Bahamas . The government has indicated to Canadian Imperial that the records it seeks are located in a Nassau branch of Canadian Imperial. Although the subpoena on its face seeks production of records located at any branch of Canadian Imperial, the court notes that for practical reasons the scope of the subpoena is limited to a search of the records of the Bahamian branches.

Canadian Imperial has moved to quash the subpoena. The government has moved for an order requiring defendant to consent to the disclosure of the records sought by the subpoena.

Analysis. The subpoena and order to produce in this case are unusual in two respects. First, the banking laws of the Bahamas prohibit disclosure of bank records without the consent of the customer except under certain circumstances not relevant here. Second, although the New York agency of Canadian Imperial was properly served in this matter, the bank contends that service on the agency does not give this court jurisdiction over its headquarters and branches located outside the United States .

I. Consent of Roger Quigg to disclosure of his bank records

In a recent amendment of the banking laws of the Bahamas , the Bahamian legislature made it a crime for any officer or employee of a bank or trust company to disclose "information relating to the identity, assets, liabilities, transactions, [and] accounts of a customer" without the customer's consent. Banks and Trust Companies Regulations (Amendment) Act, 1980. ¹ Under principles of comity and international law, this court is unwilling to compel any disclosure by Canadian Imperial which would subject the bank or its employees to criminal liability in the Bahamas . Ings v. Ferguson, 282 F. 2d 149 (2d Cir. 1960); Application of Chase Manhattan Bank, 297 F. 2d 611 (2d Cir. 1962); S. E. C. v. Minas de Artemisa, 150 F. 2d 125 (9th Cir. 1945); Trade Development Bank v. Continental Insurance Co., 469 F. 2d 35 (2d Cir. 1972). Enforcement of the subpoena and order, therefore, is conditioned on Quigg's consent to the disclosure of the bank records.

Quigg's position as expressed by his counsel is that he will not voluntarily consent to the disclosure. The government seeks a court order compelling Quigg to execute a consent form permitting Canadian Imperial of release the records. Quigg contends that such an order would violate the due process and self-incrimination clauses of the fifth amendment.

A. Due Process. Defendant's due process argument boils down to a bald statement that a criminal defendant is not obliged to cooperate with the government in his own prosecution. Defendant's position is obviously correct in its broad outline, but it fails to take into account a number of important exceptions to the general rule. A criminal defendant, for example, may be compelled to submit to a blood test, Schmerber v. California, 384 U. S. 757 (1966), to participate in an identification line-up, Appeal of Maguire, 571 F. 2d 675 (1st Cir. 1978), cert. denied, 436 U. S. 911 (1978); Rigney v. Hendrick, 355 F. 2d 710 (3d Cir. 1965), cert. denied, 384 U. S. 975 (1966), or to produce a handwriting exemplar, Gilbert v. California, 388 U. S. 263 (1967); United States v. Mara, 410 U. S. 19 (1973). An individual may also be compelled to produce papers and other evidence in his possession which may be extremely damaging at trial but which are not private or testimonial in nature and falls outside of the protection of the self-incrimination clause. In Fisher v. United States [76-1 USTC ¶9354], 425 U. S. 391 (1976), for example, the Court observed that an individual under investigation for tax violation could not refuse to produce papers in his possession which were prepared by an accountant and were thus beyond the scope of the fifth amendment. ² Unless the privilege against self-incrimination or some other constitutional right applies, therefore, a criminal defendant may be ordered to produce evidence in his possession or to cooperate in other ways as the government builds its case.

B. Self-incrimination. The records of banks located in the United States are clearly not protected from disclosure by the self-incrimination clause of the fifth amendment. For purposes of the Constitution, bank records are records maintained by a third party (the bank) and are neither private nor testimonial in nature. California Bankers Association v. Schultz [74-1 USTC ¶9318], 416 U. S. 21 (1974); United States v. Miller [76-1 USTC ¶9380], 425 U. S. 435 (1976). A subpoena ordering an American bank official to produce the records of a depositor's account maintained in the United States violates neither the fifth nor the fourth amendment. In United States v. Payner, 48 U. S. L. W. 4829 (June 23, 1980), the Supreme Court noted that the bank secrecy laws of the Bahamas create no special expectation of privacy under the fourth amendment which is not present under American banking law. The Court wrote that "[the Bahamian] statute is hardly a blanket guarantee of privacy. Its application is limited; it is hedged with exceptions . . .. Moreover, American depositors know that their own country requires them to report relationships with foreign financial institutions." Id. at 4831, n. 4. ³

If the bank records in this case are not private or testimonial, the Constitution imposes no impediment to their production pursuant to a subpoena duces tecum. It follows from Fisher that third party bank records in the hands of the defendant would be subject to production by means of a subpoena addressed directly to defendant. The court notes that as an American citizen defendant would be subject to such a subpoena despite his residence in the Bahamas . 28 U. S. C. §1783. In this case, defendant has not been ordered to produce the records himself but instead to remove an obstacle to their production created by Bahamian law. As a criminal defendant within the personal jurisdiction of this court, he cannot lawfully defeat an otherwise valid subpoena by withholding his consent to disclosure of the records.

We are not persuaded that the execution of a consent form is itself a testimonial act by a criminal defendant privileged under the fifth amendment. In consenting to disclosure, defendant will neither admit ownership of an account in the Bahamas nor vouch for the accuracy of any records produced by the bank. Defendant's consent form will merely permit Canadian Imperial to release any records it may find after it conducts a search of its own records.

Accordingly, the court orders defendant to consent to the disclosure of any bank records concerning accounts held by the defendant at any of the Bahamian branches of Canadian Imperial.

II. Motion to Quash. In its motion to quash the subpoena, Canadian Imperial relies on two arguments. It contends that under Ings and related cases it cannot be compelled to produce bank records if production would subject it to criminal liability under the law of the Bahamas . We agree. This impediment, however, will be removed by the consent which the court has ordered Roger Quigg to give. Canadian Imperial's second argument in favor of quashing the subpoena concerns the jurisdiction of the court over branches of Canadian Imperial located outside of the United States . Although counsel for Canadian Imperial have represented that the Nassau branch may be willing to supply the records on a voluntary basis, the bank contends that production pursuant to a subpoena is improper because the records are beyond the control of the New York agency served with the subpoena. The government's position, on the other hand, is that service of the subpoena on the New York agency subjects Canadian Imperial's headquarters and all 1,700 branches to the subpoena power of this court.

The subpoena power of the federal courts in criminal matters is not explicitly conferred by statute but derives from the general grant of jurisdiction over offenses against the United States which appears at 18 U. S. C. §3231. Matter of Arawak Trust Co. (Cayman), 489 F. Supp. 162 (E. D. N. Y. 1980). The geographical reach of this power appears in somewhat oblique fashion in the two parts of F. R. Crim. P. 17(e). Service abroad under rule 17(e)(2) is limited to nationals and residents of the United States by special reference to 28 U. S. C. §1783. Since Canadian Imperial cannot be considered a resident of this country, subdivision (2) is inapplicable. Subdivision (1), however, provides for service of a subpoena on anyone found in the United States . As Judge Nickerson observed in Arawak, "[s]ubdivision (1) of Rule 17(e) plainly contemplates that the witness to be served is 'in' the United States because subdivision (2) provides for service on a witness 'in a foreign country.'" Id. at 164. Under familiar principles of personal jurisdiction, a foreign corporation may be found in the United States even though its headquarters and place of incorporation may be Canada . In Arawak, the court reasoned that the grant of subject matter jurisdiction contained in 18 U. S. C. §3231 carries with it an implied grant of the subpoena power extending to the limits on personal jurisdiction imposed by International Shoe Company v. Washington, 326 U. S. 310 (1945). We adopt the same reasoning today and turn to the question of whether Canadian Imperial is found in the United States for purposes of service of a subpoena under rule 17(e)(1). ⁴

The only evidence presented to the court concerning Canadian Imperial's activities in the United States is found in the affidavits of Michael O'Leary, second in command of Canadian Imperial's New York agency, and Paul J. Dillon, Esq., an associate of the law firm which represents Canadian Imperial. ⁵ It appears from these two affidavits that the activities of Canadian Imperial are on a scale sufficient to constitute "doing business" for jurisdictional purposes. At the very least, nothing which has been brought to the attention of the court indicates that Canadian Imperial is not "doing business" in the United States . The bank's position that it is beyond the jurisdiction of the court's subpoena power is analogous to the affirmative defense of lack of personal jurisdiction which a defendant in a civil case must raise and prove or lose. See also In Re Liberatore, 574 F. 2d 78 (2d Cir. 1978) (burden of showing irrelevancy of information sought by subpoena duces tecum lies with the party seeking to quash.) Accordingly, in the absence of some specific indication that Canadian Imperial is not "doing business" in the United States, we find that Canadian Imperial is "in" the United States for purposes of service of process of a subpoena under F. R. Crim. P. R. 17(e).

For the above-stated reasons, the government's motion for an order requiring defendant Quigg to consent to the disclosure of his bank records is granted. Canadian Imperial's motion to quash the subpoena is denied.

Defendant Quigg is directed to consent to the production of records by the Canadian Imperial Bank of Commerce by preparing and executing duplicate originals of a form in manner attached and subscribing to the same before a notary public. Immediately upon execution, one original shall be delivered to the Canadian Imperial Bank of Commerce at its office closest to the physical location of the defendant and one original shall be filed with the court.

The Canadian Imperial Bank of Commerce is directed to produce the documents listed in paragraphs one through four of the subpoena and deliver them to the court as soon as possible and no later than 9:00 a. m. on January 12, 1981 in any event. The balance of the subpoenaed records shall be produced and delivered on January 19, 1981 by a custodial witness who can authenticate all of the records. The records delivered prior to the commencement of trial shall be sealed by the court and shall not be available for inspection by the parties until the consent of the defendant has been filed with the court.

¹ One of the exceptions to the secrecy requirement concerns disclosures of records required by "any court of competent jurisdiction within The Bahamas." Bank and Trust Companies Regulation (Amendement) Act, §10(1)(iii) (1960). The use of letters rogatory addressed to the courts of the Bahamas requesting an order authorizing release of the records might result in the production of the records. See United States v. Frank, 494 F. 2d 145, 156 (2d Cir. 1974). We note that in Frank the trial in the United States ended while the letter rogatory was still before the appellate courts of the Bahamas . Whatever the merits of the letters rogatory procedure may be in a more leisurely investigation, the procedure is less than satisfactory with trial scheduled to shart in a week. Accordingly, we do not believe that the availability of the letters rogatory procedure precludes issuance of a subpoena in this case.

² In Fisher, the Court considered two cases in which the government sought to subpoena financial records prepared and maintained by the accountants of individuals charged with tax offenses. In both cases, the defendants had turned over the records to their attorneys. The Court first held that the attorney-client privilege barred production only if some independent privilege under the fourth or fifth amendment would have prevented the issuance of a subpoena of the records while the records were still in the possession of the defendants. The Court noted that under proper circumstances the fourth amendment is no longer thought to bar a search for nontestimonial evidence pursuant to a subpoena directed to the defendant himself. In the Court's view, moreover, the fifth amendment does not stand in the way of the subpoena of an accountant's work papers because the papers were prepared by a third party (the accountant) and are nontestimonial in nature. In short, the Court held that the government may subpoena records prepared by a third party directly from the defendant or from his attorney.

³ The Bahamian bank secrecy provisions construed by the Supreme Court in Payner were amended in 1980 to provide a criminal penalty for unauthorized disclosures by bank officers, employees, and others. Bank and Trust Companies Regulation (Amendment) Act, 1980. As best we can determine, the addition of the penalty is the only major difference between the secrecy laws now in effect and those construed by the Supreme Court in Payner. Although by the addition of the penalty, a fine of up to $15,000 (Bahamian) or two years in jail, indicates some stiffening of the attitude of the Bahamas towards disclosure, the exceptions for disclosure of bank records with the consent of the customer or by order of a Bahamian court remain. Accordingly, we believe that the 1980 amendments do not change the court's ruling in Payner that no special expectation of privacy attaches to a Bahamian account held by an American citizen.

⁴ The court notes that the analogy between jurisdiction over a civil defendant doing business in the United States and the subpoena power is not an exact fit. 'Doing Business' subjects a civil defendant to limited amenability to suit for causes of action arising out of the business which it conducts in this country. Bersch v. Drexel Firestone, 519 F. 2d 974, 998 (2d Cir. 1975), cert. denied, 423 U. S. 1018 (1975); Restatement (Second) of Conflict of Laws §35 (1971). The subpoena power over a foreign corporation doing business in the United States , however, extends beyond inquiries related to the corporation's operations in this country. We recognize that foreign corporations may not be obliged to open all their files to American courts and prosecutors merely because they open an American office. In this case, however, the subpoena is directed only at bank records concerning an American citizen under indictment for violation of the American tax laws. The subpoena, therefore, represents no great intrusion into the purely foreign affairs and operations of Canadian Imperial and its foreign customers. Finally, we note that it should come as no great surprise to Canadian Imperial that the United States government is interested in the foreign bank accounts of its citizens. Canadian Imperial chose to enter the United States to conduct business, and by that act it became obliged to respond to reasonable requests for information concerning its transactions with Americans both in this country and abroad.

⁵ In his affidavit, O'Leary states in part that

The Canadian Imperial Bank of Commerce (the "Canadian Bank") is a banking corporation chartered under the Bank Act of Canada and has its principal office in Toronto , Canada . The Canadian Bank has more than 1,700 branch offices located throughout the Dominion of Canada. It also has branches, agencies and independent subsidiaries located throughout the world. One such agency is the New York Agency, which is licensed to transact business in the State of New York as the agency of a "foreign banking corporation" pursuant to the New York Banking Law, Section 300 et seq. The Agency has a single place of business at 22 William Street , New York , New York .

The Agency is subject to regulation by and the supervision of the State of New York Banking Department. The Agency maintains its own books and records which are inspected regularly by the New York State Banking Department.

In his affidavit, Dillon states in part that

The Canadian Imperial Bank of Commerce (the "Canadian Bank"), is a banking corporation organized and existing under the Bank Act of Canada with its head office in Toronto , Province of Ontario . The Canadian Bank has more than 1,700 branches, affiliates and agencies located throughout the Dominion of Canada and in many countries. The Canadian Bank transacts business as a "foreign banking corporation" in the State of New York through the New York Agency, pursuant to a license granted by the State of New York Banking Department, under the provisions of the New York Banking Law, Section 200, et seq. The Agency's sole place of business is at 22 William Street , New York , New York .

 

 

[58-1 USTC ¶9371]Paul E. Moore and Viola H. Moore, Appellants v. United States of America , Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 16804, 254 F2d 213, 3/18/58, Aff'g an unreported District Court decision

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

Crimes: Willful evasion of income taxes: Admissions: Books and records.--Since GMAC standard books of account were prescribed for use by automobile dealerships using GMAC "floor plan" financing and were designed to show accurately the income and expense of such dealerships, a jury was entitled to accept those books as an accurate reflection of income where there was a discrepancy between them and the income shown on taxpayers' returns. It was not necessary for the Government to prove the books were accurate. Also, an offer to pay a deficiency on the basic of book income could be taken by the jury as an admission of their accuracy. Conviction by a federal district court jury of the charge of willful income tax evasion by filing false and fraudulent returns was upheld.

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

Crimes: Willful evasion of income taxes: Original returns destroyed: Returns unsigned: Copies introduced by Government.--Taxpayers' conviction by a jury on the charge of willful income tax evasion by filing false and fraudulent returns was appealed on the grounds that the Government failed to prove that an extract copy of the 1950 return--the original had been destroyed by fire in the Government's warehouse--was a correct copy of the return as filed, and that the return for 1951 was filed by them, since that return was unsigned. The "dummy" copy of the 1950 return used at the trial was prepared from a penciled retained copy furnished an Internal Revenue Agent at his request. Held, once the original was accounted for, there was sufficient proof of its contents. The original unsigned return for 1951 was introduced. Held, further, it was established as taxpayers' return by the District Director's certificate of assessments and taxpayers' check made out in the same amount as the assessment. In addition, there was attached to the return a signed claim for refund of an overpayment of tax for 1951 due to erroneous calculation of income for self-employment tax.

