Burden of going forward with evidence

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7203: Willful Failure to File Return, Supply Information, or Pay Tax: Burden of Going Forward with Evidence

 

[98-2 USTC ¶50,765] United States of America , Appellee v. David S. Bok, Defendant-Appellant

(CA-2), U.S. Court of Appeals, 2nd Circuit, 97-1595, 9/8/98, 156 F3d 157, 156 F3d 157. Affirming an unreported District Court decision

[Code Secs. 301 , 316 , 7201 and 7206 ]

Return of capital: Sole stockholder: Burden of production, failure of taxpayer to meet: Jury instructions: Fraud and false statements: Tax evasion.--The sole shareholder of a construction company was properly convicted of tax evasion and making false statements on corporate income tax returns despite the trial court's refusal to instruct the jury that funds he withdrew from the corporation but failed to report on his personal return qualified as a nontaxable return of capital. Although the "no earnings and profits, no income" rule regarding return of capital was applicable, the taxpayer failed to produce evidence that the corporation lacked earnings or profits for the tax year at issue.

[Code Secs. 7201 and 7206 ]

Penalties, criminal: Sentencing guidelines: Restitution.--The trial court did not exceed its authority by requiring a sole shareholder who had been convicted of tax evasion and making false statements on a corporate income tax return to pay 10% of his gross monthly income against his personal tax liability for the tax year at issue. Under the Sentencing Guidelines of 1990, the court could order restitution as a condition of the taxpayer's supervised relief.

[Code Sec. 7206 ]

Fraud and false statements: Materiality determined by jury.--It was within the discretion of the trial court to permit the jury to decide whether false statements made by a sole shareholder on the corporation's tax returns were material.

Mary Jo White, United States Attorney, Jeremy H. Temkin, Craig A. Stewart, Assistant United States Attorneys, New York, N.Y., for appellee. John L. Pollok, Hoffman, Pollock & Pickholz, 260 Madision Ave. , New York , N.Y. 10016 , for defendant-appellant.

Before: CALABRESI, CABRANES and STRAUB, Circuit Judges.

Appeal from a conviction by a jury in the United States District Court for the Southern District of New York (John G. Koeltl, Judge) for attempted income tax evasion and for making false statements on corporate income tax returns. We hold that the trial court properly found that because the defendant failed to meet his burden of production, a jury instruction on the nontaxability of a shareholder's return of capital was not appropriate. We further hold that the trial court did not err in its instruction on the materiality of false statements on a tax return, that it properly admitted evidence of other acts under Rule 404(b), and that it permissibly ordered appellant to make payments against his personal income tax liability as a condition of supervised release.

Affirmed.

STRAUB, Circuit Judge:

David S. Bok appeals from a conviction by a jury before Judge Koeltl for attempted income tax evasion in violation of 26 U.S.C. section 7201 and for making false statements on corporate income tax returns in violation of 26 U.S.C. section 7206(1). Bok's appeal raises several issues. First, he argues that the trial court erred in not instructing the jury that a distribution of money he received from a corporation in which he was the sole shareholder may have constituted a nontaxable return of capital. Bok also challenges the trial court's instruction to the jury on the materiality of the false statements he made on the corporate returns he signed. Third, Bok alleges that the trial court improperly admitted evidence of his not filing various state and federal tax returns--which were not at issue in the indictment--to prove intent under Rule 404(b) of the Federal Rules of Evidence. And finally, Bok contends the trial court's requirement that he contribute ten percent of his gross monthly income towards his outstanding personal tax liability as a condition of supervised release violates 28 U.S.C. section 3663.

Having considered these arguments, we affirm in all respects.

BACKGROUND

Bok was in the construction contracting business in 1988 and 1989, during which time he was the president and sole shareholder of Abacus Construction Corp. Abacus had numerous clients both for commercial and residential projects, mostly in Manhattan . In the years before 1988, Bok had occupied a similar position with Abacus's predecessor corporation and, immediately before that, had attended and graduated from law school, having passed courses in both personal and corporate taxation.

Bok ran into trouble with the Internal Revenue Service in the early 1990s because he had not filed a personal income tax return for the 1988 tax year, and because Abacus had not filed corporate returns for 1988 and 1989. Responding to the IRS's requests, Bok eventually filed all three returns, in each case using the services of an accountant to prepare them. The accountant testified that he in turn had based his work on information provided by Bok. When Bok did file Abacus's corporate returns, there were significant discrepancies between Abacus's reported gross receipts and its actual gross receipts as suggested by a review of the company's bank statements. Similar discrepancies existed with respect to Bok's personal return for 1988, on which he had failed to include over $200,000 he had received from Abacus that year.

Specifically, for the 1988 tax year, a review of Abacus's bank statements indicated that the company had gross receipts of between $3.9 million and $4.8 million. Abacus's tax return for that year reflected gross receipts of just below $410,000. Similarly in 1989, Abacus's bank statements indicated gross receipts of just over $2 million, while its tax return reported slightly less than $405,000.

Bok's 1988 individual tax return listed his gross income as $58,154, only $16,700 of which derived from Abacus. During 1988, however, Bok used $202,765 of Abacus's assets to purchase a condominium in Manhattan , which Bok used as a personal residence. Also in 1988, Bok used $20,122.22 of Abacus's funds to purchase municipal bonds in his own name. In neither case did Bok disclose to his accountant his appropriation of Abacus's funds, and his personal income tax return in no way reflected his appropriation of those funds.

Bok was indicted and tried on one count of attempted personal tax evasion and two counts of making false statements on an income tax return. A jury convicted him on all three counts, and the trial court sentenced him to thirty months' incarceration and three years' supervised release. In addition, as a condition of Bok's supervised release, the trial court required Bok's cooperation in calculating the amount of back taxes that he owed to the government and ordered that Bok pay ten percent of his gross monthly income towards his individual tax liability for 1988 (up to a total of $45,000). As outlined above and discussed in greater detail below, Bok challenges his conviction on several grounds. After considering Bok's arguments, we conclude that the trial court committed no error and therefore affirm.

DISCUSSION

I. JURY INSTRUCTIONS

Two discrete portions of Bok's jury instructions are before us on appeal. First, we must determine whether the trial court erred in not instructing the jury that the money Bok took from Abacus to pay for the condominium and municipal bonds may have been an untaxable return of capital. Second, we analyze whether the trial court improperly prevented the jury from deciding the materiality of Bok's misstatements on Abacus's corporate tax returns.

As an initial matter, "[a] jury instruction is erroneous if it misleads the jury as to the correct legal standard or does not adequately inform the jury on the law." United States v. Dinome, 86 F.3d 277, 282 (2d Cir. 1996) (internal quotation marks omitted). We review challenged jury instructions de novo but will reverse only if all of the instructions, taken as a whole, caused a defendant prejudice. See United States v. Locascio, 6 F.3d 924, 939 (2d Cir. 1993) (citing United States v. Pujana-Mena, 949 F.2d 24, 27 (2d Cir. 1991)), cert. denied, 511 U.S. 1070 (1994). With respect to both instructions, the government argues that Bok did not object to the court's actual charge and that therefore he may only challenge portions of it if the trial court's decisions amount to plain error under Rules 30 and 52(b) of the Federal Rules of Criminal Procedure. See Johnson v. United States , 520 U.S. 461, --, 117 S. Ct. 1544,1548 (1997). Bok admits that he did not object at the proper time to the materiality issue and that the plain error standard applies. He does not explicitly accept or deny the government's contention with respect to the instruction on calculation of his income. It is, however, not necessary in this case for us to determine whether to use plain error analysis or whether the usual harmless error standard applies because neither of the trial court's instructions was erroneous.

A. RETURN OF CAPITAL

On the morning of the last day of the government's case, one day before the trial court submitted the case to the jury, Bok presented the court with several additional requests to charge. One of them concerned the treatment for tax purposes of money withdrawn by a shareholder from a corporation. Through that proposed charge, Bok sought to characterize the money he received from Abacus for his condominium and his municipal bonds as a nontaxable return of capital that he had invested in the corporation rather than as a taxable dividend. The proposed charge read as follows:

RETURN OF CAPITAL NON-INCOME TRANSACTION

If a shareholder in a corporation withdraws his capital from that corporation, either all or part of that withdrawal is not income to the shareholder, and need not be reflected on that shareholder's personal income tax return. The same treatment occurs if the shareholder directs the corporation to pay to a third party for his benefit all or part of his capital contribution.

Defendant's Additional Requests to Charge at 2. The government opposed the use of the proposed charge, arguing both that it was not legally correct as written and that there was no basis in fact for its inclusion in the charge as a whole.

After entertaining arguments from both sides, the trial court decided against including Bok's proposed charge as written. The trial judge did invite Bok to work with the government to craft a more correct statement of the law, but the two sides evidently never reached agreement on an instruction. The trial judge went on to say that, in keeping with his obligation to instruct the jury correctly on the law, he had included a charge "about a corporate distribution and how that can be income." Trial Transcript at 963. Ultimately the relevant portion of the charge read as follows:

Gains or profits and income derived from any source whatever are included in gross income for the purpose of taxation of income. This includes both lawful and unlawful gains.

In order to prove that the defendant received substantial additional income omitted from his tax return, the government has introduced evidence that the defendant was the sole shareholder, or owner, of Abacus Construction Corp., a corporation, and received certain funds or assets from the corporation for the purchase of an apartment and a bond.

If you find that the defendant obtained such funds, or assets, or other property from Abacus Construction Corp., then you should proceed to determine whether this was income to the defendant.

In this connection, the question for you to determine is whether the defendant had control over the funds, or assets, or other property from that corporation, took it as his own and treated it as his own, so that as a practical matter he derived economic value from the funds, or assets, or other property received. If you find this to be the case, then the funds, or assets, or property received by the defendant would be income; if you do not find this to be the case, then the funds or assets or other property obtained by the defendant would not be income to the defendant.

Trial Transcript at 1126-27.

We have long recognized that under certain circumstances monies lawfully withdrawn from a corporation by one of its shareholders may constitute a nontaxable return of capital. See United States v. D'Agostino [98-1 USTC ¶50,380], 145 F.3d 69, 72 (2d Cir. 1998); DiZenzo v. Commissioner [65-2 USTC ¶9518], 348 F.2d 122, 125 (2d Cir. 1965). A central condition for the application of the return capital theory--which we have also called the "no earnings and profits, no income" rule--is that the corporation must not have earned a profit for the year in which the withdrawal was made. See D'Agostino [98-1 USTC ¶50,380], 145 F.3d at 72. Under this theory, if a shareholder has invested capital in a corporation and the corporation has not earned a profit for the year at issue, any monies the shareholder removes from the corporation (up to the amount of invested capital) constitute only a return of the shareholder's basis, not dividend income.

The return of capital theory derives from the Internal Revenue Code itself, which defines the term "dividend" to mean "any distribution of property made by a corporation to its shareholders . . . OUT OF ITS EARNINGS AND PROFITS OF THE TAXABLE YEAR, . . . without regard to the amount of the earnings and profits at the time the distribution was made." 26 U.S.C. section 316(a)(2) (1994) (emphasis added). The Code further provides that "[t]hat portion of the [corporate] distribution [of property to its shareholders] which is not a dividend shall be applied against and reduce the adjusted basis of the stock." 26 U.S.C. section 301(c)(2) (1994). The natural implication of the two provisions read together is that in the absence of earnings or profits, a shareholder may treat any distribution up to the value of capital invested in the corporation--that is, the taxpayer's basis--as a return of that capital. Both the Tax Court and the Tax Litigation Service of the IRS have explicitly adopted this approach in the civil enforcement context. See Truesdell v. Commissioner [CCH Dec. 44,500], 89 T.C. 1280, 1294-95 (1987); Truesdell, action on decision, 1988-025, 1988 AOD Lexis 22 (Sept. 12, 1988).

