Burden of Proof

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7203: Willful Failure to File Return, Supply Information, or Pay Tax: Burden of Proof

   

[2005-1 USTC ¶50,412] In re Linda J. Wargo & Edward M. Wargo, Debtors. Linda J. Wargo & Edward M. Wargo, Plaintiffs v. United States of America , Defendant.

U.S. Bankruptcy Court, Mid. Dist. Fla., Tampa Div.; 01-2837-8B7, March 18, 2005.

[ Code Sec. 7201]

Individual: Income tax: Attempt to evade tax: Tax shelter deductions: Form W-4: Exemptions: Bankruptcy. --

A married couple's tax liabilities for 14 years arising from their participation in a tax shelter were discharged because the IRS failed to prove that the couple attempted to evade or defeat their tax liabilities. However, the couple's tax liabilities for the final year under audit were not discharged because the time period for expiration of taxes was tolled during the pendency of their bankruptcy petition. There was no evidence that the couple intentionally ignored a known legal duty, or voluntarily, consciously or knowingly and intentionally attempted to evade or defeat the tax. Further, the couple's act of signing the prepared Forms W-4 containing increased exemptions in order to decrease their withholding amounts was not sufficient, on its own, to reflect an attempt to evade or defeat a tax.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

BAYNES, JR., Bankruptcy Judge: THIS CAUSE came on for final evidentiary hearing on the Amended Complaint to Determine the Dischargeability of a Debt filed by Plaintiffs/Debtors Linda and Edward M. Wargo ("Debtor(s)") in the above captioned case. The United States of America , representing the Internal Revenue Service ("IRS"), filed an Answer and a Motion for Summary Judgment. The Court, having considered arguments by counsel, the entire record of this case, testimony of live witnesses, and all other relevant evidence, enters the following findings of fact and conclusions of law. See Fed. R. Civ. P. 52; Fed. R. Bankr. P. 7052.

IRS MOTION FOR SUMMARY JUDGMENT DENIED

Prior to trial, the IRS filed a Motion for Summary Judgment. The Court heard argument on the Motion at the start of trial, and gave the parties the option go forward with the evidence or have the Court rule on the summary judgment and return for trial at a later date. The Court advised the parties of the likelihood the Court might deny the summary judgment motion and proceed on the evidence in the event they chose to go ahead with trial. The Court rules the summary judgment motion shall be denied and enters the following findings of fact and conclusions of law on the Debtors' Complaint and the IRS' Answer.

FINDINGS OF FACT

The relevant facts in this case are relatively straightforward, even if the circumstances giving rise to them are not so simple. The Debtors owe income taxes, penalties and interest for the years 1982 through 1996 consecutively, due entirely to their participation in a tax shelter. The limited partnership tax shelter was engineerd by Walter J. Hoyt ("Hoyt"). The Debtors became limited partners with Hoyt in the cattle business, seemingly by exchanging their tax refunds for the ability to write off their income against the cattle business losses and for access to free professional tax preparation services and advice. The Debtors entered into agreements obligating them to pay substantial amounts to Hoyt, though the exact nature of the obligations are not clear to Debtors at the time, nor are the details easy to ascertain from reviewing the documents Debtor's signed with Hoyt. ¹

DEBTORS' TESTIMONY

During the years in question, the Debtors always filed timely tax returns reflecting all of their income. There is no evidence the Debtors ever tried to conceal any earnings from the IRS during the tax shelter years. In the years at issue, Debtors prepared their returns and submitted them to a tax service run by Hoyt for review. During the review, the tax service run by Hoyt added the necessary paperwork to include the limited partnership losses.

Whether or not Debtors recieved their claimed refunds from the IRS, Debtors remained obligated to pay the Hoyt limited partnership. For the first years Hoyt simply accepted the refund amount as payment toward Debtors' obligations. Relatively early on in the relationship, the Hoyt limited partnership began asking Debtors for periodic payments throughout the year as opposed to waiting to claim their refund. The Debtors' obligations to Hoyt are substantial: one contract reflects a $107,000.00 obligation (Def. Ex. 19), another $283,000.00 (Def. Ex. 20), the third and final in the record $55,000.00 (Def. Ex. 21).

On May 9, 1989, Debtors receive a form letter stating the IRS has advised Hoyt, as Tax Matters Partner for the limited partnerships, ² of the IRS' "belief" the deductions and/or credits are not allowable. The letter warns Debtors taxpayers who take these deductions and/or credits in connection with the limited partnership will have their returns examined and the deductions and/or credits disallowed. As a result, the taxpayer(s)' tax liability may be subject to various penalties, including a negligence penalty, an overvaluation penalty and/or a substantial understatement of income penalty.

Sometime in the late 1980's and early 1990's, the IRS begins to place holds on the Debtors' refunds. The record reflects Debtors received a total of 5 additional form letters in the ten or eleven years of their participation in reference to the refunds. These letters, the first of which is not sent to Debtors until February 19, 1993, are identical to each other, but differ from the 1989 letter. (The second IRS form letters arrive in 1993, 1994, 1995, 1996 and 1998.) The letters identify Hoyt as the promoter of the tax shelter partnership, and advises Debtors in relevant part,

We believe that tax shelter deductions and/or credits from such tax shelter partnerships will not be allowable and an examination will be conducted when the returns are filed.

....

If you file your return claiming a refund, such refund will be reduced for the amount generated by claiming deductions and/or credits from any Hoyt partnership tax shelter.

Def. Ex. 22. The last letter is dated March 5, 1998. These letters also warn Debtors of the potential for accuracy-related penalties. The Court notes none of the letters apprise Debtors of any potential fraud penalties, civil or criminal.

When the refunds were placed on hold, Hoyt still demanded payment and advised Debtors to decrease their withholding in anticipation of a favorable determination by the IRS with regard to allowing the tax shelter as legitimate. At some point, the Hoyt tax preparation services company began to prepare forms W-4 with a greater number of exemptions, sending the pre-completed forms to Debtors with their other tax forms. The Debtors were simply to sign the forms and give them to their employers.

The actual number of exemptions claimed by the Debtors on any W4 is not in evidence, as there are no forms W4 in this record. The tax returns and W2 for each year was reviewed on the record with Debtor Edward Wargo, who freely admits the Debtors accepted the advice of the Hoyt tax service in reliance on their assurances of the legitimacy and necessity of the adjustment to enable Debtors to meet their obligations to the Hoyt limited partnerships. Referring to the decreased withholding as use of the "Hoyt formula," Debtor Edward Wargo acknowledges either his and/or his wife's withholding fell below ten percent (10%) in each year between 1987 and 1995.

However, every W2 filed between 1987 and 1995 does not reflect less than ten percent withholding. Sometime in 1989, one of Debtor Edward Wargo's employers, Dickey Electric, (as a subcontractor, he often worked for more than one employer in any given year) received notice from the IRS that the number of exemptions claimed on his W4. The IRS directed Dickey Electric to ignore the claimed exemptions and withhold more from the paycheck, which the employer did with Debtor Edward Wargo's consent. When the Debtors contacted the Hoyt tax preparation service about the IRS intervention with regard to the claimed exemptions, they were assured the IRS was out of line in taking this action and that the Hoyt tax experts would contact the IRS on the matter.

The IRS never contacted the Debtors directly about the number of exemptions claimed on this W4, or any other W4, for any of the years in question. Apparently as a result of the IRS intervention, greater than ten percent was withheld on Debtor Edward Wargo's income from Dickey Electric in 1989, 1990, 1994 and 1995. In 1990, Dickey Electric provided 100% of Debtor Edward Wargo's income, so there was no use of the Hoyt formula for his wages in that tax year. ³ Debtor never questioned the IRS change to withhold more of his income, nor did he challenge it in anyway, he simply complied.

Debtor Edward Wargo testifies in his experience as a journeyman electrician the practice of increasing the number of exemptions in order to retain more money from a job was common in construction related fields such as his own. He testifies he understood the practice of adjusting exemptions on a form W4 was permissible in certains circumstances, such as in anticipation of long periods between jobs, or when a job was unusually lucrative and not typical of what he anticipated he would earn during the year. However, he freely admits these are not the reasons the withholding is adjusted in the tax years at issue in this case. He offers the information to clarify his understanding of whether the practice is generally permissible outside the context of the Hoyt tax advice.

Debtor Linda Wargo, the individual who handles the majority of the Debtors' financial affairs, testifies she may recall seeing a "7" or an "8" as the number of exemptions on the Hoyt prepared forms. She is certain there was never a "10" or higher number of exemptions claimed in any year. Linda Wargo testifies she understands her bankruptcy schedules are completed under penalty of perjury, but does not recall seeing a similar statement on any of the W4's she signed. Both Debtors testified they thought the adjustment of the exemptions on the W4's was permissible under the law.

Throughout all of the years in question, the Hoyt entities maintained a very professional outfit. They sent magazines and articles with updates on the investments. They apprised Debtors in these and other communications of their successes in obtaining approval for the partnerships court rulings. There was always someone there to answer the Debtors call, and they always seemed to know what the problem was and were ready with the answer.

In July 1998, Debtors receive the first hint of the tax liability the IRS is claiming against them and begin to understand they are in over their heads. Linda Wargo testifies she did not immediately contact the IRS because the Hoyt saga continued in the form of a Hoyt partnership defense fund formed to fight the IRS ruling on the legitimacy of the tax shelter. Also, the Hoyt tax service experts advise Debtors of the dangers of quitting the scheme, beginning in the early years by warning withdrawal makes it appear the Debtors may not be true investors, and always warning the Debtors will be facing the IRS "on their own." Debtor Edward Wargo testified these threats terrified the Debtors.

In accordance with previously made plans, the couple moves to Florida in the same time period. Liquidating their estate and buying a home here created other taxable events. Debtors paid $140,000.00 in taxes for 1998, both to the IRS and to the state of Ohio . The IRS received $62,000.00 of this amount. The Debtors mortgaged their home as collateral for a $78,000.00 loan from Debtor Linda Wargo's parents just to meet the 1998 tax obligations.

The record reflects Debtors always reported their income and paid any tax due to the best of their ability. Aside from the Hoyt tax shelter years, the Debtors paid all tax liability on time each year both before and after the investment. During the relevant tax years and beyond, Debtors paid Hoyt $147,000.00. Part of the payments to Hoyt came from a home equity loan which eventually reached $50,000.00 all borrowed to pay Hoyt.

Debtor Linda Wargo finally contacted the IRS and filled out an installment plan application and mailing in a $300.00 payment with the paperwork and each month thereafter until the IRS rejects the monthly payment amount as too small. The IRS narrative transcript reflects five $300.00 payments between June 16, 1998 and September 22, 1998. The Debtors filed for bankruptcy relief under Chapter 13 on October 22, 1998.

The record reflects the Debtors expected to be part of a global settlement of some kind with regard to Hoyt as the tax shelters affected more than 4,000 individuals. Debtor Linda Wargo testifies they allowed their 1998 Chapter 13 case to be dismissed in anticipation of participating in this type of relief. She further testified filing the bankruptcy case compromised the Debtors' ability to participate in some of the relief offered to Hoyt's victims. Finally, at some point there is a moratorium on collecting Hoyt related tax liabilities, presumably in place while the IRS addresses the issues raised in these cases.

REVENUE OFFICER'S TESTIMONY

The only other witness at trial was IRS Revenue Officer Ray Zacek. In addition to explaining the IRS narrative transcript reflecting Debtors' tax history, Mr. Zacek testifies with regard to his understanding of withholding requirements. He testifies he "thinks" the IRS requires a taxpayer to withhold enough to meet 90% of their tax obligations. With regard to claiming an excessive number of exemptions, Mr. Zacek asserts a taxpayer can claim any number of exemptions they wish with the understanding they will face penalties if the withholding is not sufficient to cover their tax liability.

With regard to what actual number of exemptions the IRS considers to be excessive, Mr. Zacek states the he thinks the IRS Service Centers monitor the W4's and generally investigate exemptions of 10 or more. Mr. Zacek notes the IRS has the ability to send a letter to an employer questioning the legitimacy of the exemptions. He also understands the taxpayer is usually queried on the matter directly, though this communication is by correspondence and may take months after the W4 is flagged to reach a taxpayer.

CONCLUSIONS OF LAW

1996 Taxes are Nondischargeable

At trial, the Court ruled the time period for the expiration of taxes during was tolled during the pendency of Debtors' prior bankruptcy petition under 11 U.S.C. §507(a)(8)(A)(i). Young v. United States [ 2002-1 USTC ¶50,257], 535 U.S. 43, 54 (2002). Debtors agreed the time period was tolled. Therefore, the Debtors' 1996 tax liability is nondischargeable. 11 U.S.C. §523(a)(1)(A).

1982-1995 Taxes

The IRS concedes Debtors tax liability for years 1982 through. 1995 is dischargeable under 11 U.S.C. §523(a)(1)(A). The only avenue for nondischargeability for the taxes in question is for the Court to find Debtors willfully attempted to evade or defeat the taxes in accordance with 11 U.S.C. §523(a)(1)(C). The IRS ccncedes the burden of proof to establish Debtors taxes fit within §523(a)(1)(C) is theirs. In support of the §523(a)(1)(C) claim, the IRS asserts the Debtors alleged conduct in manipulating the number of exemptions on the forms W4 is sufficient to establish the elements of §523(a)(1)(C).

The Eleventh Circuit holds §523(a)(1)(C) contains both a conduct and mental state requirement. Thus, Debtors must have willfully acted in an attempt to evade or defeat the tax. These requirements are most recently defined as follows:

To summarize, as the law of this circuit now stands, the conduct requirement of §523(a)(1)(C) is not satisfied where a debtor has filed accurate tax returns and simply failed to pay taxes as the debtor in Haas did. [ 95-1 USTC ¶50,200], 48 F.3d at 1157 ("The omission of the words 'or the payment thereof' from section 523(a)(1)(C) ... indicates that Congress did not intend that a failure to pay taxes, without more, should result in the nondischargeability of a debtor's tax liabilities in bankruptcy."). The conduct requirement is satisfied, however, where a debtor engages in affirmative acts to avoid payment or collection of taxes as the debtor in Griffith did. [ 2000-1 USTC ¶50,317], 206 F.3d at 1393-96.

....

As for the mental state requirement, a debtor's attempt to avoid his tax liability is considered willful under §523(a)(1)(C) if it is done voluntarily, consciously or knowingly, and intentionally. ... Fraudulent intent is not required. ... Thus, all the government must prove is that [Debtors]:

(1) had a duty to file income tax returns and pay taxes;

(2) knew he had such a duty; and

 

(3) voluntarily and intentionally violated that duty. .... The third or willfulness component of the mental state requirement "prevents the application of the exception to debtors who make inadvertent mistakes, reserving nondischargeability for those whose efforts to evade tax liability are knowing and deliberate."

In re Fretz [ 2001-1 USTC ¶50,308], 244 F.3d 1323, 1328 -1329 (11 ^th Cir. 2001). ⁴

THE HOYT TAX SHELTER SAGA

In researching this opinion, the Court discovered the Hoyt tax shelters Debtors were involved in is the subject of numerous rulings by other federal courts, including bankruptcy, tax and criminal court rulings involving Hoyt, his partners and some of the thousands of taxpayers, like the Debtors, who bought into his scheme. Initially, the Court must mention the United States Tax Court opinion in Bales v. Comm'r. of IRS [ CCH Dec. 46,099(M)], T.C. Memo. 1989-568, 1989 WL 123005 (U.S. Tax Ct. 1989), which rules with regard to a substantially similar Hoyt limited partnership:

In summary, we have decided that the transaction in issue should be respected for Federal income tax purposes. The expenses incurred by the partnerships are allowed to the extent set forth herein. In addition, petitioners are permitted their allowable share of partnership items (as previously discussed). Any losses claimed by the petitioners from the partnerships are allowed to the extent of the partner's individual basis.