John D. Cofer, G. Hume Cofer, Austin , Tex. , for appellant. John R. Locke, Jr., John E. Banks, Assistant United States Attorneys, San Antonio, Tex., for appellee.

Before JONES, BROWN and WISDOM, Circuit Judges.

BROWN, Circuit Judge:

This is an appeal by defendants, husband and wife, from convictions on a jury verdict of guilt for willful evasion of income taxes by filing false and fraudulent returns for the years 1950, 1951 and 1952. There is a frontal attack that for neither of the years is the evidence sufficient. Several less decisive attacks are made urging procedural errors requiring a new trial.

This is not the case of a wife, unwilling, reluctant, or acquiescent in her husband's demands, who finds herself criminally liable merely for the acts of her husband attributed to her. For here the Moores, owners and operators of the Pontiac automobile dealership in Freeport , Texas , were both active in the business and most, if not all, of the bookkeeping accounting activities were, as between the two of them, the immediate responsibility of Mrs. Moore. Nor is this case one of that kind so endemic in which the pressures of the net-worth method are brought to bear. For by indictment, bill of particulars and proof, the Government undertook to show willful error in specific items by which income was understated, cost of sales misrepresented, or operating expenses exaggerated, or combinations of two of them. Perhaps even more unique, the element of willful, fraudulent purpose, normally an inference from circumstances, was here, certainly as to 1950, proved directly by categorical admissions of culpability by defendants' accountant with much the same testimony coming from the other accountant who prepared the 1951, 1952 returns.

[Taxpayers' Returns Established]

The substantive complaint of the Court's failure to grant defendants' motion for judgment of acquittal boils down to these points. As to 1950: the evidence did not adequately show that the extract copy of the 1950 return was a correct copy of the return as filed, and the element of incorrectness and willfulness rested wholly on testimony of the accountant, a self-confessed felon. As to 1951: admittedly the return, as filed, was not signed by defendants and there was no evidence to show that its contents were known to them. As to 1951 and 1952: since the accountant Danforth, who prepared the returns, testified that he thought they correctly reflected income, there was no evidence of fraudulent filing. As to all three years, 1950, 1951, 1952: the evidence merely showed that the income reported in the returns varied substantially from that shown in the account books of the business with no proof that the books were correct. In our view none of these contentions is sound.

The original 1950 return was not introduced. The evidence, however, demonstrated without qualification that it could not be because it had been destroyed in the fire of the warehouse in which returns had been stored by the District Director. Once the original was accounted for, there was likewise sufficient proof of its contents. The Revenue Agent who made the initial investigation in November 1953 testified that he requested, ¹ and Mrs. Moore furnished him, a penciled retained copy of the 1950 return. From this penciled Taxpayers' retained copy, he made extracts from which he prepared the typed "dummy" copy ² used on the trial. That this was fair and adequate proof that defendants had filed such a return was overwhelmingly established by impressive facts, ³ extrinsic and intrinsic.

[Assessment Lists Establish Returns]

There is even less to the objections covering the form of the 1951 return. The original (or agreed photostat) was introduced. While it was not signed by either Mr. or Mrs. Moore, the accountant, Danforth, testified that it appeared to be the one prepared by him and, in any case, extrinsic and intrinsic facts ⁴ again overwhelmingly established it as the return submitted by defendants.

The fact of a filing by defendants of the return for 1950, and the return for 1951 showing the taxable income and income tax due and paid thereon, was thus adequately established. No such issues arise as to the 1952 return. We turn then to the questions whether, assuming this to have been established, there was sufficient evidence to show that defendants knew of the contents, knew that the true income was something else, and then willfully filed the false returns to defraud the Government?

Since the asserted incorrectness of reported income for all three years is based on the Taxpayers' books, it simplifies matters to outline this generally before discussing any specific complaints on the proof of 1950 or 1951-1952 violations.

[GMAC Standard Books of Account]

The Moores began this business in late 1949. A Pontiac dealer is required to keep a standard set of books in a form and manner meticulously prescribed by General Motors. As neither of the Moores had training in this, they hired Vetterling, on a part time basis, for the period ending mid-1951 and Danforth (a one-time relative of Mrs. Moore) through 1952. If, as was the case here, the dealer obtained from GMAC "floor plan" financing of automobiles purchased from the manufacturer for resale, or made arrangements with it for the assignment of all or part of its conditional sales contract paper covering cars sold at retail, it was necessary for the dealer to submit, under an express warranty of correctness, a periodic and annual report on GMAC accounting forms showing the true condition of the business as reflected by the prescribed books of account. In addition, similar periodic and annual reports had to be made to the Pontiac Division of General Motors on the prescribed forms. These were substantially the equivalent of a trial balance, a detailed profit and loss statement and a balance sheet showing precisely for comparative analysis, increase in net worth of the business.

[Establishing Books of Account]

The fact, so readily discovered by the Revenue Agent in the initial routine audit, that there was a substantial discrepancy ⁵ in the taxable income reported in the three returns and that shown by these elaborate books and reports, has not, nor can it ever be, denied. To escape this awful predicament, Taxpayers asserted a plea of good faith ignorance, but in refutation their main trust was put, not on facts, but on a legal theory. The legal theory is that while there was proof that there was a discrepancy as such, there was no proof that the accounts, as reflected in the books, rather than the accounts as reflected in the returns, were correct. Elaborating further, it was that since books of account are normally evidential only, Sitterding v. Commissioner, 4 Cir., 80 Fed. (2d) 939 [36-1 USTC ¶9059]; United States v. Berman, D. C. Ga., 75 Fed. Supp. 789, 790 [49-2 USTC ¶9396], a taxpayer can be convicted, not for failing to pay tax on what the books show, but only on what the real income was. In translating that further into tangible terms, the Taxpayers, by urging the plea of good faith ignorance of what the accountants had done, took positions which may well have been considered by the jury as self-defeating, irreconcilably inconsistent ⁶ ones: (1) the books were incorrect so it was proper not to follow them in preparing the returns; (2) the books were correct, but the accountants did not advise Taxpayers that the books were not followed in preparing the returns.

But this legal theory collapsed in the face of a record which overwhelmingly supported the contrary conclusions implied by the verdicts of guilt. A major part of this refuting evidence serves double harness and satisfies as well the element that the false returns were knowingly submitted.

There was first the fact that the books recorded all of the transactions showing income and expenses of the business. And, it is another one of the ironic distinctions which set this case off as a unique one that, instead of proving that the books were in error, defendants' own expert witness, a Certified Public Accountant, testified that, except for two items in 1952, these books were correct and taxes, substantially in the amounts calculated by the Government to be due, were in fact due. The jury could also credit the strong suggestion that another set of accountants to whom the books were first submitted when the Special Agent entered the case, likewise could find nothing wrong with the books or the tax computations based on them.

The Revenue Agent checked and tested the books for the three years and found them to substantiate that which was reflected in the periodic and annual reports submitted to GMAC and General Motors. Both Vetterling and Danforth affirmed that the books correctly reflected the state of the business.

Where taxpayers obtain essential credit and procure the very inventory of merchandise which is the main stock in trade on the basis of books and records regularly kept in accordance with accepted accounting principles, the jury is entitled to conclude that such books are an accurate reflection of the business. It is not required, as defendants seem to assert, that the Government go back and reconstruct the books item by item, sale by sale, check by check, to establish anew that the books and records are correct.

[Falsification of Returns]

Moreover, there is in the circumstance credited by the jury from Vetterling's testimony further corroboration. He (and his wife corroborated this in essential detail) stated that in January of 1951 he had prepared the 1950 return. As the filing deadline date was approaching (see note 3, supra), Mr. and Mrs. Moore came to his home on a Sunday morning to sign the return which Mrs. Vetterling had typed up. The return was based on the books and records which had been kept for the Moores by Vetterling. When Mr. Moore saw the proposed return, he was indignant and outspoken. He refused to sign the return and said the tax should be about $1300 to $1400. When Vetterling told him that that could not be done without falsifying the return, Moore , in effect, told Vetterling that that was Moore 's worry, not his. A new return was then prepared by Vetterling making arbitrary adjustments in the Moores ' presence, signed by the two of them, the initial return and all work papers torn up and the remnants taken away by Mr. Moore.

Danforth, the accountant who succeeded Vetterling, was not so strong. But for 1951 and 1952, he testified that Moore told him that the business had not earned the profits shown by the periodic reports, and in preparing the returns, he should use figures substantially the same as for the preceding year.

[Agreement to Pay Deficiency]

In addition, the jury had the right to impute to the defendants an admission-agreement that the books were correct. On the completion of the Agent's audit, a statement of a proposed deficiency was submitted for the assessment of additional taxes in almost the identical aggregate of the three counts of the indictment. Taxpayers, while insisting at that time that they had not made that much money, nevertheless submitted a special formal offer ⁷ to pay the proposed deficiency which was subsequently declined by the Commissioner.

[Inflated Value of Cars]

Likewise the jury had the opportunity to determine for itself whether the reason continually pressed by Taxpayers as the major cause for the books being incorrect had either substance in fact or was asserted in good faith. As justification for the instructions which Danforth testified they gave to him, and as an explanation why they had not followed the books in having the returns prepared, the Moores personally and through Danforth testified that the books did not correctly reflect income because of excessive allowances on the trade-in of used cars in the sale of new automobiles. ⁸

This theory, though expressly submitted to, was presumably rejected by the jury. Not the least reason may well have been the fact that whether excessive or not, whatever was allowed was entered in the books and was taken into account in all subsequent transactions. While an inflated value might temporarily swell assets, it was, on the records, the cost of that used car. If a car, so valued, was sold, there was an automatic loss to the extent that the resale price was less than the initial trade-in. And, in any case, the books showed, and Moore readily acknowledged, that each December the inventory of used cars was reappraised, and inventory value written off so far that December, in contrast to the other months of substantial profits, invariably showed a marked loss.

The jury was entitled, of course, in its everyday cumulative wisdom to think that a businessman, asserting the doubtful correctness of his books, would have the means of demonstrating it, and if the explanation failed ⁹ in content, that that inferentially went far toward establishing correctness, and certainly in indicating a lack of good faith.

To this the jury could add a further circumstance, plain and simple in its obvious existence, and having profound relevance in the business world. The uncontradicted fact was that instead of this being a business which remained static (as would have been the case had net profits remained the same each year as that reported for 1950), it was a business of marked growth with an increase of over 400% in net worth and 800% in cash. ¹⁰

[Substantial Correctness of Books]

Once substantial correctness of the books was established, there was ample basis for the finding that returns incorrectly showing different taxable income were willfully filed with fraudulent intent. Vetterling's testimony, while categorically refuted by the Moores , showed, if accepted, a deliberate unlawful purpose. The jury could read Danforth the same way, for it was not required to accept the self-serving protestations that he was not intentionally falsifying the returns and thought that the Moores were correct when they stated to him each year that they had not made the profits indicated on the periodic reports. What ¹¹ he did may have drowned out the sound of what he said, and in so doing, it established as well specific omissions and misstatements of income and expense.

[Procedural Errors]

When it comes to procedural errors, none require reversal. It was not error to refuse the requested instruction that the jury, in weighing the testimony of the Vetterlings and Danforth should "take into consideration the very keen interest that said witnesses have in giving the testimony which they gave." Full instructions treating these witnesses as accomplices and giving the jury the usual precautions for receiving such evidence, as well as general and specific charges concerning bias or hostility of any witness were given. We cannot discern how Vetterling had a "keen interest" in categorically confessing to a deliberate falsification of a return. Nor was Danforth aided or his interest advanced in any way by his testimony.

The instruction on "reasonable doubt" while subject precisely to the infirmities of the one criticized in Holland v. United States, 348 U. S. 121, 141, 95 L. ed. 150, 167 [54-2 USTC ¶9714], does not, again for the reasons pointed out in that very case, present a situation, on this record, of harmful effect. Fed. Rules Crim. Proc. 52(a).

The final point concerns the objections to the charge as given and the refusal of the Court to grant a requested charge on evidence of good reputation. The Court gave one in substantial accord with our prior decisions, Le More v. United States, 5 Cir., 253 Fed. 887, cert. den. 248 U. S. 586, 63 L. ed. 434, and Grace v. United States , 5 Cir., 4 Fed. (2d) 658, cert. den. 268 U. S. 702, 69 L. ed. 1165, unaware at the time of the trial of our decision in Holland v. United States, 5 Cir., 245 Fed. (2d) 341, which was not published until after the trial. In this record with its devastating facts, both direct and circumstantial, we would not have reached a conclusion that any such difference in the wording between the requested and given instructions could have had any harmful effect. United States v. Kushner, 2 Cir., 135 Fed. (2d) 668, cert. den. 320 U. S. 212, 87 L. 2d. 1850. Nevertheless, since trial courts are entitled to guides as clear as can be fashioned, we think it unsound to undertake any comparative analysis of the instructions here requested in contrast to those given by the Court or those criticized in Holland . Rather we should state plainly that in Holland neither by briefs nor argument were our prior decisions in Le More and Grace called to our attention. Those cases represented the law in this Circuit, see Kreiner v. United States, 2 Cir., 11 Fed. (2d) 722, at 726, cert. den. 271 U. S. 688, 70 L. ed. 1152. The contrary holding in Holland is disapproved so that these two prior decisions continue their vitality.

Affirmed.

¹ He was making a routine audit of the 1951 return, but when the comparison of that return and the books showed such marked discrepancy, he made a check as to the other two years and for this, initially at least, inspected and used Taxpayer's retained copies which they furnished to him.

² This contained the totals and sub-totals from the tax return form and attached schedules showing gross sales, inventories, cost of goods sold, operating expenses, and taxable income.

³ The reconstructed return showed a tax due of $1,453.28 against which Taxpayers took as an offsetting credit an overpayment of $218.08 from 1949 with a resulting cash payment of $1,235.20. The District Director's certificate of assessments covering 1949 through 1952 showed that defendants were entitled to a 1949 tax credit of $218.08, and that the 1950 tax had been paid by Taxpayer taking the credit and remitting the balance by check with the 1950 return, the check and return both being stamped with the routine serial number 3131685. A photostat of the Taxpayer's check, signed by Mrs. Moore, dated January 15, 1951, in the precise amount of $1,235.20 bears the stamped number "3131685."

Whatever infirmities there might have been earlier, they were all cured when defendants, in their case, introduced and identified the penciled retained copy of the 1950 return from which the Agent made his extract. The totals and sub-totals on the extract "dummy" copy corresponded exactly.

⁴ The District Director's certificate of assessments, see note 3, supra, showed that the tax due, $1,499.89 (the amount shown on the return) was paid February 20, 1952, under serial No. 3060172. Both the photostat of Taxpayer's check, dated January 15, 1952, in the amount of $1,499.89, signed by Mrs. Moore, and the return, bore this serial number stamp "3060172." In addition, and attached to the return as introduced, was the claim filed July 23, 1952, signed by Taxpayers seeking refund of $106.21 for overpayment due to erroneous calculation of income for self-employment withholding tax. This claim specifically identified and referred to the 1951 return and the requested refund ($106.21) shows it was based on the specified figures taken from the return.