We have made clear that the return of capital theory applies equally in both criminal and civil cases, assuming that the diversion itself was not unlawful. ¹ See D'Agostino [98-1 USTC ¶50,380], 145 F.3d at 72-73; see also United States v. Leonard [75-2 USTC ¶9695], 524 F.2d 1076, 1083 (2d Cir. 1975) (Friendly, J.) (recognizing the return of capital theory in a criminal tax prosecution but holding that the defendant failed to meet the burden of going forward as to the corporation's lack of earnings or profits), cert. denied, 425 U.S. 958 (1976). In D'Agostino, we explicitly rejected the prevailing rule in several of our sister Circuits. See [98-1 USTC ¶50,380], 145 F.3d at 72-73. These require only that the government prove that the taxpayer had "actual command" over the funds at issue in a criminal tax evasion case and do not require a showing that earnings and profits existed in a year in which the distribution was made. See United States v. Williams [89-2 USTC ¶9390], 875 F.2d 846, 850-52 (11th Cir. 1989); United States v. Goldberg [64-1 USTC ¶9316], 330 F.2d 30, 38 (3d Cir.), cert. denied, 377 U.S. 953 (1964); Davis v. United States [55-2 USTC ¶9685], 226 F.2d 331, 335-36 (6th Cir. 1955)), cert. denied, 350 U.S. 965 (1956).

Similarly, in return of capital cases, a taxpayer's intent is not determinative in defining the taxpayer's conduct. That is, the taxpayer or the corporation need not have described the distribution at issue as a dividend or a return of capital at the time it was made; rather, the realities of the transaction--including the amount of the shareholder's basis and the corporation's earnings or profits, as well as the amount of the distribution--govern its characterization for tax purposes. See D'Agostino [98-1 USTC ¶50,380], 145 F.3d at 72-73. In this way, the court in D'Agostino applied the return of capital theory even though it had "little doubt the D'Agostinos acted with bad intentions" when Mrs. D'Agostino surreptitiously diverted up to $4,000 each week in large bills from the couple's solely-owned businesses to her kitchen drawer. ² Id. at 70, 73.

The fact that the return of capital theory applies in this Circuit does not, however, end our inquiry. We must also determine whether Bok established an adequate basis in the record for the proposed charge. The legal standard is generous: Generally "a criminal defendant is entitled to instructions relating to his theory of defense, for which there is some foundation in the proof, no matter how tenuous that defense may appear to the trial court." United States v. Dove, 916 F.2d 41, 47 (2d Cir. 1990), quoted in United States v. Workman, 80 F.3d 688, 702 (2d Cir.), cert. denied, -- U.S. --, 117 S. Ct. 319 (1996). On appeal, however, "[a] conviction will not be overturned for refusal to give a requested charge . . . unless that instruction . . . represents a theory of defense with basis in the record that would lead to acquittal." United States v. Allen, 127 F.3d 260, 265 (2d Cir. 1997) (quoting United States v. Vasques, 82 F.3d 574, 577 (2d Cir. 1996)) (internal quotation marks omitted). In determining whether an adequate basis exists for a return of capital charge, we must first determine the extent and nature of the showing the defendant must make.

Although our earlier cases have not stated it with perfect clarity, a defendant does always bear the burden of production--under which the defendant must make an initial showing on each key element of the theory--to receive an instruction on the return of capital theory. That is, there must be some credible evidence that the corporation did not enjoy income or profits for the tax year at issue, and that the amount of the taxpayer's capital contribution exceeded the amount of the distribution from the corporation. The court in Leonard effectively held as much:

In prosecutions for income tax violations, production of a rather slight amount of evidence by the Government, here the proof of receipt of what are charitably characterized as constructive dividends rather than embezzled funds, may transfer the burden of going forward to the defendant. Although the ultimate burden of persuasion remains with the Government, Leonard did not introduce sufficient evidence of an absence of earnings or profits. . . . ³

[75-2 USTC ¶9695], 524 F.2d at 1083 (citations omitted). Though Leonard used precatory language in discussing the defendant's burden of production, it did not purport to do away with the general requirement that a proposed jury instruction must have an adequate basis in fact. To the extent that Leonard was at all unclear on the issue, we now clarify that in order to merit a charge on the return of capital theory, a defendant must satisfy a burden of production by showing that an adequate basis in fact exists for the charge. As suggested by the cases cited in Leonard [75-2 USTC ¶9695], 524 F.2d at 1083, this is not the only circumstance in which a taxpayer faces a burden of production once the government has come forward with evidence of tax evasion. See, e.g., United States v. Vardine [62-2 USTC ¶9624], 305 F.2d 60, 63 (2d Cir. 1962) ("[I]t is reasonable to he defendant, if he wishes to disprove intent and likely source [of a net worth bulge], to bear the burden of going forward when he alleges that he had additional deductions not claimed on his income tax return."). Of course in cases involving the return of capital theory, the allocation of the burden of going forward to the taxpayer does not affect the ultimate burden of persuasion, which always remains with the government. See Leonard [75-2 USTC ¶9695], 524 F.2d at 1083.

Like the taxpayer in Leonard, Bok failed to satisfy his burden of going forward and therefore did not establish an adequate basis in the record for his proposed instruction. Specifically, neither Bok nor the government produced any admissible evidence to suggest that Abacus lacked earnings or profits for 1988. Although Bok did introduce Abacus's 1988 financial statements, he made clear that they were offered only to show Bok's state of mind when he gave information to his accountant, not for the underlying truth of the figures in the statements. Even if the financial statements had been admitted for their truth, they alone would not have satisfied Bok's burden because they were based entirely on information provided by Bok, purportedly using an entirely different method of accounting than that used on Abacus's corporate return. ⁴ In addition, Bok had suggested that Abacus DID have net earnings for 1988. During the IRS's investigation, Bok accounted for the low figures in the gross receipts portion of Abacus's return by explaining that he had mistakenly entered the corporation's net profits in place of its gross receipts. At trial Bok referred to this explanation for the false statements on Abacus's returns in arguing that he lacked the requisite intent to be convicted. Bok continues to make the same argument on appeal, noting his contention that the numbers on the gross receipts line of Abacus's tax returns "were really net profits." Brief for Defendant-Appellant David S. Bok at 36. Finally, Bok declined the trial court's invitation to elicit facts to support his proposed charge. Because Bok's accountant had not been qualified as an expert witness, the trial court rejected Bok's attempt to establish through the cross examination of the accountant that, as a matter of law, a return of capital was a nontaxable event. In doing so, however, the trial court expressly suggested that Bok use the witness to develop facts that Bok might later use as the basis for a jury instruction; Bok did not follow up on the trial court's suggestion.

Thus, despite our generous approach to jury instructions, under which the defendant is entitled to an instruction on his theory when "there is some foundation in the proof, no matter how tenuous," Dove, 916 F.2d at 47, Bok did not provide sufficient facts to warrant his proposed charge. Given the lack of evidence produced by Bok on the issue of Abacus's earnings or profits, we cannot say the trial judge erred in finding no basis in the record for the return of capital theory. Because Bok failed to satisfy his burden of production, the trial court properly rejected Bok's proposed instruction.

B. MATERIALITY OF FALSE STATEMENTS

Bok also argues that the trial court erred in not permitting the jury to decide whether the false statements Bok made on Abacus's corporate returns were material. In doing so, he appears to argue that United States v. Klausner [96-1 USTC ¶50,173], 80 F.3d 55, 60 (2d Cir. 1996), which permitted a trial judge to decide issues of materiality in a section 7206 case, is wrongly decided under United States v. Gaudin, 515 U.S. 506 (1995). Gaudin affirmed the Ninth Circuit's reversal of a conviction under 18 U.S.C. section 1001 because the trial court had not submitted the question of materiality to the jury. Because the trial court DID submit the question of materiality to the jury in this case, it is not necessary for us to examine or apply Klausner.

It is abundantly clear that the trial judge allowed the jury to decide the issue of materiality, even though Klausner did not explicitly require him to do so. The court charged the jury in pertinent part as follows:

. . . [T]he third element the government must prove beyond a reasonable doubt is that the return at issue in the count you are considering was not true and correct as to every material matter. . . .

In relation to whether statements on a document are incorrect as to a material matter, a line on a tax return is a material matter if the information required to be reported on that line is capable of influencing or impeding the IRS in verifying or auditing the return. In other words, the test of materiality in this case is whether the information required to be reported on the tax return in question was necessary for the proper evaluation of the accuracy of the tax return. . . .

. . . [I]f you find beyond a reasonable doubt that gross receipts were understated in such a way as to influence or impede the IRS in verifying and auditing the return, then you should conclude that the return was not true and correct as to all material matters . . . .

Trial Transcript at 1135-36. Thus, in his instructions, the trial judge did nothing more than define "material" for the jury, an action which is entirely permissible under Gaudin. See 515 U.S. at 513. If the jury had found that the statements were false but would not "influence or impede" the IRS in its evaluation of the returns, the jury would have been free to acquit because the false statements were not material.

Because the trial judge left the question of materiality to the jury, he committed no error in his instruction on that issue.

II. SIMILAR ACTS

Also at issue is one of the trial judge's evidentiary rulings. Over Bok's objection, the government introduced evidence at trial of other similar acts by Bok, specifically his failure to file a state personal tax return for 1988 as well as the failure of Abacus and its predecessor corporation to file federal and state corporate returns for the years during and after those in the indictment. On appeal we must decide whether such evidence of similar acts was admissible to prove Bok's knowledge and intent, and whether the trial court properly admitted such evidence in the government's case in chief on the assumption that the defendant would argue that he lacked the requisite intent for conviction. District courts enjoy broad discretion in admitting evidence of similar acts; to find an abuse of that discretion "we must be persuaded that the trial judge ruled in an arbitrary and irrational fashion." United States v. Pipola, 83 F.3d 556, 566 (2d Cir.), cert. denied, -- U.S. --, 117 S. Ct. 183 (1996). We hold that the trial judge did not abuse his discretion here, and therefore the admission of this similar act evidence in the government's case in chief was permissible.

Rule 404(b) of the Federal Rules of Evidence governs the admissibility of evidence on "[o]ther crimes, wrongs, or acts," permitting its admission for purposes including "proof of . . . intent [or] knowledge" while prohibiting its admission "to prove the character of a person in order to show action in conformity therewith." Fed. R. Evid. 404(b); accord United States v. Germosen, 139 F.3d 120, 127 (2d Cir. 1998). "We take an 'inclusive approach' to 'other acts' evidence: it can be admitted 'for any purpose except to show criminal propensity,' unless the trial judge concludes that its probative value is substantially outweighed by its potential for unfair prejudice." Germosen, 139 F.3d at 127 (internal citation omitted) (quoting United States v. Stevens, 83 F.3d 60, 68 (2d Cir.), cert. denied, -- U.S. --, 117 S. Ct. 255 (1996)).