Id. Thus, after Debtors receive the first IRS letter in 1989, Hoyt receives a favorable ruling on the limited partnerships. Recall, Debtors first letter regarding freezing their refunds does not arrive until February 19, 1993.

Obviously, at some point the tide turned in the opposite direction with regard to the legitimacy of the Hoyt tax shelters. The United States Tax Court entered the following detailed history of Hoyt's tax shelters:

Walter J. Hoyt III and the Hoyt Partnerships The accuracy-related penalty at issue in this case arises from an adjustment of a partnership item on petitioners' 1991 Federal income tax return. This adjustment is the result of petitioners' involvement in certain partnerships organized and promoted by Walter J. Hoyt III (Mr. Hoyt).

 

Mr. Hoyt's father was a prominent breeder of Shorthorn cattle, one of the three major breeds of cattle in the United States . In order to expand his business and attract investors, Mr. Hoyt's father had started organizing and promoting cattle breeding partnerships by the late 1960s. Before and after his father's death in early 1972, Mr. Hoyt and other members of the Hoyt family were extensively involved in organizing and operating numerous cattle breeding partnerships. From about 1971 through 1998, Mr. Hoyt organized, promoted to thousands of investors, and operated as a general partner more than 100 cattle breeding partnerships. Mr. Hoyt also organized and operated sheep breeding partnerships in essentially the same fashion as the cattle breeding partnerships (collectively the "investor partnerships" or "Hoyt partnerships"). Each of the investor partnerships was marketed and promoted in the same manner.

 

Beginning in 1983, and until removed by this Court due to a criminal conviction, Mr. Hoyt was the tax matters partner of each of the investor partnerships that are subject to the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. 97-248, 96 Stat. 324. As the general partner managing each partnership, Mr. Hoyt was responsible for and directed the preparation of the tax returns of each partnership, and he typically signed and filed each return. Mr. Hoyt also operated tax return preparation companies, variously called "Tax Office of W.J. Hoyt Sons", "Agri-Tax", and "Laguna Tax Service", that prepared most of the investors' individual tax returns during the years of their investments. Petitioners' 1991 return was prepared in this manner and was signed by Mr. Hoyt. From approximately 1980 through 1997, Mr. Hoyt was a licensed enrolled agent, and as such he represented many of the investor-partners before the Internal Revenue Service (IRS) before he was disbarred as enrolled agent in 1998.

 

Beginning in February 1993, respondent generally froze and stopped issuing income tax refunds to partners in the investor partnerships. The IRS issued prefiling notices to the investor-partners advising them that, starting with the 1992 taxable year, the IRS would disallow the tax benefits that the partners claimed on their individual returns from the investor partnerships, and the IRS would not issue any tax refunds these partners might claim attributable to such partnership tax benefits.

Also beginning in 1993, an increasing number of investor-partners were becoming disgruntled with Mr. Hoyt and the Hoyt organization. Many partners stopped making their partnership payments and withdrew from their partnerships, due in part to respondent's tax enforcement. Mr. Hoyt urged the partners to support and remain loyal to the organization in challenging the IRS's actions. The Hoyt organization warned that partners who stopped making their partnership payments and withdrew from their partnerships would be reported to the IRS as having substantial debt relief income, and that they would have to deal with the IRS on their own.

On June 5, 1997 , a bankruptcy court entered an order for relief, in effect finding that W.J. Hoyt Sons Management Company and W.J. Hoyt Sons MLP were both bankrupt. In these bankruptcy cases, the U.S. Trustee moved in 1997 to have the bankruptcy court substantively consolidate all assets and liabilities of almost all Hoyt organization entities and the many Hoyt investor partnerships. This consolidation included all the investor partnerships. On November 13, 1998, the bankruptcy court entered its Judgment for Substantive Consolidation, consolidating all the above-mentioned entities for bankruptcy purposes. The trustee then sold off what livestock the Hoyt organization owned or managed on behalf of the investor partnerships. Mr. Hoyt and others were indicted for certain Federal crimes, and a trial was conducted in the U.S. District Court for the District of Oregon. The District Court described Mr. Hoyt's actions as "the most egregious white collar crime committed in the history of the State of Oregon ." Mr. Hoyt was found guilty on all counts, and as part of his sentence in the criminal case he was required to pay restitution in the amount of $102 million. This amount represented the total amount that the United States determined, using Hoyt organization records, was paid to the Hoyt organization from 1982 through 1998 by investor-partners in various investor partnerships.

Hansen v. Comm'r of IRS [ CCH Dec. 55,812(M)], T.C. Memo. 2004-269, 2004 WL 2677035 (U.S. Tax Ct. 2004) (holding accuracy related penalty for negligence on part of taxpayer permissible where taxpayers reliance on Hoyt and his tax preparation entities was negligent). There are several recent written opinions almost identical to Hansen involving the Tax Court upholding accuracy related penalties against Hoyt tax shelter investors. See, e.g., Mortensen v. Comm.'r of IRS [ CCH Dec. 55,824(M)], T.C. Memo. 2004-279, 2004 WL 2900972 (U.S. Tax Ct. 2004).

While the facts in these cases are incredibly similar to the facts before the Court, and the individual taxpayer/investors are repeatedly found to be negligent in their reliance on Hoyt's representations, the Court was unable to find even one case holding an investor acted in a willfull manner to evade or defeat a tax by following Hoyt's advice. Further, the penalties and adjustments addressed are all based on negligence, not civil or criminal tax fraud. As suggested in the warning letters received by Debtors, the investors in the tax cases are penalized for accuracy related deficiencies for their negligence.

DEBTORS' FORMS W4

The Court reviewed all of the cases offered by the IRS in support of its contention that taken on its own, the act of altering W-4's to include more exemptions is sufficient to find the taxes nondischargeable. In every case cited by the IRS to the Court, there is conduct in addition to the W-4 issue. The Court's own review of cases in this area revealed no instances where a Court found claiming too many exemptions on a W-4 is a sufficient act to establish a willful attempt to evade or defeat a tax absent other acts in either the bankruptcy or the tax case law.

Looking to the factual record in this case on the issue of increasing the number of exemptions on the W4, the Court first notes an absence of any forms W4 signed by the Debtors. The Court also notes IRS Revenue Officer Zacek's testimony that taxpayers are free to claim as many exemptions as they would like, but will face consequences in the form of penalties if they are unable to pay. Mr. Zacek indicates the IRS is generally concerned when 10 or more exemptions are claimed, which is certainly not the case here. This record reflects Debtors withheld some of their wages every year, and even met the 10% threshold the IRS suggested is necessary at trial in some years with regard to Debtor Edward Wargo. The Court notes the IRS offers no specific legal requirement for the 10% figure as a threshold indicator of abuse, and the IRS's own witness testified there is a relatively simple table to calculate 90% of the potential tax. In this case, the Debtors repeatedly testified they did not anticipate they owed any tax, nor did they intentionally seek to raise their exemptions in order to keep money owed to the IRS from the IRS. Compare Cheek v. United States [ 91-1 USTC ¶50,012], 498 U.S. 192, 194, (1991) ("[Taxpayer] also claimed an increasing number of withholding allowances --eventually claiming 60 allowances by mid-1980 --and for the years 1981 to 1984 indicated on his W-4 forms that he was exempt from federal income taxes.")

CONCLUSION

The Court finds it need not decide whether increasing exemptions claimed on a form W4 is ever sufficient on its own to establish the conduct requirement of §523(a)(1)(C). Instead, the Court finds the Debtors admitted act of signing the Hoyt prepared forms W4 containing increased exemptions in order to decrease their withholding amounts is not sufficient on its own to reflect an attempt to evade or defeat a tax under the circumstances of this case. This is especially true as the Court finds the record in this case is devoid of any evidence the Debtors intentionally ignored a known legal duty, or voluntarily, consciously or knowingly and intentionally attempted to evade or defeat the tax liability for tax years 1982 through 1995. Thus, the IRS failed to meet its burden with regard to the mental state requirement of §523(a)(1)(C). With regard to whether increasing exemptions claimed on a form W4 is ever sufficient on its own to establish the conduct requirement of §523(a)(1)(C), the Court need not rule.

Accordingly, it is

ORDERED, ADJUDGED, AND DECREED the Plaintiffs/Debtors taxes for the years 1982 through 1995 consecutively are dischargeable. The Court shall enter a separate judgment in favor of Debtors Edward M. and Linda Wargo on this issue. It is further

ORDERED, ADJUDGED AND DECREED the Debtors taxes for the year 1996 are not dischargeable. The Court shall enter a separate judgment in favor of the Defendant, United States of America on this issue.

DONE AND ORDERED.

FINAL JUDGMENT

This case came on for trial before the Court, the Honorable Thomas E. Baynes, Jr., presiding, and the issues having been duly tried and a decision having been duly rendered, it is

ORDERED, ADJUDGED, AND DECREED that the tax liabilities of Plaintiffs/Debtors Edward M. and Linda Wargo for the tax years 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, and 1995 are discharged. It is further

ORDERED, ADJUDGED AND DECREED that the tax liabilities of Plaintiffs/Debtors Edward M. and Linda Wargo for the tax year 1996 are not discharged.

DONE AND ORDERED.

¹ A more detailed examination of the tax shelter appears in the Conclusions of Law section below.

² Tax Matters Partner is a defined role in relation to the IRS, and is discussed in more detail in the Conclusions of Law section below.

³ The Court's own cursory review of App. 1 to the IRS post-trial brief (a Table representing each year's income and withholding by employer for both Debtors, limiting review to the top 4 income sources for Debtor Edward Wargo) reveals only two years, 1991 and 1993, in which 100% of Debtor Edward Wargo's withholding is below 10%. In 1991, 8.4% is withheld, in 1992, 8.7% is withheld. In 1990, 1991 and 1995, 100% of his earnings have withholding rates of 10% or more. During the two remaining years after the Hoyt formula is in use, 1989 and 1992, withholding is above 10% on roughly 50% of his earnings in 1989 and on roughly 20% of his earnings in 1992. There is one single W2 in the record, except minimal union W2's for Debtor Edward Wargo, reflecting zero dollars withholding in 1987.

Debtor Linda Wargo's W2's reflect a minimum of 1.1% in 1995 and a maximum of 8.8% in 1990. Using the figures from the IRS appendix, the Court calculates her average withholding percentage from 1987 to 1995 is 4.23%.

⁴ For the reasons stated in detail in Pert v. United States , (In re Pert), 248 B.R. 659, 664 -667 (Bankr. M.D. Fla. 2000), this Court finds the mental state requirement problematic.

 

[80-2 USTC ¶9669] United States of America , Plaintiff v. Duane O. Hestnes, Defendant

U. S. District Court, West. Dist. Wis., 77-CR-23, 492 FSupp 999, 7/9/80

[Code Secs. 446 and 7203]

Crimes: Tax evasion: Proof.--The government failed to prove that the taxpayer had willfully and knowingly attempted to evade taxes by pocketing cash receipts from specific customers without depositing them in his bank account and without reporting them as income on his 1971 income tax return, where the taxpayer used the accrual method of accounting. The court determined that because the invoices for goods delivered and invoiced in 1971 were not available to the government, it then did not prove that there was a distortion with respect to his accounts receivable for 1970 and 1971. Without this evidence, no conviction for understatement of income for 1971 with the intent to evade taxes could be sustained, and the court granted the taxpayer's motion for judgment of acquittal.

John Franke, Assistant United States Attorney, Madison , Wis. 53701 , for plaintiff. James Shellow 222 E. Mason St. , Milwaukee , Wis. 53202 , for defendant.

OPINION AND ORDER

DOYLE, District Judge:

Defendant was found guilty by a jury on the second count of an indictment in which he was charged with having wilfully and knowingly attempted to evade and defeat a large part of an income tax due and owing by him and his wife for calendar 1971, by filing a false and fraudulent return which understated their taxable income by about $55,000. Defendant has moved for an order setting aside the verdict and acquitting him and, if that motion is denied, for an order granting him a new trial.

I regret the extended delay in the entry of this decision on these motions after verdict.

At the core of the motion for a judgment of acquittal is a single issue. If resolved in the defendant's favor, acquittal must be granted and many other difficult questions need not be addressed. Nevertheless, I have taken pains to explore the whole range of issues raised by defendant's motions after verdict. I have done so, in part, because of the vast amount of time and effort invested by counsel and the court in the trial of this case--some 25 trial days. I have explored the whole range of issues with the thought, also, that in the course of re-examining the interplay of factors in the case, including a large number of difficult evidentiary rulings and a number of significant jury instructions, I might discern why it is that government counsel, on the one hand, and defense counsel (and, in the course of several trial rulings, the court), on the other, have perceived the single core issue so differently.

The essence of the government's case is that during calendar 1971, the defendant pocketed specific receipts from specific customers in his meat business without depositing them in his business bank account and without reporting them as 1971 income on his tax return for 1971. ¹ This method of proof is spoken of as the specific items of income method. Therefore, it was the government's obligation to prove beyond a reasonable doubt that the defendant's failure to deposit and report these 1971 cash receipts from his customers resulted in a failure to report 1971 income.

As the government concedes in its post-trial brief, the evidence permits no finding other than that during the period preceding, following, and including calendar 1971, defendant followed an accrual method of accounting. Nevertheless, again as the government now concedes, the government intended from the start of the trial to persuade the court that if it proved that specific payments were received from customers in 1971 and not deposited and reported, each was to be allocated to 1971 income "essentially on a cash basis." As this intention on the government's part was revealed in the course of the presentation of its case-in-chief, it was objected to, of course, and there ensued a discussion among the court and counsel which persisted to the point at which jury instructions were decided upon.

Among the instructions as given was the following:

The jury may not assume without evidentiary support that checks were income in the year in which they were negotiated. If you find from the evidence that the taxpayer was on an accrual basis in 1971, then the government would be bound to follow an accrual method in making its calculations. This means that defendant's income would have been required to be reported in the year in which it is earned. Before any gross receipts could be considered as income in 1971, the government would be required to prove to your satisfaction that the gross receipts were in payment for merchandise shipped and invoiced in 1971.

Because, at defendant's urging, the theory embodied in the jury instruction just quoted was embraced by the court early in the trial, the government was compelled to improvise and reimprovise its proofs and its theory, contending initially that allocation of income to 1971 "essentially on a cash basis" was permissible; then that the evidence supported the inference that all of the unreported cash received in 1971 was for merchandise delivered and invoiced in 1971 (with minor year-end inferences as to when the cash actually reached defendant); then that the evidence supported the inference that of the unreported cash received in 1971, the portion shown to have been received for merchandise delivered and invoiced in 1971 was substantial enough to support a conviction; and so on. Although the government continues to contend that the evidence was sufficient to show that a substantial portion of the unreported cash received in 1971 was in payment for goods delivered and invoiced in 1971, it now relies principally on a theory developed in its brief in opposition to defendant's post-trial motions: namely, that even if the accrual method is fully recognized in this case, the failure to report cash received in 1971 resulted in a failure to report 1971 income, whether it was received in 1971 for merchandise delivered and invoiced in 1971 or for merchandise delivered and invoiced at some earlier time.

