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[61-1 USTC ¶9221] United States of America , Plaintiff-Appellee v. Leonard M. Bernard, Charles E. Bernard and James B. Jackson, Defendants-Appellants

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 12868, 287 F2d 715, 1/26/61, Rev'g and aff'g an unreported District Court case

[1954 Code Sec. 7201]

Crimes: Income tax evasion: False and fraudulent returns: Automobile dealer: Corporate officer: Failure to report "under-the-table" payments: "Overwhelming persuasiveness" of evidence.--Evidence lacked the "overwhelming persuasiveness" necessary for conviction of the crime of wilfully attempting to evade and defeat a part of the corporation income tax where it failed to show that the defendant, a vice-president of the corporate taxpayer-automobile dealer, had any knowledge of its books and records, or that he participated in the preparation of the return or had any knowledge as to its filing or contents. The crime charged arose out of the policy of selling a substantial part of the corporation's new 1948 automobiles to used car dealers for a cash bonus over and above the manufacturer's list. The bonus was neither entered in the sales records nor reported in the corporate income tax return for 1948 which, it was alleged, was therefore false and fraudulent in that income was understated by about $78,000. However, conviction of the president and treasurer was affirmed, on the record.

[1954 Code Sec. 7201]

Crimes: Income tax evasion: Admissibility of evidence: Automobile dealers' records: Testimony of "bird-dog": Admission against all defendants: Theory of "vicarious responsibility".--No error was committed in granting the government's motion that evidence based on (1) the omission from the sales journal of "under-the-table" payments, (2) records of used car dealers which showed that each of 103 new cars had been sold to them directly or indirectly through third parties commonly known as "bird-dogs", and (3) testimony of the used car dealers and these "bird-dogs", be admitted against all the defendants, rather than limiting the evidence to a particular defendant. The government's motion was properly grounded in the principle of "vicarious responsibility of all joint venturers" in the furtherance of a common plan or design.

[1954 Code Sec. 7201]

Crimes: Income tax evasion: Admissibility of evidence: Incomplete records: Check stubs: Police records: Summaries of primary evidence.--No error was committed in admitting (1) incomplete records of used car dealers to contradict apparently complete records of the taxpayer-corporation, there being no requirement that records made in the regular course of business be correct in all respects, (2) the check stubs of used car dealers regularly prepared in the business, (3) "police books" regularly kept by used car dealers in accordance with state law which required records identifying car purchases, and (4) summaries of primary evidence prepared by a government witness, full opportunity for cross-examination on the summaries and method of preparation having been accorded the defendants.

[1954 Code Sec. 7201]

Crimes: Income tax evasion: Charge to the jury: Ownership of "under-the-table" payments.--The trial court correctly charged the jury that monies received by the officers and agents of a corporation on the sale of property offered for sale by the corporation were corporate income. Thus, there was no basis to the contention that there was no proof that "under-the-table" payments received on the sale of new cars to used car dealers were ever received by the corporation.

[1954 Code Sec. 7201]

Crimes: Income tax evasion: Admissibility of grand jury minutes: Impeachment of accomplice testimony.--Questions and answers read from grand jury minutes were properly admitted where the trial judge cautioned the jury that it was to consider them only insofar as they tended to impeach defendants' witness, such instructions concerning "accomplice testimony" being a correct statement of the law.

[1954 Code Sec. 7201]

Crimes: Income tax evasion: Production of records: Reports of government agent.--Defendants were properly denied access to the written reports made by an Internal Revenue Service agent concerning the investigation of witnesses, even though the investigation was made simultaneously with the investigation of defendants' affairs, where the information obtained would have been used on cross-examination of the agent. The Jenks Act (18 U. S. C. §3500) requires the production only of such written statements and reports as are related to the subject of a witness' direct testimony.

Rob ert Tieken, United States Attorney, John Peter Lulinski, Charles R. Purcell, Jr., Mitchell S. Rieger, Assistant United States Attorneys, Chicago, Ill., for plaintiff-appellee. Maurice J. Walsh, 105 West Adams St. , Chicago , Ill. , for defendant-appellant.

Before HASTINGS, Chief Judge, and DUFFY, Circuit Judge, and MERCER, District Judge.