Both section 7201 and section 7206(1) require that the government prove that the defendant acted willfully. And the Supreme Court has made clear that in order to avoid snaring people in the tangled net of the tax code solely due to their incompetence, willfulness under the tax laws requires " 'a voluntary, intentional violation of a known legal duty.' " Cheek v. United States [91-1 USTC ¶50,012], 498 U.S. 192, 200-01 (1991) (quoting United States v. Bishop [73-1 USTC ¶9459], 412 U.S. 346, 360 (1973)); see also Klausner [96-1 USTC ¶50,173], 80 F.3d at 62-63. As we have often explained, a defendant's past taxpaying record is admissible to prove willfulness circumstantially. See, e.g., Klausner [96-1 USTC ¶50,173], 80 F.3d at 63 (holding that failure to file income tax returns and underestimating tax liability for purposes of estimated payments for the tax years at issue constituted evidence of willfulness); United States v. Ebner [86-1 USTC ¶9215], 782 F.2d 1120, 1126 n.7 (2d Cir. 1986) ("The jury may consider evidence of intent to evade taxes in one year as evidence of intent to evade payment in prior or subsequent years."); United States v. Magnus [66-2 USTC ¶9660], 365 F.2d 1007, 1011 (2d Cir. 1966) ("[P]rior taxpaying history, both federal and state, was probative of [taxpayer']s wilfulness in failing to pay substantial amounts of federal taxes in [the years at issue.]"), cert. denied, 386 U.S. 909 (1967). As a simple matter of logic, Bok's failure to file state or federal returns for either himself or his corporations until told to do so by the IRS is indicative of an intent to evade the tax system. This is particularly true in light of Bok's legal education, which included coursework in both corporate and personal taxation.

Although it is generally the favored practice for the trial court to require the government to wait before putting on its similar act evidence until the defendant has shown that he will contest the issue of intent, see United States v. Colon, 880 F.2d 650, 660 (2d Cir. 1989), "such evidence is admissible during the Government's case-in-chief if it is apparent that the defendant will dispute that issue," United States v. Inserra, F.3d 83, 90 (2d Cir. 1994). Accord United States v. Zackson, 12 F.3d 1178, 1183 (2d Cir. 1993), cert. denied, 512 U.S. 1224 (1994). In this case, before the admission of the evidence, Bok had proposed instructions that concerned intent, and in Bok's cross examination of his accountant, Bok had suggested that his reliance on the accountant effectively negated his willfulness. The trial court was therefore well within its discretion in allowing the introduction of evidence of similar acts when it did.

III. SENTENCING

Finally, we must consider whether the trial judge exceeded his authority by requiring Bok to pay ten percent of his gross monthly income--up to $45,000 in total--against his 1988 personal tax liability as a condition of his term of supervised release. ⁵ Bok argues that this condition is effectively an order of restitution and therefore not permitted except when provided by statute. The dispute centers around how to harmonize 18 U.S.C. sections 3563(b)(2), 3583(d), and 3663, which provide when a court may order restitution, with this Circuit's most extensive interpretation of any of those statutes in the tax context, United States v. Gottesman [97-2 USTC ¶50,636], 122 F.3d 150 (2d Cir. 1997). We hold that a natural reading of the statutes permits the trial court's order here, and that Gottesman does not require a different result.

It is well-established that a federal court may not order restitution except when authorized by statute. See United States v. Helmsley [91-2 USTC ¶50,455], 941 F.2d 71, 101 (2d Cir. 1991), cert. denied, 502 U.S. 1091 (1992). Section 3663(a) provides that a district court generally may order restitution as part of a sentence itself when the defendant is convicted of a specified collection of statutes; that collection, however, does not include either of the statutes Bok violated here. See 18 U.S.C. section 3663(a)(1)(A) (Supp. II 1996). In addition to section 3663, section 3583(d) governs orders of restitution within the context of supervised release, detailing the required and permissible conditions of restitution in that context. It provides that "[t]he court may order, as a further condition of supervised release, to the extent [certain factors not relevant here are met,] any condition set forth as a discretionary condition of probation in section 3563(b)(1) through (b)(10) . . . and any other condition it considers to be appropriate." 18 U.S.C. section 3583(d) (1994). Among the discretionary conditions of probation referred to in section 3563(b) is the requirement that the defendant "make restitution to a victim of the offense . . . (BUT NOT SUBJECT TO THE LIMITATION OF SECTION 3663(a) . . .)." 18 U.S.C. section 3563(b)(2) (Supp. II 1996) (emphasis added). Thus a plain reading of sections 3583(d) and 3563(b) permits a judge to award restitution as a condition of supervised release without regard to the limitations in section 3663(a).

The Sentencing Guidelines of 1990, which were in effect at the time Bok committed his crimes, provide additional support for the conclusion we find to be suggested by the statutes. Section 5E1.1(a) specifically authorized a trial court to order restitution as a condition of supervised release in all cases, without reference to the limitations in section 3663(a). See U.S. Sentencing Guidelines Manual section 5E1.1(a) (1990). Revisions to the Guidelines have been even clearer, requiring the trial judge to order restitution as a condition of supervised release or probation where restitution would be available under section 3663(a) but for the fact that the offense is not within the category of offenses listed in the statute. See id. section 5E.1.1(a)(2) (1997).

Our opinion in Gottesman does not require a different result. Gottesman rejected a court's order of restitution, payable upon the defendant's completion of supervised release, but did so primarily because the trial court ignored a provision in Gottesman's plea agreement, which provided that the defendant would pay his past taxes "on such terms and conditions as will be agreed upon between . . . Gottesman and the IRS." 122 F.3d at 150. The opinion focuses entirely on the requirements of section 3663(a)(3)--the provision concerning the treatment of restitution in the plea bargaining context--and the proper deference towards and interpretation of plea agreements. See id. at 151-53. ⁶

Outside the context of plea bargaining, which raises unique concerns about a defendant's expectations regarding sentencing, we see no reason to depart from the clear meaning of section 3583(d) and section 3563(b) and therefore hold that the trial judge permissibly ordered Bok to pay restitution as a condition of supervised release.

CONCLUSION

For the foregoing reasons, we affirm the judgment of conviction entered in the District Court, and we affirm the District Court's order that as a condition of his supervised release, Bok must pay ten percent of his gross monthly salary, up to $45,000, towards his personal tax liability.

¹ Our opinion in D'Agostino made clear that "the 'no earnings and profits, no income' rule would not necessarily apply in a case of UNLAWFUL diversion, such as embezzlement, theft, a violation of corporate law, or an attempt to defraud third-party creditors." [98-1 USTC ¶50,380], 145 F.3d at 73.

² In not finding intent to be determinative, this Circuit has also followed a different path from at least one of our sister Circuits. See United States v. Miller [76-2 USTC ¶9809], 545 F.2d 1204, 1215 (9th Cir. 1976) (permitting taxpayers to apply the return of capital theory only when there has been "some demonstration on the part of the taxpayer and/or the corporation that such distributions were intended to be such a return"), cert. denied, 430 U.S. 930 (1977).

³ Transferring the burden of production to the taxpayer is consistent with the burden allocation in DiZenzo, a civil case, under which the taxpayer faces burdens of both production and proof. See [65-2 USTC ¶9518], 348 F.2d at 126-27.

⁴ The accountant's letter accompanying the financial statements makes their limitations clear, explaining that the statements are "compilation[s] . . . limited to presenting in the form of financial statements information that is the representation of management. [The accounting firm] ha[s] not audit[ed] or reviewed the accompanying financial statements and, accordingly, do[es] not express an opinion or any other form of assurance on them."

⁵ Although Bok challenged the trial judge's authority to make ANY restitution order, he did not challenge the reasonableness of the actual order itself.

⁶ Gottesman also referred to a Fifth Circuit case, United States v. Stout, 32 F.3d 901 (5th Cir. 1994), which treated a trial court's order of restitution as a condition of supervised release in a tax evasion case. See Gottesman [97-2 USTC ¶50,636], 122 F.3d at 152. Like Gottesman, Stout involved a plea agreement, and the Fifth Circuit's reasoning depended on the trial court's interpretation of that agreement. See Stout, 32 F.3d at 904-05. That reasoning is therefore not applicable here.

 

 

[56-2 USTC ¶9719]Louis E. Wolcher, Appellant v. United States of America , Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 14,919, 233 F2d 748, 5/15/56, Affirming District Court, 55-1 USTC ¶9161

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

Tax evasion: Conviction: Motion for new trial: Newly discovered evidence.--Taxpayer was convicted on a charge of attempted tax evasion under 1939 Code Sec. 145(b). It is held that taxpayer's motion for a new trial on the ground of newly discovered evidence was properly denied. No extraordinary circumstances existed to require the Appeals Court to disturb the discretion of the trial Court in denying the motion, it appearing that taxpayer was twice convicted and the proposed new evidence would at most corroborate his story as to the disposition of the black market money admittedly received, leaving a large amount unaccounted for except by his testimony. A showing of failure to report a lesser amount than charged would support a conviction.

Leo R. Friedman, San Francisco , Calif. , Harold Leventhal, Washington , D. C., for appellant. Lloyd H. Burke, United States Attorney, Rob ert H. Schnacke, Assistant United States Attorney, San Francisco, Calif., for appellee.

Before HEALY, ORR and POPE, Circuit Judges.

ORR, Circuit Judge:

This case has been before us on two previous occasions. For a detailed statement of the facts we refer those who may be interested to 200 Fed. (2d) 492 [493] [52-2 USTC ¶9547] and 218 Fed. (2d) 505 [55-1 USTC ¶9161]. The case is now before us on appeal from a denial by the trial court of a motion for a new trial on the ground of newly discovered evidence.

We approach the consideration of this appeal with the thought in mind that, "a trial judge's order denying a motion for new trial on the ground of newly discovered evidence, should remain undisturbed 'except for most extraordinary circumstances,' United States v. Johnson, 327 U. S. 106, 111." ¹

[The Facts]

The defense relied on by appellant to the charge made in the indictment of failing to report profits alleged to have been made in the course of black market liquor operations was simply that he made no profits. While freely admitting that he collected large sums "under the table" in excess of the legitimate O. P. A. prices appellant testified that he paid out all over ceiling prices collected in order to obtain black market liquor. The over ceiling money collected by appellant, so he testified, was paid to one Gersh, who, appellant claimed, acted as Wolcher's agent in obtaining liquor.

Two affidavits were presented to the trial court in support of the motion for new trial. One Edwin Corriston deposed that he was in the business of operating "amusement machines;" that he was an old friend of appellant and said Gersh; that in the spring of 1943 he met Gersh in New York City and Gersh then and there told him that he, Gersh, was looking for a contract in the liquor business who could obtain black market liquor for appellant; that he, Corriston, suggested contacts to Gersh and on one occasion witnessed payment by Gersh to one such contact of $10,000 as part of a black market liquor purchase; that he, Corriston, did not reveal his knowledge of the transactions to appellant until after the second trial because of his reluctance to get involved in a criminal case.

Appellant contends that the new evidence outlined in the affidavit if introduced in a new trial would corroborate Wolcher's testimony in a vital aspect of the case, to wit, that Wolcher did remit to Gersh moneys to be used in the purchase of black market liquor.