The essence of the accrual method is that the taxpayer is required to report the price of goods sold as income for the year in which the goods are sold. For a taxpayer who commences a business on January 1, 1970, for example, it would be necessary to report as 1970 income the price of all goods sold in 1970. If this obligation is met for 1970, the taxpayer is under no further obligation. That is, the taxpayer is not required to inform the government at some later time that payment for the sale has now been received. On the other hand, if the taxpayer fails to meet this obligation to report as 1970 income the price of goods sold in 1970, the violation has occurred with respect to the 1970 tax year. ²

It is possible for an accrual taxpayer to adopt the technique of adding up invoices for goods sold and delivered in 1970 and reporting the total as 1970 income, and then a year later adding up the invoices for goods sold and delivered in 1971 and reporting the total as 1971 income.

There is another technique for achieving this same result. Rather than to add up all one's invoices for goods sold and delivered in 1970 in a business commenced on January 1, 1970, for example, one may report the sum of cash received in 1970 from one's customers, plus the sum of the invoices for goods sold and delivered in 1970 but for which the customers have not paid by December 31, 1970. This latter sum represents the accounts receivable on December 31, 1970. This technique discharges the obligation to report as income for 1970 the price of all goods sold in 1970.

A taxpayer employing this technique can repeat the process for 1971 by reporting the sum of cash received in 1971 from one's customers, plus the sum of the invoices for goods sold and delivered in 1971 but for which the customers have not paid by December 31, 1971. As was true for 1970, this technique discharges the obligation to report as income for 1971 the price of all goods sold in 1971.

However, for a business with a history commencing prior to January 1, 1971 (in the example, a business which commenced January 1, 1970), there is a danger that this technique may result in overreporting income for 1971. A portion of the cash received from customers in 1971 may have been in payment for goods sold in 1970; that is, for sales already reported as 1970 income although payment had not been received in 1970 from the purchasers. If so, to use that particular portion of 1971 cash receipts as a reflection of sales made in 1971 is to distort. Also, the accounts receivable as of December 31, 1971 may include some carryovers from 1970 sales, the proceeds of which were receivable as early as December 31, 1970 and which were reported as 1970 income. Therefore, from the combination of 1971 cash receipts and the accounts receivable as of December 31, 1971 there must be deducted all accounts receivable as of December 31, 1970. The resulting figure includes only those cash receipts in 1971 and only that portion of the accounts receivable as of December 31, 1971 which reflect sales made during 1971.

Faithfully followed tax-year in and tax-year out by an accrual taxpayer, the technique just described is valid and acceptable for income tax purposes only because of the integrity of each of its three components: (1) a number accurately aggregating all opening accounts receivable; (2) a number accurately aggregating all closing accounts receivable; and (3) a number accurately aggregating all cash receipts during the intervening year. When components (1) and (2) are accurate, an inaccuracy in component (3) inevitably distorts the figure which emerges from the mixture of the three components: that is, the figure which purports to reflect the price of the goods delivered and invoiced in the given year. When the inaccuracy in component (3) inheres in the omission of cash received during the intervening year, there is an understatement of the price of goods delivered and invoiced during that year and thus, on the accrual system, an understatement of income for that very year. Because each of the three components is itself an aggregate number, the understatement of income for the very year occurs whether the specific unreported cash received that year was in payment for goods delivered and invoiced in that year or for goods delivered and invoiced at some earlier time.

My understanding is that the proposition which I have stated in the preceding paragraph of this opinion is the proposition upon which the plaintiff now takes its stand and which it has embraced in its brief in opposition to the defendant's post-trial motion for acquittal. I accept it.

As I have observed above, the technique of using cash receipts during a given year, such as 1971, as a reflection of the price of goods actually delivered and invoiced in 1971, is a valid and acceptable technique for an accrual taxpayer only because of the integrity of each of the three components. As I have also observed, when the integrity of component (3)--the aggregation of all cash receipts during 1971--is undermined by distortion, the technique results in an inaccurate computation of the price of goods delivered and invoiced in 1971. However, it follows that when the integrity of either component (1) or (2)--the aggregation of the accounts receivable as of January 1, 1971 and December 31, 1971, respectively--is undermined by distortion, the computation is also invalid and unacceptable.

Let us assume, for example, that on a day in 1970 defendant had delivered and invoiced to customer A goods priced at $4000, and that A had not made payment by the close of business on December 31, 1970. It would have been defendant's tax obligation to report that sale as 1970 income by including it in his closing accounts receivable as of December 31, 1970. Had he failed to include it among the accounts receivable, he would have understated his 1970 income and, had the elements of knowledge and wilfulness been present, the criminal evasion for 1970 would have been complete.

It we assume further that some time in 1971 customer A had paid defendant the $4,000 for the 1970 delivery, then had defendant included this payment in his cash receipts for 1971, the result of combining components (1), (2) and (3) for 1971 would have been an overstatement of 1971 income by $4,000. With respect to cash actually received during 1971, omissions of up to $4,000 would have reduced the distortion pro tanto, and the omission of a full $4,000 would have eliminated it. So far as a correct report of 1971 income is concerned (that is, the price of goods delivered and invoiced during 1971), it would have been irrelevant whether such an omission from cash receipts had been carefully noted and explained in the business books and records and even on the tax return or the omission had been accomplished simply by pocketing one or several payments received from customers in 1971. If the latter course had been chosen, it would also have been irrelevant whether a specific receipt of cash thus pocketed had been a payment for goods delivered and invoiced in 1971 or for goods delivered and invoiced at some earlier time. ³

To put all this somewhat differently, the crime charged in this case requires the government to prove that the defendant knowingly and willfully understated in his tax return for 1971 the price of the goods he delivered and invoiced in 1971. Had all of the invoices for goods delivered and invoiced in 1971 been available to the government as evidence, it might have been in a position to prove that defendant reported as 1971 income a sum significantly less than the aggregate price reflected in those invoices. The attempt, however, was to prove the understatement of 1971 income by proving that the third component of three components of a certain formula had been distorted by the defendant. Proof of such a distortion of that third component, however strong, is insufficient without proof that the distortion resulted in an understatement of income for 1971. ⁴ The latter proof must establish that there had been no compensating distortion of the first component (the figure which represented the closing balance of accounts receivable for 1970 and the opening balance of accounts receivable for 1971) and no compensating distortion of the second component (the figure which represented the closing balance of accounts receivable for 1971.

Inadequate would be a kind adjective to describe the government's proof concerning the first and second components--the balance of accounts receivable as of December 31, 1970 and January 1, 1971 and the balance of accounts receivable as of December 31, 1971. The validation of the source of the $15,701.40 figure for the 1971 closing balance of accounts receivable was virtually nonexistent, and the validation of the source of the $8,200 figure for the 1971 opening balance was hardly more impressive. But even if it were accepted that those two figures appeared somewhere in defendant's books and records, there was a total absence of evidence that either figure was a true and accurate aggregation of the price of goods actually delivered and invoiced prior to the pertinent date but as yet unpaid. If the $8,200 figure was significantly less than the true aggregate of 1971 opening accounts receivable or if the $15,701.40 figure was significantly greater than the true aggregate of 1971 closing accounts receivable, an understatement of the cash received during 1971 may have been merely compensating. That is, an understatement of the cash received during 1971 may or may not have resulted in an understatement of the price of goods delivered and invoiced during 1971.

The instruction given the jury and quoted early in this opinion strongly implied that with respect to each specific 1971 cash receipt which was allegedly unreported by defendant as cash received in 1971, it was necessary for the government to prove that the payment was for goods delivered and invoiced some time in 1971. This was the manner in which, during the trial, defendant's counsel had stated his contention and also the manner in which the court had expressed its view on the issue. As explained in this opinion, I now believe that at best the instruction given was poorly expressed and that under certain conditions an understatement of cash received by defendant in 1971 could have resulted in an understatement of the price of goods delivered and invoiced during 1971, whether a particular omitted cash receipt was in payment for goods delivered and invoiced during 1971 or delivered and invoiced at some earlier time.

That the instruction given was poorly expressed does not give rise to a problem in the admin istration of this particular case, however. This is because, viewing the evidence most favorably to the plaintiff, a judgment of acquittal is necessary whether the rule properly governing the case is as expressed in the instructions given or as I would now express it.

No jury could reasonably have found, either beyond a reasonable doubt or even by a preponderance of the evidence, that any specific cash receipt in 1971, which the jury believed to have gone unreported, was in payment for goods delivered and invoiced in 1971.

On the other hand, a more accurately phrased instruction would have informed the jury that only under certain conditions, relating to the true opening and closing balances of accounts receivable, would the failure to report this or that specific receipt of cash in 1971 have resulted in an understatement of the price of goods delivered and invoiced during 1971.

No jury could reasonably have found either beyond a reasonable doubt or even by a preponderance of the evidence, that those certain conditions were present: that the stated figures for the 1971 opening and closing balances of accounts receivable, whatever the evidence may have shown those stated figures to be, were accurate aggregations of the accounts truly receivable at the pertinent dates. Therefore, no reasonable jury could have found that an understatement of the cash received in 1971, if there had been such understatement, had resulted in an understatement of the price of goods delivered and invoiced in 1971 and, therefore, an understatement of defendant's 1971 income.

Order

It is ordered that defendant's motion for judgment of acquittal on Count II of the indictment is granted. The defendant is released from any and all restrictions imposed upon him as a result of the return of the indictment in this case.

¹ In this opinion I will use the term "cash" to include checks, currency, or coins.

² This defendant has not been charged with, or found guilty of, conduct with respect to his tax return for 1971 which amounted to concealment of a failure to report 1970 income in his return for 1970.

³ A similar example could be stated to demonstrate the effect of an overstatement of the December 31, 1971 accounts receivable.

⁴ I appreciate that defendant challenges strongly the adequacy of the proof that defendant pocketed and diverted to nonbusiness uses any of the cash he received from customers in 1971. I express no opinion on that question.

 

 

[2002-1 USTC ¶50,401] United States of America , Plaintiff-Appellee v. Nanja Rutherford, Defendant-Appellant United States of America , Plaintiff-Appellee v. Martin Rutherford, Defendant-Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 01-10164, 01-10172, 4/29/2002, 39 Fed. Appx. 574, 2002 U.S. App. LEXIS 7874. Affirming an unreported District Court decision

[Code Sec. 7203 ]

Crimes: Failure to file return: Failure to pay tax: IRS interrogation: Fifth Amendment rights: Motion to suppress: Self-incrimination: Right to counsel.--A married couple's convictions for making and filing false tax returns and failing to file returns were affirmed. The taxpayers' argument that evidence obtained in an interrogation with an IRS agent should be suppressed because their right against self-incrimination and right to counsel were violated was meritless. The interrogation was not custodial in nature and no special circumstances were involved that would make the evidence the taxpayers sought to suppress coerced or otherwise not freely determined.

[Code Sec. 7203 ]

Crimes: Failure to file return: Failure to pay tax: Burden of proof.--A married couple's motion for acquittal was properly denied. The government met its burden of proving that the taxpayers earned sufficient income to be required to file a tax return by showing that the gross receipts from their chiropractic practice exceeded the statutory minimum.

Alan Hechtkopf, Jennifer C. Smith, Gregory V. Davis, Thomas J. Krysa, Department of Justice, Washington D.C. 20530, for plaintiff-appellee (01-10164). Rob ert E. Lindsay, Department of Justice, Washington , D.C. 20530 , for plaintiff-appellee (01-10164, 01-10172). Alan Hechtkopf, Gregory V. Davis, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee (01-10172). Kevin J. Mirch, Mirch & Mirch, Reno , Nev. , for defendants-appellants.

Before: BRUNETTI, LEAVY and NELSON, Circuit Judges.

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

MEMORANDUM ^*

Martin and Nanja Rutherford ("the Rutherfords ") appeal their convictions by a jury for making and filing false income tax returns for 1992, and for failing to file income tax returns for 1993. Specifically, they argue that the district court erred in denying their motions to suppress evidence, in denying their Rule 29 motions for judgments of acquittal, and in making inconsistent evidentiary rulings throughout the trial. We disagree, and affirm the district court's order entering judgments of conviction against the Rutherfords . Because the parties are familiar with the facts, we will not recite them except as necessary.

I.

We review de novo a district court's denial of a motion to suppress and its application of the law. United States v. Murillo, 255 F.3d 1169, 1174 (9th Cir. 2001). The district court's factual findings underpinning its denial of a motion to suppress are reviewed for clear error. Id.

The Rutherfords argue that IRS Special Agent Lilia Ruiz interrogated them at their offices without identifying herself or informing them of their constitutional rights, and that all evidence obtained as a result of the interrogation violated their Fifth Amendment rights and was thus inadmissible. The Rutherfords also argue that a tape recorded interview of Martin Rutherford by another IRS agent should be suppressed because the IRS purported to conduct it as part of a civil investigation, when in fact the case had already been referred to the criminal division of the IRS. These arguments have no merit.

The United States Supreme Court held that an IRS agent need not provide Miranda warnings to an individual under IRS investigation before questioning unless the individual was in custody or "special circumstances" were present "such as to overbear [the individual's] will to resist and bring about confessions not freely self-determined." Beckwith v. United States [76-1 USTC ¶9352], 425 U.S. 341, 347-48, 48 L.Ed.2d 1, 96 S.Ct. 1612 (1975) (quoting Rogers v. Richmond, 365 U.S. 534, 544, 5 L.Ed.2d 760, 81 S.Ct. 735 (1961)). There is no evidence that the meeting between Ruiz and the Rutherfords was custodial in nature, nor were "special circumstances" involved so as to make the evidence the Rutherfords wish to suppress coerced or otherwise "not freely determined." See Beckwith [76-1 USTC ¶9352], 425 U.S. at 347-48. Therefore, Ruiz was not required to Mirandize the Rutherfords , and the meeting did not trigger their constitutional rights against self-incrimination or right to counsel. Accordingly, any evidence obtained as a result of this meeting was properly admitted.

The Rutherfords argue that the taped interview should be suppressed because the IRS had already referred the Rutherfords' case from its civil division to its criminal division, and that once a case is referred from the IRS's civil department to its criminal division, under the IRS manual and Crystal v. United States [99-1 USTC ¶50,464], 172 F.3d 1141 (9th Cir. 1999), the IRS is required to suspend all civil auditing activities. However, the district court found that the tape recording was made several months before the IRS referred the case to its criminal division, and there is no evidence indicating that the district court's finding was clearly erroneous.