⁵                  

                                                        1950                       1951                                   1952

Net Income perbooks .....  $24,886.69     $25,900.17         $26,419.92

Net Income per return ....   9,980.59       8,320.89           9,113.94

Difference not reported .. $14,906.10     $17,579.28         $17,305.98

Tax due ...........        $ 5,701.86     $ 6,835.08         $ 7,697.56

Tax paid ..........          1,453.28       1,499.89           1,365.41

Deficiency in tax .......  $ 4,248.58     $ 5,335.19         $ 6,332.15

 

⁶ Defendants requested and the Court gave specific instructions to the jury on both of these two special defenses. Where this left defendants is well described in the Government's brief: "One defense was that the discrepancies were the result of mistakes on the part of the bookkeepers and appellants never knew the discrepancies existed. The other was that they, in good faith, thought their books were wrong and, accordingly, reported less income on their returns, which they believed to be their true income. The latter probably would have had the best chance of success, but either defense, had they chosen it and stuck to it, would have been more convincing than seesawing between the two. Up until the time the case went to the jury, appellants had not yet decided whether they were oblivious to the discrepancies or whether they recognized them, but thought the returns correct."

⁷ On pretrial motion of defendants, the Court instructed the Government to make no reference to this abortive settlement. Silence was kept until defendants purposely opened up the inquiry and acknowledged that it was then in the case for all purposes.

⁸ The record bears out the contention that to meet currently imposed Federal war-time restrictions on installment credit requiring a substantial (one-third) down payment the common practice was to inflate the stated "paper" value fo the used car.

⁹ This might also have been the fate of the similar plea of innocent ignorance in which it was urged that these inexperienced, untutored, self-made laymen were dependent altogether on the accountants as experts. This, too, was expressly submitted to the jury on a record which abundantly raised the issue. But cross examination of Mr. Moore concerning the periodic GMAC and GM reports warranted the jury's concluding that he did in fact know the meaning and significance of the items in the balance sheet (e.g., "cash," "contracts in transit," "new cars," "used cars") and the resulting figure in the profit and loss statements, and especially the latter which he stated, he always looked at to see whether they had made or lost money.

¹⁰ These figures are for the year ending:

                      1949           1950          1951       1952

Cash in Bank       $ 6,742.03     $ 8,818.99    $23,919.27  $46,600.52

Net Working Capital 17,438.80      30,512.33     50,553.16   77,539.18

Total net worth ... 22,857.78      44,444.47     69,109.44   97,720.22

 

By Bill of Particulars the Government stated that its proof would be of specific items and that evidence of increases in net worth might be used "by way of corroboration or rebuttal but no such * * * method will be relied upon in itself as establishing an additional tax due and owing." The use of this evidence, coming both from the books and bank accounts all of which was received without objection, was within this purpose to establish correctness of the books. The Court did not, as defendants contend, err in declining to instruct the jury that this could be considered on "intent" only. Since these figures came from the detailed periodic reports which reflected all changes, upwards or downwards, in all liabilities as well as assets, it was not a distorted picture as in United States v. Venuto, 3 Cir., 182 F. 2d 519, 523.

[54-2 USTC ¶9578] United States of America v. M. A. Mackie, Defendant

In the United States District Court for the Middle District of North Carolina, Wilkesboro Division.

Criminal penalties: Willful attempt to evade payment of income tax: Failure to report income: Jury verdict: Evidence.--Defendant was indicted on three counts of wilfully and knowingly attempting to evade income taxes due for the years 1946, 1947 and 1948. Agents for the government were not able to determine defendant's true income from records he kept in his furniture store and funeral home, and they resorted to the net worth method of determining his income. There was also evidence of defendant's complete failure to report income from other sources. The jury determined from the evidence and the law instructions of the court that the defendant was not guilty, under any of the three counts, of wilfully failing to report income.

Edwin M. Stanley, United States Attorney, Post Office Bldg., Greensboro, N. C., for plaintiff. Eugene Trivette, North Wilkesboro , N. C., for defendant.

Before HAYES, District Judge.

Charge to the Jury

GENTLEMEN of the Jury:

The statute under which the indictment in this case has been filed was enacted by Congress and provides, among other things, that any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof shall in addition to other penalties provided by law be guilty of a felony and upon conviction thereof shall be punished.

[Indictment]

Pursuant to this statute, the defendant has been charged here in a bill of indictment returned by the Grand Jury which contains three separate counts. The first count in the bill of indictment charged the defendant with willfully and knowingly attempting to defeat and evade a large part of the income tax due and owing by him to the United States of America for the calendar year 1946 by filing and causing to be filed with the Collector of Internal Revenue for the collection district of North Carolina at Greensboro a false and fraudulent income tax return signed and mailed, or caused to be mailed, by the said M. A. Mackie at Granite Falls, North Carolina, to the Collector at Greensboro, wherein he stated that he had a net loss for the calendar year in the sum of $3,109.69, and no tax due and owning thereon; whereas, as he then and there well knew, his net income for said calendar year was $16,676.46, upon which said net income he owed to the United States of America income tax of $4,349.04.

The second count in the indictment relates to the subsequent year, that is--to the calendar year of 1947. Without repeating here the formal charges contained in the first count, in substance with respect to the second count it alleges that for the calendar year 1948 he willfully filed a false and fraudulent income tax return, knowing it to be false, wherein he stated that he had a net loss for the calendar year of $1,088.06, and no tax due and owing thereon; whereas, as he well knew, his income for said calendar year was $60,233 and some cents, upon which said net income he owed the United States of America income tax of $31,026.72.

MR. GAMBILL: You missed a year.

COURT: The return, it was alleged, was in 1948 for the calendar year 1947.

The third count, it alleges, was filed in 1949 for the calendar year 1948; and in the third count it is alleged that he willfully and knowingly attempted to defeat and evade a large part of his income tax due and owing by him for the calendar year of 1948 by filing or causing to be filed a tax return which it is alleged was false and fraudulent, a joint income tax return for himself and his wife, wherein it was stated in that return that their net income for the year was the sum of $1,355.12, and there was no tax due and owing thereon; whereas, as he then and there well knew, their joint net income for said year was $13,576.79, and upon which said net income there was owing to the United States of America income tax of $2,165.29.

[Evidence and the Jury Function]

The indictment itself is not evidence and constitutes no evidence against the defendant; that is merely the accusation made against him by the Grand Jury, and on which he has come to trial. He has pleaded not guilty to these charges, and under our system of law and trial by Jury the defendant, when he pleads not guilty, is presumed to be innocent, and this, presumption of innocence abides with him throughout each and every stage of the trial, and entitles him to an acquittal unless evidence is produced which overcomes the presumption of innocence and which satisfies the Jury beyond a reasonable doubt of the defendant's guilt.

Reasonable doubt means doubt that has some reasonable basis to support it; it is not a fanciful doubt or a conjecture that one may conjure up in one's mind for the purpose of arriving at the truth, but it is a doubt that has some reasonable grounds on which to rest it. It means in substance that when you are trying to arrive at a fact and are considering all the information you have available on it, that information which we speak of in law as "evidence", is it sure to convince the Jury to a moral certainty of its truth, or does it leave lingering in your minds a reasonable doubt as to its being true? If the evidence in the case is such that it overcomes the presumption of innocence and convinces you beyond a reasonable doubt as I have defined it to you, in that case then the degree of proof required is met; but, if after considering the evidence, you have in your minds a reasonable doubt as just defined as to the guilt of the defendant, it is your duty to give him the benefit of it and acquit him. On the other hand, if the evidence considered in its entirety convinces you beyond a reasonable doubt that he is guilty, then it is your duty to return a verdict of guilty.

Another thing--evidence may be of two kinds, that is--it may be direct testimony, sometimes referred to as that of an eyewitness, or of a document, or a written instrument as to which there could be no controversy except as to the veracity of the person who tells it. Another kind of testimony or evidence is spoken of in law as circumstantial; that is to say, by proof of several facts which when considered in their relationship to each other have a tendency to establish the existence of the ultimate fact necessary to be shown; the law recognizes that as a legitimate means of proof. When circumstantial evidence constitutes an essential element in the proof of a case so that without that proof there could be no guilt, it is the duty of the Jury in considering those circumstances to weigh them fairly and dispassionately, and to see whether the circumstances are not only consistent with guilt but inconsistent with innocence and point unerringly to the guilt of the accused.

In this case, the Government relies on both kinds of testimony; that is--it relies on evidence which it contends is direct testimony, and in other instances it has offered evidence of certain circumstances of facts from which it contends that only one conclusion could be arrived at; and on the basis of all this testimony, it contends that it has produced evidence here from which you should return a verdict of guilty against the defendant as to all counts contained in the bill of indictment.

The defendant, on the other hand, contends that the Government's evidence has failed to establish beyond a reasonable doubt the guilt of the defendant on any one of the three counts; and he contends that you ought to return a verdict of not guilty.

I trust that you understand from what I have now said that although we are having but one trial under one indictment, you are nevertheless engaged in an inquiry to determine whether or not the defendant is guilty of the three cases, that is--on all three of these counts because each count is separate and distinct in itself.

Without trying to be too tedious, I want to suggest to you in that connection that the law of the United States requires every person who has a stated amount of income to file an annual return with the Tax Collector showing what his income is, and he is required to file that return on or before the fifteenth day of March showing what his income for the preceding year was; and if any taxpayer knowingly and willfully files a tax return for a stated year which he knows to be false and with intent on his part to evade or escape the payment of part of his tax that he knows to be due, then each time he does that, for each year, he can be prosecuted, and if found guilty, is subject to punishment. So, what is done in one year, if the defendant committed the offense in 1946 as alleged in the first count, you must determine whether from the evidence in the case you would find him guilty of it for that year, or not guilty.

Then you must inquire with respect to the second count which relates to his income tax return for the year 1947, and decide whether for that year he willfully attempted to evade payment of his income taxes in that year by filing a false return and understating his income.

Then the third count makes it necessary for you to decide with respect to his return which he filed for the year 1948, whether he willfully and knowingly filed that return understating his income with intent to evade payment of his taxes.

[Elements of the Offense]

I have tried to explain to you what are the necessary elements in law to constitute the offense of willful attempt to evade payment of income taxes; and again, I say--first of all, the filing of the return understating his income must be willful, that is--it must be intentional with the evil purpose of trying to evade payment of all the taxes that he owes, that is, inconsistent with a mere mistake, or mere oversight, or mere inadvertence.

By way of illustration, but not restricting it to that--if a man has an income of, say, $10,000.00, and if that income all consists of interest, say, that he collected on his investments, and through some inadvertence or mistake on his part he happened to overlook an interest item of, say, $50.00, the fact that he understated his income by that sum would not constitute the offense under this statute; but, if he knew when he filed his tax return that he had that additional income item of $50.00 and knowing that he had it, he deliberately, that is--intentionally--failed to include it in order to avoid payment of his tax on it, then he would be guilty of attempting to evade payment of the tax if he withheld it or failed to include it in there with knowledge that he had it, and by returning the rest of it and omitting that which he knew that he had, but this tax law requires something more than mere inadvertence or oversight. It is necessary for the evidence to satisfy you beyond a reasonable doubt that it was willful, that is--intentional, as I have explained it to you, with the evil purpose of trying to evade payment of his tax.

Secondly, another thing that is required is that it must be done by him as an attempt to evade or defeat part of his taxes. In that connection I don't know of anything better I could do than to tell you what our Court has said with respect to that: "The attempt made criminal by this statute does not consist of conduct that would culminate in a more serious crime but for some impossibility of completion or interruption or frustration. This is an independent crime, complete in its most serious form when the attempt is complete, and nothing is added to its criminality by success or consummation . . ." In other words, it is not necessary that the taxpayer succeed in defeating or evading the tax; the offense is complete if he attempts to do it in the manner charged in the statute and defined to you by the Court; it is not essential that he should succeed in his efforts to evade his tax. "Although the attempt succeed in evading tax, there is no criminal offense of that kind, and the prosecution can be only for the attempt." In other words, that doesn't create a new crime or make his offense any greater. "We think that in employing the terminology of attempt to embrace the gravest of offenses against the revenues, Congress intended some willful commission in addition to the willful omissions that make up the list of misdemeanors.

"Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished and perhaps did not define lest its effort to do so result in some unexpected limitation. Nor would we by definition constrict the scope of the congressional provision that it may be accomplished 'in any manner'."

The Court said: "By way of illustration, and not by way of limitation we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books,"--just mere illustration now--"making false entries, or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal. If the taxevasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purpose such as concealment of other crime."

Thirdly, it is also necessary to show that the taxpayer was liable in taxes in excess of what was disclosed by his return; that is another way of saying that it is necessary for the Government to satisfy you beyond a reasonable doubt that the defendant in fact owed taxes which he did not include in his return; so, whether you take it on the theory that it is an attempt to evade the tax or on any other basis, it comes back to this net result--that the taxpayer must willfully, and by that I mean intentionally and knowingly attempt, that is--try, to evade payment of his tax with intent to defeat or defraud the Government of its tax; and it is likewise incumbent on the Government to show beyond a reasonable doubt that he did in fact owe a tax that is not covered in this case where he filed his return, that is to say--that he owed tax in excess of what was shown by his return.

[Instructions on the Weight of the Evidence]

Let me give you some general instructions concerning witnesses. You are the sole judges of the weight that you will give to the testimony of any witness. It is your duty to consider the demeanor of the witness on the stand; his candor, or lack of it; his interest or bias or prejudice, if any; his feeling, if any, in the matter; or any other rule by which you are enabled to determine the truthfulness of the statements made by the witness, for after all, it is your responsibility to weigh that testimony and to decide what credit, if any, you can give to the testimony of any witness. If the witness is related or has any interest in the matter, it is your duty to take that into consideration and to reconcile if you can statements made by the witness with any other testimony in the case, the ultimate purpose being to try to arrive at the truth of the matter without bias or prejudice in order to try to determine what the truth is. If you find that a witness is testifying falsely, you have the privilege to reject his testimony, although that does not mean that it is your duty to do so; you can reject such part as you may think not worthy of acceptance, and accept that portion which you do believe is worthy of your belief.

There has been conflicting testimony offered concerning the records kept by the defendant in respect to his furniture store and funeral home. The agents for the Government testified that they took the records which the defendant turned over to them, and analyzed these records and endeavored to reconcile them with the defendant's bank account; that they didn't have access to his paid checks for the year 1946 as I recall it, and for that reason, they were not able to make the necessary determination with respect to that year.

They testified further that what records they did have, after making an analysis of them, disclosed that adding machine tapes professing to report the sales were not reconcilable with the accounts receivable on the books and with the transactions in the bank; therefore, since they were not able to find from the records the true income and all the income of the defendant, they resorted to what is known as "the net worth method" of trying to determine what the income of the defendant was for each of the years--1946, 1947, and 1948.

On that question, there was testimony offered by the defendant to the effect that the books which the defendant had were sufficient, that is--the system was sufficient from which an accountant could determine the income in that business, but as I recall it, each one of those witnesses stated that depended on whether or not the money collected from cash sales was all actually deposited in the bank to the bank account. By that, I take it that what the witnesses were saying is this: that if all sales had been either on time or cash, and an accurate record kept of the time sales as shown on the ledger sheet, and then all the money received from the cash sales had actually been deposited in the bank, then you could deduct the cash that had been paid on the charge accounts from the total amount put in the bank, and in that way the difference would represent the cash sales.

You will recall furthermore that there was evidence here on the part of Glenn Mackie to the effect that it was customary to deposit the money from the store and the funeral home usually on the first of the week, but that this money was turned over to his father who was the one who actually became the agent from the store to see that it got in the bank; whether or not the money collected in the store and delivered to M. A. Mackie was actually deposited to that bank account, there has been no direct testimony to show it as I recall.

If in the course of my instructions I refer to my recollection of the evidence, I don't want you to let that control you in your recollection. I want you to follow your recollection because, after all, you are the ones who are to determine the proof; but I say, as I recall it there was no evidence from any source that I recall to the effect that Mr. Mackie actually put in the bank all the cash he took out of the store.