[Opinion]

One important reason such alleged newly discovered evidence is insufficient to move the trial court to exercise its discretion in favor of granting a new trial is that such evidence would be inadmissible for the purpose intended, although appellant argues strenuously to the contrary. That the alleged testimony on its face is hearsay is conceded by appellant, but, he argues, it would nevertheless be admissible under an exception to the hearsay rule, in that it would be within the res gestae, in the sense of constituting verbal acts or verbal portions of acts. In our opinion appellant's argument stretches the exception beyond its accepted use. We think it is not an oversimplification to hold that, in applying the exception to the facts here, the line of demarcation is that if the purpose was to establish that Gersh made the statements attributed to him perhaps the exception would apply, but, as here, where the probative value lies in an attempt to establish that the statement made by Gersh was true, then the Corriston statement is hearsay.

Statements constituting verbal acts or verbal portions of acts are admissible only where the fact that the statement was made is the significant matter sought to be proved. Here, however, the attempt would be to introduce Corriston's testimony as to Gersh's statement to establish the truth of what Gersh said, which purpose is not within the res gestae exception. We find support for this conclusion in VI Wigmore on Evidence, third edition, §§ 1766-1792, see particularly §§ 1772-1776. ²

Another ground advanced by appellant as supporting the admissibility of the so called newly discovered evidence is that it comes within the exception relating to admissions of a co-conspirator in pursuance of a conspiracy. This exception to the hearsay rule, insofar as we are advised has never been allowed in favor of a defendant. It has been applied consistently in favor of the prosecution. But, argues appellant, if evidence is admissible for the prosecution why should it not be so for the defense?

The co-conspirator's assertion doctrine has developed as a reasonable extension of the rule excepting admissions of a party from the hearsay prohibitions, IV Wigmore, §1079. As was said by the Supreme Court in the case of Lutwak v. United States, 344 U. S. 604, 617, "Declarations of one conspirator may be used against the other conspirator not present on the theory that the declarant is the agent of the other and the admissions of one are admissible against both under a standard exception to the hearsay rule applicable to the statements of a party, Clune v. United States, 159 U. S. 590, 593."

The rationale of the exception is that such assertions constitute vicarious admissions chargeable against all conspirators, IV Wigmore, §1049. As in other instances of admissions by a party or his agent acting within the scope of his authority the statements are admissible against the declarant, but it is well established that the latter may not, when it suits his advantage, avail himself of them their hearsay character notwithstanding. ³

[Extent of Discovery]

Other so called newly discovered evidence is detailed in an affidavit of one Murray M. Chotiner who was defense counsel at appellant's trial. Mr. Chotiner's affidavit states that he held a conference with the United States Attorney on December 19, 1953, which date was subsequent to appellant's conviction, at which conference the United States Attorney stated in substance and effect as follows:

"We have evidence that the money Wolcher paid to Gersh was passed on to people very high in the syndicate, who had no relation or contract with Wolcher, with very little, if any, of the money being retained by Gersh."

and further,

"If all the money collected by Wolcher were for payment of the liquor, he is innocent of tax evasion."

By counter affidavit the United States Attorney informed the court that whereas he did not recall whether or not he had made the quoted statements, if he had made them it was in the course of a conversation and in a context from which it must have been clear to Mr. Chotiner that the term "evidence" was used to refer to "all information whether the result of speculation, rumor, suspicion or otherwise . . ." rather than in the strict legal meaning of the word. The counter affidavit further asserts, and it is not denied, that a Mr. Friedman, appellant's former counsel, had been advised by the Government of the same matters at an earlier date.

On this point suffice it to say that the alleged newly discovered evidence related in the Chotiner affidavit is no more material than the alleged Corriston statement, see discussion infra. Though it be shown that "the money paid to Gersh was passed on to people very high in the syndicate who had no relation or contact with Wolcher, with very little of the money being retained by Gersh," this in no way corroborates Wolcher's testimony on the crucial point of whether Wolcher's black market operations netted a profit. Furthermore, the unrefuted statement in the United States Attorney's affidavit that he had made the same disclosure to Mr. Friedman of counsel for appellant destroys the newly discovered claim as to said evidence.

[Exercise of Discretion]

Further, even should the matter contained in the affidavits be deemed admissible in the event of a new trial, no "extraordinary circumstances" appear as to require this court to disturb the discretion exercised by the trial judge in denying the motion. Appellant has been twice convicted. The last trial was before the trial judge who denied the instant motion.

On motion for a new trial on the grounds of newly discovered evidence it is incumbent upon the moving party to offer new matter which, if true, would probably produce an acquittal, Balestreri v. United States, 9th Cir. 224 Fed. (2d) 915, United States v. Johnson, 7th Cir. 1944, 142 Fed. (2d) 588 [44-1 USTC ¶9317]. In assessing the probative value of proferred new evidence the district judge, if he presided at the trial of the case, may exercise his discretion in the light of the understanding of the case he gained at the trial, Balestreri v. United States , supra.

The proposed new evidence would at most corroborate appellant's story as to the disposition of but a portion of the black market money admittedly received, leaving a large amount unaccounted for except by apellant's testimony. A showing of failure to report a lesser amount than charged would support a conviction. ⁴ Two juries failed to credit appellant's implausible story wherein he pictures himself as a "good fellow" daily running the rick of find and imprisonment in illegally receiving some $200,000 without any of it "sticking to his fingers," his assertion that he did so in order to obtain liquor for his own taverns, notwithstanding.

The exercise of a sound discretion would dictate that no different result would be reached at a new trial.

Judgment affirmed.

¹ The quotation is from the opinion of Mr. Justice Douglas, filed December 31, 1955, accompanying an order granting bail pending appeal in the instant case.

² The cases on which appellant relies for his contrary contention are distinguishable: Insurance Co. v. Mosley, 75 U. S. (8 Wall.) 397 involved the spontaneous exclamation rule; St. Clair v. United States, 154 U. S. 134, involved the use of a conspirator's admission against a co-conspirator; Mutual Life v. Hillmon, 145 U. S. 285 was based on the exception in favor of statements of present intent admissible to show a state of mind.

³ The only case cited to us or discovered by our research in which a contention was made that admissions of a co-conspirator uttered in the course of the conspiracy should be received in evidence on his behalf is the case of Nothaf v. State, 91 Tex. Cr. Reports 378, 239 S. W. 215. The contention was rejected. Appellant claims to find support for his contention in the law of agency wherein, he states, "It is clear that the declarations of his agent made in the course of a transaction are admissible in evidence as part of the res gestae whether offered for or against the principal. 32 C. J. S. Evidence, §410." The cited section does not support appellant's statement. See IV Wigmore, §1078 to the contrary.

⁴ Once the prosecution has established unreported receipts the defense has the burden of producing evidence to support its claim of deductions, United States v. Bender, 7th Cir. 1955, 218 Fed. (2d) 869 [55-1 USTC ¶9142], United States v. Link, 3rd Cir. 1952, 202 Fed. (2d) 592 [53-1 USTC ¶9230].

 

 

[55-1 USTC ¶9161]Louis E. Wolcher, Appellant v. United States of America , Appellee

(CA-9), In the United States Court of Appeals for the Ninth Circuit, No. 14,109, 218 F2d 505, December 28, 1954

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

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

Tax evasion: Trial errors: Evidence: Instructions.--Taxpayer was convicted on a charge of attempted income tax evasion. The Appeals Court ruled against taxpayer on all of the following assignments of error: (1) that the trial court erred in its instruction which had the effect of shifting the burden of proof to taxpayer and of authorizing the jury to disregard frailties in the government's proof, (2) that the court erred in refusing to give a requested instruction which required the jury to determine the actual amount which taxpayer paid for and received for whiskey sold, (3) that the court improperly ruled on self-serving or hearsay testimony, and (4) that the court erred in refusing to reopen the trial to enable taxpayer to call a witness after the parties had rested.

Leo R. Friedman, San Francisco , Calif. , for appellant. Lloyd H. Burke, United States Attorney, Rob ert H. Schnacke, Assistant United States Attorney, Melvin L. Sears, Regional Counsel, Rob ert G. Thurtle, Trial Attorney, Internal Revenue Service, San Francisco, Calif., for appellee.

Before HEALY, ORR, and POPE, Circuit Judges.

HEALY, Circuit Judge:

This matter is before us on appeal from a judgment of conviction on a charge of attempted income tax evasion.

[The Facts]

Appellant had earlier been convicted on the same charge, and we reversed for error committed in the course of the trial. Wolcher v. United States , 200 Fed. (2d) 493 [52-2 USTC ¶9547]. The background of the case is rather fully developed in that opinion, and we shall here touch but briefly on the evidence. During the tax year involved (the fiscal year ending June 30, 1944) appellant collected large sums from the sale at wholesale of whisky at overceiling prices. Wolcher himself was not a wholesaler of whisky, but operated or was interested in a number of taverns or bars. The sales in question were made through San Francisco liquor wholesalers. The purchasers gave checks to the wholesalers in the amount of the ceiling price and paid the overceiling price in cash directly or indirectly to Wolcher. Wolcher reported no income from the sales.

The government through various witnesses established the details of these transactions, and Wolcher himself admitted them while on the stand. He contended only that he made no profit from the operations for the reason that in acquiring whiskey he himself was obliged to make overceiling payments to one William Gersh in amounts which approximately offset the cash paid him by the buyers. At the former trial Gersh testified for the government that the large sum of money sent him by Wolcher was to be in payment for coin machines which Gersh thereafter attempted unsuccessfully to buy for Wolcher. He said the money was returned except for a minor amount spent in acquiring for Wolcher a number of phonographs. Gersh did not testify on the second trial.

[Instruction Affecting Burden of Proof]

The sufficiency of the evidence to sustain the conviction is not disputed. What is claimed is that certain prejudicial errors were committed on the trial. The assignment most heavily relied on is an alleged error in the giving of an instruction. During the course of a lengthy charge to the jury the court said: "So that in my opinion brings the issue of the case down to a very simple (question), and that is this--that since the Government has proved and the defendant has admitted receiving the cash over ceiling prices, the issue is whether you do or do not believe the testimony and the story told by the defendant in the case. If you believe his story, then you should return a verdict of not guilty. If you are convinced beyond a reasonable doubt that his story should not be believed, then you are justified in returning a verdict of guilty."

It is argued that the instruction shifted the burden of proof from the government to appellant; that it took from the jury the question of whether the government's evidence established the charge beyond a reasonable doubt; that in effect it told the jury to disregard all other evidence in the case save the testimony and story of the defendant and to decide his guilt or innocence solely upon his testimony; and that it told the jury to discount or ignore weaknesses in the government's case if the jurors found appellant's testimony to be unworthy of belief.

Naturally the propriety of the instruction is to be considered in context. In the course of its charge the court gave the jury the following instruction: "The presumption is that the defendant is innocent and that presumption continues until such time as the Government has proved the guilt of the defendant beyond a reasonable doubt. The Government has the burden of proving the guilt of the defendant. That burden never shifts at any stage of the proceeding to the defendant. The defendant has no obligation of any kind to go forward and prove that he is innocent."

In immediate connection with the passage under attack, and as preliminary to it, the court gave the instructions shown on the margin. ¹

We think in the circumstances and in light of the accompanying instructions the jury could not rationally have understood the particular passage as shifting the burden of proof to the defendant, or as authorizing them to disregard frailties in the government's proof. As already said, the government had shown and the appellant had admitted that in the course of his liquor transactions during the tax year under inquiry he had received large sums in cash which he did not report as income. Obviously in such condition of the record he had some explaining to do; and, as the court indicated, he undertook specifically to show that the cash did not represent a profit because he had to pay out equivalent sums as overceiling acquisition costs.