The Rutherfords claim that, under United States v. Sourapas [75-1 USTC ¶9379], 515 F.2d 295, 298 (9th Cir. 1975), the both the tape-recorded interview and the evidence obtained during and as a result of the Ruiz interrogation must be suppressed because the IRS violated its own procedures. However, this argument has no merit. Sourapas did support the Rutherfords argument, holding that "any information obtained from Sourapas' personal records or answers to questions should be suppressed by reason of Saetta's failure to comply with the [IRS] regulations," Sourapas [75-1 USTC ¶9379], 515 F.2d at 298, but the holding in Sourapas has long been superceded. The United States Supreme Court held that evidence obtained in violation of IRS regulations is admissible at the criminal trial of a taxpayer, so long as there was no constitutional or statutory violation. United States v. Caceres [79-1 USTC ¶9294], 440 U.S. 741, 754-56, 59 L.Ed.2d 733, 99 S.Ct. 1465 (1979); accord United States v. Snowadzki [84-1 USTC ¶9157], 723 F.2d 1427, 1430-31 (9th Cir. 1984) ("Absent unusual circumstances, the exclusionary rule does not apply when IRS agents violate internal regulations, without also infringing on constitutional or statutory rights"); see also United States v. Appoloney [85-2 USTC ¶9565], 761 F.2d 520, 522 (9th Cir. 1985) (stating that "the Court [in Caceres] held that absent any constitutional or statutory violation, the exclusionary rule was inapplicable. Thus, the continuing validity of our holding in Sourapas is questionable. Subsequently, [in Snowadzki] we have held that 'absent unusual circumstances, the exclusionary rule does not apply when IRS agents violate internal regulations, without also infringing on constitutional or statutory rights' ") (citations omitted). Even if the IRS violated its own regulations, the evidence remains admissible because the actions of the IRS agents did not violate the Rutherfords ' statutory or constitutional rights. See Caceres [79-1 USTC ¶9294], 440 U.S. at 754-56; Snowadzki [84-1 USTC ¶9157], 723 F.2d at 1430-31.

II.

A trial court's ruling on a Rule 29 motion for acquittal is reviewed de novo. United States v. Ruiz-Lopez, 234 F.3d 445, 447 (9th Cir. 2001). We must review the evidence in the light most favorable to the government to determine whether any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt. United States v. Pacheco-Medina, 212 F.3d 1162, 1163 (9th Cir. 2000). We will not set aside the findings of the trier of fact unless they are clearly erroneous. Marchini [86-2 USTC ¶9701], 797 F.2d [759] at 766.

Examining the evidence in the light most favorable to the government, it is clear that the government met its burden of proving that the Rutherfords earned enough gross income to be required to file a tax return under 26 U.S.C. §6012 by showing that the gross receipts of their chiropractic practice exceeded the statutory minimum.

The Rutherfords also argue that their Rule 29 Motion should have been granted because they relied on the advice of counsel and on correspondence from the IRS when they determined that they owed no taxes for 1992 and 1993. Reliance on the advice of a tax professional does not constitute a complete defense, but is a factor that the trier of fact may consider on the issue of willfulness. United States v. Ibarra-Alvarez, 830 F.2d 968, 973 (9th Cir. 1987). However, the jury considered the evidence on this issue and rejected the defense. The government offered a great deal of credible evidence showing that the Rutherfords knew that they owed taxes and acted willfully in violating the tax laws in 1992 and 1993. Viewing this evidence in the light most favorable to the government, we conclude that the government met its burden of proving that the Rutherfords acted willfully.

III.

We review a district court's evidentiary rulings for abuse of discretion. Murillo, 255 F.3d at 1174; United States v. Alatorre, 222 F.3d 1098, 1100 (9th Cir. 2000). Such rulings must be reversed for an abuse of discretion only if such nonconstitutional error more likely than not affected the verdict. United States v. Ramirez, 176 F.3d 1179, 1182 (9th Cir. 1999).

The Rutherfords have appealed a number of the district court's evidentiary rulings, alleging various errors. Generally, the district court controlled the scope of the Rutherfords ' cross-examination of government witnesses tightly, often sustaining government objections for irrelevance or exceeding the scope of direct examination. However, we could find no instance where the court abused its discretion.

AFFIRMED.

^* This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as may be provided by Ninth Circuit Rule 36-3.

 

 

[98-2 USTC ¶50,724] United States of America , Plaintiff-Appellee v. Elton Howard Silkman, Defendant-Appellant

(CA-8), U.S. Court of Appeals, 8th Circuit, 97-3888, 9/16/98, 156 F3d 833, 156 F3d 833. Reversing and remanding an unreported District Court decision

[Code Sec. 7203 ]

Penalties, criminal: Tax evasion: Prosecution: Trial: Evidence: Admissibility: Conclusiveness of assessment: Prima facie evidence: Taxes owed: Jury question.--In a case of first impression, assessments that were admin istratively final for the purposes of civil collection remedies were determined not to be conclusive proof of deficiencies in the taxpayer's prosecution for criminal tax evasion. Thus, a taxpayer who failed to exercise his rights to raise civil challenges to his assessments was, nonetheless, entitled to submit evidence that he did not owe the assessed taxes during his trial for evasion. In a criminal case, the assessments were only prima facie evidence that permitted an inference that the taxes were due and owing, and a conclusive presumption based on that inference was inappropriate.

Before: MCMILLIAN, LOKEN and HANSEN, Circuit Judges.

LOKEN, Circuit Judge:

Elton Silkman appeals his conviction for tax evasion in violation of 26 U.S.C. §7201. Silkman, a former South Dakota farmer, did not file federal income tax returns for the years 1981 through 1985 and ignored numerous IRS inquiries about his failures to file. In March 1991, the IRS issued a notice of deficiency reciting that Silkman owed $282,515 in taxes for those five years, plus accrued penalties and interest, and advising he had ninety days to petition the United States Tax Court for redetermination of the asserted deficiency. See 26 U.S.C. §§6212-6213. Silkman instead responded with letters stating, "I am not a 'taxpayer' as that term is defined within section 7701 . . . of the [Internal Revenue] Code," and, "If I do not hear from you within 30 days from the receipt of this letter, I will presume that you have no intention of following the Internal Revenue Service procedures outlined above and I will take appropriate action." Later that year, Silkman sold his farm, equipment, cattle, grazing rights, and grain and transferred most of the substantial proceeds to European bank accounts in the names of various trusts, where he now claims the money disappeared.

In September 1991, the IRS assessed the asserted tax deficiencies. See 26 U.S.C. §§6201-6203; 26 C.F.R. §301.6203-1. After efforts to collect the assessments failed, the government indicted Silkman on five counts of tax evasion, one for each of the five tax years. Tax evasion is defined in §7201 as willfully attempting "in any manner to evade or defeat any tax imposed by this title or the payment thereof." The elements of this crime "are willfulness; the existence of a tax deficiency; and an affirmative act constituting an evasion or attempted evasion of the tax." Sansone v. United States [65-1 USTC ¶9307], 380 U.S. 343, 351 (1965) (citations omitted); see United States v. Abodeely [86-2 USTC ¶9713], 801 F.2d 1020, 1023 (8th Cir. 1986). At trial, the government's proof of tax deficiencies consisted of the March 1991 notice of deficiency plus five certificates evidencing the September 1991 assessments. At the government's urging, the district court excluded defense evidence offered to prove that Silkman in fact had no taxable income for the tax years in question. Instead, the court instructed the jury that the tax assessment for each year "establishes the tax liability." The jury convicted Silkman on all five counts. On appeal, he challenges this evidentiary ruling and raises three other issues. We agree the district court erred in excluding this evidence and therefore remand for a new trial.

Tax evasion is a felony, a serious offense that is "the capstone of a system of sanctions which singly or in combination were calculated to induce prompt and forthright fulfillment of every duty under the income tax law and to provide a penalty suitable to every degree of delinquency." Sansone [65-1 USTC ¶9307], 380 U.S. at 350-51, quoting Spies v. United States [43-1 USTC ¶9243], 317 U.S. 492, 497 (1943). Section 7201 is broadly worded, reflecting the fact that willful tax evasion can occur at any stage of the IRS's complex process for determining, assessing, and collecting federal taxes. But whether a taxpayer is charged with tax evasion by willfully attempting to defeat the IRS's ascertainment of his tax liability, or by willfully attempting to evade the payment of a tax, the government must prove that the tax was in fact "imposed by this title," in other words, a tax deficiency. See United States v. Dack [84-2 USTC ¶9913], 747 F.2d 1172, 1174 (7th Cir. 1984). ¹ Conversely, "a taxpayer-defendant has a right to establish as a defense that he owed no tax in addition to what he had paid." United States v. Moody [64-2 USTC ¶9873], 339 F.2d 161, 162 (6th Cir. 1964).

The issue in this case--one of first impression--is whether an IRS tax assessment that is admin istratively final for purposes of the agency's civil collection remedies is also conclusive proof of the tax deficiency in a tax evasion prosecution. The district court reasoned that this criminal trial was not the appropriate forum to contest the IRS assessments after Silkman slept on his right under the tax laws to challenge them admin istratively or by Tax Court litigation. But Silkman was not charged with willfully refusing to obey an agency order; in that type of case, the criminal defendant may be barred from attacking the validity of the order he disobeyed. Compare Cox v. United States , 332 U.S. 442, 453 (1947), with Estep v. United States , 327 U.S. 114, 122 (1946). Here, the IRS assessments were offered as conclusive proof of an underlying fact that is an element of the crime--that taxes were in fact owed. In this type of case, the overriding principle is that "one charged with the commission of a felony . . . has an absolute right to a jury determination upon all essential elements of the offense." United States v. England [65-1 USTC ¶9350], 347 F.2d 425, 430 (7th Cir. 1965); see Koontz v. United States [60-1 USTC ¶9405], 277 F.2d 53, 55 (5th Cir. 1960).

The government has no authority for its startling contention that an IRS assessment is conclusive proof in a criminal trial that taxes were in fact owing. The government cites Dack [84-2 USTC ¶9913], 747 F.2d at 1174, and United States v. Daniel [92-1 USTC ¶50,095], 956 F.2d 540, 542 (6th Cir. 1992), but they merely held that when an alleged tax evasion arose from the failure to file a tax return, no formal assessment is necessary because the deficiency is deemed to arise by operation of law on the date a return should have been filed. Accord United States v. Hogan [88-2 USTC ¶9593], 861 F.2d 312, 315 (1st Cir. 1988). These cases did not address whether a formal assessment when made is conclusive proof of the asserted deficiency. The government also cites United States v. Voorhies [81-2 USTC ¶9710], 658 F.2d 710 (9th Cir. 1981), but that case supports Silkman's position. In Voorhies, the taxpayer was charged with evading the payment of taxes by concealing assets at a time prior to the formal assessment. The government's proof of a tax deficiency consisted of the certificates of assessment and the testimony of an agent explaining how the tax liability had been determined. Like the later decisions in Dack and Daniel, the court first rejected the taxpayer's contention that a tax deficiency cannot exist prior to formal assessment. It then went on to conclude that the government's uncontradicted evidence was sufficient to prove a tax deficiency because "the certificates of assessment were prima facie correct and therefore adequate evidence of the amount of Voorhies' tax liability." Id. at 715 (emphasis added).

We agree with the analysis in Voorhies--a formal tax assessment that has become admin istratively final is prima facie evidence of the asserted tax deficiency, and if unchallenged, it may suffice to prove this element of the crime. But the assessment is only prima facie proof of a deficiency. The assessed deficiency may be challenged by the defendant accused of tax evasion, and the issue is one for the jury. As the Supreme Court said in United States v. Martin Linen Supply Co., 430 U.S. 564, 572-73 (1977), the jury's

overriding responsibility is to stand between the accused and a potentially arbitrary or abusive government that is in command of the criminal sanction. For this reason, a trial judge is prohibited from entering a judgment of conviction or directing a jury to come forward with such a verdict, regardless of how overwhelmingly the evidence may point in that direction.

(Citations omitted.) This conclusion is consistent with United States v. England, where the government conceded that proof of a valid assessment was essential to its evasion case, and the court held it was error to instruct the jury the assessment was valid as a matter of law. [65-1 USTC ¶9350], 347 F.2d at 430. England was followed in United States v. Goetz [84-2 USTC ¶9947], 746 F.2d 705, 708-10 (11th Cir. 1984). Our conclusion is also consistent with decisions that the taxpayer may defend a charge of willfully evading the assessment of taxes by proving there was no tax due and owing, for example, by evidence of unclaimed deductions and expenses. See, e.g., Clark v. United States [54-1 USTC ¶9291], 211 F.2d 100, 103 (8th Cir. 1954); see also Sansone [65-1 USTC ¶9307], 380 U.S. at 354 (the crime of tax evasion is complete when a false return is filed "assuming, of course, that there was in fact a deficiency").

We find further support for this conclusion in the Supreme Court's cases dealing with the validity of presumptions in criminal cases. The government argues, in effect, that the alleged tax deficiency may be conclusively presumed from an admin istratively final assessment. But conclusive presumptions are invalid in criminal cases because they "conflict with the overriding presumption of innocence with which the law endows the accused and which extends to every element of the crime, and would invade the factfinding function which in a criminal case the law assigns solely to the jury." Sandstrom v. Montana, 442 U.S. 510, 523 (1979) (quotations omitted). The court's approach in Voorhies, on the other hand, creates in effect only a permissive presumption, one that "merely allows an inference to be drawn and is constitutional so long as the inference would not be irrational." Yates v. Evatt, 500 U.S. 391, 402 n.7 (1991). It is rational to infer that an assessment which the taxpayer chose not to contest is prima facie evidence of the asserted deficiency. But it is not rational to make the assessment conclusive proof of the deficiency, particularly because in the absence of a tax return an assessment is based upon a "substitute" return prepared by the IRS without the benefit of factual input from the taxpayer.

For the foregoing reasons, we conclude that one accused of tax evasion must have the opportunity to prove, however unlikely the proposition may be, that an admin istratively final tax assessment does not accurately reflect the existence of a tax deficiency. Therefore, Silkman is entitled to a new trial at which he may introduce evidence relevant to whether there was in fact a tax deficiency in one or more of the tax years in question.

Silkman raises three additional issues on appeal that require little discussion. First, he argues he is entitled to a judgment of acquittal because the government failed to prove tax deficiencies. We disagree. The formal assessments were prima facie evidence of tax deficiencies. When combined with the other evidence that Silkman consciously refused to file returns, ignored numerous IRS inquiries, evasively responded to the notice of deficiency, and then purposefully concealed his assets overseas, we think the trial record was more than sufficient to permit the jury to find tax deficiencies and the other elements of tax evasion beyond a reasonable doubt.

Second, Silkman argues the district court erred in excluding Exhibit 106, a document purporting to show that the deficiencies asserted in the IRS assessments were determined in an arbitrary or unreliable manner. The court excluded this evidence as part of its overall ruling that the assessments were conclusive proof of tax deficiencies. At a new trial, where the fact of tax deficiencies will be an open issue, we assume that, if Exhibit 106 is offered, the district court will consider its relevancy in the context of that trial. Third, Silkman argues the district court erred in excluding Exhibit 107, documents purporting to show the IRS did not properly assess deficiencies according to its own procedures. This contention is based upon Silkman's theory that proof of a valid assessment is essential when the defendant is accused of evading payment of a tax. However, we agree with cases holding that, while an assessment may be used to prove a tax deficiency in a payment evasion case, an assessment is not a necessary element of a payment evasion charge. See Hogan [88-2 USTC ¶9593], 861 F.2d at 315-16; Dack [84-2 USTC ¶9913], 747 F.2d at 1174; Voorhies [81-2 USTC ¶9710], 658 F.2d at 714-15. As the assessments in this case were simply evidence of the asserted deficiencies, Exhibit 107 was at best marginally relevant, and its exclusion was not error.

The judgment of the district court is reversed, and the case is remanded for a new trial.

¹ By contrast, a taxpayer can be convicted of the misdemeanor of willfully failing to file an income tax return without proof that any tax was assessed or owing. See 26 U.S.C. §7203; United States v. Richards [84-1 USTC ¶9130], 723 F.2d 646 (8th Cir. 1983).