Now then, since the testimony of the Government witnesses was to the effect that the money put in the bank when reconciled with the sales accounts was such that they did not correspond, and that it was not possible to tell whether or not all the income was accounted for, it is the contention of the Government that the Government was then entitled to resort to the net worth method for the purpose of trying to determine what this man's income was.

There is another phase here of that matter which I think that I should call to your attention, and that is that there are either stipulations here or there was undisputed testimony to the effect that the defendant had income other than that which was derived from the store; that he had income by way of interest on Government bonds which the stipulation agrees that he owned; and there was testimony on the part of a number of witnesses who testified that they borrowed money from him, and that they paid him interest. It was just as much the duty of the defendant to keep a record of his interest or rents or any other taxable income that he received as it would be to keep a correct record of his sales in the store; as I recall, there was not any testimony from any source that he kept any record of money that he received as rents or as interest with the exception of Mr. Hagaman to the effect that if the interest money and the rent money had been deposited in the bank as cash sales along with the money there, there is a possibility that it might have been done, but he didn't testify that he found any evidence that it had been done.

I call attention to the fact that there was at the outset of the trial read in your presence a long typed sheet of what we call "stipulations", which is to say that the prosecution and the defendant agree on the existence of certain facts, and therefore no proof would be necessary because they admit that that is so; by doing that, a lot of time is saved in the trial of a case, and where those facts are admitted, the Jury is bound by them--you cannot reject them because the parties agree to them. With respect to the bond matter, for instance, it is stipulated that he had $40,000.00 worth of United States "G" bonds at the end of December, 1945; and there was evidence to the effect that the United States sends to the owners of those bonds twice a year two and one-half percent interest, or in this case it would be $500.00 each time or twice a year, making a total of $1,000.00 in the course of a year. That interest is taxable, and it constitutes part of his income, and it is necessary for the defendant to include it in his income; not only is interest on Government bonds an item that has to be included, but any interest paid to him by individuals or corporations also is required to be accounted for in the year that it is received.

In addition to that, if he had any dividends on stocks, I don't recall at this time that there was any but if there was, that is an item the taxpayer is required to report.

It is the contention of the Government here that there isn't any evidence from any source that the defendant kept any record anywhere or included in the store records the existence of any cash which he kept on hand or any additions that he made to the cash on hand or any subtraction from it, or any record kept of the interest which he received, or that it was actually included in the records of the bank.

An individual may trade under as many names as he sees fit--there is no law against that. In this case, it seems that the defendant was conducting a business under the name of Mackie Furniture Store and a business under the name of Mackie Realty Company, and then he was carrying on trades of his own in his capacity not connected with these store names, but regardless of how many different names he traded under, it is necessary for him to include all of his income from any of these sources when he makes out his tax return to the Collector of Internal Revenue; and if he fails to do it by way of mere inadvertence or oversight on his part with no evil intent, there is no crime involved; but if he fails to include it knowingly and willfully, that is--intentionally, for the purpose of trying to defeat or attempting to evade payment of the tax he is due, and if you find that he was due a tax, then he would be guilty if you find those facts to be true beyond a reasonable doubt.

If upon this evidence you should find that the defendant's records were complete and sufficient to reflect his true income from all sources, then the Government would have no right to resort to this net worth method of determining his income; but before the Government could be precluded from resorting to that method, you would have to find that all of his income was truly and correctly reflected on the records that he kept.

I have described to you what is meant by "willful" and what is meant by the term, "attempt to evade." We next come to the question of whether the Government has shown that the defendant in fact was due taxes to the United States on each of these years that he did not report under his income tax returns.

It is with respect to that where in part at least the net worth statements have a right considerable part to play; they are not the sole proof, because apart from the net worth statement there is evidence on the part of the Government's witnesses and also on the part of Mr. Hagaman that in making out the returns that were filed, he only consulted the records of the store business that were submitted to him, and as I recall, there was no testimony on his part that any record was ever submitted to him showing any interest collections or rents that had been received or any investment made except he said in the year 1950, as I recall it, he was apprised of this Gaston County enterprise and he included in his 1949 tax return--this is one subsequent now--a portion of the profit that Mr. Mackie realized on that enterprise and investment.

You may take into consideration the number of businesses which the defendant was carrying on, any income you have been convinced that he received during the taxable years in question--that is, any income that was received by him in 1946 on the question of whether he is guilty on the first count; any income during the year 1947 not reported, on the second count; and any income in the year 1948 not reported, on the third count, in trying to determine the question of whether he was in fact due tax that was not paid, and whether his failure to include his income was due to a willful and knowing attempt on his part to evade or defeat the taxes.

[Government's Contention]

The contention of the Government here is that the net worth statement should be taken into consideration, and for that purpose it was necessary to determine as near as possible what was the value of his estate, his net worth, at the end of the year 1945. The agent testified that they made an itemized statement of the assets which he was known to have at that time--the inventory in the store, his inventory stipulated here as being correct, the parties agree on that.

[Divergence in Proof]

There is a divergence between the Government's proof and the defendant's with respect to the accounts receivable that were on hand at the end of the year 1945. With respect to that, the Government agent contends that the accounts receivable were approximately $28,000.00. The testimony of the accountant Hagaman for the defendant was that his net worth at the end of the year 1945 was $46,328--

MR. GAMBILL: The accounts receivable.

COURT: The accounts receivable--Yes--as against the Government agent's statement that they were $28,000.00. Mr. Hagaman, however, admitted in arriving at his determination that he included in his computation a list of accounts taken from the old ledger of discarded accounts which aggregated a sum in excess of $14,000.00.

With respect to the accounts receivable, it is the contention of the Government that they deducted from his accounts receivable all accounts on which there had not been any payments made for two years, and that they followed that method consistently throughout all three of these taxable years in determining the amount of his accounts receivable, that is--store debts due him, and that in determining his net worth with respect to the accounts receivable the agent did that each year and followed the same system throughout; that he not only rejected this $14,000.00 worth of old discarded accounts but he rejected those on the ledger on which no payments had been made during the last two years; that in that way, he arrived at the determination of the accounts receivable which the defendant had of approximately $28,000.00; so the defendant contends in figuring and trying to compute his net worth, if you do, that you should take into consideration this conflict of the testimony, and the defendant contends that you should believe the testimony of Mr. Hagaman. The Government contends that you should accept the testimony of the Government's witnesses who testified to that effect.

[Testimony Offered]

There was testimony offered during the course of the trial tending to show what the assets of the taxpayer consisted of, which aggregated the sum of $224,900.74 at the end of the year 1945 from which deductions were taken, leaving as the net worth of the defendant Mackie at the end of the year, $209,436.49. In that connection, I call your attention to the fact that the agents in computing his net worth accepted the statement of the defendant to the effect that he had $30,000.00 in cash on hand; that he had Government "E" bonds to the extent of $11,250.00, and that he had series "G" bonds to the extent of $40,000.00, and then stocks and notes receivable and a partnership investment and real estate, and then the mercantile business.

Evidence was offered tending to show what transactions occurred during the year 1946. I will not refer to them in detail, but there was testimony tending to show that his cash account at the end of December, 1946, in the bank was increased to $1,070.30, and in the Bank of Granite in the furniture company account the amount was $4,243.71, which was a deduction over what it was the preceding year, and the funeral home had a bank account at the end of 1946 of $16,375.64; that he treated the same $30,000.00 cash as being on hand, the same bonds as being on hand, and his stock in the Granite Savings & Loan Association increased from $6,353.00 to $8,359.48; his investment in the Caldwell Hosiery Mill remained the same, and he invested $5,000.00 in the Period Furniture Company during that year. His notes receivable, that is--debts made payable to him, increased from $9,150.00 to $11,325.00; his investment in the Gaston County property had been extinguished; he had invested $4,410.00 in the Granite Chair Company; his real estate holdings increased from $32,337.50 to $36,917.50. In all, the total of his assets, according to the testimony of the Government's witnesses had increased to $246,107.50, from which certain deductions for depreciation were taken, and leaving his net worth at that time being $226,066.54.

You will recall that a number of witnesses were called--the Secretary-and-Treasurer of the Granite Savings Loan Company, and of the bank over there, and a representative of the bank at Hickory, and different persons who borrowed money from Mr. Mackie, and then the Register of Deeds of Caldwell County brought certain deeds here showing what purchases of land the defendant had made, and the considerations cited in the deeds for the purchase of the land, and evidence was offered to show what his assets were that were acquired that year; so you will take into consideration all of the testimony and any to the contrary to enable you to arrive at the truth of whether or not the financial condition of the defendant increased so that his net worth was greater at the end of the year 1946 than at the end of the year 1945. According to the calculation made by the Government agent, this increase of net worth resulted in his being due the Government the sum of $16,929.58 taxes for the year 1946.

Without going into the details of it, I refer to the years 1947 and 1948 as follows: the summary of these different items that have been listed and testimony relating thereon has been computed to show that the man's net worth increased to $259,270.93 in the year 1947, and that his net taxable income for that year was $36,243.58, whereas he reported a loss and no tax for the year 1946; in the year 1947 there was testimony offered tending to show what the bank balances were and what his balance was in the Granite Savings Realty Company; in 1947, $30,000.00 in cash is taken out of the assets there and $40,000.00 worth of bonds still reported in 1947, and his savings stock investment also listed here and the amount of his notes receivable, and his real estate, is reported to have increased from $36,917.50 to $113,392.56.

In that year 1947, as I recall it, there was evidence offered to show that he erected a building on his property, a store, at the cost to him of some $76,000.00, and that the cost of the building is added to all of his real estate; corresponding items are listed there as to his investment in his business there, and according to the computation made by the agents, the total assets at the end of the year 1947 had increased, and after making the necessary deductions, the agent computed at the end of the year 1947 the net worth as $259,270.93, and that he had a taxable net income of $36,243.58; whereas, he only reported that year that he had no taxable income and paid no taxes.

For the year 1948, there was testimony offered tending to show in respect to each of the listed items there, and after making deductions from his assets, his net worth had increased to $269,201.96, and he had a taxable income of $13,258.08; but that he reported an income of only $1,605.12 on which there was no tax due.

[Nature of Case]

This is not a case for the purpose of determining the exact amount of tax which the defendant here owes the United States , if anything. This is a criminal case, not a civil suit--a case in which the defendant is charged with the commission of a crime, the essential elements of which the Court has tried to define to you; that is--it is a case in which the defendant is charged with the willful attempt to evade or defeat the payment of his income taxes during the year 1946 on the first count, and the year 1947 on the second count, and the year 1948 on the third count.

I have referred to this mass of figures here and the net worth statement and the items that constitute it and then his alleged increase in net worth for the purpose of pointing out to you from that source of information that it is the contention of the United States that the defendant had income during the years 1946, 1947, and 1948 that he did not report; that he knew that he had that income and that he willfully concealed it; that he did not disclose it to Mr. Hagaman; that it was not included in his income tax return, and that he knew it was not, and that he did it with willful purpose on his part and with intent to defeat and to evade payment of the taxes that he owed the United States.

[Defendant's Contention]

The defendant contends in the first place that he did not owe any more taxes than that which has been reported; but that if he did owe more than that contained in his tax return, that failure to include it was not due to any willful conduct on his own part or with intent to evade or defeat the Government of its taxes; that it was due to errors and not to any deliberate or willful purpose on his part to evade payment of his taxes.

[Intent Necessary]

There is one other thing that maybe I should call to your attention in connection with the elements that constitute the offense that I have not. There is involved in this case an intent, and it is necessary for you to determine whether or not in the filing of the returns that he did file, if you find them to be false--whether he did it with the intent to attempt to evade payment of his taxes. When you come to the question of what is a man's intent, that is a state of mind; in trying to arrive at what his intent was, you can consider all the evidence that sheds any light on what his intention was and from that if the facts shown warrant you in finding from it that the defendant did have intent fraudulently of trying to evade payment of taxes due; if you have a reasonable doubt that he had any intent to defraud the Government or that his return that he filed was not willfully made, that is--knowingly and intentionally to defeat payment of taxes, or that he was not knowingly attempting to evade payment of his taxes, then he would not be guilty, and it would be your duty to acquit him.

[Jury to Weigh the Facts]

In conclusion, Gentlemen of the Jury, again I invite you to consider all the evidence that has been offered by the various witnesses, whether by the Government or the defendant, and try to arrive at the truth here. We have had in this case testimony of witnesses who have qualified and been admitted by the Court as so-called expert witnesses--accountants. The law recognizes that there are certain fields of human knowledge in which expert knowledge can be acquired; for example, a dentist who has been properly trained and educated is presumed to know more about a man's teeth than an car, nose, and throat specialist, who is presumed to know more about the ears, nose, and throat than about the teeth. There are other experts who qualify as surgeons who know more about operating on the human body than about treating him when he has something wrong with his stomach which is not organic but which can be cured by medicine. In like fashion, attorneys ordinarily are presumed to know something more about the law than a layman (although we have folks in the law aspiring to know the elements of law, whether or not they do know these elements).

In the realm of figures, bookkeeping, this is a field recognized as accountancy in which persons by study and education and experience can acquire knowledge with respect to keeping records and making computations and ascertaining facts necessary through that knowledge.

Whether he be a doctor or an accountant, in neither case has the expert any right to invade the province of the Jury. It is permissible to let the expert express his opinion on an assumed state of facts, that is--if the Jury should find certain facts to exist, then the expert can take those facts and make his calculations and express his opinion on them. Where that has been permitted in this case, the Court again instructs you that it is your duty to bear in mind his opinion based on that assumption of such a state of facts, but it has no weight unless you find that those facts exist.

I think I can illustrate that in this way: if we assume a man has five fingers on one hand and that he has five on the other hand, then an accountant as well as anybody else could say the net result of that is that he has ten fingers; suppose, in assuming that the man had five fingers on one hand and five on the other, the proof actually shows that he only had one finger on one hand, then the opinion of the expert that he had ten fingers would go out because it was based on the assumption that he had five on each hand.

[Determination of Tax Liability]

With respect to the tax liability here, it proceeds on the assumption that the defendant had certain assets when the taxable year 1946 started. Of course, that is nothing more than a mere approximation of what he had; that is based on such information as the witnesses have already narrated to us and as to its reliability or accuracy, you are the sole judges. If you assume that correctly represents approximately what the man had then, then you can take into consideration such additions as you find from the evidence that he acquired during the year. If at the end of the year, you should find from the evidence here that his income had increased and that his assets grew, to whatever extent they did grow and to whatever extent it resulted in net income not reported, you are to take that into consideration and the opinion expressed by the expert as to what tax would be due thereon; but, of course, if he had no net income during that time, then it would not be necessary to make computation about the tax, and the opinion expressed by the agent would not be of value.

In passing on the testimony of an expert, you will bear in mind at all times that he is dealing with the assumption that there are certain facts which the Jury is going to find to be true, and in that light and in that light only can you consider the value of expert testimony.

During the course of the trial, there may have been statements made to the Court by counsel, or the Court may have made comments, or evidence may have been offered that was rejected, but none of that constituted evidence before you. The only thing you will consider is the evidence the Court admitted and that evidence from the witness stand or from documents produced in evidence or from facts that have been agreed to and stipulated here during the course of the trial.

The defendant did not become a witness in his own behalf. He has a right, if he wishes, to be a witness, or he can refrain from testifying. Our statute provides in any criminal case that while a defendant has the privilege of being a witness in his own behalf, his failure to be a witness is not to be construed as any evidence against him.

Your verdict in this case can be one of guilty on all three of these counts, or it can be a verdict of not guilty on all three; or it can be a verdict of guilty on the first count and not guilty on the second and third counts, or it can be a verdict of guilty on the first and second counts and not guilty on the third, or it can be a verdict of guilty on all, or not guilty, as you may find the facts to be under the law as given to you by the Court. In other words, I have tried to be as clear as I know how to express it that there are three separate counts involved, and it is your duty to determine the guilt or innocence of the defendant on each one of the three counts, so if you will, some one of you make a note that the first count relates to the taxable year 1946, the second count to the taxable year 1947, and the third count to the taxable year 1948.