[Supporting Authorities]

The government had clearly established a prima facie case. Several of the circuits have held in prosecutions for income tax evasion that when a prima facie case has been made out the burden of going forward with the evidence is on the accused. United States v. Stayback, 212 Fed. (2d) 313, 316-317 [54-1 USTC ¶9345]; United States v. Smith, 206 Fed. (2d) 905, 910 [53-2 USTC ¶9538]; United States v. Link, 202 Fed. (2d) 592, 593-594 [53-1 USTC +9230]; United States v. Hornstein, 176 Fed. (2d) 217, 220 [49-2 USTC ¶9326]. The holdings appear well grounded. In this instance, however, the court instructed the jury that no duty of going forward rested on the accused, and we think it unnecessary to consider whether the decisions mentioned should be followed here. If the jury were convinced beyond a reasonable doubt that there was no truth in appellant's defense, then, certainly, as the court advised them, they were justified in returning a verdict of guilty. In sum, the instruction did not impose on appellant the burden of going forward. On the contrary, it left upon the government the onus of disproving his affirmative defense beyond a reasonable doubt.

The claim that the jury were told to disregard all evidence other than the testimony of the defendant himself presents a different question. It is pointed out that other witnesses had given testimony of a nature corroborative of the defendant--principally in respect of the great difficulty of obtaining whisky at the time other than on the black market; and it is said that in effect the jury were instructed to disregard these corroborative circumstances.

We think the point is without force. The problem confronting the jury was not whether whisky was difficult to obtain or whether appellant was able to obtain it. Admittedly he did obtain the whisky in question, albeit at what he said was a heavy overceiling price. The instruction could hardly be understood by the jury as telling them to disregard these, or other circumstances in evidence, which might tend to corroborate appellant's account of his transactions or the asserted necessity of his paying overceiling prices. The choice of the term "his story" may not have been a happy one, but we think in the framework of this case the term would naturally be understood as having reference to appellant's defense as a whole, including whatever corroboration it might have in the testimony of others or in the circumstances in evidence.

[Instruction on "Amounts"]

The second specification of error is the refusal of the court to give a requested instruction reading as follows: "In determining whether the defendant made any profit on his purchases and sales of whiskey, you must determine, from all the evidence in the case, the actual amount the defendant paid for the whiskey and the actual amount the defendant received for the whiskey; in determining what amount the defendant paid for any whiskey involved in this case, you must add to the actual cost of said whiskey, any amounts of money, if any, that Wolcher paid to any person as a bonus or commission or fee for procuring such whiskey for him."

The proposed instruction was on its face misleading and there was no error in refusing to give it. The jury were not required to determine the "actual amount" the defendant paid for the whisky or the "actual amount" received for it. It was enough if he were found to have received net income which he failed to report. The instructions actually given sufficiently covered the general subject.

[Hearsay Testimony]

Another error claimed is the ruling of the court on a question asked appellant regarding a conversation he had had with William Gersh, when, as he said, he approached the latter in the spring of 1943 for the purpose of acquiring the whisky. The government objected to the interrogation as calling for self-serving or hearsay testimony, and the court sustained the objection.

A sufficient answer to the assignment is that the substance of the conversation was actually related by Wolcher, and is in the record. He testified that at that time he had a conversation with Gersh with respect to obtaining whisky, and that Gersh told him he (Gersh) had friends in the liquor business who could get it for him; that in the conversation Gersh mentioned the necessity of paying an overceiling price. Wolcher testified, of course, to the details of his asserted transactions with Gersh, the amounts of money he had sent the latter, the quantity of liquor received from him, and the amount of the overceiling price he had to pay him. Those, rather than details of conversations preliminary to them, were the essential matters Wolcher needed to get before the jury. Appellant made no offer of proof with respect to further items of the alleged conversation which might have been thought material. We think the ruling of the court in this respect was not prejudicial, and certainly it was not reversible error.

[Reopening of Trial]

Finally it is claimed that the court erred in refusing to reopen the trial after the parties had rested, in order that appellant might call Gersh as a witness. Appellant was familiar with Gersh's testimony given at the former trial. He had had opportunity to subpena Gersh and knew where he lived. He claims that he was not aware of the presence of the witness in San Francisco until shortly before the time of making the request for a reopening, and he suggests that he had a right to rely upon the government to call Gersh. We think otherwise. Under the circumstances the court's refusal to reopen was well within its discretionary authority. Cf. Horowitz v. United States , 5 Cir., 12 Fed. (2d) 590; Brink v. United States , 6 Cir., 60 Fed. (2d) 231.

Affirmed.

¹ "The indictment in this case charges the defendant with wilfully and knowingly attempting to defeat and evade a large part of his income tax for the fiscal year ending June, 1944. The amount by which his net income is alleged to have exceeded the amount he reported on his return was approximately $45,000, as alleged in the indictment. The indictment was filed pursuant to a federal statute which makes it a criminal offense for any person to wilfully attempt in any manner to evade or defeat any tax imposed by the revenue laws of the United States . Now the defendant plead not guilty to that charge, and so that's the issue. Did he wilfully and intentionally attempt to evade the payment of income taxes due the United States for this fiscal year ending in June, 1944?

"Now the Government has the burden of proving that the defendant had taxable net income which he did not report, and that his act in so doing, failing to report it, was wilfull and intentional.

"Now what do we mean when we speak about net income? Well, there is of course a very simple definition of it. Most of the men on the jury, I think, have heard it stated--maybe the ladies not so often, unless you are following some occupation--that it means the gross income, the total income that a man has, less the deductions or expenses or expenditures that the law says he can take from it; than what he has got left is his net income. Now that's what the defendant is charged in this case with nonpayment of, is the net income. Now the taxable income of an individual includes anything by way of a gain or profit or income that he might get from salaries or wages, business, compensation for personal services, from trade or business, or sales or dealings in property; and it also includes any profit or income, net in character, that a man would obtain from any illegal transaction as well as a legal transaction. He has to account for all of his net income to the United States .

* * *

"Now it is not necessary for the Government to prove the exact amount of the evasion, if any, nor the exact amount charged in the indictment. It would be sufficient if the Government shows that a substantial amount of money, consisting of net income, was wilfully evaded by the defendant in the case.

"Now I think it might be well if I very briefly stated to you what the Court believes is the issue of the case as it appears from the contentions respectively of the parties--the Government on the one hand and the defendant on the other hand. The Government contends, as appears from the argument made by Government counsel, that the cash monies that the Government proved the defendant received from the sale of liquor and which the defendant admitted that he received, were income and were net income, and that the whisky was purchased for the purpose of making a profit on it in its resale and not for the benefit of the defendant's own taverns, or his friends'. The Government contends that there were no records of the transaction kept by the defendant, and that that was so that he could keep the proceeds without paying any tax on them. The Government contends, as stated by the Government lawyer, that the defendant's account of sending large amounts in cash through the mail and otherwise to someone in the East is a story that is fabricated and should not be believed by you. That, I think very briefly, is the Government's contention.

"The defendant, on the other hand, admits that the black market transactions were had by the defendant, but contends that he made no profit in connection with these transactions and that therefore he had no net income and that therefore he is not chargeable with any evasion of income taxes; that he made no profit in the matter, because he had to pay out certain monies in connection with the transactions and that therefore the net result was that he had no profit in the matter, and that therefore he is not chargeable with a violation of federal statute.

"So that in my opinion brings the issue of the case down to a very simple (question), and that is this--that since the Government has proved and the defendant has admitted receiving the cash over ceiling prices, the issue is whether you do or do not believe the testimony and the story told by the defendant in the case. If you believe his story, then you should return a verdict of not guilty. If you are convinced beyond a reasonable doubt that his story should not be believed, then you are justified in returning a verdict of guilty."

 

 

[56-1 USTC ¶9111]Paul Dillon v. United States

In the Supreme Court of the United States, No. 37.--October Term, 1955, 350 US 906, 76 SCt 191, December 5, 1955

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

[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201; 1939 Code Sec. 145(a)--similar to 1954 Code Sec. 7203; 1939 Code Sec. 3616(a)--changed in 1954 Code Sec. 7207]

Tax evasion: Trial: Admission of evidence: Lesser offense: Instructions.--Taxpayer was convicted on charges of tax evasion under 1939 Code Sec. 145(b) for failure to report substantial amounts of income. By a per curiam opinion, the Supreme Court dismissed the writ of certiorari and remanded the case to the Eighth Circuit which had ruled against taxpayer on all of the following assignments of error: (1) that the trial court erred in instructing the jury that questions of taxpayer's counsel should be disregarded as evidence when based on the assumption that all the money represented by checks for legal fees did not belong to taxpayer, (2) that there was no foundation laid for the introduction of checks in evidence so as to shift the burden of proof to taxpayer to show that they did not represent income, (3) that the Government agent was not entitled to testify as an expert witness on the identity of certain checks, (4) that the court improperly refused to instruct the jury that it might find taxpayer guilty of the lesser offense of a misdemeanor under either 1939 Code Sec. 145(a) or 3616(a), (5) that the trial court refused to declare a mistrial because of newspaper publicity, and (6) that the court erred in refusing to direct a verdict for taxpayer at the close of all the evidence.

Morris A. Shenker, Sidney M. Glazer, 408 Olive Street , St. Louis 2, Mo. , for petitioner. Simon E. Sobeloff, Solicitor General, H. Brian Holland, Assistant Attorney General, Ellis N. Slack, John H. Mitchell, Joseph M. Howard, and George Willi, Special Assistants to the Attorney General, for respondent.

PER CURIAM:

The writ of certiorari is dismissed and the case is remanded to the Court of Appeals for such further action as law and justice may require.

 

 

 

 

[55-1 USTC ¶9131]Paul Dillon, Appellant v. United States of America , Appellee

(CA-8), In the United States Court of Appeals for the Eighth Circuit, No. 15,048, 218 F2d 97, January 5, 1955

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

[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201; 1939 Code Sec. 3616(a)--changed in 1954 Code Sec. 7207]

Tax evasion: Trial: Admission of evidence: Instructions.--Taxpayer was convicted on charges of tax evasion under 1939 Code Sec. 145(b) for failure to report substantial amounts of income. The Appeals Court ruled against taxpayer on all of the following assignments of error: (1) that the trial court erred in instructing the jury that questions of taxpayer's counsel should be disregarded as evidence when based on the assumption that all the money represented by checks for legal fees did not belong to taxpayer, (2) that there was no foundation laid for the introduction of checks in evidence so as to shift the burden of proof to taxpayer to show that they did not represent income, (3) that the Government agent was not entitled to testify as an expert witness on the identity of certain checks, (4) that the court improperly refused to instruct the jury that it might find taxpayer guilty of the lesser offense of a misdemeanor under either of 1939 Code Secs. 145(a) or 3616(a), (5) that the trial court refused to declare a mistrial because of newspaper publicity, and (6) that the court erred in refusing to direct a verdict for taxpayer at the close of all the evidence.

Morris A. Shenker and Sidney M. Glazer for appellant. Charles H. Rehm, Assistant United States Attorney (Harry Richards, United States Attorney, and Rob ert C. Tucker, Assistant United States Attorney, were with him on the brief), for appellee.

Before GARDNER, Chief Judge, and COLLET ANDVAN OOSTERHOUT, Circuit Judges.