 

 

[76-1 USTC ¶9400] United States of America , Plaintiff-Appellee v. Leonard Dixon, Defendant-Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 75-1178, 538 F2d 812, 4/26/76, Affirming in part, vacating sentence and remanding unreported District Court decision

[Code Sec. 7201]

Criminal penalties: Tax evasion: Net-worth method: Abuse of grand jury process: Sentence: Ambiguous.--Because the taxpayer stipulated to amounts of gross income and tax owing for the years in question, the government was relieved from having to prove the subjects dealt with in the stipulation, and sufficiently established the elements of tax evasion. Also, the taxpayer failed to show that there was an abuse of the grand jury process. His argument that the IRS used the grand jury to further its tax investigations was rejected since an indictment did result. Further, the trial court's sentence was not ambiguous when it ordered the taxpayer committed until payment of fines or until he was discharged by course of law. Such a sentence was not subject to constitutional attack, nor did it constitute cruel and unusual punishment. Finally, the appellate court concluded that the trial court did not abuse its discretion concerning the effect of government affidavits on the severity of the sentence since information supporting the judge's remarks was supplied by the taxpayer's own admissions at trial and by a presentence report received by the judge prior to sentencing.

Ronald Muntean, Assistant United States Attorney, Los Angeles , Calif. , for pliantiff-appellee. James E. Sutherland, 3505 Long Beach Blvd., Long Beach, Calif., for defendant-appellant.

Before MERRILL, WRIGHT and CHOY, Circuit Judges.

Opinion

MERRILL, Circuit Judge:

This appeal is from conviction of conspiring to evade payment of income taxes and evasion of payment of income taxes for the years 1966 through 1970.

1. Sufficiency of Evidence

Appellant contends that the Government has failed to prove essential elements of the cash-expenditure variant of the net-worth method of proving taxable income; that the Government has failed to establish that unreported income attributed to appellant was earned in the year for which it was taxed; that the Government failed to establish appellant's net worth at the opening of the taxable period in question to refute the possibility that expenditures in excess of reported income could be attributed to resources on hand at the beginning of the tax period.

Appellant's principal defense at trial appears to have been that he did not realize that income derived from illegal sources was taxable. The contentions advanced on appeal were not asserted at trial. Instead, appellant stipulated to the amounts of gross income and tax owing as specified in the indictment, and admitted that the figures in his delinquent tax returns correctly reflected his gross income for the years in question. These open court admissions relieved the Government from the necessity of making proof upon the subjects dealt with and sufficiently established the elements of the crime now challenged. No corroboration was necessary, as may be required in the case of an extra-judicial admission.

2. Abuse of Grand Jury Process

Appellant asserts as error the district court's order striking appellant's motion to enjoin use of evidence obtained by what he contends was abuse of the grand jury process. In support of his motion for injunction appellant presented an affidavit of a former special agent of the Intelligence Division of the IRS to the effect that it was in the past common practice of the IRS to use grand jury subpoenas not to further grand jury investigations of crime, but to further IRS tax investigations. When defense counsel could not advise the court what testimony he expected to obtain from other witnesses, and upon finding no showing of abuse in this particular case, the district court struck appellant's motion.

Appellant's basic contention is that he was denied due process by the district court's refusal to allow him to show that evidence used against him was illegally obtained. The nature of the asserted illegality--abuse of the grand jury process--is such that a hearing upon the question would involve a breach of grand jury secrecy ¹ and the delay and disruption of the orderly functioning of the criminal justice system. Accordingly hearing is not lightly granted; one is not entitled to hearing "to enable [him] to satisfy [his] unsupported suspicions." Lawn v. United States [58-1 USTC ¶9189], 355 U. S. 339, 350 (1958). Moreover, the grant of hearing in such matters, involving grand jury secrecy, is a matter of judicial discretion. See Pittsburgh Plate Glass Co. v. United States , 360 U. S. 395. 398-99 (1959).

Appellant has not met his burden here. The fact that IRS has improperly used the grand jury for its own purposes on occasions in the past gives rise to no more than a doubtful inference that they may have acted in such a fashion in this case. This inference (if we concede that it is such) is rebutted by the fact that an indictment in fact did result. See Beverly v. United States , 468 F. 2d 732, 749 (5th Cir. 1972). We can, then, presume that the grand jury was properly pursuing an inquiry as to appellant's guilt of crime. We find neither error not abuse of discretion in the action of the district court in striking appellant's motion.

3. Sentence

The maximum sentence for tax fraud is five years or $10,000, or both. Appellant was found guilty on six counts. On the first four counts he received sentences of two years to run consecutively. On the two last counts he received sentences of two years to run concurrently with the sentences on the first four counts. On each of the six counts he was fined "$1,000 together with the costs of prosecution." In sentencing, the court ordered: "IT IS FURTHER ADJUDGED that the defendant stand committed until the fines herein imposed are paid or until he is otherwise discharged by due course of law."

Appellant contends that this language is ambiguous. We disagree. It is taken from the opinion of this court in Wagner v. United States, 3 F. 2d 864, 865 (9th Cir. 1925). "Otherwise discharged by due course of law" has reference to the right of a prisoner who is unable to pay his fine to obtain release upon proper showing after thirty days imprisonment for nonpayment, pursuant to 18 U. S. C. §3569 (successor to Rev. St. §1042, which was the statute before the court in Waaner).

Appellant attacks the constitutionality of extending a term of imprisonment of an indigent prisoner solely for nonpayment of the fine. Resolution of this question, in our judgment, must await the event. It is far from certain that grievance ever wil occur. We find no merit in appellant's contention that the sentence constituted cruel and unusual punishment.

4. Bail Affidavits

Appellant contends that severity of sentence was enhanced by information contained in affidavits by government agents, the substance of which was not disclosed to him. The district court, however, expressly disclaimed reliance on the affidavits Appellant contends that references made by the judge in imposing sentence to appellant's past activities show that the judge in fact did rely on information obtained from the affidavits and that his disclaimer should be rejected. Information supporting the judge's remarks, however, was supplied by appellant's own admissions at trial and by a presentence report received by the judge prior to sentencing. We see no occasion for rejection of the disclaimer. We find no abuse of discretion.

Appellant contends that under Gregg v. United States, 394 U. S. 489 (1969), receipt by the district judge of the affidavits prior to completion of trial disqualified the judge from further participation in the case. We disagree. The affidavits were presented to the court in a matter respecting release of the accused on bail, and clearly were not presented or intended to serve as a presentence report to assist the court in sentencing under Rule 32(c)(1). They thus were not such a file or document as was before this court in United States v. Montecalvo, -- F. 2d -- (9th Cir. Mar. 15, 1976), and under United States v. Duhart, 496 F. 2d 941 (9th Cir. 1974), neither Rule 32 nor Gregg applies.

Judgment is affirmed.

¹ Appellant explicitly asked that the Government be required to disclose to him "the names and addresses of all witnesses called before any Grand Jury to give evidence with respect to the instant prosecution." Moreover, appellant's apparent purpose in seeking the hearing was to learn "what witnesses and what evidence were produced from the use of Grand Jury subpoenas which were simply used for the purpose of funneling information from the Grand Jury into the hands of the Internal Revenue Service."

 

 

 

[75-1 USTC ¶9420] United States of America v. Francis J. Ettorre

U. S. District Court, East. Dist. Pa., Criminal Action No. 74-171, 387 FSupp 582, 1/10/75

[Code Sec. 7203]

Criminal penalties: Failure to file returns: Wilfulness: Miscellaneous assertions of error: Misdemeanor conviction upheld.--A failure to fulfill the obligation of timely filing income tax returns is wilful if done intentionally, rather than carelessly or due to a mistake, and with the knowledge that information to which the Government is entitled is being withheld. Therefore, taxpayer's post-trial motion to overturn his conviction for failing to file personal income tax returns, as well as tax returns for a company in which he was part owner for the years 1969, 1970, and 1971, was denied because the Government has no duty to prove beyond a reasonable doubt that a taxpayer had a "bad purpose" and "evil motive" in failing to file. Taxpayer's other arguments that he lacked the requisite mental capacity, that certain amendments to the criminal information prejudiced his rights, and that certain evidentiary rulings at trial were erroneous were all dismissed as being without merit.

Opinion

DITTER, District Judge:

The defendant was charged with willfully failing to file personal and corporate income tax returns for a three year period in violation of 26 U. S. C. §7203. After a two-day trial without a jury I found defendant guilty on all six counts of the information. Before me are his post-trial motions. ¹

Francis J. Ettorre, during the years in question, 1969, 1970, and 1971, was a certified public accountant with a substantial private practice. In 1968, 1969, and 1970, he was also part owner of Panett Computer Service Corporation and was responsible for its accounting work and the preparation of its tax returns. As the fortunes of the company waned, Ettorre assumed more and more responsibility for its operation. Not only did he extend substantial funds to Panett, but also spent a great deal of time juggling creditors and attempting to obtain new business. Finally the company failed.

During this period, Panett did not file required federal and state tax returns nor did Ettorre file his personal federal tax returns. However, it was established that defendant had in the past timely filed his returns and those of his clients. Moreover, during the period in question, Ettorre applied for and received an extension until June 15, 1970, in which to file his 1969 personal income tax return and until May 15, 1971, in which to file his 1970 personal income tax return.

Mr. Ettorre explained that he did not file his personal tax returns because he was too busy with all the worries and problems he had at Panett (N. T. 179). Although he knew he would have to get around to it, would have to complete them, he just disregarded the corporate tax returns (N. T. 173-74). He did not file his personal returns for 1970 and 1971 because they depended upon the return or 1969 being done--and that was still not completed (N. T. 179, 181). He also admitted that he knew of the obligation to file his tax returns by April 15 of the following year--or at the end of whatever extension had been granted (N. T. 180).

In determining the defendant had acted willfully, I concluded that he knew of the time requirements for the filing of tax returns but for the years involved had deliberately failed to comply. I further held, however, that Ettorre did not intend to defraud the Government and always intended to file the returns at some undetermined time in the future.

The principal issue before me is whether my interpretation of the word "willfully" as used in this section of the Code, 28 U. S. C. §7203, is correct. I adopted the explanation found in United States v. Litman [57-2 USTC ¶9820], 246 F. 2d 206, 208-09 (3d Cir. 1957), where it was held that willfulness existed when a taxpayer intended not to fulfill the obligation of timely filing of which he was well aware. Citing Spies v. United States [43-1 USTC ¶9243], 317 U. S. 492, 496, 63 S. Ct. 364, 367 (1943), Judge Hastie stated that punctuality is important to the fiscal system and there are sanctions to assure punctual as well as faithful performance of the duty to file tax returns.

Defendant, relying on United States v. Bishop [73-1 USTC ¶9459], 412 U. S. 346, 93 S. Ct. 2008 (1973), argues that the Government must prove beyond a reasonable doubt that he had a "bad purpose" and "evil motive" in order to find him willful. The Supreme Court in Bishop simply held that "willfully" had the same meaning in both felony and misdemeanor sections of the tax statutes. In discussing a specific definition of the word, Justice Blackman states:

the word "willfully" in these statutes generally connotes a voluntary, intentional violation of a known legal duty. It has formulated the requirement of willfulness as "bad faith or evil intent", Murdock [3 USTC ¶1194], 290 U. S. at 398, 54 S. Ct. at 226, . . .

United States v. Bishop, supra at --, 93 S. Ct. at 2017.

Defendant contends that this language required the court to find bad faith or evil motive before convicting him.

A close reading of Bishop and United States v. Murdock [3 USTC ¶1194], 290 U. S. 389, 54 S. Ct. 223 (1933), fails to support defendant's position. Both cases make clear that the purpose of the Court's emphasis on bad faith and evil motive was to distinguish a criminal violation of the tax statutes from mere negligence or honest misunderstanding. Justice Rob erts points out in Murdock, supra at 396, 54 S. Ct. at 226, that:

Congress did not intend that a person, by reason of a bona fide misunderstanding as to his liability for the tax, as to his duty to make a return, or as to the adequacy of the records he maintained, should become a criminal by his mere failure to measure up to the prescribed standard of conduct.

This distinction between negligence or misunderstanding on the one hand, and intentional criminal violation on the other, is the essence of Justice Blackman's statement in Bishop. After citing Spies v. United States , supra at 496, 63 S. Ct. at 367, he reiterates the proposition that innocent errors or frank differences were not intended by Congress to be the basis of criminal prosecution:

The Court's consistent interpretation of the word "willfully" to require an element of mens rea implements the persuasive intent of Congress to construct penalties that separate the purposeful tax violation from the well-meaning, but easily confused, mass of taxpayers.

United States v. Bishop, supra at --, 93 S. Ct. at 2017.

A review of the facts in this case leads to only one conclusion: the defendant did not file his returns because he was preoccupied with matters he deemed to be more important than his legal obligations. He was not a taxpayer who had some frank difference with the I. R. S., nor one who relied upon some prior decision to make a point on which he would contest his obligation. Neither was he confused nor mislead by some intricacy of the law. This was a taxpayer who expected his compliance with the law as to truthfulness would negate his failure to comply with the requirements as to timeliness. The situation is all the worse--and the more convincing--because this defendant's entire professional life was intertwined with tax returns and their exigencies.

I agree with the Court of Appeals for the Ninth Circuit when it characterizes the term "evil motive" as merely a convenient shorthand used to distinguish liability based upon conscious wrongdoing from liability based upon carelessness or mistake. United States v. Hawk [74-1 USTC ¶9465], 497 F. 2d 365, 368 (9th Cir.), cert. denied, -- U. S. --, 95 S. Ct. 67 (1974). See Cooley v. United States [74-2 USTC ¶9718], 501 F. 2d 1249, 1252-53 (9th Cir. 1974). Judge Aldisert of this Circuit has pointed out that evil intent or bad purpose are not magic words which must be invoked in each criminal tax case. United States v. Malinowski [73-1 USTC ¶9199], 472 F. 2d 850, 855 (3d Cir.), cert. denied, -- U. S. --, 93 S. Ct. 2164 (1973). An act is done willfully if done with specific intent to do something the law forbids and the defendant knew he was withholding from the Government information to which it was entitled.

Defendant further alleges that even if the Government's definition of willfully is correct, there is no evidence to show that he intentionally failed to file. However, this is what he himself stated (N. T. 173-74). The Third Circuit has consistently "equated evil motive with a specific intent to do that which is proscribed." United States v. Malinowski, supra. The fact that Ettorre intended to file his returns and pay his taxes in the future is of no assistance in negating his specific intent to violate the statute. Sansone v. United States [65-1 USTC ¶9307], 380 U. S. 343, 354, 85 S. Ct. 1004, 1011 (1965).

Ettorre next argues that he was not required to make the returns charged in Counts III, IV, V and VI, Counts III to V charge Ettorre, as president of Panett Computer Service Company, with willfully and knowingly failing to file employer's quarterly federal tax returns. Defendant claims that Panett rather than he should be charged.

Section 7203 states:

Any person required under this title to pay any estimated tax or tax, or . . . to make a return . . . who willfully fails to pay [or] make such return . . . at the times required by law or regulations, shall, . . . be guilty of a misdemeanor . . .

Section 7343 defines person:

as used in this chapter includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.

There is no dispute that Panett was required to file the quarterly returns mentioned in the information. Moreover, it is uncontradicted that Ettorre was president and sole operating officer of Panett during the period in question (N. T. 154-55). Previously he testified that as secretary-treasurer he was responsible for filing tax returns (N. T. 151). This responsibility was never delegated to another. Finally, Ettorre admitted that he knew that he was ultimately personally responsible for the taxes (N. T. 171).