[False and Fraudulent Corporate Income Tax Return]

MERCER, District Judge:

The defendants, Leonard M. Bernard, Charles E. Bernard and James B. Jackson, were charged by indictment with having wilfully attempted to evade and defeat a part of the corporation income tax due and payable to the United States of America for the taxable year 1948 by Bernard Bros., Inc., a corporation, by the filing of a false and fraudulent income tax return on behalf of that corporation. ¹ The return was alleged to have been false and fraudulent, as defendants well knew, in that the corporate income therein reported was understated in the amount of approximately $78,000.00 and that the tax due to the United States was therein understated by approximately $30,000.00. After a trial before a jury, a judgment of conviction was entered by the court upon the jury's verdict finding all defendants guilty as charged in the indictment. Defendants appeal from that judgment.

During 1948, Bernard Bros., Inc., was a franchised dealer in new DeSoto and Plymouth automobiles at Evanston , Illinois . Defendants, in the respective order in which they are above named, were the president, vice-president and treasurer of that corporation. For the taxable year 1948 an income tax return was filed on behalf of the corporation reporting taxable income of $298,833.64, and a total tax due of $113,556.78. That return was signed by defendants, Leonard M. Bernard and James B. Jackson, in their respective capacities as president and treasurer of the corporation.

[No Guilty Knowledge]

The judgment must be reversed as to the defendant, Charles E. Bernard. The government concedes in its brief "that the evidence of Charles Bernard's guilt lacks the overwhelming persuasiveness of the case against Leonard Bernard and Jackson." We are convinced upon a review of the record that the evidence against this defendant lacks overwhelming persuasiveness to such extent that there is no evidence of his guilt of the crime charged.

Viewed in the light most favorable to the government, the evidence shows only that Charles Bernard was the vice-president of the corporation in 1948 and that he participated to some extent in the conduct of the corporate business in that year. The evidence fails to show that he had any knowledge of the books and records of the corporation, or that he participated in the preparation of the corporate tax return for 1948 or had any knowledge as to the filing or content of that return. His motion for acquittal made at the close of the government's case should have been granted.

[Background Facts]

The remaining defendants, Leonard M. Bernard and James B. Jackson, who are hereinafter referred to as defendants, except as the context otherwise requires, assert a number of alleged procedural errors as a basis for reversal of the judgment. In order that these alleged errors may be placed in focus, the following summary of background facts and of the procedural chronology of the trial is set forth in advance of discussion of the particular errors alleged.

[Omission of Bonus on Sale of New Cars to Used Car Dealers]

The theory of the government's case was that defendants, as officers and agents of Bernard Bros., adopted a policy of selling a substantial part of the corporation's new 1948 automobiles to used car dealers for a cash bonus over and above the manufacturer's list price; that, upon the sale of such cars for a cash bonus, the list price only was entered in the corporation's sales records; and that bonus payments received for such cars were not included in the corporation's gross sales as reported in the 1948 corporation tax return. To sustain its burden of proof upon that theory, the government undertook to prove the receipt by defendants and other agents of the corporation of cash bonus payments upon the sale of 103 specific new cars sold in 1948, and the omission from the corporation tax return of the specific items of income reflected in the receipt of such bonus payments.

[Sales Journal]

As the keystone of its specific-omitted-item proof, the government introduced into evidence the corporate records of Bernard Bros., and the key book of those records was the sales journal, which contained entries reflecting a sales price and a factory installed identification serial number for each new car sold by the corporation in 1948.

The foundation for introduction of the Bernard Bros. records was laid by the testimony of Rob ert H. Sharp, an internal revenue agent. Sharp testified that he had received the Bernard Bros. books, including the sales journal, from the defendant Jackson, in 1950. In July, 1950, Sharp and a second agent made a complete transcript of new car sales for the year 1948 as shown by the entries in those books and records. From comparison of that transcript with the Bernard Bros. sales journal, Sharp was able to testify that the sales journal was the same book from which he had made the transcript of new car sales in July, 1950. Sharp further testified that the net taxable income figure of $298,833.64, reported on the Bernard Bros. income tax return for 1948, was derived from the books which he had examined, and that the closing journal entries of all profit and loss accounts shown upon the corporation's books agreed, precisely, with corresponding items reported on the return. He testified that he could identify the books, including the Bernard Bros. sales journal, as records kept by Bernard Bros., because they had been supplied to him at his request by the defendant, Jackson, and had been identified to him as the Bernard Bros. books by both Jackson and Leonard Bernard. Sharp also testified that Leonard Bernard had stated to him in 1950 that all gross income of Bernard Bros. for 1948 was reflected in the books supplied to Sharp by Jackson and in the corporation tax return filed on behalf of the corporation for 1948.