There is one thing with respect to the taxable year 1948 which creates a situation with respect to that year that is a little different from that prevailing for the taxable years 1946 and 1947 which I think I should call your attention to in spite of the fact that I have already talked longer to you than I intended. On June 30, 1948, the defendant Mackie conveyed to the new corporation that was organized all of his assets in the mercantile business, reserving the real estate. There is evidence tending to show that he received a hundred and twenty shares of stock in the new corporation and that ten shares each were issued to his four children. If I make a mistake in the figures, call my attention to it * * *

MR. GAMBILL: You are right.

COURT: There is no evidence as I recall it that he received anything from the corporation for his assets except the stock he got, and it was testified by Glenn Mackie that he did not pay anything for the ten shares of stock that he got, nor did any of his brothers and sisters, except that he did testify that they only got a meager salary while they worked in the store, and that there was discussion as to what they would get later, or something to that effect; and so in any event, in determining the net worth of the defendant for the year 1948, the agents for the Government have treated the assets on hand at the end of the year as being a proprietary interest in the new corporation to the extent, I believe, of about $105,000.00--

MR. GAMBILL: $108,000.00.

COURT: In other words, for the purposes of determining what his wealth was at the end of that year, the agent has assumed that his assets that he conveyed into the corporation gave him an interest in the corporation to the extent of the assets which he conveyed, and he assumed that that was $108,000.00. By that method, he has arrived at the determination that the defendant did have for the taxable year 1948 a taxable net income of $13,258.08.

The defendant contends with respect to that item that at the end of the year, the agent did not have sufficient evidence to determine what the value of his stock in the corporation was; he contends that so far as this case is concerned, the defendant only had three-fourths interest in whatever assets the corporation did have; that he only had a hundred and twenty shares of the outstanding hundred and sixty shares, and that he had lost at least that much of it during the taxable year 1948. It is your duty to take into consideration all the evidence which you have heard with respect to the financial condition of the defendant in each of the three years, and from all that evidence, determine whether or not the defendant in fact did have a net income which he failed to report in his tax return, and if in making that report he failed to do so knowingly and willfully, that is--with evil purpose on his part to try to evade payment of the tax, he did it in an attempt to evade payment of the tax that he was due the United States.

If you will wait just a moment, I will see if there is anything I have omitted.

(NOTE: The Court then reads a portion of the request for instructions presented the Court by the defendant, as follows:)

"Evidence of inefficiency and ignorance of accounting methods are not sufficient to establish fraud. Even if you find that there was some understatement of income, that is not enough to establish fraud. The Government cannot sustain its burden of proof on a fraud issue by merely establishing that the taxpayer understated his taxable income * * * Fraud implies bad faith, intentional wrongdoing, and a sinister motive. It is never imputed or presumed. Mere suspicion of fraud and mere doubts as to the intentions of a taxpayer are not sufficient proof of fraud. Negligence or carelessness, unaccompanied by bad faith, does not make a taxpayer guilty of fraud. Of course, the duty of a taxpayer to file his return is personal and it cannot be delegated. But bona fide mistakes should not be treated as false or fraudulent."

[Preparation of Return]

In that connection, I want to call your attention further to the fact that a taxpayer has the right to get an accountant or an attorney to prepare his tax return; if he furnishes his accountant or attorney with all of the necessary facts showing what his true income is, then if his accountant or attorney makes a mistake in the preparation of that income tax return, and he signed it without knowledge that it was false, then he would not be guilty; he would not be chargeable with that; but if he fails to disclose all the facts to his attorney or accountant who prepares his tax return, he cannot excuse himself from the responsibility of making a true return by the mere saying or showing that he turned it over to somebody else to do it.

In other words, the requirement for a taxpayer to file a return is personal; he is required to sign it under the solemnity of his oath; he has to file his return, and it cannot be signed for him by anybody else. In the actual mechanics of preparing it, he can get an attorney or an accountant to make preparation of it for him, and if he gives his accountant all of the facts showing what his true income is, and then a mistake is made, he is not chargeable with it, but if he knowingly conceals from his accountant what his income is or fails to disclose all when he knows that he has more and only reveals part, and knowingly supplies it, then the fact that the accountant made out the return cannot constitute an excuse for him; in other words, an accountant cannot make a true return for the taxpayer unless he has the true facts.

If the Government failed to prove beyond a reasonable doubt both the attempt to evade taxes due and owing the United States and that such attempted evasion, if any, was willful, then in each count in which you so find, it would be your duty to acquit the defendant.

There has been evidence offered concerning the general character of the defendant. In this case it is competent for you to consider that evidence as substantive evidence on the question of whether a man of such proven character would be guilty of committing an offense such as that charged in the indictment.

Are there any exceptions which you desire to take to the instructions that the Court gave?

MR. GAMBILL: We have none.

MR. STANLEY: No.

COURT: I have consumed a lot of time but it has been a lengthy case. We are dealing with three separate and distinct years; there has been an enormous amount of figures and it has been difficult; a lot of things I should have probably called to your attention I would be glad to but I think I have taken all the time I should where I could be of help. If there is any further information which you desire, do not hesitate to come back into Court and make inquiry.

It is your duty to consider the entire evidence, whether the Court referred to it or not. The Court has a right to express its opinion if it saw fit to do it, but I have steadily refrained from doing so in the trial here because in the first place, I have confidence in the intelligence, integrity, and character of the men whom we permit to serve on Federal juries, and in almost all instances, I have been able to see the juries' verdicts as returned. As long as the Jury will return a verdict on their own without any intimation from the Court as to how they should decide it, it is is my purpose to adhere to that policy.

[General Comments]

To my judgment, the greatest thing we have as a bulwark to our liberty and to the protection of our property is the right of trial by Jury. I know of no better way to settle disputes than for twelve disinterested men who have no knowledge of the facts when they are empanelled to listen to the testimony and strive to the best of their ability to decide the matter at issue--I know of no method better than that. As long as jurors will approach any case with unbiased and unprejudiced minds and strive to the best of their ability, as God gives it to them to do, to use their senses and to ascertain the truth, whether it be for or against the defendant, or for or against the Government,--as long as they do that, the right of trial by Jury, I think, will be preserved. Whenever jurors depart from that method, then our system of trial by Jury will become endangered.

There has been evidence offered here from time to time with respect to the age of the defendant, and with respect to the health of the defendant at the time some of the witnesses were interviewing him. Of course, whatever the condition of the defendant was that in any way interfered with him keeping records or keeping up with what he was doing, that should be taken into consideration; but the age of the defendant or his physical condition has no real pertinent business in the determination of the ultimate question of whether the defendant is guilty or is not guilty.

In order that this tax law of the United States under our Constitution must be uniform, Congress has no power to levy tax on one person and to exempt another; there is no provision in the law that lessens the duty of a person to return his income on account of his age. If he has income, it has to be returned, and so, if in doing it he turns in his true income or if he fails to do so, all must be measured by the same standard, and so, just approach this case like you would any other for the purpose of determining the evidence and analyzing and arriving at the true verdict. When you do that, all persons should be satisfied.

You will retire and make up your verdict; you can return a verdict of guilty of all three counts or not guilty, or a verdict of guilty on part and not guilty as to others as you may find from the evidence in the case.

Verdict

After some several hours of deliberation and the lunch recess during which the Jury was kept together by the United States Marshal, the Jury returned into open Court and for their verdict said that they found the defendant not guilty as to each count in the bill of indictment.

 

 

[53-1 USTC ¶9402]Thomas W. Banks, Appellant v. United States of America , Appellee.

(CA-8), In the United States Court of Appeals for the Eighth Circuit., No. 14,648., 204 F2d 666, 05/27/53

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

Fraud conviction for willful evasion established by net worth increase method upheld: Fair trial.--Defendant-taxpayer's appeal from a conviction of willful evasion of income tax failed where large sums of unreported income were determined by use of the net worth increase method of reconstructing his income over a period of years. He had a fair trial, for the court below did not abuse its discretionary power, as contended.

John W. Graff (Jerome Hoffmann and Richard E. Kyle were with him on the brief) for appellant. Murray L. Schwartz, Special Assistant to the Attorney General (H. Brian Holland, Assistant Attorney General, Ellis N. Slack and Meyer H. Rothwacks, Special Assistants to the Attorney General, and Philip Neville, United States Attorney, were with him on the brief) for appellee.

Before GARDNER, Chief Judge, and WOODROUGH and THOMAS, Circuit Judges.

THOMAS, Circuit Judge:

Thomas W. Banks was indicted, tried and convicted on three counts of an indictment which charged that he had willfully and knowingly attempted to evade his income taxes for the years 1945, 1946, and 1947, in violation of §145(b) of the Internal Revenue Code, 26 U.S.C.A. §145(b). ¹

The indictment was returned by the grand jury on January 14, 1952. On February 18, 1952, the defendant moved to dismiss the indictment and to require the taking of testimony of the members of the grand jury and the production of the transcript of the proceedings before the grand jury. The United States voluntarily filed two bills of particulars. A motion for a further bill of particulars was overruled. After defendant had been arraigned and entered a plea of not guilty he renewed his motion to dismiss the indictment, require the testimony of the grand jury to be taken and to produce the transcript of the testimony. Both motions were denied.

On May 20, 1952, prior to the introduction of evidence one juror was released by the trial judge on the ground that he was disqualified and an alternate juror was substituted for him.

The trial was concluded on May 30, 1952. The defendant offered no evidence but moved for a judgment of acquittal. The motion was denied, and the jury returned a verdict of guilty on each of the three counts. On June 23, 1952, the court imposed a general sentence of three years' imprisonment and a fine of $10,000. Notice of appeal was filed June 30, 1952.

The trial was commenced on May 19, 1952, and concluded on May 30th. The defendant's brief fills 115 printed pages and cites 40 cases, four textbooks, two statutes and two Federal Rules of Criminal Procedure. To discuss each point and each argument separately would extend this opinion to unreasonable length.

The defendant contends that the court erred: 1. In refusing to dismiss the indictment; 2. In dismissing a juror and substituting an alternate; 3. In holding that the evidence was sufficient to support the conviction on each of the three counts; 4. In denying his request for a further bill of particulars; 5. In receiving in evidence the testimony of witnesses Weinstock, O'Gordon and Kleven, together with certain exhibits; 6. In permitting the government attorney to comment prejudicially on defendant's failure to take the witness stand in his own defense; 7. In failing to give requested instructions and in giving certain instructions; and 8. In admitting incompetent evidence.

The defendant's first contention, namely, that the court erred in refusing to dismiss the indictment upon defendant's motion is predicated upon two subordinate contentions: first, in general, that there was no competent evidence to support a finding by the jury that the defendant willfully attempted to evade and defeat a tax; and, second, the court erred in refusing to permit the evidence before the grand jury to be made available to the defendant and his counsel.

The court properly instructed the jury that the defendant is presumed to be innocent of the crimes alleged against him in the indictment, and that the burden was upon the government to prove him guilty beyond a reasonable doubt. That burden in this case, in which a violation of §145(b) of the Internal Revenue Code, supra, is charged, required proof (1) that a tax was due from defendant to the government for each of the years charged; (2) that the defendant attempted to evade payment of that tax; and (3) that his attempt so to evade payment was willful.

Failing to secure the cooperation of the defendant in its investigation of his income for the years involved, the government used the net worth and gross expenditures method of proving the increase in defendant's net worth from year to year. This method has been approved by this and other courts. Leeby v. United States , 8 Cir., 192 Fed. (2d) 331 [51-2 USTC ¶9497]; Schuermann v. United States, 8 Cir., 174 Fed. (2d) 397 [49-1 USTC ¶9281]; Pollock v. United States, 5 Cir., 202 Fed. (2d) 281 [53-1 USTC ¶9229]; United States v. Yeoman-Henderson, Inc., 7 Cir., 193 Fed. (2d) 867 [52-1 USTC ¶9155]; Gariepy v. United States, 6 Cir., 189 Fed. (2d) 459 [51-1 USTC ¶9318]; Bell v. United States, 4 Cir., 185 Fed. (2d) 302 [50-2 USTC ¶9499]; Brodella v. United States, 6 Cir., 184 Fed. (2d) 823 [50-2 USTC ¶9477]. The purpose of the government's evidence by this method is to show that the net worth of the taxpayer increased from year to year from a fixed starting point in amounts greater than shown on his income tax returns.

Here the government used as the starting point the net worth of defendant at the end of the year 1936 as determined from his own affidavit filed with the Bureau of Internal Revenue in 1937. Starting with the date given in that affidavit the investigators for the government found defendant's net worth at the end of the year 1936 to be $18,578.78.

The government introduced evidence to show that defendant's net worth increased thereafter so that at the close of 1944 it was $231,029.26; in 1945 it was $270,968.33; in 1946 it was $296,087.27; and in 1947 it was $322,877.34. The defendant's taxable net income as reported in his returns for the three years involved was for 1945, $20,170.11; for 1946, $27,100.99; and for 1947, $20,609.29. His taxable net income as claimed by the government was for 1945, $43,690.11; for 1946, $36,799.97; and for 1947, $41,453.07. And his federal income taxes which should have been reported and paid, but were not, were for 1945, $15,044.06; for 1946, $5,829.41; and for 1947, $12,067.55.

In arriving at these figures the government investigators compiled and analyzed statistics for the years 1936 to and including 1947 showing defendant's cash deposits in banks, his United States bonds purchased and held, his receivables, his investments in marketable stocks and bonds, stocks of operating companies, investments in real estate and other property, and his liabilities for mortgages, other loans and accounts payable; and from all such data arrived at a statement of his taxable income for all three years.

This written undisputed evidence was all introduced in evidence by the government; and it was sufficient to warrant the submission of the case to the jury and to support the verdict, requiring an affirmance of the judgment, unless some other alleged error of the court requires a reversal. Pollock v. United States , 5 Cir., 202 Fed. (2d) 281 [53-1 USTC ¶9229].

We shall next consider defendant's objections to the grand jury proceedings. It is asserted that the court erred in refusing to permit the evidence taken before the grand jury to be made available to the defendant and to his counsel. It is the law that matters occurring before a grand jury may not be disclosed to the defendant nor to his counsel unless "permitted by the court . . ." Rule 6(e) of the Federal Rules of Criminal Procedure. Two judges in this case denied the motions of defendant calling for a transcript of the evidence taken before the grand jury. The question for decision here, therefore, is whether the rulings of these judges upon the motions so made were an abuse of discretion on their part.

The motions in question asked the court--

1. To dismiss the indictment . . .;

2. To require the members of the grand jury . . . to disclose matters occurring before such grand jury; and

3. To permit the furnishing to counsel for defendant of a stenographic report of the proceedings before the grand jury when the case against the defendant was presented.

Counsel for defendant filed with the motion his affidavit in which he avers that he had investigated the circumstances pertaining to the proposed prosecution of his client; that he had been informed that representatives of the newspapers were outside the grand jury room on the morning of January 14, 1952, when the grand jury was in session; that it appeared in one newspaper of January 15, 1952, that the grand jury was called into session at 10:00 a.m. to receive instructions; that at 10:30 a.m. that same day it commenced hearing testimony; that at 11:30 a.m. word was sent that it was ready to report; and that it made its report at 11:45 a.m. It was further averred that only one witness was called before the grand jury and that such witness was the special agent of the Intelligence Unit of the Bureau of Internal Revenue who directed the investigation of the taxpayer's affairs.

It developed that the special agent referred to was George H. McKusick who testified at the trial and whose testimony for the government is reviewed above. He testified as to the method adopted, that is the net worth method, and the findings of the investigators. Reviewing that evidence indicates that not more than an hour or at most an hour and a half would be necessary to place it before a grand jury or a petit jury in case no time was consumed by counsel's objections and arguments to the court on admissibility. The evidence was admissible not only before the grand jury but also upon the trial. We do not think the judges abused their discretion in denying the motion.