It is an inescapable conclusion, after reviewing the relationship of Panett and Ettorre, that the defendant was the person, as defined by 26 U. S. C. §7343, who was under a duty to file all the required tax returns. See United States v. Jasper [73-1 USTC ¶9413], 352 F. Supp. 254 (D. Del. 1972).

Defendant contends that his conviction should be reversed since the Government failed to meet its burden o proving his mental capacity. He argues that it is clear he suffered from a mental disease and if he is not legally insane the evidence was still admissible to show that his conduct was not willful.

The legal standard I must use is set forth in United States v. Currens, 290 F. 2d 751, 754 (3d Cir. 1961):

at the time of committing the prohibited act the defendant, as a result of mental disease or defect, lacked substantial capacity to conorm his conduct to the requirements of the law which he is alleged to have violated.

The test is not whether the defendant suffered from a mental disease or defect but whether the disease or defect caused a lack of substantial capacity to conform his conduct to the requirements of the law.

Once a defendant raises the issue of mental capacity, the burden shifts to the Government to prove sanity beyond a reasonable doubt. United States v. Currens, supra at 761. Defendant presented one psychiatrist and the Government presented one psychiatrist and one psychologist as expert witnesses. All three experts concluded that Ettorre suffered from some form of mental defect or disease. The Government experts, however, testified that in their opinion he could conform his conduct to the law.

The issue o sanity is one for the trier of fact to decide. The testimony of defendant's psychiatrist is not conclusive even when the Government offers no expert rebuttal testimony. United States v. Lutz, 420 F. 2d 414 (3d Cir.), cert. denied, 398 U. S. 911, 90 S. Ct. 1709 (1970). It is not the number of expert witnesses that is determinative of this question; rather, it is the quality and credibility of their testimony which must be weighed. United States v. Handy, 454 F. 2d 885, 888 (9th Cir.), cert. denied, 409 U. S. 846, 93 S. Ct. 49 (1972).

It is uncontested that Ettorre was under a great deal of stress and suffered from some mental abnormalities during the period in question. But the evidence establishes that defendant at the time of the offense was running a business on a daily basis, teaching school and paying state and local taxes. Thus, I conclude he had the requisite capacity to conform his conduct to the requirements of the law, that is, to file his returns in a timely way.

Next, defendant contends that Counts I and II must be dismissed because amendments to Counts I and II of the information allowed by the court substantially prejudiced his rights. It is uncontested that while Counts I and II specify April 15 as the date each personal income tax return was due, the true date was somewhat later since Ettorre received extensions for both years.

In United States v. Goldstein [74-2 USTC ¶9664], 502 F. 2d 526 (3d Cir. 1974) the Court of Appeals, en banc, held that an indictment could not be amended to show that the defendant requested and received an extension in which to file his tax returns. The court held that the alteration was substantial and material in a case where willfulness is the central issue.

The court based its decision on the fact that the amendment violated the most important function of an indictment. That function is the protection of a citizen from unfounded charges by requiring probable cause to be proven to an independent body, a grand jury. When they are uninformed of a material fact such as the extension of filing date for income tax returns it is impossible for them to properly pass on an indictment. See also United States v. Radowitz, No. 74-1235 (3d Cir., filed December 18, 1974.)

Unlike Goldstein, however, I am not faced with an amendment to an indictment but rather to a criminal information. In this case the protection of a grand jury was not available to Ettorre. The information, as to Counts I and II, was sufficient to inform defendant of the charges against him and sufficient to protect him from double jeopardy. Furthermore, it afforded him ample opportunity for discovery and utilization of the filing extensions at trial. Therefore, under F. R. Cr. P. 7(e), the amendment of the information was proper.

Defendant's allegation that may denial of certain portions of his motion for a bill of particulars was error is without merit for two reasons. First, he shows no prejudice by my ruling. Second, the Government is not required to revel its trial theory to the defendant at the pre-trial stage.

Defendant's remaining objections are directed to a number of evidentiary rulings which I made in the course of his trial. First, defendant asserts that I erred in admitting the testimony of special agent Howard L. Merkel, of the Internal Revenue Service, that defendant had told him that he was responsible for handling Panett's tax returns. Such statement, rather than being a conclusion of law, as defendant contends, actually was a statement of fact, and was plainly admissible as a voluntary out-of-court statement to a Government agent. Second, defendant contends that refusal to permit his counsel to cross-examine Agent Merkel concerning selective prosecution was error. The short answer to this objection is that selective prosecution is not per se violative of the Constitution. See Ogler v. Boles, 368 U. S. 448, 456, 82 S. Ct. 501, 506 (1962). Next, defendant asserts that I erred in allowing Agent Merkel to testify concerning defendant's filing of the corporation's 941 forms. This evidence was highly relevant to the issue of defendant's intent, and in light of defense counsel's thorough cross-examination on this point, its admission did not constitute an abuse of the trial court's discretion. Fourth, defendant argues that I erroneously admitted payroll records of certain Panett employees. These documents were identified by Government witnesses as having been prepared by them during business hours and for business purposes. Defendant's unfamiliarity with them was irrelevant with respect to their admissibility. Finally, defendant contends that I erred in refusing to allow impeachment of the testimony of one of the Government's experts, Dr. Frank Hoffman, on the basis of statements attributed to a Philadelphia assistant district attorney in a 1971 newspaper article. This attempted impeachment constituted collateral double hearsay, and was inadmissible under sound rules of evidence.

Accordingly, I conclude that defendant's motions must be denied.

Order

AND NOW, this 10th day of January, 1975, it is hereby Ordered that:

1. Defendant's motion and supplemental motion to find facts separately are Granted, and such findings are contained in the Opinion accompanying this Order;

2. Defendant's motion and supplemental motion or acquittal are Denied;

3. Defendant's motion in arrest of judgment is Denied; and

4. Defendant's motion for a new trial is Denied.

¹ Defendant's motion and supplemental motion to find facts separately are sufficiently covered by my findings of facts in this case. F. R. Cr. P. 23(c).

 

 

 

[71-2 USTC ¶9594]Archie L. Wainwright, Petitioner-Appellant v. United States of America , Respondent-Appellee

(CA-10), U. S. Court of Appeals, 10th Circuit, No. 560-70, 448 F2d 984, 8/17/71, Aff'g unreported District Court

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

Crimes: Willful attempt to evade tax: Understatement of income: Cash rebates: Defenses.--The taxpayer's conviction for willful attempt to evade tax by failing to report cash rebates in income was upheld: (1) failure to object to an IRS Agent's "misstatement" was due to faulty trial strategy, (2) an instruction imputing knowledge of the contents of a return to a taxpayer who signs it violated no Constitutional provision, (3) polygraph evidence was properly rejected where no foundation had been laid, and (4) the Government produced some evidence of the purchases for which rebates were given.

Melvin A. Coffee, Rob ert D. Inman, 690 Capitol Life Center, Denver , Colo. , for petitioner-appellant. Richard B. Buhrman, Johnnie M. Walters, Assistant Attorney General, Meyer Rothwacks, Joseph M. Howard, Department of Justice, Washington, D. C. 20530, James L. Treece, United States Attorney, Denver, Colo., for respondent-appellee.

Before LEWIS, Chief Judge, BREITENSTEIN and BARRETT, Circuit Judges.

LEWIS, Chief Judge:

This case reaches us after denial by the trial court of a motion to vacate judgment under 28 U. S. C. §2255. Appellant had been convicted of willfully attempting to evade federal income taxes for the years 1961-1963 and the judgment was affirmed by this court. United States v. Wainwright [69-2 USTC ¶9503], 413 F. 2d 796, cert. denied, 396 U. S. 1009.

Appellant's primary post-conviction contention is that his conviction was based upon false and misleading testimony, known to the prosecution to be such, and thus leading to a constitutional infirmity. A brief statement of the facts is necessary to put this contention in proper perspective.

[Facts]

During the tax years in question, Wainwright owned and operated several gasoline stations. To supply these stations, he made large purchases of gasoline, paying the full purchase price monthly and receiving back from the supplier a discount or rebate check, the amount of which depended on the individual supplier and the volume of gasoline purchased. Wainwright failed to report a substantial amount of these rebates on his tax returns, and this omission was the sole element of the government's criminal case against him. It is undisputed, however, that the investigation of appellant's tax returns uncovered many other errors which were the basis of civil liability. Appellant contends that by failing to bring out these other errors at the criminal trial, the government painted a misleading picture before the jury. It is appellant's theory that if the jury knew the whole picture, i. e., that there were many mistakes on the tax returns, then it would more likely have considered the omission of the discounts to lack criminal intent.

[Agent's Testimony]

The essence of appellant's objection is contained in the testimony of Revenue Agent Smith, who was asked:

Q. In summary then, Mr. Smith, for these three years the only adjustment that you made in Mr. Wainwright's tax returns which would increase his income were the adjustments of the result of the rebate discounts paid to him by the oil companies, is that correct.

A. Yes.

Although appellant now claims that the agent's statement was completely false because admittedly other adjustments were made that would increase appellant's income, the argument has only superficial appeal. The agent's answer was clearly directed to the basis of the criminal charge, a complete failure to report income, and not to adjustments made through application of different accounting methods which resulted in increased taxable income and increased civil liability. The government had no duty to prove deficiencies not premising the criminal charge and, indeed, any such effort would be laced with potential prejudice. If, as is now contended, such further evidence would have benefited appellant that conclusion points only to misplaced trial strategy. The court below found that appellant's attorneys were knowledgeable in tax matters, were informed of and had access to the report showing the civil tax liability, and therefore knew or should have known about the "misstatement" by the government's witness.

[Instruction Challenged]

Appellant also contends that the following instruction is constitutionally defective:

Now whenever the facts appear beyond a reasonable doubt from the evidence in the case that the accused had signed his tax return, a jury may draw the inference and find that the accused had knowledge of the contents of the return.

A challenge to this instruction was rejected on direct appeal but appellant now calls to our attention a decision of the Seventh Circuit, United States v. Bass [70-1 USTC ¶9311], 425 F. 2d 161, which apparently interprets the instruction as creating a conclusive presumption contrary to constitutional safeguards pertaining to burden of proof. We must simply reiterate that we believe the instruction in this case to have been properly given and violative of no constitutional provision. See United States v. Wainwright, supra at 801-02.

[Polygraph Evidence]

Next, appellant urges that polygraph foundation evidence should have been allowed in the §2255 hearing. Polygraph evidence was rejected at the criminal trial and this was upheld on direct appeal since proper foundation was not laid. Again appellant urges that he should have another chance to litigate this issue because of an intervening change in the law. He points to our opinion on direct appeal as the first indication that polygraph evidence might be admitted in this circuit. We give no comfort to appellant's interpretation of our earlier opinion in that regard and in any event appellant must present his case at the proper time. The original failure to establish a foundation appears to be an evidentiary problem already decided and not a constitutional question.

[Proof of Purchase]

Finally, appellant argues that the government failed to prove the purchases involving the rebate discounts. This issue was also decided on appeal, but appellant contends that In re Winship, 397 U. S. 358, requires a reversal since the Supreme Court determined that every element of a crime must be proved beyond a reasonable doubt. This was done in the instant case. Appellant's conviction required only that he had attempted to evade a substantial amount of tax. See Swallow v. United States, 10 Cir., [62-2 USTC ¶9693] 307 F. 2d 81, cert. denied, 371 U. S. 950. There was evidence that a spot check of gasoline purchases was made, and this is sufficient.

Affirmed.

 

 

 

[69-2 USTC ¶9503] United States of America , Plaintiff-Appellee v. Archie L. Wainwright, Defendant-Appellant

(CA-10), U. S. Court of Appeals, 10th Circuit, No. 88-68, 413 F2d 796, 6/30/69, Affirming unreported district court decision

[Code Sec. 7201]

Crimes: Willful attempt to evade tax: Understatement of cash rebates: Defenses: Evidence: Trial.--The taxpayer's conviction for willfully failing to report income was affirmed. The unreported income consisted of suppliers' cash discounts. Although discounts are normally considered as reductions of expenses, rather than additions to gross income, the government was not required to prove the correct expense figure for the purchases, where it built its case around proving the correct amount of the discount receipts. The trial court properly excluded the testimony of an expert witness that involved (1) an opinion concerning the issue before the jury; (2) the effect of alleged omissions of deductions, where the witness had no personal knowledge of the deductions; and (3) the character and sufficiency of the taxpayer's accounting records in a general way. The trial court also properly limited cross-examination of an Internal Revenue agent that pertained to the agent's involvement in the separate potential civil aspect of the case. Nor did the trial court err when it instructed the jury that the taxpayer could be assumed to have knowledge of the contents of the returns that he filed if the jury found he signed them. Taken as a whole, the Tenth Circuit found that instructions were accurate and contained no errors. The Tenth Circuit also sustained the trial court's denial of admission of lie detector tests offered by the taxpayer as evidence. The taxpayer laid no predicate for the admissibility of this evidence, in that there was no testimony by an expert witness as to the probative value of the test nor its reliability. The taxpayer's right against self-incrimination was not violated when the trial court allowed the government to introduce schedule C's prepared by the taxpayer and given to his accountant. The schedules were obtained from the accountant by subpoena.

Lawrence M. Henry, United States Attorney, Denver, Colo., Joseph M. Howard, Richard M. Rob erts, Acting Assistant Attorney General, Richard B. Buhrman, Attorney for Department of Justice, Washington, D. C. 20530, for plaintiff-appellee. Rob ert D. Inman and Melvin A. Coffee of Inman, Flynn & Coffee, 690 Capitol Life Center, Denver, Colo., for defendant-appellant.

Before MURRAH, Chief Judge, PHILLIPS, Senior Circuit Judge, and SETH, Circuit Judge.

MURRAH, Chief Judge:

The appellant, Archie L. Wainwright, was indicted on four counts for willfully attempting to evade federal income taxes for the years 1960, 1961, 1962, and 1963 in violation of Section 7201 of Title 26 United States Code. ¹ On motion for acquittal on all counts, the trial judge struck the count relating to 1960. He was convicted by a jury on the remaining counts and appeals from the sentencing judgment, alleging numerous errors which we shall consider as developed by the facts.

During the period involved, Wainwright and his wife operated the Park Oil Company as individual proprietors. The company owned and operated several gasoline service stations. Each station was run by a mannager who received a commission on gasoline sales. Wainwright had several large gasoline suppliers. He paid the full purchase price of the gasoline monthly and received back from the supplier a discount or rebate check. The amount of this purchase discount depended on the individual supplier and the volume of gasoline purchases.

When the Internal Revenue Service agent checked the taxpayer's books he found that the gross income per the return exceeded the gross income per the accounting records. Wainwright explained this discrepancy to the agent by producing a "black book" he had not earlier shown the agent. This record contained lists of purchase discount checks for the years in question and for each year corresponded to the difference noted in gross income. Except for minor adjustments, all other items on the returns corresponded with the accounting records. But when the agent checked the purchase discounts with Wainwright's suppliers discrepancies developed. The crux of the government's case, therefore, was that Wainwright willfully understated his purchase discounts with consequent understatement of taxable income for each of the prosecution years.