[Used Car Dealers' Records]

The testimony of Sharp and the Bernard Bros. books constituted the first leg of the government's specific-omitted-item proof. The second leg of proof was approached through the testimony of witnesses and certain records of used car dealers which tended to show that each of the 103 new cars had actually been sold to a used car dealer, either directly or indirectly, and that defendants and agents of Bernard Bros. had received a greater price for each of those cars than that shown by the corporation's books.

[Direct Sales]

The 103 sales fell into two categories, direct and indirect. Adley Lorbeer, Anthony Volante and officers of Stoltz Motors, Inc., which is hereinafter referred to as Stoltz, testified with respect to a number of transactions in the first category. For example, Volante testified that he had purchased new Plymouths from Bernard Bros. in 1948 and that he had dealt with the sales manager George Smith in these transactions. He identified 7 invoices which he had obtained from Bernard Bros. with the delivery of new Plymouths purchased in 1948 from that corporation. Each of those documents identified, by factory serial number, one of the new automobiles shown by the Bernard Bros. sales journal as having been sold in 1948. He further testified that he had paid exactly $400.00 more than the invoice price for each of the automobiles purchased.

The other direct sale testimony was similar, consisting of the testimony of witnesses and the identification of invoices, checks or business records tending to show the purchase in 1948 by a used car dealer witness of specific new automobiles which could be identified with entries in the Bernard Bros. sales journal. In some instances the government sought to prove the bonus price paid for specific cars by oral testimony. In others, the evidence of amount of bonus payments was reflected upon the car dealer's records.

[Sales Through "Bird-Dogs"]

The second category of transactions, indirect sales, encompassed a majority of the specific transactions to which the government's evidence related. In indirect transactions, new cars were channeled to used car dealers through third parties who were commonly known to the trade as "bird-dogs."

"Bird-dogs", Edward Gallagher, Lawrence Fisher, Anthony Antonucci, Raymond Stoltz and Joseph D. Kaziny, were key government witnesses relative to indirect sales.

The testimony of Gallagher is representative of the "bird-dog" evidence adduced by the government. Gallagher testified that he had purchased a number of new cars in 1948 from agents of Bernard Bros. for Nichols Motor Sales, a used car dealer, which is hereinafter referred to as Nichols. He could not recall the dates and auto serial numbers involved in any transaction, but stated that, in each instance, he paid cash for the car purchased and received a Bernard Bros. invoice for each car purchased. He further testified that the car and invoice were delivered by him to Nichols.

Gordon Nichols and other Nichols' employees were then called by the government to lay the foundation for the introduction of records kept by Nichols relative to the purchase of cars in 1948. Those records, and the testimony relative thereto, tended to prove that Nichols had purchased 35 new cars from Gallagher in 1948 which were shown by the sales journal of Bernard Bros. as having been sold by that corporation.

The evidence of other "bird-dog" transactions followed the same sequence--the testimony of the "bird-dog", followed by introduction of the records of the used car dealer for whom he had purchased new cars.

["Bird-Dogs" Testimony]

Although the testimony as to each particular transaction differed, the transactions as to which evidence was adduced were all similar in nature. The witnesses, whether "bird-dogs", used car dealer or used car dealer employee, testified as to a sequence of events substantially as follows: Each witness approached one of the defendants, Charles Bernard or Mr. Smith to arrange for the purchase of a new car or cars; the person with whom he dealt would, in each instance, require that the car be paid for in cash for a price above the manufacturer's list price thereof and that the purchaser supply to Bernard Bros. the name of some person, either real or fictitious, to whom the car would be invoiced and in whose name an application for a certificate of title would be executed; an invoice was delivered with each car which showed only the manufacturer's list price as the sales price thereof; and that the car, and the invoice bearing the name supplied by the purchaser, would then be delivered to the purchaser for the agreed cash consideration. Each such car was then offered for sale by the ultimate dealer-purchaser as a "like-new" used car, i.e., a car showing less than 100 miles of use.

The amount of the bonus which the witnesses testified they had paid to the corporation through one of defendants, Mr. Smith or Adelaide Locke Adsit, Bernard Bros. cashier and bookkeeper, varied with the different transactions. The government's evidence with respect to the 103 identified new cars tended to prove that cash "bonuses" therefor aggregating a minimum amount of $34,108.06 had been paid in 1948 to agents of Bernard Bros. Agent Sharp testified that his inspection of the Bernard Bros. books revealed that all cash bonuses were systematically excluded from the recorded sale price of each car.