COLLET, Circuit Judge:

The defendant was convicted by a jury of attempting to defeat and evade the payment of income taxes for the years 1950 and 1951. The Government presented evidence showing that defendant's receipts for 1950 were substantially in excess of the amount reported for that year, and that his receipts for 1951 were approximately $5,700.00 more than reported. The defendant did not testify. Counsel sought to convince the jury that the Government's evidence was consistent with the hypothesis that all of the money shown to have been received by defendant was not income to him. He was an attorney. The argument was made that probably the portion of the receipts which was not reported as income went to associate counsel as fees, or did not belong to defendant, or that at least the Government had not shown the contrary. The court, in its charge to the jury, referring to that argument, instructed the jury that the questions of counsel which may have assumed that possibility were not evidence and that as the court understood the testimony, there was no evidence that the defendant had shared any fees with anyone. That part of the charge is assigned as error here.

[Comment on Evidence]

As to this first assignment, it is argued that the court's charge was "one-sided" and constituted "advocacy against the defendant." The charge included the usual cautionary admonition that anything contained in it which might be construed by the jury as a comment on the evidence which differed from the jury's understanding of the evidence should be disregarded--that it was the jury's sole province to find the facts. The charge was not argumentative and did not go beyond pointing out the factual situation portrayed by the evidence. The situation here was very different from that in the cases of Boatright v. United States, 105 Fed. (2d) 737, andBilleci v. United States , 184 Fed. (2d) 394, cited by defendant.

[What Part of Receipts Constituted Income]

Error is assigned on account of the admission as evidence of seven checks payable and delivered to defendant during the years covered by the indictment. Defendant contends that there was no foundation laid for the introduction of those checks in evidence, because there was no testimony to the effect that the checks represented taxable income to the defendant. Two of them were marked "legal services", two were marked "fees", and three were not marked. The gravamen of defendant's contention is that before evidence of this nature should be admitted it should be first shown that the money was received under such circumstances as to "strongly" indicate it was actually taxable income, and that the burden of proof or the burden of going forward with the evidence to show that it was not income should not be shifted to the defendant, absent such initial showing. If the word "fairly" be substituted for "strongly", the principle is correct. If the foundation or initial evidence does fairly indicate that the receipts were income, the Government is not required initially to adduce positive evidence to support a negative hypothesis that it was not money received for someone else or that it was not received for some purpose which would prevent it from being income to the person to whom it was paid. The rule is not a new one. The explanation of the reason supporting it and the limitations of its application were stated by Mr. Justice Cardozo in Morrison v. California, 291 U. S. 82, 88, and reiterated by Chief Justice Vinson in United States v. Fleischman, 339 U. S. 349, 360. For a transfer of the burden--"experience must teach that the evidence held to be inculpatory has at least a sinister significance." 291 U. S. 82, 90. It may be said with considerable force and logic, as defendant now says, "that in view of the nature of the legal profession the mere receipt of money does not represent income," and that the "sinister significance" that it was income does not arise in an income tax prosecution from its receipt alone. But there is another exception so closely related that for practical purposes, at least under circumstances such as these, it is a part and parcel of the exception stated. The latter is--"if this [the sinister significance] be lacking, there must be in any event a manifest disparity in convenience of proof and opportunity of knowledge. * * * The decisive considerations are too variable, too much distinctions of degree, too dependent in last analysis upon a common sense estimate of fairness or of facilities of proof, to be crowded into a formula. One can do no more than adumbrate them; sharper definition must await the specific case as it arises." 291 U. S. 82, 91.

In the present case the Internal Revenue agent assigned to investigate this case prior to the indictment appears to have made inquiry of defendant seeking to determine if all of the amount of the checks in question did represent income or whether part was received for some other purpose, and that defendant declined to give any information other than that all of it was not income, which latter the agent was unable to substantiate. Under these circumstances the exception to the general rule that the burden of making an explanation will not ordinarily be shifted to the defendant in a criminal case applies, and the problem of the trial court became one of evaluating the circumstances and determining whether in fairness to both parties the evidence should be admitted upon the initial showing and leave to the defendant the opportunity to dispell the inference which could reasonably follow, absent explanation.

[When Burden of Proof Shifts]

Great care should be observed in the exercise of judicial discretion to the end that no shifting of the burden placed upon the prosecution to prove guilt result in requiring to any degree or extent that a defendant prove his innocence. The burden of proof must remain on the prosecution to establish guilt. The admin istration of justice is not a game of chess or of hide-and-seek. It is a search for truth and the application of the law to the true facts in order that substantial justice be done under the law. The prosecution must not be permitted to introduce evidence which is not so indicative of guilt as to fairly point to guilt and cast the burden on the defendant to disprove an unfair implication or inference. One charged with a crime may testify in his own behalf or not, as he chooses. In making the choice he must weigh the considerations in favor of a decision not to testify against the possibility or probability that evidence fairly adduced against him will be accepted at its face value with damaging results. If he decides not to explain, when absent an explanation he will appear to be guilty, he shall not be criticized for his choice. But if the evidence is of such a nature that it fairly indicates guilt, a defendant may not be heard to complain that an explanation reposing, comparatively speaking, particularly and peculiarly in him, has not been given by another. We have condemned the use of evidence which in fairness should not under the circumstances have been admitted and the burden cast upon the defendant to explain or suffer the possible consequences. But that is not the situation here. The checks were made payable to the defendant. They were either marked "fees" or "legal services" or were given to him under circumstances indicative that they were for legal services. They were all endorsed by defendant and cashed. The discretion involved in determining that this evidence was fairly indicative of income received by defendant, and permitting its introduction in evidence, was not abused in this instance.

A case involving a factual situation requiring a converse ruling will illustrate the limitation of the exception. In Kirsch v. United States , 174 Fed. (2d) 595 [49-1 USTC ¶9274], the defendant was charged with having received income in an amount equal to his bank deposits. The Government's witness was permitted to assume that all of the bank deposits represented income, when the Government's investigation had disclosed that a large part of those deposits represented pay checks cashed for customers out of funds theretofore drawn from the bank for that purpose. Under those circumstances it was held unfair to admit the evidence of total deposits, characterized as income, and permit the inference from the proof of the amount of the deposits that all of those deposits constituted income, thereby casting the burden on defendant to disprove that inference.

[Expert Witness]

It is asserted that the court committed reversible error in permitting the revenue agent to testify that Exhibits 4 and 10, two of the checks heretofore referred to, were not recorded in defendant's records and that Exhibits 5, 6, 8, and 9, four of those checks, were understated in those records. The complaint that in made is that the witness was testifying as an expert, that expert testimony is only admissible when the facts are so complicated that expert testimony is needed to assist the jury, that the defendant's records and the facts to be gleaned therefrom were not complicated and the jury did not need expert guidance. The argument is ingenious but lacks substance and merit. The records were in evidence before the jury. They were not voluminous. The cash receipt book, which the witness was familiar with, was handed to him and he was asked whether Exhibits 4 and 10 were recorded therein. Over defendant's objection that the question called for "a conclusion and opinion and comparison of documents," and that it had not been shown that the checks represented income, the witness answered that Exhibits 4 and 10 were not recorded. When asked about Exhibits 5, 6, 8, and 9, he testified that Exhibits 5 and 6, which were in evidence, totaled $4,500.00 and were recorded in the record as $1,500.00; that Exhibits 8 and 9, also in evidence, totaled $3,500.00 and were entered in the books as $1,500.00. These records were not very legible or orderly. The witness had made a calculation of the total receipts of the defendant. If the records were so abstruse as not to be readily understandable by the jury, an explanation was appropriate. But if it be assumed that the records were not of such a nature as to justify expert testimony to decipher or simplify them, then the checks and the records clearly showed for themselves what they alluded to and there was no possible prejudice in the witness so stating. And if, as defendant contends, the latter be the situation, the witness' testimony was admissible for the purpose of explaining how his total figure of defendant's income was arrived at from these books. There was no prejudicial error in permitting this testimony.

[Lesser Offense Not Included]

Defendant was charged with a felony under §145(b), 26 U. S. C. A. §145(b). He requested an instruction that the jury might find him guilty of a lesser offense--specifically, a misdemeanor under §145(a), 26 U. S. C. A. §145(a), or §3616(a), 26 U. S. C. A. §3616(a). The request was denied. He contends that the lesser offenses defined in §145(a) and §3616(a) are included in the greater defined by §145(b) and that under Rule 31(c) of the Federal Rules of Criminal Procedure, ¹ he was entitled to the instruction. The pertinent portions of §145(a), §145(b), and §3616(a) are quoted in the footnote. ²

As stated in Spies v. United States, 317 U. S. 492, 493 [43-1 USTC ¶9243], "Section 145(a) makes, among other things, willful failure to pay a tax or make a return * * * a misdemeanor. Section 145(b) makes a willful attempt in any manner to evade or defeat any tax * * * a felony." The indictment did not charge, nor did the evidence show, that defendant merely failed to pay a tax or failed to make a return. On the contrary, the evidence showed that a return was filed and a tax was paid. No evidence was offered that defendant failed to file a return or to show the willful failure to pay the tax when due, except insofar as willfulness was involved in the charged willful and felonious attempt to evade the payment of taxes owed. Hence the universal rule that it is not error to fail to instruct on an offense not presented by the evidence applies. There consequently was no error in failing to instruct that defendant might have been convicted of either of the misdemeanors defined by §145(a), of willful failure to pay a tax when due or willful failure to file a return.

[Purpose of Sec. 3616(a)]

As the quoted portion of §3616(a) shows, that section makes a misdemeanor the filing of a false or fraudulent list or return with intent to defeat or evade the assessment of taxes. Was this misdemeanor included in the felony defined by §145(b)? Defendant cites Kirsch v. United States, 174 Fed. (2d) 595 [49-1 USTC ¶9274], as authority that it was.

The question of whether evidence which the defendantclaimed only showed a violation of §145(a), coupled with evidence of a violation of §3616(a) of filing a false or fraudulent list or return, would sustain a conviction of feloniously attempting to evade or defeat the payment of a tax under §145 (b), was presented in Kirsch v. United States . Upon the record in that case the question was found to be abstract because, as was stated in the opinion, "If there was need for proof of affirmative acts other than those defined as misdemeanors in Sections 3616(a) and 145(a) in furtherance of an attempt to evade taxes, it is contained in the record." The present question not being presented by the record in the Kirsch case, it was not decided. Now we are confronted with the problem of determining whether §3616(a) really applies to income tax returns. If it does not apply to income tax violations, the offense it defines was not included in the felony charge based on §145(b) and Rule 31(c) did not authorize a conviction under the felony charge of the lesser offense defined by §3616(a). And, if that be true, an instruction authorizing a conviction for the misdemeanor, not embraced in the felony charge, was not appropriate. The question has not been passed upon directly. We take note of cases cited by defendant.

In Cave v. United States , 159 Fed. (2d) 464[47-1 USTC ¶9171], this court sustained a conviction under §145(b) upon proof that the defendant willfully filed a false and fraudulent return. No exceptions were taken to the instructions at the time of trial. On appeal, complaint was made of the instructions on the ground that they were so indefinite, inconsistent and prejudicial as to require reversal, although no exceptions were taken. The precise point now presented, that the defendant was entitled to an instruction on the misdemeanor defined in §3616(a) in the event the jury found a false return had been filed but failed to find that it was willfully false, was not raised. InMyres v. United States , 174 Fed. (2d) 329 [49-1 USTC ¶9275], the situation was the same.