[Burden of Proof]

This method of proof is attacked for failure to prove the "corpus delecti" of the crime, i.e. overstatement of the amount of gasoline purchased with consequent understatement in taxable income. The specific error urged in this regard is that since purchase discounts are properly deductions from merchandise expense rather than additions to gross income, the burden was on the government to prove the correct amount of the gasoline purchases. Admittedly, the government made no attempt to verify purchases from suppliers other than on a spot check basis since this item agreed with Wainwright's books and the I. R. S. apparently had no reason to question its correctness. The government refers us to that line of cases holding that the I. R. S. has no burden to show that an accused tax evader had no offsetting expenses. See United States v. Bender [55-1 USTC ¶9142], 218 F. 2d 869 (7th Cir. 1955) cert. den. 349 U. S. 920 (1955); United States v. Stayback [54-1 USTC ¶9345], 212 F. 2d 313 (3rd Cir. 1954) cert. den. 348 U. S. 911 (1955); and Dillon v. United States [55-1 USTC ¶9131], 218 F. 2d 97 (8th Cir. 1955) cert. dismissed 350 U. S. 906 (1955). The taxpayer's response is that since I. R. S. regulations, 26 C. F. R. §1.471-3(b), and proper accounting practices consider rebates a reduction in an expense item it was thereby incumbent on the government to show the correct expense figure.

We think appellant's argument puts too great an emphasis on accounting factors. By comparing Wainwright's books with his suppliers' records, the I. R. S. agent was able to show that the rebate account, as included in gross income, was substantially less than the figures reflected in the suppliers' records. The government's case was built around proving the true rebate receipts. Having proved this, the factum of a substantially understated return was established. It was not incumbent on the government to defense its own case by negating the existence of additional unreported gasoline purchases. We think the government may safely rely on the statements in the taxpayer's return and determine its correctness by reference to the books and records upon which the return was made and any other data which may affect the integrity of the reported taxable income. The taxpayer's thesis would require the government to prove not only that some figure was incorrect but that all the others were correct--clearly an intolerable burden.

[Testimony of Witness]

The next allegation of error refers to the exclusion of certain testimony of Wainwright's expert witness, Mr. Marvin Stone. Mr. Stone was called and qualified as an expert witness in the field of accounting but was prevented from answering several questions directed by Wainwright's counsel, the first of which occurred in this way: Mr. Glenn Smith, a special revenue agent for the I. R. S., was called and qualified as an expert witness for the government. He testified that he compared the taxpayer's records against his books for the years in question and found the discrepancies here involved. In relation to the rebate figure, Smith testified that while it should be treated as a reduction in expenses, it made no difference in the taxable income whether reported properly or as an item of gross income. The taxpayer's expert agreed with this conclusion.

On direct examination, Wainwright's counsel asked Mr. Stone: "If an accountant were to indicate that purchase discounts could be reported [either as part of gross income or as part of expenses] would you have any opinion regarding the qualifications of that particular [accountant]". On the government's objection, the trial court rightly prevented counsel from finishing the questions and the witness from answering. While it is perfectly proper to impeach an adverse expert witness by contrary testimony of another expert, it is improper to seek an opinion on the very matter which the jury alone must judge, i.e. which expert they wish to believe. Moreover, in reviewing these alleged errors we are guided by the principle that the admission of evidence lies largely in the trial court's discretion and will not be set aside on appeal except for a clear prejudicial abuse of this discretion. Leavitt v. Scott, 338 F. 2d 749 (10th Cir. 1964).

The taxpayer also attempted to prove that he had unreported expenses which would offset the alleged understatement of income. He testified generally that he had not reported all expenses and specified that dependent deductions relating to his children by a former marriage, entertainment expenses, and parking expenses had not been reported. Outside a few minor examples, however, he was unable to testify as to exact amounts or occasions. He then attempted to have Mr. Stone testify as to what effect the omission of these deductions would have had on his taxable income. The trial judge refused to permit this, saying, "This expert cannot testify to matters of which he does not have knowledge, either that he obtained through some documents or that has been established." We agree with the trial judge that the taxpayer failed to lay a proper foundation for this type of questioning.

The last and most serious challenge to the limitation placed on the examination of the taxpayer's expert concerns the character and sufficiency of Wainwright's accounting records. He offered to prove, by his expert witness, that "The kinds of records which would have been necessary to accurately reflect income for one reason or another were not kept, . . . what types of ledgers, what types of cost control, would have been necessary to accurately reflect and present summary and cost analyses for him so that accurate income figures could have been kept," and "That it was an accounting impossibility for him to accurately keep the records which would enable him . . . to accurately and completely reflect all of his income." On objection by the government, the trial judge excluded this testimony, stating, "I don't think that's a defense."

On appeal, Wainwright argues that the lack of accounting records sufficient to properly and accurately reflect his income was evidence for the jury on the issue of willfulness and actually negated any intent on his part to evade the income taxes. The government's answer, without the benefit of any citation of authority, is that the "black book" method of recording rebate checks was sufficiently accurate for tax purposes and, if properly maintained, would have reflected the true amounts of purchase discounts. Thus, they argue, the failure to accurately maintain this record was evidence for the jury of willfulness and evidence as to what he should have done in a general way is irrelevant.

In Haigler v. United States [49-1 USTC ¶9171], 172 F. 2d 986, 987 (10th Cir. 1949) we noted that whenever willfulness or bad intent is an essential element of the crime, as it is here, "the accused may not only directly testify that he had no such motive or purpose, but he may, within rational rights, 'buttress such statement with testimony of relevant circumstances.' Miller v. United States, 120 F. 2d 968, 970 (10th Cir. 1941)." See also McDonald v. United States [57-2 USTC ¶9802], 246 F. 2d 727 (10th Cir. 1957) cert. den. 355 U. S. 863 (1957) and Petersen v. United States [59-2 USTC ¶9538], 268 F. 2d 87 (10th Cir. 1959). And cf. McCarty v. United States [69-1 USTC ¶9322], -- F. 2d -- (10th Cir. 1969). But none of these cases dealt with the issue of whether an accountant may comment on the deficiencies of a taxpayer's books to show the lack of intent, and no such cases were cited to us.

Our own research has disclosed a paucity of cases, none directly in point. In Fischer v. United States [54-1 USTC ¶9370], 212 F. 2d 441 (10th Cir. 1954) we held that a booklet on taxation written by an attorney-taxpayer was admissible against him to show willfulness. But the closest case to ours is the Ninth Circuit case of Kohatsu v. United States [65-2 USTC ¶9715], 351 F. 2d 898 (9th Cir. 1965). In this case, the taxpayer sought to prove by an accountant that in maintaining his accounting records the taxpayer had made many mistakes. The taxpayer himself had already testified that these mistakes had been made and the court held that no expert testimony was needed to show the "fact" of the mistakes and that "The accountant's opinion or conclusion that the errors resulted from appellant's carelessness, without intent to evade his income tax, would have been improper as going beyond the scope of his expert competence." [footnotes omitted]. Cf. Bostwick v. United States [55-1 USTC ¶9170], 218 F. 2d 790 (5th Cir. 1955) and Blumberg v. United States [55-1 USTC ¶9437], 222 F. 2d 496 (5th Cir. 1955).

In our case, however, the taxpayer did not attempt to elicit an expert opinion on his subjective good faith, but rather that his deficient accounting practices were objective evidence that he did not willfully evade the income taxes. But the gravamen of this alleged offense was the failure to report all purchase discounts. As the court said in Bostwick v. United States, supra p. 793, "The most adequate method of accounting will not clearly or truly reflect income unless the items of receipt and expenditure are truthfully entered." And here the character of his general accounting system is too remote from his failure to accurately maintain the "black book", to be relevant to the issue of willfulness. Surely if Wainwright had recorded all such rebates in his "black book" no understatement would have occurred and whether or not his failure to do so was willful is for the jury to decide in light of all the circumstances.

Appellant next argues that the trial judge unduly limited his cross-examination of the government's expert witness. Specifically, he complains that he was not permitted to probe the revenue agent's familiarity and "understanding of the relationship between the civil and criminal investigatory arms of the Internal Revenue Service." Apparently the purpose of this attempted probe was to ascertain the witness' credibility as an expert. The trial court expressed a lack of comprehension as to exactly what Wainwright was attempting to attack with his offer of proof and asked Wainwright's counsel specifically what he wanted to ask. After a lengthy list of questions, the court ruled that most of what he wanted to ask would be permitted but that the agent's involvement with the separate potential civil aspect of the case would be excluded.

Neither the record nor appellant's brief give us any hint as to the relevancy of probing the expert's familiarity with the possible civil action to collect back taxes and penalties. Certainly, counsel is permitted broad discretion in cross-examining an expert witness, but the trial court also has broad discretion in the conduct of the trial and we will not upset its evidentiary rulings relating to a witness' credibility without a clear showing of prejudice. See Leavitt v. United States, supra. We can find no error in this regard.

[Jury Instruction]

Wainwright also complains of an instruction given by the trial judge. ² He argues the instruction that if the jury found that he signed the returns they could infer that he had knowledge of the contents of the returns, erroneously shifted the burden to him on the issue of willfulness. ³ Again the government answers without authority.

All instructions must be read as a whole and exceptions to a part can only be considered as it related to the whole. Haskell v. United States [57-1 USTC ¶9553], 241 F. 2d 790, 794 (10th Cir. 1957) and Devine v. United States, 403 F. 2d 93 (10th Cir. 1968). In viewing the challenged instruction in this light we find nothing more than proper comments made to guide the jury in their deliberations. See Elbel v. United States, 364 F. 2d 127, 136 (10th Cir. 1966). Advising a jury they may infer a logical consequence from a demonstrated fact in no way shifts the burden to the accused. The jury was told the taxpayer must have a specific intent to evade the tax, that per 26 U. S. C. §6064 they could accept the return as being signed by the taxpayer unless evidence showed the contrary, that they could believe from his signing of the return that he knew its contents, but that to convict him they must find "a fraudulent return was filed with a specific intent" to evade taxes lawfully due. We find no error in the instruction given.

[Lie Detector Test]

Wainwright further complains of the exclusion of evidence that he had taken a polygraph or "lie detector" test, furnished the government with the results and offered to take another admin istered by a government expert. ⁴ The primary purpose for this proffer was not as direct proof of his innocence but to reflect his subjective intent--an essential element of the crime charged. Counsel for Wainwright, with admirable candor, admits no federal cases support him and notes specifically a case from this circuit holding contrary to his position. Marks v. United States, 260 F. 2d 377 (10th Cir. 1958) cert. den. 358 U. S. 929 (1959). Nevertheless, we are strongly urged to reconsider and at least modify the ruling in Marks.

The thrust of Wainwright's argument is that in the 10 years since Marks, the "state of the art" of polygraph testing has improved to the point that the accuracy of such tests equals that of such commonly admissible evidence as results of handwriting tests, psychiatric opinion evidence, and alcohol blood tests. But leaving to one side the numerous reasons advanced for rejecting polygraph results, ⁵ the argument has no force in our case.

Despite the periodical literature cited relating to the reliability of polygraph testing, Wainwright laid no predicate for the admissibility of this evidence. Without doubt, matters of factual proof must keep pace with developing scientific standards. And rules of evidence exist to assist the jury in arriving at factual conclusions. But no judgment can be made without relevant expert testimony relating to the probative value of such evidence. Wainwright totally failed to supply the condition noted by Wigmore that before such evidence be admitted an expert testify "that the proposed test is an accepted one in his profession and that it has a reasonable measure of precision in its indications." 3 Wigmore on Evidence (3rd Ed. 1940) §990. The trial court properly excluded it even though in a proper case it may be admissible.

The final error urged by Appellant is that evidence was admitted by the trial court which violated his right against self-incrimination preserved by the Fifth Amendment. The government called Mr. John Larrow who had prepared the challenged returns for the years 1961 and 1962. Mr. Larrow testified that he prepared the returns partially from a "schedule C" ⁶ prepared by Mr. Wainwright. Apparently under subpoena duces tecum, Mr. Larrow had furnished the government with the originals of these schedule C's as penciled in by Mr. Wainwright. These two items were properly identified and introduced into evidence the morning of the first day of trial without objection. Mr. Larrow transferred these penciled figures to the actual return as filed with the result that the filed returns include a schedule C identical with the challenged exhibits. That afternoon, counsel for Wainwright orally moved that the exhibits be stricken on Fifth Amendment grounds. The motion was denied.

The essence of the argument is that the schedule C's as prepared by Wainwright were compulsively obtained from Larrow by subpoena and Wainwright was thus compelled to give evidence against himself. Without saying so, he seems to invoke the rationale of Leary v. United States, 395 U. S. 6 (1969) and United States v. Covington, -- U. S. -- (1969). See also United States v. Freeman, -- F. 2d -- (10th Cir. 1969). Before discussing this argument it should be understood that Wainwright does not claim an accountant-client privilege as to confidential communications. He realizes that such a privilege is not recognized in federal court. Rule 26 Fed. R. Crim. P., 18 U. S. C.; F. T. C. v. St. Regis Paper Co., 304 F. 2d 731 (7th Cir. 1962); United States v. Bowman, 358 F. 2d 421 (3rd Cir. 1966); United States v. Balistrieri [68-2 USTC ¶9641], 403 F. 2d 472 (7th Cir. 1968) vacated on other grounds 395 U. S. 710 (1969); and cf. Preliminary Draft of Proposed Rules of Evidence for the United States District Court.

No in depth discussion of the relevant case law is necessary to dispose of this alleged error. Mr. Larrow testified that Mr. Wainwright had given him the information on the return and that he had supplied this information on a penciled-in schedule C. No error is asserted as to this testimony and none can be found. Thus the alleged self-incrimination must proceed from the prejudicial effect of the jury's actually seeing the penciled-in schedule C's to which the accountant had already testified. But such evidence is merely cumulative of matters already in evidence and could not affect the substantial rights of the accused. The purpose of the testimony was to show that Mr. Wainwright furnished the erroneous information as to trade discounts or rebates. There was no compulsory self-incrimination as in Leary, Covington and their progenitors.

The remaining theories advanced by Appellant have been examined and found to be without merit.

THE JUDGMENT IS AFFIRMED.

¹ §7201 reads: "Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the cost of prosecution."

² It does not appear in our record whether Wainwright properly objected to the challenged instruction. Rule 30, Fed. R. Crim. P., 18 U. S. C. But since the government does not raise the question, we shall treat the issue as properly preserved.

³ The challenged instruction appeared in context as follows:

"Now, if a person in good faith believes that he has paid all the taxes that he owes, he cannot be guilty of criminal intent to evade the tax, but if a person acts without reasonable grounds for belief that his conduct is lawful, it is for the jury to decide whether or not he acted in good faith or whether he wilfully intended to evade the tax. This issue of intent as to whether the defendant wilfully attempted to evade or defeat the tax is one which the jury must determine from consideration of all of the evidence in the case bearing upon the defendant's state of mind.

"Now, the pertinent section of the Internal Revenue Code does provide the fact that an individual's name as signed to a return shall be prima facie evidence for all purposes that the return was actually signed by him, which is to say unless and until out weighed by evidence in the case which leads the jury to a different or contrary conclusion, the presumption is that a filed tax return was in fact signed by the person whose name appears to be signed thereto.

"Now, wherever the facts appear beyond a reasonable doubt from the evidence in the case that the accused had signed his tax return, a jury may draw the inference and find that the accused had knowledge of the contents of the return.