Further a trial court's exercise of discretion in denying a motion to quash or dismiss an indictment because of irregularity, if any, in grand jury proceedings is not ordinarily reviewable. United States v. Holmes, 3 Cir., 168 Fed. (2d) 888. The same rule applies to defendant's motion for a bill of particulars. United States v. Rosenburgh, 74 U.S. 580; Wong Tai v. United States, 273 U.S. 77, 82; Knauer v. United States, 8 Cir., 237 Fed. 8; Stewart v. United States , 8 Cir., 300 Fed. 769; Bedell v. United States , 8 Cir., 78 Fed. (2d) 358; Pines v. United States , 8 Cir., 123 Fed. (2d) 825; Braatelien v. United States , 8 Cir., 147 Fed. (2d) 888.

It is next contended that the court erred in receiving the testimony of one Joseph A. O'Gordon and Exhibits 70 and 71. Reference to the testimony discloses that O'Gordon representing the defendant in the fall of 1950 discussed with representatives of the Bureau of Internal Revenue some aspects of defendant's business. The revenue officer submitted to O'Gordon a list of questions to which he requested answers. Answers of the defendant were obtained by O'Gordon on a separate sheet of paper and delivered to the revenue agent. O'Gordon was called as a witness by the government and identified the paper containing the list of questions as Exhibit 70 and the paper containing the answers as Exhibit 71. They were received in evidence over the objection of counsel for defendant.

The objection was on two grounds: first, that the lawyer-client relation existed between defendant and O'Gordon and the answers were privileged, and further they were incompetent because they were submitted as part of a proposed settlement of a civil case. O'Gordon at the time in question was not negotiating with the revenue officer as a mere attorney. He was acting as defendant's agent with a power of attorney. In that capacity he secured defendant's answers to the questions submitted and returned them to the officer. Under these circumstances they were admissible. In American Fur Co. v. United States, 2 Peters 358, 364, 27 U.S. 229, 233, the Supreme Court say: ". . . whatever an agent does or says, in reference to the business in which he is at the time employed, and within the scope of his authority, is done or said by the principal; and may be proved, as well in a criminal as a civil case; in like manner as if the evidence applied personally to the principal." The testimony objected to here was clearly admissible. Himmelfarb v. United States , 9 Cir., 175 Fed. (2d) 924 [49-1 USTC ¶9313]. The information requested was furnished by Banks to O'Gordon for the sole purpose of giving it to McKusick in answer to McKusick's questions. O'Gordon was therefore acting within the scope of his authority as Banks' agent.

The defendant next contends that the court erred in admitting the testimony of the witness Gerald O. Kleven, an expert called by the government, and in admitting Exhibits 224, 225, 226, and 227.

Exhibit 224 is a summary of all the evidence in the case. Exhibit 226 consists of a calculation by the witness of the differences between the net income reported by the defendant in his income tax returns and the net income shown by the government's evidence, including the amount of taxes due according to each such net income and the differences between the taxes so calculated. Exhibits 225 and 227 are merely enlarged copies of Exhibits 224 and 226 respectively.

That such expert testimony is admissible in cases of this character has been decided by this court and other courts frequently. See Myres v. United States , 8 Cir., 174 Fed. (2d) 329 [49-1 USTC ¶9275], cert. den., 338 U.S. 849; Kirsch v. United States , 8 Cir., 174 Fed. (2d) 595 [49-1 USTC ¶9274]; Cave v. United States, 8 Cir., 159 Fed. (2d) 464 [47-1 USTC ¶9171], cert. den., 331 U.S. 847, rehear. den., 332 U.S. 786; Gleckman v. United States , 8 Cir., 80 Fed. (2d) 394 [35-2 USTC ¶9645], cert. den., 297 U.S. 709; United States v. Johnson, 319 U.S. 503 [43-1 USTC ¶9470].

Counsel for defendant in their brief say: "While there is an appropriate area in tax cases of this kind for expert testimony . . . there are limitations as well", and they contend that this case comes within those limitations. Attention is first directed to the case of Kirsch v. United States, supra, in which this court reversed the conviction of the taxpayer because the witness assumed without qualification that all of the defendant's deposits in a certain account represented income for tax purposes, although the government's own evidence showed that a large part of the deposits did not represent income. That is not the situation here. The Kirsch case is not in point. Other objections to these exhibits are trivial and without merit.

Defendant contends further that the court erred in admitting the testimony of Leonard H. Weinstock as to the defendant's living expenses for the years 1945, 1946, and 1947. It will be recalled that Mr. George H. McKusick was in charge of the investigation of defendant's income for the years involved. Defendant gave Weinstock a power of attorney to represent him in conferences with McKusick. McKusick furnished Weinstock a copy of his estimate of defendant's living expenses for submission to defendant. Weinstock was called as a witness to testify to the schedule of living expenses for the years in question, but claimed to have forgotten the amounts agreed upon, whereupon he was cross-examined by counsel for the government over objection of defendant's counsel. There was no error in admitting his testimony under these circumstances. It is the law that where a party, in good faith, has called a witness in his behalf and is surprised by his adverse testimony, he may, in the court's discretion, be allowed to cross-examine or to show by others, that the witness has previously made statements materially at variance with his present testimony. Ellis v. United States , 8 Cir., 138 Fed. (2d) 612; Lewis v. United States , 8 Cir., 153 Fed. (2d) 724.

The defendant complains that the court erred in dismissing a juror after he had been selected and substituting an alternate for him. The court consistent with the provisions of Rule 24 of the Federal Rules of Criminal Procedure examined the prospective jurors on their voir dire. The next morning after the jury and the alternates had been selected the court directed that the juror in question be brought before the court from the jury room where he was reminded that at the voir dire on the preceding day in answer to a question he stated that he had his tax matters all straightened out with the government. Upon further questioning by the court it then developed that he had trouble over his tax problems with the government in 1945; that he had made returns for 1948 and 1949; that he had not paid all the taxes due for those years and that he had not made a return for 1950 or 1951, but that he had intended to do so. The court thereupon excused him from the jury and substituted an alternate juror. It is clear that on his voir dire examination the juror, whether intentionally or not, misled the court and counsel in reference to his tax troubles with the government. Under these circumstances the court did not abuse its discretion in dismissing the juror and substituting an alternate. No good reason to the contrary is suggested by counsel for defendant. His contention is that defendant was entitled to have the juror remain on the panel. But no proceedings other than the selection of the jury had been had. Under these circumstances the defendant's contention is without merit.

Another contention of defendant is that the evidence fails to disclose an affirmative willful attempt to evade and defeat a tax and hence there is no offense under 26 U.S.C. §145(b). To support this contention the case of Spies v. United States, 317 U.S. 492 [43-1 USTC ¶9243], is cited. In fact the opinion in that case supports his conviction, and not his contention. That opinion, quoted by defendant in his brief, points out that a willful attempt to evade may be inferred by ". . . concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal. If the tax-evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime."

Here the evidence shows that defendant failed to report his entire income for taxation; that he paid only a part of the taxes which he should have paid. He held property in the names of nominees; he procured cashier's checks with which he paid for property. He did not furnish to his attorney, Mr. Weinstock, who made out his income tax returns, information necessary to make accurate returns. A part of such information which he furnished was on adding machine tape. He simply told Weinstock that the source of such income was "wagering." This, of course, referred to a part of his income only. The evidence shows that the total income included in his returns was much less than his actual income. The jury could very well find from all the testimony that defendant willfully attempted to evade and defeat his federal income taxes.

It is further charged that government attorneys prejudicially commented on the failure of defendant to take the witness stand in his own defense. No direct charge of that kind was made by government counsel. What occurred in substance was that in argument to the jury and in analyzing the government's evidence they pointed out that the government's evidence was undisputed.

No objections were made nor exceptions taken to these references at the time they occurred. Such references did not directly call the attention of the jury to the fact that defendant did not testify and no comment was made on his failure to testify further than to point out that the government's testimony was undisputed. In this situation there is no question to review. Johnson v. United States, 318 U.S. 189 [43-1 USTC ¶9288]. Further, "The statement of counsel that certain evidence is not denied is not a violation of the safeguard vouched an accused by the law." Baker v. United States , 8 Cir., 115 Fed. (2d) 533, 544, cert. den., 312 U.S. 692. In the cited case the court quotes with approval the statement of the court in Lefkowitz v. United States, 2 Cir., 273 Fed. 664, 668, that "It is only objectionable to comment upon the failure of the defendant personally to testify; and if at the close of the whole case any given point stands uncontradicted, such lack of contradiction is a fact, an obvious truth, upon which counsel are entirely at liberty to dwell."

Here there was no direct reference to the failure of Banks to testify. The law was not, therefore, violated. In Morrison v. United States , 8 Cir., 6 Fed. (2d) 809, 811, Judge Booth speaking for this court said: "Comments by court and counsel that certain testimony is uncontradicted is common, oftentimes helpful, and very generally held to be without error." Citing authorities.

Counsel for defendant requested 14 numbered instructions to be given to the jury. His careless criticism of the court is illustrated by his assigned error for alleged failure to give these instructions. His first requested instruction reads:

"For proof of its case, the government relies upon circumstantial evidence. Circumstantial evidence consists of facts proved from which the jury may infer by process of reasoning certain ultimate facts. A conviction may be had upon circumstantial evidence, but to warrant a conviction on such evidence the proven facts must not only be consistent with the hypothesis of guilt and point surely and solely in the direction of guilt, and must clearly and satisfactorily exclude every other reasonable hypothesis except that of guilt."

In his brief counsel says: "Requested instruction No. 1 pertained to circumstantial evidence and while the court did state something about circumstantial evidence it refused to state that the government relied upon circumstantial evidence."

A comparison of the requested instructions with the instructions given is convincing that the court most carefully protected the rights of the defendant and that as a whole the given instructions were more favorable to the defendant than were the requested instructions. The court gave requested instruction No. 1 on circumstantial evidence in the exact language of the request.

The whole record discloses, we think, that the defendant had a fair trial. The judgment appealed from is accordingly

Affirmed.

¹ 26 U.S.C.A.

Sec. 145. Penalties * * *

(b) Failure to Collect and Pay Over, or Attempt to Defeat or Evade Tax--

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

 

 

[54-1 USTC ¶9137]C. N. Papadakis, Appellant v. United States of America , Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 13,772, 208 F2d 944, December 21, 1953

Appeal from the United States District Court for the Southern District of California, Central Division.

Criminal penalties: Unreported income determined by net worth method: Whose income?: Sufficiency of evidence.--Defendant and his father were charged with attempting to defeat and evade income taxes due and owing by the father and defendant. The latter had general supervision of his father's business affairs, as well as being responsible for reporting the income of the family enterprises for tax purposes. The required information was turned over to an accountant who prepared the returns. By use of the net worth method, the Government established that the parents had total unreported income of $20,822.94 in 1945. Defendant contended that this amount was overstated since $16,761.52 belonged to him and his brother. The Court held that although the defendant and his brother reported this amount on their own returns, the evidence indicated that the parents were not under any obligation to pay this sum to the sons. Also, that the jury could have inferred from the evidence that the sons reported the income in order to avoid higher surtax rates applicable if the income would have been reported by the parents. Moreover, even if this amount were not considered, the parents would yet have unreported income of nearly $3,000 for 1945. With respect to unreported income for the years 1947 through 1949, the Court held that (1) one-half of the profits was the income of the father's partner, and (2) payments made by the defendant and his brother to the father on the purchase price of the inventory of the liquor store were not taxable income. Nevertheless, even after allowance for these errors, the parents still had unreported income in each of the taxable years, and testimony of the accountant indicated that the omissions were deliberate and made under the defendant's direction.

Criminal penalties: Fact finding.--Defendant was also guilty of attempting to evade taxes of himself and his wife on the income from a partnership. Relying on the partnership books, the Government established substantial overstatements of purchases and expenses and understatements of gross receipts. The accountant testified that, at the defendant's direction, he had cut net income on partnership returns. There was also evidence of an attempted bribe of a Bureau agent investigating the partnership.

Criminal penalties: Admissibility of evidence.--Defendant objected to the admission of certain exhibits on the ground that they were hearsay as against him. The Court held admissible (1) an exhibit admitted without objection by the defendant in the lower court, (2) a summary of deposits and checks drawn on bank accounts of the father and the partnership, (3) a net worth statement of the parents signed by the father, and (4) summaries of omissions from a book showing receipts from rental properties. Evidence of certain oral statements made out of court by the father were hearsay as against the defendant but defendant failed to show that these statements were prejudicial.

Criminal penalties: Instructions to the jury.--The Court below did not err in refusing to give an instruction on the defense of entrapment. The accountant had informed Government officials of irregularities in 1948 but continued to work for the defendant until 1952. However, there was no evidence that the accountant was ever an agent of the Government, and the defense of entrapment is available only where there has been "an instigation by government officials * * *." Nor was it reversible error not to instruct the jury that the accountant was an accomplice and that his testimony was to be viewed with extreme caution. The Court did not err in instructing the jury that in judging the testimony of the defendants they were to consider the interest of the defendants in the case, "their hopes and fears, and what they have to gain as a result of your verdict." An instruction that "* * * any juror should not hesitate to abandon his own view when convinced it is erroneous" was properly given. The Court also acted properly in refusing to instruct that "* * * unless the evidence established guilt * * * beyond a reasonable doubt, in the mind of each and every juror, then such juror should vote to acquit * * *."

Russell E. Parsons, Beverly Hills , Calif. , for appellant. Laughlin E. Waters, United States Attorney, Ray H. Kinnison, Assistant United States Attorney, Chief, Criminal Division, James K. Mitsumori, Assistant United States Attorney, Los Angeles, Calif., for appellee.

Before STEPHENS, BONE and ORR, Circuit Judges.

BONE, Circuit Judge:

Appellant, C. N. Papadakis, stands convicted on 16 counts of willfully and knowingly attempting to defeat and evade income taxes by filing and causing to be filed false and fraudulent income tax returns in violation of 26 U. S. C. A. §145(b).

The first 8 counts charged appellant and his father, Nick Papadakis, as joint defendants, with attempting to defeat and evade income taxes due and owing by Nick and his wife, Katina, who reported their income on a community property basis. Counts 1, 3, 5 and 7 relate to income taxes due and owing by Nick for the taxable years 1945, 1947, 1948 and 1949, respectively. Counts 2, 4, 6 and 8 concern income taxes due and owing by Katina for the same years, and in the same order.

The counts numbered 9 through 16 charged appellant as sole defendant with willfully attempting to defeat and evade income taxes due and owing by himself and his wife, Helene, who reported their income on a community property basis. Counts 9, 11, 13 and 15 relate to income taxes due and owing by appellant for the taxable years 1946, 1947, 1948 and 1949, respectively. Counts 10, 12, 14 and 16 concern income taxes due and owing by Helene for the same years, and in the same order.

Appellant was sentenced to 10 months imprisonment on each of the 16 counts, the sentences to run concurrently, and to pay a fine of $200 on each of the counts--a total of $3,200. Nick was convicted and sentenced on counts 1 through 8 but took no appeal.

Prior to the taxable years involved Nick Papadakis owned and operated the LaSalle Hotel and two liquor stores in San Pedro , California , and owned a number of other properties on which he received rental income. In 1946 Nick turned over the business of the two liquor stores to appellant and his brother, George Papadakis, who thereafter operated the stores as a partnership under the firm name of Anchor Liquors. Prior to 1950 Anchor Liquors took on two additional partners and acquired two more liquor stores.

Nick and his wife received all of the income from the LaSalle Hotel and the rental properties until early in 1947 when Nick took his son, Ernest, in as his partner. Ernest left this partnership late in 1949 to join the firm of Anchor Liquors.