[Summary Containing Computation of Bonuses Received]

The government's case was concluded by the testimony of William Ruggaber, an employee of the Bureau of Internal Revenue. Ruggaber was present in court and heard the testimony of the various "bird-dog" and used-car dealer witnesses. From that testimony and the exhibits in evidence Ruggaber prepared a summary containing his computation of the amount of the cash bonus received by officers and employees of Bernard Bros. upon each of the 103 transactions. Over defendants' objection, a copy of that summary was given to each juror as Ruggaber testified as an expert witness to his evaluation of the primary evidence and the mechanics of his preparation of the summary. After the witness had testified, the summary prepared by him was admitted in evidence as an exhibit and given to the jury, over defendants' further objection, for use in their deliberations.

The major contentions now asserted against the judgment arise out of the summarized procedural aspects of the trial.

[Admission of Specific Testimony Against All Defendants]

A major contention urged by defendants for reversal of the judgment is premised upon the asserted error of a ruling related to the admissibility and use of evidence. As the various "bird-dog" and used-car dealer witnesses testified to transactions and conversations with one, or more, of defendants, Charles Bernard or Mrs. Adsit, admission of the testimony was limited to the particular person to whom it pertained. Near the close of its case, the government moved that such testimony be admitted against all of the parties named in the indictment upon the theory that the evidence tended to prove a common scheme or design between defendants, Charles Bernard and employees of Bernard Bros. to sell new cars for bonus prices, in the furtherance of which each party had acted as agent for each of the other parties. Over defendants' objection, the government's motion was allowed, and all of the evidence, with certain specific exceptions noted, was admitted as competent evidence against each of the defendants named in the indictment.

[Theory of Vicarious Responsibility]

Defendants now assert that the trial court, by so ruling, permitted them to be convicted of conspiracy, a crime not charged in the indictment. That premise overlooks and misconstrues the theory upon which the government's motion was made and allowed by the court. In moving that evidence admitted as against the individual defendants be admitted as against all defendants, the government relied upon the principle of vicarious responsibility of all joint venturers for all acts done and statements made in furtherance of the object of the joint scheme or undertaking. As a preface to its ruling allowing the government's motion, the court said, in pertinent part:

"But the broad terms of the indictment would imply that there was a common design or a common plan to defraud the government, with only one exception.

"There was very extensive cross-examination by counsel for the defendants. They examined into each and every area. The one exception was Mr. Walsh, as to one of defendants in this case.

"Under the circumstances, I feel that the motion of the Government at this time could not be construed to be taking the defendants by surprise, so that they did not have an adequate opportunity to cross-examine as to the various issues in the case; and I therefore hold that the testimony and the exhibits in each and every case, with the exception of those outlined will apply to all defendants in the case; and the motion of the Government is allowed."

In its charge to the jury on this phase of the case, the court said, in pertinent part:

"When men enter into an agreement for an unlawful end, they become agents for one another. What one does pursuant to the common purpose, all do, and declarations, statements or conversations by one in furtherance of the common design and during its continuance are competent against all.

"During the course of the trial, various testimony and exhibits were received in evidence only as to certain defendants, and you were instructed that such evidence was not then to be considered against any defendant to whom the evidence did not pertain. Later, near the close of the government's case you were instructed that such evidence, with certain exceptions, had been admitted as to all defendants and that you might consider such evidence as pertaining to all defendants.

"If you now find beyond a reasonable doubt from all the evidence in this case that there was a common plan or design to engage in a general course of corporate business transactions of the type shown by the evidence, you may consider all the acts [of each of the individual defendants as evidence pertaining to all.]

"On the other hand, if you find from all the evidence that such a common plan or design was not shown beyond a reasonable doubt then you will consider the acts and declarations of each defendant only as to him and not to any other defendant."

[Existence of Common Plan or Design Properly Submitted]

From our review of the record, it is apparent that we are dealing in this phase of the case with a question of the admissibility of evidence only, not one of any amendment of the substantive charge of the indictment. The evidence complained of was admitted by the court and submitted to the jury upon a theory of the vicarious responsibility of all joint venturers for all acts done and declarations made by each in furtherance of the joint undertaking. The question whether a common plan or design was proved beyond a reasonable doubt was properly submitted to the jury.