In Taylor v. United States , 179 Fed. (2d) 640[50-1 USTC ¶9151], on an appeal from a denial of habeas corpus, one convicted under §145(b) contended that §145(b) had been repealed by implication by §3616(a). In that case note was not taken of the fact that §145(b) involves willfulness while §3616 does not. The court rested its denial of the contention on the fact that §3616(a) was originally enacted long prior to the enactment of §145(b) and could not have repealed by implication §145(b). Our attention has not been directed to any other reported cases in which there was any contention that §3616(a) applied to income tax violations.

The language of §3616(a), which appears under the heading "Penalties", differs from that customarily applied to income tax returns. Its juxtaposition to statutes relating to the duty of collectors to canvass their districts for taxable persons and objects, 26 U. S. C. A. §3600; the entry of premises for examination of taxable objects during the day or night (§3601); search warrants (§3602); the making of a"list or return" by a taxpayer of articles, objects, goods, wares and merchandise made or sold, charged with a tax, the rates of the tax and aggregate amount thereof, and if such list is not made by the taxpayer, the list should be made by the collector (§3611); the provision for penalties for failure to file "returns or lists" (§3612) without reference to similar penalties found in connection with that part of the code relating specifically to income taxes; rewards to informers with respect to illegally produced petroleum (§3617); all would appear to indicate a relationship of §3616 to subjects other than income taxes. The fact, as pointed out in the Taylor case, 179 Fed. (2d) 640 [50-1 USTC ¶9151], that §3616 was enacted long prior to §145 and does provide a penalty for submitting a false return (or list) without willfulness, and none of the later prohibitions of §145 do so, would be some indication that the existence and application of the older §3616 to all tax matters, including income tax returns, was recognized by Congress when §145 was enacted, and that the reason for not making provision in §145 for a penalty for nonwillful filing of a false return was to avoid duplicating §3616(a), if Congress had not indicated such was not the intention when it revised the entire tax code by the Internal Revenue Code of 1954.

[Treatment in 1954 Code]

When the Internal Revenue Code was revised in 1954, ³ §3616 (including §3616(a)) was dropped from the code. The only reference to it in the revision is found in Table 1 where §3616 is shown to be incorporated in new §7207 of Chapter 75 of the 1954 Revised Code. §7207 is entirely different from §3616. It reads:

"§7207. Fraudulent Returns, Statements, or Other Documents. Any person who wilfully delivers or discloses to the Secretary or his delegate any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $1,000, or imprisoned not more than 1 year, or both." Internal Revenue Code of 1954, 68A Stat. 853.

§7207 appears in the statutory context with other offenses relating to income tax offenses. It is sufficiently broad to apply to both income tax derelictions as well as to those subjects other than income taxes with which §3616 was in juxtaposition. The only substantive portion of §3616 which was retained and carried forward in the 1954 revision was placed with income tax derelictions. And then the element of willfulness, absent in §3616 but previously consistently present in offenses relating to income tax violations, was inserted.

We are convinced, both from the language of §3616 and the statutory context where it was formerly placed, that it was never intended to apply to income tax violations. If it had been intended to apply to income tax returns, the nonwillful making of an incorrect statement in the making of an income tax return, in the honest belief of its legal justification but which would operate to defeat the assessment of income taxes, would have constituted a crime. In Spies v. United States, 317 U. S. 492, 497-498 [43-1 USTC ¶9243], the Supreme Court said that without the clearest manifestation of Congressional intent it would not be assumed that the mere knowing and intentional default in the payment of income tax, where there had been no willful failure to disclose the liability, was intended by Congress to constitute a criminal offense of any degree. The Supreme Court said that the willfulness required to constitute the offense of willful failure to pay income taxes when due, defined by §145(a), would be expected to include some element of evil motive and want of justification in view of all the financial circumstances of the taxpayer. See also United States v. Kahriger, 210 Fed. (2d) 565 [54-1 USTC ¶49,023]. The same reasoning applies here. We conclude that Congress did not intend by §3616(a) that a nonwillful inaccurate and ipso facto false statement in an income tax return, frequently very complicated, should constitute a crime. It only made such a false statement a misdemeanor when, by §7207, it required that the statement be willfully made and known to be fraudulent or false as to a material matter. §3616(a) not being applicable, there was no error in failing to instruction concerning it.

[Newspaper Publicity]

There was no error in refusing to declare a mistrial because of newspaper publicity. Such matters are within the sound discretion of the trial court and, absent an abuse of discretion, such decisions are not reviewable. The court interrogated the jury after defendant's counsel called attention to the newspaper articles. Only one juror had read either article. He positively said it "did not make sense to him" and would not influence him in the least. There was no abuse of discretion.

[Motion for Directed Verdict]

The sixth assignment of error is that the court erred in overruling defendant's motion for a directed verdict at the close of all the evidence. The argument is again made that the Government failed to prove an understatement of income in the return filed and no act of fraud. As heretofore stated, the evidence fairly justified a finding by the jury that the money received by defendant was income to him. That evidence, coupled with evidence that defendant attempted to conceal a portion of it by not entering it on his books and not reporting a substantial amount in his returns, was sufficient to show the willful filing of a false return. Proof of the willful filing of a false return was sufficient to sustain a conviction under §145(b) of a willful attempt to defeat or evade income taxes. ⁴ Cave v. United States , 159 Fed. (2d) 464 [47-1USTC ¶9171], Myres v. United States, 174 Fed. (2d) 329 [49-1 USTC ¶9275].

The last assignment is that the court erred in overruling defendant's objection to the revenue agent's testimony in which the agent assumed, for the purpose of calculating the tax due, that the checks heretofore discussed constituted income. The situation here is said to be similar to that in Kirsch v. United States, 174 Fed. (2d) 595 [49-1 USTC ¶9274]. That is not correct, for reasons which have been made clear.

The judgment is affirmed.

¹ "The defendant may be found guilty of an offense necessarily included in the offense charged or of an attempt to commit either the offense charged or an offense necessarily included therein if the attempt is an offense."

Fed. Rules Cr. Proc. rule 31(c), 18 U. S. C. A.

² §145(a). "Failure to file returns, submit information, or pay tax. Any person required under this chapter to pay any estimated tax or tax, or required by law or regulations made under authority thereof to make a return or declaration, keep any records, or supply any information, for the purposes of the computation, assessment, or collection of any estimated tax or tax imposed by this chapter, who willfully fails to pay such estimated tax or tax, make such return or declaration, keep such records, or supply such information, at the time or times required by law or regulations, shall, * * * be guilty of a misdemeanor * * *."

(b) "Failure to collect and pay over tax, or attempt to defeat or evade tax. Any person * * * who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, * * * be guilty of a felony * * *."

26 U. S. C. A. §145(a) and (b).

§3616. Penalties.

"Whenever any person--

"(a) False returns. Delivers or discloses to the collector or deputy any false or fraudulent list, return, account, or statement, with intent to defeat or evade the valuation, enumeration, or assessment intended to be made * * * he shall be fined not exceeding $1,000, or be imprisoned not exceeding one year, or both, at the discretion of the court, with costs of prosecution."

26 U. S. C. A. §3616(a).

³ The date of its approval was August 16, 1954. By §7851(a)(6)(C), Chapter 75, relating to crimes, became effective as to offenses committed after the date of enactment of the 1954 Code.

⁴ We need not and do not consider the effect of the enactment of §7207 of the 1954 Code with respect to whether proof alone of the willful delivery or disclosure of a false or fraudulent statement or return to the Secretary of the Treasury or his delegate will hereafter, in view of §7207 making such act a misdemeanor, be sufficient to support a conviction for the felony defined by §145(b), now §7201 et seq. of the 1954 Code.

 

 

[55-1 USTC ¶9142] United States of America , Plaintiff-Appellee v. Abe Bender, Defendant-Appellant

(CA-7), In the United States Court of Appeals for the Seventh Circuit, No. 11168. October Term, 1954, January Session, 1955, 218 F2d 869, January 12, 1955

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.

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

Criminal prosecution: Defendant's burden of going forward with evidence.--Defendant was convicted of income tax evasion. The Government's evidence indicated that defendant during 1946 had gross receipts far in excess of the gross income reported in his return. At the trial defendant cross-examined the Government's witnesses and attacked the Government's evidence but introduced no evidence of his own. On appeal defendant contended that the Government must establish not only undisclosed income but also a lack of any deductions or exclusions. The Seventh Circuit held that once the Government had established receipts in excess of those reported in defendant's return, defendant had the burden of going forward with evidence of business costs and expenses which would lessen his tax liability, and that, since defendant introduced no evidence, the jury was justified in finding that there was tax for 1946 which defendant had not paid, and that there was no error in admitting a work sheet prepared by defendant's accountant.

Rob ert Tieken, United States Attorney, Chicago , Ill. , for plaintiff-appellee. Maurice J. Walsh, 105 West Adams, Chicago , Ill. , for defendant-appellant.

Before DUFFY, Chief Judge, and LINDLEY ANDSWAIM, Circuit Judges.

SWAIM, Circuit Judge:

The defendant, Abe Bender, was convicted, under 26 U. S. C. A. §145(b), of wilfully and knowingly attempting to evade payment of income tax by filing a false return. This appeal is from that conviction.

The Government's evidence consisted of cancelled checks payable to the defendant, receipted statements of account, and testimony, all of which indicated that the defendant during the year 1946 had gross receipts from the sale of syrup far in excess of the gross income from that source which he reported in his income tax return. The defendant limited his defense to cross-examination of the Government's witnesses and to attacks on the Government's evidence. At the close of the Government's case defendant's counsel announced that the defendant would introduce no evidence.

The defendant first contends that the court erred in denying his motion for acquittal at the close of the Government's case. The ground for the motion was the contention that the Government had not proved beyond a reasonable doubt that there was tax due, which required establishing not only undisclosed income but also a lack of any compensating deductions or exclusions. The defendant seems to contend that the Government here must prove all the facts necessary to show unpaid tax on net income in excess of all business costs and expenses and personal exemptions. But that is not required.

The taxpayer's costs and other factors which would lessen his tax liability are peculiarly within his own knowledge. Accordingly, the law has placed upon him the burden of going forward with the evidence once the Government has established receipts in excess of those reported in his income tax return. As this court said in United States v. Hornstein, 7 Cir., 176 Fed. (2d) 217, 220 [49-2 USTC ¶9326]: "The figures of cost of goods sold, as they were used in preparing his tax returns, were at least admissions by the defendant which the government could utilize in making a prima facie case. The defendant was chargeable with them until he offered credible evidence to show that the figures were in error, and that his costs were greater."

If the defendant had additional costs or expenses that offset the unreported income established by the Government's case, the burden was on him to prove that as part of his defense. In his brief on appeal the defendant insists that this rule of law improperly shifts part of the burden of proof from the Government to him. But as we have pointed out, the Government satisfies its burden of proof when it shows that the taxpayer has received more income than was reported. It is then the taxpayer's burden to show, if he can, that, even though he received more income than he reported, he does not owe any additional tax. This rule is grounded on the realization that it would be virtually impossible for the Government to show the negative fact that a taxpayer had no unreported deductions or exclusions. In such a case the Government, having shown unreported income, is aided by the presumption that the deductions and exclusions listed by a taxpayer in his return are all that exist. This presumption is based upon reasonable experience (tax payers would not knowingly fail to report all valid deductions), and has the effect of shifting the burden of going forward with the evidence to the defendant, when the Government has shown unreported income. Clark v. United States , 8 Cir., 211 Fed. (2d) 100 [54-1 USTC ¶9291]; United States v. Link, 3 Cir., 202 Fed. (2d) 592 [53-1 USTC ¶9230]; United States v. Zimmerman, 7 Cir., 108 Fed. (2d) 370 [40-1 USTC ¶9102].