The income of Nick and his wife from all of the properties, including the two liquor stores, is in issue for the year 1945 under counts 1 and 2 of the indictment, and their incomes from the LaSalle Hotel and the rental properties for the years 1947 through 1949 are in issue under counts 3 through 8. The incomes of appellant and his wife from Anchor Liquors for the years 1946 through 1949 are in issue under counts 9 through 16.

Appellant challenges the sufficiency of the evidence on all counts and we turn first to that question, putting off for the moment questions raised as to the admissibility of certain evidence introduced by the government.

Sufficiency of the Evidence

In determining whether the evidence was sufficient to sustain the verdict we view the record in the light most favorable to the government and affirm if the evidence, so viewed, was sufficient to justify the jury in finding, beyond a reasonable doubt, that there has been a willful attempt to evade taxes. Gendelman v. United States , 9 Cir., 191 Fed. (2d) 993, 995 [51-2 USTC ¶9474], cert. denied 342 U. S. 909; McFee v. United States , 9 Cir., 206 Fed. (2d) 872, 874 [53-2 USTC ¶9549].

Counts 1 through 8. Appellant was charged in these counts on the theory that he knowingly and willfully assisted Nick in an attempt to defeat and evade income taxes due and owing by Nick and his wife.

In late 1945 appellant was given general supervision of his father's business affairs. For all of the taxable years in question he had charge of reporting the income of the family enterprises for tax purposes. Books were kept by several members of the Papadakis family showing receipts and expenses of the LaSalle Hotel and the rental properties. The manager of each of the liquor stores kept the books for that store. At the end of each year appellant collected from the person or persons who kept the books information as to the receipts, costs and expenses of the hotel and rental properties and of each of the liquor stores. From these figures appellant prepared consolidated work sheets and turned these sheets over to an accountant, who prepared the required partnership and individual returns.

Counts 1 and 2 concern the incomes of Nick and Katina for the year 1945. The books and records for the LaSalle Hotel and rental properties being admittedly incomplete, the government relied solely upon the net worth-expenditures method to prove that Nick and Katina had unreported income in 1945. In other words, the government sought to show the net worth of Nick and Katina as of the beginning and the end of the year 1945 and the non-deductible expenditures and gifts made by them in that year. If the increase in their net worth plus their non-deductible expenditures and gifts exceeded their reported income, and this excess was not satisfactorily explained, the jury was entitled to find, as it evidently did find, that they received income in that year which they failed to report.McFee v. United States, supra.

The evidence was sufficient on counts 1 and 2. The government introduced evidence and computations based thereon which, if believed, established that Nick and Katina had a total unreported income of $20,822.94 in 1945. The only substantial dispute of fact was whether the income from the liquor stores in that year, amounting to $16,761.52, was income of Nick and Katina or of their two sons, appellant and George Papadakis. The theory of the defense was that while the profits of the two stores went into the bank account of Nick or were expended by him, those profits in fact belonged to appellant and George, as owners of the businesses; that Nick and Katina were therefore obligated to appellant and George for the amount of those profits; and that in failing to take this obligation into account the government overstated the unreported income of Nick and Katina in the amount of the income from the stores.

Admittedly Nick held fee title to the land and the store buildings, but several members of the Papadakis family testified that the business of one of the stores had belonged to George Papadakis since 1935 and that the business of the other had been the property of appellant since 1939. The off-sale liquor licenses for the stores were in the names of appellant and George, and they reported the income from the stores in 1945, as in prior years, as their own for income tax purposes. However, there was abundant evidence to sustain the conclusion that the businesses in fact belonged to Nick and his wife in 1945. The net worth statement introduced by the defense, on which appellant relies, lists the inventories of the stores as belonging to Nick and Katina as of December 31, 1944 and December 31, 1945, and it is admitted that appellant and George Papadakis were obliged to buy the inventories from Nick for a very substantial sum in 1946, when the firm of Anchor Liquors was formed. And there is room for doubt that Nick was ever in fact under an obligation to pay his sons the 1945 profits from the stores, for no payments were ever made by him and no time set for payment. Appellant testified vaguely that perhaps Nick would take care of the matter in his will.

From the fact that appellant and George reported the 1945 income from the stores on their own income tax returns it might have been found that appellant acted in good faith, and that there was no willful attempt to evade taxes on that income. But this was a question for the jury. There was evidence that in 1949 appellant told a Bureau agent that the business belonged to Nick in 1945. This cast doubt on appellant's good faith in failing to report the income from the stores as income of Nick and Katina. There was ample evidence, as will be seen, from which the jury could have decided that this was but a part of a deliberate, long-continued practice by appellant of attempting to defeat taxes on the income from the family enterprises, and that the reporting of the income of the stores by appellant and George was merely a ruse to avoid the higher surtax rates which would apply if the income was reported [by] Nick and Katina.

Moreover, even if the income of the stores is eliminated from the income of Nick and Katina, and if we allow for a seeming minor error in the government's computation, the government's proof still established that Nick and Katina had unreported income of nearly $3000 in 1945.

Counts 3 through 8 concern the incomes of Nick and Katina Papadakis from the LaSalle Hotel and the rental properties for the years 1947 through 1949. The government relied upon both the net worth-expenditures method and upon other evidence to prove evasion of the taxes of Nick and Katina for those years.

The government claims to have established, by the net worth-expenditures method, that Nick and Katina had unreported income of $42,949.12 in 1947, $42,395.02 in 1948, and $34,440.29 in 1949. However, a large part of the income attributed to Nick and Katina in the government's computation was in fact the income of Ernest Papadakis, who was Nick's partner in those years. The government concedes the existence of this partnership. The profits from the LaSalle Hotel and the rental properties all went into Nick's bank account or were expended by him for his own account. This was brought out by Martha O'Sullivan, testifying as a government witness on direct examination, and was never contradicted. One-half of the profits held or expended by Nick in the years 1947 through 1949 were taxable to Ernest, and the government did not consider this in its calculation of the unreported income of Nick and Katina for those years.

It was also brought out in the government's own evidence, and never disputed, that in the years 1947, 1948 and 1949 appellant and George Papadakis made payments to Nick on the purchase price of the inventory of the liquor stores. Those receipts were not taxable income, and the government's computation of unreported income is therefore excessive because of a failure to take them into account.

After allowing for these errors, Nick and Katina had unreported income, according to the net worth-expenditures proof of the government, of more than $10,000 in 1947, $15,000 in 1948 and $5,000 in 1949. Appellant contends that there was an additional overstatement by the government of unreported income of $7,000 in 1949, but the basis for that contention has been nowhere satisfactorily explained.

There was other, overwhelming proof of appellant's guilt on counts 3 through 8. Some of this evidence was supplied by the defense itself. In attacking the government's net worth-expenditures computation appellant relies upon defense evidence that Ernest's share of the profits of the LaSalle Hotel and the rental properties was more than $23,000 in 1947 and more than $27,000 in 1948. Admittedly the share of Nick and Katina was an equal amount in each of those years. Yet the partnership tax return stated Nick's share to be less than $11,000 in 1947 and less than $14,000 in 1948, and this was of course reflected in the individual returns of Nick and Katina.

A Bureau agent testified that an audit of the rental receipt book kept for the rental properties revealed a great number of omissions. This book was the source of information for the income tax returns. In some instances receipts of rent were proved by the production of checks drawn by tenants, indorsed by Nick, and it was shown that those receipts were never entered in the book. Substantial omissions were admitted by several members of the Papadakis family. There were apparent omissions which were never explained. The undisputed and apparent omissions amounted to more than $8,000 in 1947 and 1948 and more than $7,000 in 1949. While appellant did not personally make the entries in this book, he had general supervision of the family enterprises, and the jury could well have concluded that he was fully aware of the omissions when he directed the preparation of the tax returns.

In his investigation the Bureau agent first totaled the rental receipts shown in the book on an adding machine. Later he made an audit of the book. Some of the apparent omissions had been filled in between his first and second examinations of the book. This was admitted by Ernest Papadakis, a defense witness.

Leonard Mattis, an accountant who prepared the income tax returns for the Papadakis family for the years 1947 through 1951, testified that in March of 1948, in the course of preparing the partnership income tax return for the LaSalle Hotel and the rental properties, he found that approximately $22,000 had been spent in 1947 in remodeling the LaSalle Hotel. Mattis thought this should have been capitalized, but appellant told him to put it all down as deductible expense, and that if they were caught, he (appellant) would take care of it. When Mattis had prepared a tentative return, appellant told him it was still "too damn high." Under appellant's direction, Mattis raised expenses and cut gross receipts until the net income was reduced by $16,000 on the final return.

The following year Mattis prepared a tentative return for the partnership for the year 1948 from the work sheets given him by appellant. Appellant told him that the income shown on the tentative return would have to be cut. Accordingly, Mattis, at appellant's direction, reduced the gross receipts on the final return by $10,000. Moreover, when appellant found that there would be an overall tax saving by omitting the rental paid Nick by Anchor Liquors from the rental receipts, and also omitting it from the expenses of Anchor Liquors, this was the course followed, with the view that Anchor Liquors would be reimbursed by appellant's father in the amount of the tax saving to the latter.

The evidence was clearly sufficient on counts 3 through 8.

Counts 9 through 16. These counts charged appellant with attempting to evade taxes of himself and his wife on the income from Anchor Liquors for the years 1946 through 1949. Appellant was in charge of preparing the tax returns for the firm. He signed the partnership returns and also the individual returns of his wife.

The government did not use the net worth-expenditures method of proof on these counts. They relied instead upon the partnership books. These books revealed that there had been substantial overstatements of purchases on the partnership returns for each of the years 1947, 1948 and 1949, and in addition that gross receipts had been understated and expenses overstated for the year 1949. The resulting understatements of net income in the partnership returns were reflected in the individual returns of appellant and his wife. This evidence was corroborated by Mattis, appellant's accountant. He testified that, at appellant's direction, he cut net income on the partnership returns in the years 1947 through 1949, and that work papers made available to him indicated a similar practice in the preparation of the return for 1946.

At Mattis' first meeting with appellant in March of 1948, Paul Hoffman, the prior accountant for the Papadakis family, was present. According to Mattis, Hoffman told him that "they had been cutting the grass and changing the inventory from year to year." When Mattis asked whether that was risky, Hoffman said that "they had been getting away with it for years."

There was evidence that shortly after the Bureau investigation of Anchor Liquors was commenced, appellant offered a Bureau agent a bribe first of $1,000 and then of $1,500 to "wind up this case--set up some deficiency and get out."

The evidence was sufficient on counts 9 through 16.

Admissibility of Evidence

Appellant contends that Government Exhibits 34, 74, 75, 77, 77-A and 77-B were hearsay as against appellant.

Exhibit 34 is a statement showing the net worth of Nick and Katina Papadakis as of the beginning and end of each of the taxable years involved. It was prepared by Martha O'Sullivan, an accountant for Nick. Whether it was hearsay as against appellant we need not decide, for it was admitted without objection by appellant. Moreover, it was almost an exact copy of Defense Exhibit N-D, on which appellant here relies. Appellant can hardly contend, therefore, that he was prejudiced by Exhibit 34.

Exhibit 74 is a summary of the deposits made in and checks drawn on the bank accounts of Anchor Liquors and Nick Papadakis. It was introduced to show that the amounts of cash which flowed through these accounts were abnormally large when compared with the reported incomes of the depositors. It was based upon records kept in the ordinary course of business by the bank. These records were identified by an official of the bank and properly admitted in evidence under the Business Records exception to the hearsay rule. 28 U. S. C. A. §1732. Exhibit 74 was admissible as a summary or tabulation of the results of an examination of these records. Augustine v. Bowles, 9 Cir., 149 Fed. (2d) 93; Hanson v. United States , 8 Cir., 186 Fed. (2d) 61 [51-1 USTC ¶9118]; United States v. Kelley, 2 Cir., 105 Fed. (2d) 912 [39-2 USTC ¶9621].

Exhibit 75 was a net worth statement of Nick and Katina Papadakis signed by Nick. It was hearsay as against appellant, but the error in admitting it as against him was clearly harmless. Exhibit 75 was substantially the same as Government Exhibit 89, as to which appellant makes no complaint. Even Defense Exhibit N-D, on which appellant relies, varies from Exhibit 75 in only a few particulars. Defense Exhibit N-D corrects errors in Government Exhibits 75 and 89--errors which we have noted above--and these corrections constituted the only substantial differences between the government and the defense on the net worth-expenditures evidence. Appellant was not prejudiced by the admission of this exhibit.

Exhibits 77, 77-A and 77-B were summaries of omissions from the book showing receipts from the rental properties. Photostatic copies of the pages of the rental receipt book and, later, the original book itself were received in evidence. The book was admissible as against appellant under the business records exception to the hearsay rule. 28 U. S. C. A. §1732. Exhibits 77, 77-A and 77-B were admissible a summaries or tabulations of the results of an examination of the book.Augustine v. Bowles, supra; Hanson v. United States , supra; United States v. Kelley, supra.

Appellant presents a blanket objection to all of these documents. All of them, says appellant, summarized accumulations of properties by Nick and Katina or transactions in which appellant had no part and therefore they were hearsay as against him. In other words, appellant asserts that the facts should not have been shown as against him since he had nothing to do with those facts. But that is no valid objection under the hearsay rule. That rule is not concerned with what facts may or may not be the subjects of evidence. Other rules, such as the rules of relevancy, deal with that question. The hearsay rule is concerned only with the reliability of evidence offered to prove a fact, whatever that fact might be. It operates to render inadmissible extra-judicial writings or declarations introduced to prove the truth of what was said or written, on the theory that such evidence, not being subject to the tests of cross-examination, is not reliable. 5 Wigmore on Evidence, §1361. That appellant had no part in the transactions summarized in the exhibits complained of may raise a question of relevancy, but it is a matter of indifference so far as the hearsay rule is concerned.

If appellant means to say that the documents were irrelevant as against him, the contention is clearly without merit. The documents tended to show that Nick and Katina Papadakis had income which they failed to report, and therefore that there was an attempt to defeat their income taxes--an attempt in which appellant had a very active, if not the principal part.

The court below also admitted evidence of certain oral statements made out of court by Nick Papadakis. The declarations were properly received as against Nick as admissions of a defendant, but they were hearsay as to appellant. Lutwak v. United States , 344 U. S. 604. The court below instructed the jury at the close of the trial to consider out-of-court statements by either of the defendants only as against the defendant who made them, but this was not sufficient. The court should have directed that the declarations were received only as against Nick Papadakis at the time they were admitted. Lutwak v. United States , 344 U. S. 604, 619. In this connection, three oral conversations of Nick with Bureau agents are complained of. They were as follows: (1) Bureau agents examined the journal showing receipts from the rental properties. They discovered apparent omissions and asked Nick Papadakis why the rentals had not been shown. Nick replied that he did not know. (2) Nick stated to Bureau agents that the entries in the rental receipts book had been made by himself, his son and his daughter. (3) Bureau agents discovered in their second examination of the rental receipt book that apparent omissions had been filled in since their first examination of the book. Nick was asked why these additions had been made, why the book had never been totaled, and whether the book was the original book kept for the rental properties. Nick replied that he couldn't understand the talk as to the filling in of omissions, that the book must have been totaled at some time, and that the book was the original book.