"If you find beyond a reasonable doubt from the evidence in the case that a fraudulent return was filed with a specific intent on the part of the defendant here to evade or defeat a substantial portion of the tax lawfully due from him and that this was done wilfully, the offense was complete as soon as the fraudulent return was wilfully filed."

⁴ Wainwright's proffer to the trial court outside the presence of the jury was:

"Your honor, we wish to make two offers of proof. The first one is that the defendant would testify, if allowed, that he took a polygraph test to the Intelligence Division [of the I. R. S.] and that he offered to take another test and have the FBI or federal officials admin ister said polygraph test."

⁵ See Tyler v. United States, 193 F. 2d 24 (D. C. Cir. 1952) cert. den. 343 U. S. 908 (1952); Sheppard v. Maxwell, 346 F. 2d 707 (6th Cir. 1965); Aetna Insurance Co. v. Barnett Brothers, Inc., 289 F. 2d 30 (8th Cir. 1961); United States v. Tremont, 351 F. 2d 144 (6th Cir. 1965); United States ex rel. Sadowy v. Fay, 189 F. Supp. 150 (D. C. N. Y. 1960); United States v. Stromberg, 179 F. Supp. 278 (D. C. N. Y. 1960); and United States ex rel. Szocki v. Cavell, 156 F. Supp. 79 (D. C. Pa. 1957).

And for numerous state cases dealing with the topic see 3 Wigmore on Evidence (3rd Ed. 1940) §999 footnote 2, 1964 Supplement.

⁶ A schedule C is a form for the reporting of income and expenses by an individual in the conduct of a business or profession.

 

 

 

[55-1 USTC ¶9149]Fay Heasley, Appellant v. United States of America, Appellee

(CA-8), In the United States Court of Appeals for the Eighth Circuit, No. 15,091, 218 F2d 86, January 13, 1955

Appeal from the United States District Court for the District of North Dakota.

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

Criminal prosecution: Sufficiency of indictment.--Defendant, a farmer, was convicted of filing false and fraudulent income tax returns. There was no error in denying defendant's motion to dismiss the indictment on the ground of insufficiency of the indictment, since the indictment had charged defendant with attempt to evade income tax by understating his adjusted gross income.

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

Criminal prosecution: Sufficiency of evidence: Net worth method.--There was no error in denying defendant's motion for acquittal on the ground of the insufficiency of evidence, since the net worth summarization prepared by the Government was based upon the net worth statement signed and sworn to by defendant.

[1939 Code Sec. 22(n)--similar to 1954 Code Sec. 62; 1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201]

Criminal prosecution: Instructions to jury.--There was no error in instructing the jury that taxable income was to be computed on the basis of adjusted gross income which generally represented the profit from business operations and that the burden was upon the Government to establish the amount of defendant's taxable income as well as defendant's failure to make a true report for the purpose of evading tax.

Submitted on brief (Francis Murphy was on the brief), for appellant. Ralph B. Maxwell, Assistant United States Attorney ( Rob ert Vogel, United States Attorney, was with him on the brief), for appellee.

Before GARDNER, Chief Judge, and JOHNSEN and COLLET, Circuit Judges.

GARDNER, Chief Judge:

Appellant was convicted on three counts of an indictment which charged him with willfully and knowingly attempting to defeat and evade a large part of his Federal income taxes for the years 1946, 1947 and 1948 respectively. He was acquitted on Court IV of the indictment which charged him with a similar offense for the year 1949. We shall refer to appellant as defendant. During the times here involved defendant was a farmer and carried on extensive farming operations in North Dakota. He claims to have kept no books of account or record of his farming operations or financial transactions. In his income tax return for the year 1946 he reported $317.00 as tax due and owing; for the year 1947 he reported $150.50 as tax due and owing; and for the year 1948 he reported $240.00 as tax due and owing. It was charged in the indictment that there was in fact justly due and owing for the year 1946 the sum of $12,007.45; for the year 1947 the sum of $19,093.14; and for the year 1948 the sum of $27,518.36. In the absence of any books of account the government attempted to prove the allegations of the indictment by the receipts and disbursements method and by the so-called net worth method. It was the contention of defendant that he had only a grade school education, that he had no knowledge of methods or systems of accounting or of the requirements of the revenue laws, that for the various years involved he had turned over all the records he had covering each year's business to John Schoonover, an expert accountant, and that he had relied upon Schoonover to prepare his tax returns and that the returns which he signed were prepared by Schoonover and believed by defendant at the time they were made to be substantially correct. As Mr. Schoonover had prior to the time of trial died it was not possible to secure his testimony.

The counts of the indictment are identical except as to the period involved and amounts of income and tax designated therein. Count I may be taken as typical. It reads as follows:

"That on or about the 10th day of February, 1947, at Fargo, in the District of North Dakota, one Fay Heasley, late of Eldridge, North Dakota, did willfully and knowingly attempt to defeat and evade a large part of the income tax due and owing by him to the United States of America for the calendar year 1946, by filing and causing to be filed with the Collector of Internal Revenue for the Internal Revenue Collection District of North Dakota, at Fargo, North Dakota, a false and fraudulent income tax return wherein he stated that his adjusted gross income for said calendar year was the sum of $4,071.03 and that the amount of tax due and owing thereon was the sum of $317.00, whereas, as he then and there well knew, his adjusted gross income for the said calendar year was the sum of $31,563.58, upon which said adjusted gross income he owed to the United States of America an income tax of $12,007.45."

In due course defendant interposed a motion to dismiss the indictment on the grounds that "the said Indictment and each and every count thereof fails to set forth or describe a public offense as defined by the laws of the United States, in that the Internal Revenue Act in force at the times set forth in the various counts in said. Indictment required the payment of tax only upon net incomes of individuals and that said Indictment and each and every count thereof wholly fails to allege that the said defendant did not during the times mentioned in each of said counts actually return and pay a proper amount upon his net income for each of the years involved." The motion was denied. At the close of the government's testimony and again at the close of the entire case defendant interposed a motion for judgment of acquittal on the grounds that "there is a variance between the Indictment and the proof offered in that the Government's Indictment charges an evasion of adjusted gross income tax for the four years involved and for the further reason that the testimony offered in behalf of the Government is based in substantial measure upon opinion or conjecture and asked this jury to arrive at a conclusion in a substantial measure based upon such opinion or conjecture on the part of the Government's witnesses." Both motions were denied and the case was sent to the jury by the court on instructions to which the defendant saved certain exceptions to be hereinafter noted. The jury as hereinbefore observed found the defendant guilty on Counts I, II and III and not guilty on Count IV. On the verdict thus returned the court entered judgment and sentence of imprisonment for a period of three years on each count, the sentences to run concurrently.

Defendant seeks reversal of the judgment and sentence thus imposed on substantially the following grounds:

1. The trial court erred in refusing to dismiss the indictment.

2. The trial court erred in receiving in evidence government's exhibit 82--net worth summarization.

3. The trial court erred in denying the motion for judgment of acquittal at the close of the government's case and at the close of the entire case.

4. The trial court erred in instructing the jury in effect that the charge of fraudulent report of adjusted gross income was a sufficient basis for determining whether or not an attempt had been made to evade a tax.

[Sufficiency of Indictment]

The sufficiency of the indictment is challenged because it includes a charge that the defendant in his income tax returns willfully and knowingly understated the amount of his adjusted gross income, it being argued that the amount of taxes due from a taxpayer is not dependent upon the amount of his adjusted gross income but such tax is levied upon his net income.

The indictment embodies the words of the statute and ordinarily an indictment for a statutory offense is sufficient where the charge is made in the words of the statute. The defendant is charged with a willful and fraudulent attempt to defeat and evade a large part of his income tax by understating his adjusted gross income. The indictment would have been good had it not embodied the additional charge or information as to the manner in which the evasion was attempted. Rule 7(c) of the Federal Rules of Criminal Procedure provides that:

"The indictment or the information shall be a plain, concise and definite written statement of the essential facts constituting the offense charged. It shall be signed by the attorney for the government. It need not contain a formal commencement, a formal conclusion or any other matter not necessary to such statement. Allegations made in one count may be incorporated by reference in another count. It may be alleged in a single count that the means by which the defendant committed the offense are unknown or that he committed it by one or more specified means. The indictment or information shall state for each count the official or customary citation of the statute, rule, regulation or other provision of law which the defendant is alleged therein to have violated. Error in the citation or its omission shall not be ground for dismissal of the indictment or information or for reversal of a conviction if the error or omission did not mislead the defendant to his prejudice."

This indictment specifically informed the defendant of the time of the commission of the alleged offense, of the place of its commission, of the method by which he was alleged to have committed it, and it informed him as to what amount he paid and the amount which he should have paid. Had defendant desired further information he could have asked for a bill of particulars and the fact that the indictment informed him of the amount reported by him as his adjusted gross income and the amount of his actual adjusted gross income did not, we think, impair its validity nor make it vulnerable to the charge of indefiniteness and uncertainty. From the facts stated the court could say that there was an income tax due from the defendant to the government and the defendant was definitely advised as to the amount of income tax unpaid. We think the allegations of the indictment fully satisfied the requirements of Rule 7(c) of the Federal Rules of Criminal Procedure and informed defendant of the nature and cause of the accusation against him within the meaning of all Constitutional provisions. Cochran and Sayre v. United States, 157 U. S. 286; Risken v. United States, 8 Cir., 197 Fed. (2d) 959; Cave v. United States, 8 Cir., 159 Fed. (2d) 464[47-1 USTC ¶9171]; Hewitt v. United States, 8 Cir., 110 Fed. (2d) 1; Capone v. United States, 7 Cir., 56 Fed. (2d) 927 [3 USTC ¶885]; Guzik v. United States, 7 Cir., 54 Fed. (2d) 618 [1931 CCH ¶9681];United States v. Rosenblum, 7 Cir., 176 Fed. (2d) 321[49-1 USTC ¶9314]; Himmelfarb v. United States, 9 Cir., 175 Fed. (2d) 924 [49-1 USTC ¶9313]. InHewitt v. United States, supra, quoting from Hagner v. United States, 285 U. S. 427, the requisites of an indictment are thus stated:

`The true test of the sufficiency of an indictment is not whether it could have been made more definite and certain, but whether it contains the elements of the offense intended to be charged, "and sufficiently apprises the defendant of what he must be prepared to meet, and, in case any other proceedings are taken against him for a similar offense, whether the record shows with accuracy to what extent he may plead a former acquittal or conviction.'""

We think this indictment clearly advised the defendant of the facts constituting the offense with which he was charged and a conviction or acquittal would be a bar to a further prosecution for the same offense.

[Net Worth Summarization]

As the defendant produced no books or records reflecting his farming operations or financial transactions government accountants attempted to ascertain the extent of his income by the so-called net worth method. The results of their computation were embodied in what is referred to as a summarization identified as exhibit 82. When the exhibit was offered in evidence it was objected to on the ground that proper foundation had not been laid and that it was incompetent and immaterial because it purported to show the adjusted gross income of defendant for the years in question. Defendant signed and swore to a statement identified as exhibit 11 which reflected his net worth as of January 1, 1944. As to this statement he said in part as follows:

"I, Fay Heasley, hereby certify that the above list of assets and liabilities constitutes a true and complete list of my holdings and of my debts as at January 1, 1944. I certify that at that date I had no other assets and no other liabilities. The above figure regarding cash represents the amount on deposit at the National Bank of Jamestown in my checking account and I certify that I had no other cash in any bank, at home, or at any other place. Again, the above list is a true and complete picture of my financial standing as at January 1, 1944."

This definitely fixed a starting point from which the government accountants prepared exhibit 82 showing defendant's net worth for the years 1946, 1947, 1948 and 1949. It is argued that the corpus delicti may not be proven alone by extra judicial statements. This contention is doubtless correct but the weakness of this argument is that it goes to the weight or sufficiency of the evidence and not to its competency. In the cases relied upon by defendant the question was not as to the admissibility of the testimony but as to its sufficiency to prove the corpus delicti. The government in the instant case does not rely on this testimony alone as proof of the corpus delicti. It is relied upon as corroborative of the facts sought to be established by the testimony as to defendant's receipts and disbursements for the years in question. Whether or not the testimony standing alone would be sufficient to establish the guilt of the defendant is not the test of its admissibility. We have consistently approved the use of the so-called net worth method of determining taxable income in conjunction with the receipts and disbursements method.Schuermann v. United States, 8 Cir., 174 Fed. (2d) 397[49-1 USTC ¶9281]; Hanson v. United States, 8 Cir., 186 Fed. (2d) 61 [51-1 USTC ¶9118]; Olson v. United States, 8 Cir., 191 Fed. (2d) 985 [51-2 USTC ¶9468]; Leeby v. United States, 8 Cir., 192 Fed. (2d) 331 [51-2 USTC ¶9497]. There was no error in admitting exhibit 82.

By his motion for acquittal interposed at the close of the case defendant laid the basis for challenging the sufficiency of the evidence. As the jury found the defendant guilty the evidence must be viewed in a light most favorable to the government. The government's proof of receipts and disbursements by the defendant for the years involved showed the amount of taxes due and evaded as charged in the indictment. If this evidence was competent it abundantly sustained the verdict returned. The probative value and admissibility of this character of testimony cannot well be questioned. As we have pointed out in Leeby v. United States, supra, and Hanson v. United States, supra, the offense here is not one requiring exact proof as to the amount of net income evaded but whether or not the defendant attempted to evade a substantial amount of net income tax. Thus inLeeby v. United States, supra, we said:

"It must be borne in mind that this was not an action to recover the amount of income taxes alleged to be due, nor an action in which it was necessary to determine the exact amount of defendant's income for the years in question. On this phase of the case all that it was necessary to show was that there was omitted from the reported income a substantial amount."

We conclude that there was no error in denying defendant's motion for acquittal on the ground of the insufficiency of the evidence.

[Instructions to Jury]

It remains to consider the contention of defendant that the court erred in its instructions to the jury particularly in its instruction with reference to the adjusted gross income. It is somewhat difficult to gather from the objections made just what counsel had in mind but apparently he did not wish to be in the position of having waived his objection to the indictment. This is manifest from the following part of his objection:

"What I am objecting to is the Court's approval of the method of drawing the indictment."

We have already considered the question of the sufficiency of the indictment. What the court said in its instructions with reference to the adjusted gross income is followed by a clear statement as to what are the essential elements of the offense as charged. The instruction reads in part as follows:

"The computation of an adjusted gross income is an essential step toward arriving at a net taxable income upon which the tax which the defendant should pay is computed. Consequently, if the adjusted gross income is incorrectly stated, it then follows that the net income which is derived therefrom would also be incorrect. Adjusted gross income is, roughly speaking, the defendant's profit from his business operations. It is arrived at through deducting from his entire income the cost of doing business. When that figure is arrived at, that is, the adjusted gross income, then the net income is ascertained by subtracting therefrom certain deductions allowed by law. The tax which the defendant must pay is computed from the net taxable income, which must be arrived at through subtracting the exemptions from the net income. Therefore, if the net income is wrong, any subsequent figure based thereon must be wrong. The law requires the defendant to pay an income tax on his net taxable income only, so it follows that in this case the burden is upon the Government to establish to your satisfaction beyond a reasonable doubt the amount of the defendant's net taxable income in each of the years involved in the indictment, and that the defendant has willfully and knowingly substantially failed to make a true report and that he has done so for the purpose of defeating or evading payment of the correct tax."

We think the jury was correctly instructed and that the defendant was accorded a fair trial. The judgment appealed from is therefore affirmed.