Authority for the ruling is found in Reistroffer v. United States, 8 Cir., 258 F. 2d 379, 386-388; United States v. Pugliese, 2 Cir., 153 F. 2d 497, 500; United States v. Olweiss, 2 Cir., 138 F. 2d 798, 799-800, cert. denied 321 U. S. 744. To the same effect is American Fur Co. v. United States, 2 Pet. (27 U. S. ) 358, 364-365. We find no analogy between the ruling in this case and the case of Stirone v. United States, 361 U. S. 212, upon which defendants' principal reliance is placed. There the indictment charged that Stirone had interfered with the movement of certain sand in interstate commerce by an act of extortion. When the government's evidence tended to prove that the statute of limitations barred prosecution for interference with the movement of sand, the court allowed the introduction of evidence tending to prove interference with the interstate movement of steel manufactured by a steel mill constructed from the sand alleged in the indictment. In reversing the judgment of conviction, the Supreme Court held that the latter evidence related only to substantive acts not charged in the indictment, and that the admission of such evidence had the effect of permitting the government to amend the indictment against Stirone by the use of evidence.

We hold that the court's ruling admitting the evidence against all defendants was proper.

[Apparently Correct Records Contradicted by Incomplete Records]

Error is assigned upon the admission by the court of numerous documents and books from the records of the used-car dealer witnesses. The exact contention of defendants upon this phase of the case, as embodied in their brief, defies precision of statement. Their apparent contention is that it was in some manner unjust and prejudicial to permit the Bernard Bros. books which were compact and well arranged to be contradicted by used-car dealer records and documents which were in some instances incomplete and, in part, inaccurate.

From time to time as the trial progressed, the purchase journal of Nichols, the "police books" of Park Motor Sales, Atlas Motors and Stoltz, stock cards of Park, envelopes kept by Atlas for each car purchased, invoices identified as having been issued by Bernard Bros., and cancelled checks and check stubs of several used-car dealer witnesses were admitted as exhibits. We do not deem it necessary to set forth in detail the description or trial history of each document. We have examined the foundation laid for the introduction of the documents in each instance, and we conclude that all were properly admissible as records made in the regular course of a business, 28 U. S. C. §1732(a); Palmer v. Hoffman, 318 U. S. 109, 112-114; United States v. Wicoff, 7 Cir., 187 F. 2d 886, 889, or as documents corroborating the oral testimony of witnesses.

["Correct in All Respects"]

Defendants' argument, that some of these business record exhibits were demonstrated to be inaccurate in certain respects goes to the weight or credibility of the documents, not to any question of admissibility. As we observed in United States v. Wicoff, 7 Cir., 187 F. 2d at 889 "Title 28 U. S. C. A. §1732 provides for the admissibility of books and records made in the regular course of business, but does not require that they be correct in all respects." Accordingly, we will devote further discussion of this phase of the case to only two of several specific contentions.

[Check Stubs of Used Car Dealers]

The court admitted the check stub records of Nichols. Gordon Nichols identified the stubs of checks written in the course of various transactions for the purchase of specific cars in 1948. These stubs, variously, showed that the checks were payable to cash or to one of the proprietors of Nichols. In addition, each stub upon which the government's case depends bore the written notation, "Gallagher". Mr. Nichols testified that the name of the "bird-dog" was regularly noted upon the stub of each check written for the purchase of an automobile from a "bird-dog"--that the notation, "Gallagher", upon each of the stubs introduced in evidence denoted that the check had been issued for the purchase of a car from Gallagher.

We hold that the check stubs and explanatory testimony were properly admitted in evidence, upon the foundation testimony that the stubs were regularly prepared in the conduct of Nichols' business. The circumstance of the placement of the notation, "Gallagher", upon particular stubs, and the necessity for explanatory testimony, affect the weight and credibility of the evidence, not the admissibility. Bodnar v. United States [57-2 USTC ¶9971], 6 Cir., 248 F. 2d 481, 482-483.

["Police Books"]

We conclude that defendants' contention against the admissibility of the "police books" of Atlas and Stoltz also lacks merit. Each of those books was kept pursuant to the provisions of an Illinois statute, (now I. R. S. 1959, c. 951/2, Sec. 5-401), which required all car dealers to keep records containing sufficient information as to the identity of cars purchased and sold to aid law enforcement officials in the enforcement of the motor vehicle theft laws. Both Atlas and Stoltz entered upon their "police books" the price for which each automobile had been purchased, in addition to the information, which the statute required. The foundation testimony disclosed that the amount of the purchase price of each car was customarily recorded in the "police book" as a regular record entry. It is wholly frivolous to contend, as defendants do, that the character of such books as a record made in the regular course of a business is destroyed merely because more information was recorded therein than the State statute required.