Appellant contends that this evidence was "highly inflammatory" but he gives no reason why it should be so considered and we perceive none. The only declaration of Nick which could conceivably have prejudiced appellant was the statement that he did not know why there were omissions from the book. But evidence of the same omissions was introduced at the trial and never rebutted or explained by the defense. The errors in failing to limit the effect of these declarations, whether considered singly or cumulatively, were wholly innocuous. This is a clear case for application of Rule 52(a) of the Federal Rules of Criminal Procedure. ¹

The Court's Instructions

Questions raised as to the lower court's instructions to the jury make it necessary to consider the role of appellant's former accountant, Leonard Mattis, in the transactions and investigations which gave rise to the indictment in this case. Mattis was employed at some time prior to March of 1948 by Paul Hoffman, who for years had prepared income tax returns for members of the Papadakis family. At a meeting between Mattis, Hoffman and appellant in March of 1948, ways and means of cutting income taxes were discussed. Mattis testified that he thereafter took part in preparing fraudulent income tax returns for the Papadakis family for the taxable year 1947 under the direction of appellant. In September or October of 1948, either because he had fears concerning his part in the preparation of the returns, or because he thought he might obtain, as an informer, a part of the government's recovery of deficiencies as against members of the Papadakis family, Mattis wrote a letter to the Internal Revenue Bureau stating what had transpired. In the summer of 1949, after the Bureau had begun an investigation of the Papadakis family enterprises, Mattis was called to the San Pedro Office of the Bureau of Internal Revenue to meet with an investigator. Later he turned over a number of his work papers on Papadakis income tax matters to Bureau agents. Mattis continued to prepare income tax returns for the Papadakis family through March of 1952, and during that period was in touch with Bureau agents.

Appellant contends, first, that the court below erred in refusing to give instructions on the defense of entrapment. We think not. The defense of entrapment is available only where there has been "an instigation by government officials of an act on the part of persons otherwise innocent in order to lure them to its commission and punish them." (Italics supplied). Sorrells v. United States , 287 U. S. 435, 448. The defense is recognized, not because a person induced by another is any the less guilty of the crime committed, but because it is deemed unconscionable to permit the government to prosecute an accused for an offense instigated by its own agents. "The defense is available, not in the view that the accused though guilty may go free, but that the government cannot be permitted to contend that he is guilty of a crime where the government officials are the instigators of his conduct." Sorrells v. United States, supra, 287 U. S. at 452.

Here there is not a shred of evidence that Mattis was ever an agent of the government. His testimony certainly did not so indicate, and the defense did not see fit to explore the matter on cross-examination. The evidence is that he prepared the income tax returns of the Papadakis family for the years 1947 through 1951 for a reasonable fee, and that he contacted government officials in the summer of 1948 either out of fear or in hope of a profit. Neither is there any evidence that Mattis instigated the fraudulent preparation of tax returns, or that he implanted the criminal design in the mind of appellant. Mattis did not appear on the scene until March of 1948, two years after the commission of the crimes charged in counts 1 and 2 of the indictment and a year after the crimes charged in counts 9 and 10. Mattis testified that it was only under appellant's instructions that he thereafter prepared fraudulent returns. Appellant denied giving such instructions, but he did not testify that Mattis at any time suggested the falsification of returns. There is simply no evidence of entrapment, and the court below correctly refused an instruction on that subject.

Appellant also contends, rather anomalously, in view of his position on the entrapment issue, that Mattis was an accomplice, and that the court below erred in failing to instruct the jury that the testimony of an accomplice is to be viewed with extreme caution. Whether Mattis was an accomplice we need not decide, for it does not appear that appellant requested an instruction on that score. But assuming that Mattis was an accomplice, and assuming further that the instruction had been requested, a refusal to give it, though not the better practice, would not have been reversible error. Caminetti v. United States, 242 U. S. 470, 495, affirming 9 Cir., 220 Fed. 545; United States v. Wilson, 2 Cir., 154 Fed. (2d) 802, 805, cert. denied 328 U. S. 823, rehearing denied 329 U. S. 819; cf. Kearns v. United States, 9 Cir., 27 Fed. (2d) 854, cert. denied 278 U. S. 652; Stillman v. United States , 9 Cir., 177 Fed. (2d) 607.

Appellant urges that the court erred in refusing to instruct the jury to consider the "motives and statements" of prosecution witnesses who were officers of the government, but that subject was adequately covered in another instruction.

It is next contended that the court erred in instructing the jury that in judging the testimony of the defendants they were to consider the interest of the defendants in the case, "their hopes and fears, and what they have to gain or lose as a result of your verdict." This instruction was proper.Frederick v. United States , 9 Cir., 163 Fed. (2d) 536, 550, cert. denied 332 U. S. 775; Marino v. United States , 9 Cir., 91 Fed. (2d) 691, cert. denied 302 U. S. 764;Schulze v. United States , 9 Cir., 259 Fed. 189.

Appellant requested an instruction that the defendant was entitled to the individual and independent verdict of each and every member of the jury, and that unless the evidence established guilt of the crime charged, beyond a reasonable doubt, in the mind of each and every juror, then such juror should vote to acquit the defendant. The court refused this instruction, and charged the jury that "Jurors are expected to agree upon a verdict where they can conscientiously do so, you are expected to consult with one another in the jury room and any juror should not hesitate to abandon his own view when convinced it is erroneous." The instruction requested was properly refused; the instruction given was substantially correct. Allen v. United States , 164 U. S. 492;Zamloch v. United States , 9 Cir., 193 Fed. (2d) 889, cert. denied 343 U. S. 934; Egan v. United States , D. C. Cir., 5 Fed. (2d) 267; Lias v. United States , 4 Cir., 51 Fed. (2d) 215, affirmed 284 U. S. 584; Bowen v. United States , 8 Cir., 153 Fed. (2d) 747, cert. denied 328 U. S. 835; United States v. Furlong, 7 Cir., 194 Fed. (2d) 1, cert. denied 343 U. S. 950.

The judgment is affirmed on all counts.

¹ "RULE 52. HARMLESS ERROR AND PLAIN ERROR

"(a) Harmless Error. Any error, defect, irregularity or variance which does not affect substantial rights shall be disregarded."

 

 

[53-1 USTC ¶9227]Roy A. H. Knisely, Defendant-Appellant v. United States of America , Plaintiff-Appellee

(CA-6), In the United States Court of Appeals for the Sixth Circuit, No. 11,666, 200 F2d 559, December 18, 1952, Cert. denied, 345 U. S. 923, 73 S. Ct. 781

Criminal prosecution: False entries and documents submitted to Bureau agents.--Judgment against taxpayer for violation of 18 U. S. C. A., Sec. 1001 was sustained, where based on jury's verdict of guilty in connection with certain account books and records purporting to contain correct entries of amounts received by taxpayer for treatment of patients during 1947, which books and records, when submitted to the investigating agents of the Bureau and Treasury Department, were known and intended by taxpayer to be false, fictitious and fraudulent.

Roy H. Lambert, Toledo, Ohio, Harry Peterson, Minneapolis, Minn., Thomas V. Sullivan, Chicago, Ill., for appellant. Gerald P. Openlander, Assistant United States Attorney, Toledo , Ohio , for appellee.

Before SIMONS, Chief Judge; ALLEN and MCALLISTER, Circuit Judges.

Order

MCALLISTER, Circuit Judge:

The above cause coming on to be heard upon the transcript of the record, the briefs of the parties and the arguments of counsel in open court, and it appearing that the case presents solely questions of fact, and it appearing that the verdict of the jury and judgment of the court are sustained by the evidence, and there appearing no reversible error in the charge of the court or the conduct of counsel for the government, and the court being duly advised,

Now, therefore, it is ordered, adjudged, and decreed that the judgment of the district court be and is hereby affirmed.

 

 

[54-2 USTC ¶9574]C. G. Benham, Appellant v. United States of America , Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 14657, 215 F2d 472, September 3, 1954

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

Criminal penalties: Filing fraudulent return on behalf of another: Sufficiency of evidence.--Taxpayer was convicted of filing a fraudulent return and of filing and causing to be filed a fraudulent return on behalf of his wife. The Circuit Court found that, even though the taxpayer's erroneous records may have accounted for the errors in his wife's return, the evidence was insufficient to sustain taxpayer's conviction on the count of filing his wife's return. The evidence as to taxpayer, which showed increases in taxpayer's net worth not explained by taxpayer's return, was held to be sufficient, although the entire case was reversed and remanded on other grounds.

Criminal penalties: Prejudicial argument of counsel before jury.--Taxpayer was convicted on two counts of tax evasion. Taxpayer did not object to the prosecutor's comments to the jury, and did not move for a mistrial, but nevertheless, taxpayer appealed on the ground that the prosecutor's improper arguments were so grossly prejudicial that the harm could not be removed by objections or instructions. The Circuit Court agreed with taxpayer that the comments regarding taxpayer's refusal to testify and taxpayer's activities as a usurer deprived the taxpayer of a fair trial.

Muckleroy McDonnold, Leonard Brown, San Antonio, Tex., George O. B. John, Houston, Tex., for appellant. Charles F. Herring, United States Attorney, Austin, Tex., Thomas E. James, Assistant United States Attorney, Austin, Tex., for appellee.

Before HUTCHESON, Chief Judge, and RIVES, Circuit Judge, and WRIGHT, District Judge.

[Prior History of This Case]

RIVES, Circuit Judge:

The appellant was tried upon an indictment containing four counts, each charging that he did wilfully and knowingly attempt to defeat and evade income taxes in violation of Section 145(b), Title 26, United States Code. The indictment included two counts for each of the years 1946 and 1947, covering the separate returns filed by the defendant and by his wife. The jury found the defendant not guilty under the two counts covering the year 1946, but guilty under the third and fourth counts covering the year 1947. The court sentenced the defendant under the third count to imprisonment for a period of three years and to pay a fine of $5,000.00, and under the fourth count to one year imprisonment and a fine of $5,000.00, the sentence to begin at the expiration of the sentence under the third count. A motion for new trial having been overruled, this appeal followed. Of the numerous specifications of error, we find it necessary to discuss but two.

[Sufficiency of Evidence]

The first specification questions the sufficiency of the evidence to support the verdict as to each count. The defendant moved for a judgment of acquittal at the close of the Government's evidence, but failed to move for a judgment of acquittal at the close of all the evidence. Upon such a record the appellate court will not consider the objection that the verdict is not supported by the evidence except to prevent a miscarriage of justice. Ansley v. United States , 5th Cir., 135 Fed. (2d) 207, 208; Battle v. United States , D. C. Cir., 206 Fed. (2d) 440, 441; Demetree v. United States , 5th Cir., 207 Fed. (2d) 892, 894 [53-2 USTC ¶9646].

The Government sought to convict the defendant by proving increases in his net worth corroborated by evidence showing specific items of income not reported. Without detailing the evidence, we think it sufficient to say that, insofar as the third count is concerned, in our opinion the evidence of the Government if believed by the jury sustains the verdict of guilty. On the other hand, there was no evidence to support a conviction under the fourth count charging that the defendant "did wilfully and knowingly attempt to defeat and evade a large part of the income tax due and owing by the said Ethel H. Benham to the United States of America for the calendar year 1947, by filing and causing to be filed with the Collector of Internal Revenue * * * a false and fraudulent income tax return for and on behalf of the said Ethel H. Benham * * *." While the returns show on their face that the joint community income of the husband and wife was determined and divided in half for tax purposes, that fact alone does not suffice to establish that the husband either filed or caused to be filed the wife's separate return. That return was not signed by the husband, but was signed by the wife and by the accountant who prepared it, and the evidence is entirely consistent with the theory that they were the only ones responsible for its filing. The husband's erroneous records may have accounted for the errors in the wife's return, but the crime was not complete until the return was filed, and to be guilty under the fourth count the husband must either have filed his wife's return or have caused it to be filed. There is no evidence that he did either. The sentence, however, under each count was separate, and the defendant would still be subject to the specific sentence under count three if the record were otherwise free from error. Blitz v. United States , 153 U. S. 308, 318.

[Prosecutor's Prejudicial Comment]

The argument of counsel for the Government is set out in full in the record. The defendant interposed no objections and made no motions to instruct the jury to disregard any part of the argument, but appeals for reversal on the ground that improper argument was so grossly prejudicial that the harm could not be removed by objections or instructions, and that under such circumstances there was no duty on the part of a defendant in a criminal case to move for a mistrial. After careful consideration, we are constrained to agree with the appellant's position. A few illustrative excerpts from the argument are set forth in the footnote. ¹

Each case stands upon its own peculiar facts and circumstances as to whether a defendant has been afforded a fair trial. It sometimes becomes the duty of the trial judge to stop counsel's discourse without waiting for an objection. Viereck v. United States , 318 U. S. 236, 248; De Bonis v. United States , 6th Cir., 54 Fed. (2d) 3, 5. Whenever this Court is of the opinion that a defendant has been denied a fair trial, it must set aside the judgment of conviction.

`The United States Attorney is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all; and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done. As such, he is in a peculiar and very definite sense the servant of the law, the two-fold aim of which is that guilt shall not escape or innocence suffer. He may prosecute with earnestness and vigor--indeed, he should do so. But, while he may strike hard blows, he is not at liberty to strike foul ones. It is as much his duty to refrain from improper methods calculated to produce a wrongful conviction as it is to use every legitimate means to bring about a just one.' Berger v. United States , 295 U. S. 78, 88. Compare New York Central R. Co. v. Johnson, 279 U. S. 310, 316-18" Viereck v. United States , supra at p. 248.

The prosecuting attorney's argument could be ever so vigorous so long as it was confined to the issue of the defendant's guilt or innocence of the crime charged against him; but the indirect reference to the defendant's failure to testify, the appeals to prejudice against the defendant as a usurer, and to the jurors' selfish interests effectively deprived the defendant of a fair trial and make necessary a reversal of the judgment of conviction and a remand of the case for a new trial.

REVERSED AND REMANDED.

¹ "Let's see if we can tell a little more about Mr. Benham here. Let's look at these postcards that he had, that we introduced into evidence. He was advertising--he was even advertising himself as being an attorney at law. I don't think that man can have much scruples, and I think the evidence before you reflects that."

* * *

"Let's look a little further. He required from people who borrowed money from him to sign an agreement--the agreements are in evidence--releasing him from usury charges--usury, gentlemen, prohibited by the Constitution. Now, why would he have those signed if he weren't in the usury business?"

* * *

"He is the kind of a man who, in the course of his operations, buys notes at fifty per cent, sells them to an unsuspecting investor in second lien notes at a hundred per cent. He is not satisfied with a hundred per cent profit on his investment. No, he reserves a portion of the piddling interest that those notes drew and takes that away from his investors. And, in addition to that, he charges those investors the accrued interest up to the day the notes transferred. Now, what does he do about recording those transfers to his investors? He makes those investors sign an agreement that they won't let the borrower know that they own the note, and that they will not record it so that the public may scrutinize it. That's the kind of man he is, gentlemen."

* * *

"You can call him by another name, but he is still a loan shark by my book, and every man in Travis County will agree to that. That's the kind of man you are dealing with. I think that is significant in determining whether or not he has an intent to evade."

* * *

"The defendant is seeking, as is not unusual, to lay off his guilt here on women folks--these three women that took the stand--or dead people. He doesn't have the courage to come up before you and say, 'Yes, I did it.'"

* * *

"I have talked some here about Benham, a loan shark, a man of no principle, in my judgment, a man that charged three hundred per cent interest on notes to poor devils buying second-hand cars; such a man, to my mind, was not a good man."

* * *

"But, gentlemen, you can see his tracks. You -- follow his modus operandi, if you will, mode of operations, over the years, see the kind of man he is, see that he's the sort of man, in my judgment, who will do a thing like this. This is a man who would evade his taxes, beat anything he thought he could get by with. He has had time to figure it out in the shadow of Pike's Peak in Colorado . He is a shrewd and cunning man with no principle, in my judgment."

* * *

"In my judgment, if you turn this man loose, what you are going to be doing by your verdict is encouraging people who hear about what you have done, to do the same thing. There is too much of it, gentlemen. It's got to be stopped. You and other honest taxpayers have to make up the difference that the tax evaders fail to pay. If this man had evaded $250,000 worth of taxes over the years, the government is going to have the money, and you are going to have to pay it. Somebody is."