The presumption may be rebutted by any substantial evidence but, since the defendant introduced no evidence, the jury was justified in finding that there was tax for 1946 which the defendant had not paid.

[Exhibit 55 Admitted]

The defendant claims that the admission of Government Exhibit 55 was error. Exhibit 55 is a work sheet, prepared by defendant's own accountant from cancelled checks, receipts, etc., in the course of preparing defendant's income tax return. It lists all the individual expenditures and income declared by Bender in his syrup business for the year of 1946. The total "Sales" and "Purchases" listed on the Exhibit are the same as those in Bender's tax return.

Defendant's first complaint is that this is an "extra-judicial confession," and as such cannot be used, uncorroborated, to establish part of the corpus delicti of the crime charged. This argument finds no support in either the law or the facts involved here. The exhibit was corroborated both by Bender's tax return and by the cancelled checks which were in evidence. Furthermore, as already made clear, the corpus delicti of income tax evasion is prima facie established when the Government shows that the defendant has received more money than he reported. This was done before Exhibit 55 was introduced, and defendant did nothing to upset that prima facie case. Since Exhibit 55 was not necessary to establish the corpus delicti, it need not have been corroborated. Auerbach v. United States , 6 Cir., 136 Fed. (2d) 882, 885.

Bender's contention that Exhibit 55 was improperly obtained by the Government is also without merit. The record shows that Government agents did not obtain the work sheet with, as Bender claims, the promise of dropping the criminal charges against him. They obtained it from Mr. Pos to whom Bender had granted his power of attorney. Mr. Pos told Government investigators that he thought the auditor's work sheet contained mathematical errors which would explain the discrepancies between Bender's actual income and that listed on his tax return. The investigators said that if this proved to be true, they would, of course, drop the criminal charges. It was after this conversation that Mr. Pos gave the investigators the work sheet which later became Exhibit 55. As it turned out, the work sheet did not explain the deficiency, and Bender was indicted. There was nothing improper in the Government agents' conduct. Careful examination of the record shows that Bender's attorney, Mr. Pos, gave the document to the Government voluntarily in the hope that it would explain the deficiencies on the tax return. As attorney for the defendant, he had the authority to do this. For another criminal tax case in which the admission of similar evidence, obtained by the Government from the defendant's attorney, was held proper, see Banks v. United States, 8 Cir., 204 Fed. (2d) 666 [53-1 USTC ¶9402].

[The $6,800 Refund]

The defendant objects to the limitation placed upon him by the trial judge with regard to his closing argument concerning a $6,800.00 refund he made to one of his syrup customers. The following took place while the defendant's attorney was addressing the jury with regard to the $6,800.00 refund.

"Mr. Walsh: * * * He didn't take that back to resell it. That isn't the inference you must take from the evidence. He took it back because it was no good.

Mr. Kralovec: I object. There is no testimony that it was no good.

Mr. Walsh. The testimony is that it was unsatisfactory merchandise, and I think it is a fair argument.

Mr. Kralovec: Counsel has stated what he believes is a fact, from the testimony, and there was no such testimony to that effect. It was testified, I submit, that that was reported on the books as a sale. There is no indication or characterization of what condition that merchandise was in.

The Court: I do not recall any evidence of the fact that the goods were not satisfactory, Mr. Walsh.

I will sustain the objection and ask the jury to disregard that phase of Mr. Walsh's argument."

Actually the evidence showed that the syrup was returned because it was unsatisfactory. Mr. Waller, Vice President and Treasurer of Sunset, Incorporated, the company which returned the syrup in question, testified that "it was a return of merchandise which we had purchased that we found unsatisfactory." Apparently the defendant was trying to make the jury think that the deficiency in income reported on his tax return should be reduced by $6,800.00 because he had to refund that amount and received in return syrup that was of no value. If this was defendant's purpose, the court was correct in striking out his statement. The evidence we have set out above was that Sunset returned the syrup because it was "unsatisfactory," and to us this means not suited for Sunset's purposes. This description does not necessarily mean that the returned syrup was valueless to the defendant as his term, "no good," would indicate.

The entire objection is without merit, however, because, if the defendant could have reduced by $6,800.00 the amount of the deficiency proved against him there would still have been some $17,000.00 of unreported income.

[Cross-Examination of Government's Witnesses]

The Government introduced witnesses who had done business with the defendant. These witnesses identified statements of accounts received from and checks paid to defendant for goods received, and testified as to the particular transactions in which the Government claimed the defendant received unreported income. On cross-examination the defendant's attorney asked questions about other transactions between the witnesses and the defendant which had not been mentioned in direct examination, and about the witnesses' business operations in general. The Government's objections to these questions were sustained in each instance and the defendant claims that this was reversible error.

The extent of cross-examination is a matter within the discretion of the trial judge and this court will review the exercise of that discretion only to determine whether or not it has been abused. Bell v. United States , 4 Cir., 185 Fed. (2d) 302, 310-11 [50-2 USTC ¶9499]; Wright v. United States, D. C. Cir., 183 Fed. (2d) 821; United States v. Fotopulos, 9 Cir., 180 Fed. (2d) 631, 640; Minnehaha County , S. D. v. Kelley, 8 Cir., 150 Fed. (2d) 356, 360-1.

It is the trial judge's duty to so control the presentation of evidence to the jury that it will be as well organized and understandable as possible. The traditional procedure is for the moving party to present its case and then for the defendant to present his defense. As each witness testifies, it is important that the opposing party have an opportunity to test his truthfulness and competency. But it is also important that the regular procedure of the trial be maintained. As a result, each party is allowed to cross-examine his opponent's witnesses but he must ordinarily confine his cross-examination to the subject matter brought out on direct examination. United States v. Fotopulos, supra; Chevillard v. United States, 9 Cir., 155 Fed. (2d) 929, 934-5; Kincade v. Mikles, 8 Cir., 144 Fed. (2d) 784, 787. If the cross-examiner wants to use the witness to prove other matters, he must wait until it is time to present his case and then call the witness as his own. In this way each party is given an opportunity to challenge the other's witnesses, but the jury is not unnecessarily confused by being presented with evidence as to the contentions of both parties so intermingled as to make the evidence unintelligible.

Under some circumstances extraneous matter may be explored on cross-examination for the purpose of testing the credibility of the witness. United States v. Lawinski, 7 Cir., 195 Fed. (2d) 1, 6. The extent to which counsel may go in such an attempt is, again, within the discretion of the trial judge who must balance the party's right to impeach his opponent's witnesses against the need to prevent the confusion which may be created by delving into matters which were not examined in the direct examination.

The trial judge's duty to see that the evidence is presented to the jury in as orderly and understandable a manner as possible requires that he have broad discretion in such matters. The defendant gave no definite reasons for his attempted examinations. He made no offers of proof. In each case he merely said that he thought the questions were proper and in each case the questions sought information on matters not raised on direct examination. We find in this record no abuse of discretion on the part of the trial judge in refusing to permit the witnesses to answer these questions.

[Bill of Particulars Amended]

The defendant further complains that the Government changed the theory of the case and greatly confused him by amending its bill of particulars several time, the last of which times was the day before the trial. He further complains that the Government introduced evidence of income from sources which were not even mentioned in the bill of particulars.

As regards the amendments, Rule 7(f) of the Federal Rules of Criminal Procedure (18 U. S. C. A.) provides: "* * * A bill of particulars may be amended at any time subject to such conditions as justice requires." Whether or not an amendment should be allowed is in the discretion of the trial court and we will review its decision only for abuse of discretion. United States v. Chapman, 7 Cir., 168 Fed. (2d) 997, 999 [48-1 USTC ¶9312].

The bill of particulars listed the income which the Government expected to prove that defendant did not report on his tax return. It was amended three times. The first amendment increased the amount allegedly received from one customer and dropped the entire amount allegedly received from another. The second amendment stated that "The term 'gross income' as used in * * * the Amended Bill of Particulars * * * is intended to have the same meaning as the words 'gross receipts' and 'gross payments.'" The day before trial the court ordered, on motion of the Government, "that leave be and is hereby given to the Government to withdraw all of the assertions contained in the Supplemental Amended Bill of Particulars [second amendment] and to re-affirm all of the assertions made in the Bill of Particulars * * *." This last minute defining and redefining of terms had no effect on the matters necessary for Bender's defense. It did not amount to a surprise allegation which defendant was not given time to meet. It was therefore not an abuse of the trial court's discretion to allow these amendments to be made.

Of all the objections now made to the introduction of evidence of facts not included in the bill of particulars, a careful review of the record shows that the defendant objected to such evidence only once during the trial. We will not review the admission of evidence to which there was no objection made at the trial. Boyle v. Bond, D. C. Cir., 187 Fed. (2d) 362; Mutual Benefit Health & Accident Association v. Francis, 8 Cir., 148 Fed. (2d) 590. The admission of evidence of facts not shown by the bill of particulars certainly did not constitute such obvious or damaging error that we must notice them in the absence of proper objections.

The defendant did object, however, to the admission of evidence concerning money received from the Jerome Company which was not mentioned in the bill of particulars. The Government made its case by proving all the income received by Bender from the sale of syrup and comparing that with the amount declared on his income tax return. The bill of particulars purported to list only that income which was not reported on defendant's tax return. The income from the Jerome Company was listed on Bender's tax return and, therefore, was properly omitted from the bill of particulars. This objection was therefore properly overruled.

[Objections to Instructions to Jury]

Defendant cannot for the first time on appeal object to the instructions given to the jury by the trial court. Rule 30, Federal Rules of Criminal Procedure (18 U. S. C. A.); United States v. Angel, 7 Cir., 201 Fed. (2d) 531, 534. At the trial the defendant did object in a general way to certain of the instructions, but his objections fell far short of being specific enough to give the trial court an opportunity to correct the alleged errors now complained of on appeal.

The defendant now objects to the court's instructions on three subjects: circumstantial evidence, the proper determination of tax due, and the testimony of a single witness. We will quote from the only statements of the defense attorney that could be construed as giving reasons for his objections, Record 427-8:

"Mr. Walsh: * * * The defendant objects to the statement that the case need not be proved by direct and positive evidence.

"The defendant objects to the use of the word 'positive' and objects on the ground that the word 'positive' may lead the jury to believe that the proof need not be affirmative.

"The defendant objects to the statement by the Court that the law demands a conviction in certain instances. Circumstantial evidence is one where it could be identified, contains a statement argumentative and prejudicial to the defendant.

* * *

"As I heard it, I believe the instruction contained a statement that Krane's testimony was controlling. That may be an error.

The Court: That wording was not used. I think you are mistaken.

Mr. Walsh: I say, I may be mistaken.

* * *

"Mr. Walsh: It may be that I misunderstood that. I think I probably did."

We find it impossible, from the above,

"Mr. Waslsh: It may be that I misunderstood were and we doubt that the trial judge was able to understand them. The objections must be called to the trial judge's attention with sufficient specificity to apprise him of the question of law raised by the objector. If the District Court was not given an opportunity to rule on the specific objection, we may not consider it on appeal. Reeve Brothers v. Guest, 5 Cir., 131 Fed. (2d) 710.

Since we have found no prejudicial errors, the judgment of the District Court is AFFIRMED.