The distinction between Hartzog v. United States [55-1 USTC ¶9128], 4 Cir., 217 F. 2d 706, and Bruce v. McClure, 5 Cir., 220 F. 2d 330, upon which defendants principally rely in their argument against the admissibility of these records, is readily apparent upon reading the reported opinions in those cases.

[Admissibility of Summary]

We have examined the circumstances of the trial court's admission in evidence of the summary prepared by Ruggaber, and we hold that the admission of that summary was not error. The use of charts and summaries of voluminous records and testimony, as secondary evidence, has been approved in United States v. Johnson [43-1 USTC ¶9470], 319 U. S. 503; Somberg v. United States, 7 Cir., 71 F. 2d 637; Smith v. United States [57-1 USTC ¶9242], 6 Cir., 239 F. 2d 168, cert. denied 353 U. S. 983; Corbett v. United States [56-2 USTC ¶10,055], 9 Cir., 238 F. 2d 557, cert. denied 352 U. S. 990; Blackwell v. United States [57-1 USTC ¶9644], 8 Cir., 244 F. 2d 423, cert. denied 355 U. S. 838, among other cases. In Lloyd v. United States [55-2 USTC ¶9665], 5 Cir., 226 F. 2d 9, one of the cases upon which defendants principally rely, the court stated that admission of charts made by government agents summarizing the basic evidentiary facts is discretionary with the trial court and that the court's exercise of discretion in that regard can be reviewed only upon a clear showing of abuse and resulting prejudice to the accused person. Although the court there expressly disapproved the inclusion of certain conclusionary statements in summaries admitted in evidence, the reversal of the judgment was on other grounds. The court, expressly, did not decide whether the use of the charts was prejudicial error.

[Admissible as Summaries of Primary Evidence]

The Ruggaber summaries were admitted by the court as summaries of the primary evidence, only, and not as primary evidence within themselves. Examination of the record discloses that defendants were afforded full opportunity to cross-examine Ruggaber with respect to the summaries and his method of making the same. With respect to the testimony of Ruggaber, the court instructed the jury that his testimony was entitled to weight as evidence only to such extent as the jury should find that the primary testimony of other witnesses and the exhibits upon which his expert testimony was based was entitled to weight and credibility. With respect to the Ruggaber summaries, the court stated in its charge to the jury:

"Such exhibit has no independent value. If you choose to disregard as evidence all or a part of the testimony of any witness in this cause or do not accept the correctness of any document admitted into evidence, then you must likewise disregard so much of the summary as is based upon the testimony of such witnesses and such documents you decide so to disregard."

Those instructions meet all of the requirements for the use of such evidence as set forth in the cases above cited.

[Proof that "Under-the-Table" Payments Received by Corporation]

Equally wanting in merit is the defendants' contention that the evidence was insufficient to sustain their conviction. Defendants' argument is premised principally upon the contention that the evidence tended to show only that "under-the-table" payments were received by various individuals, including defendants, but that there is a lack of proof that such "under-the-table" payments were ever received by the corporation. The court correctly charged the jury that monies received by officers and agents of a corporation in the sale of property offered for sale by the corporation is corporate income. Burger v. United States [59-1 USTC ¶9217], 8 Cir., 262 F. 2d 946, 955-956. It is immaterial that all or a part of that money may have been embezzled from the corporation by the person who received it as defendants suggest. Assuming, arguendo, that the contention is a fact, the money received was none the less corporate income. Burger v. United States, supra. The cases of Rutkin v. United States [52-1 USTC ¶9260], 343 U. S. 130, Briggs v. United States [54-2 USTC ¶9551], 4 Cir., 214 F. 2d 699, and Davis v. United States [55-2 USTC ¶9685], 6 Cir., 226 F. 2d 331, upon which defendants rely are inapposite. Each dealt only with the question whether funds embezzled from a corporation, or received by an individual through extortion, constituted taxable income to the individual.

Upon the evidence the jury could find that defendants systematically omitted cash bonus payments from the Bernard Bros. books and from the 1948 corporation tax return in a wilful attempt to evade a substantial part of the income tax due for that year.

[Charge to Jury]

Defendants contend that the court erred in its charge to the jury and in its refusal to give certain instructions tendered by the defendants. We have examined the court's charge to the jury as a whole, and we conclude that the jury was correctly instructed. The charge, as a whole, is both complete and fair to the defendants.

That conclusion might well dispose of the whole of defendants' many contentions against the charge given, but we deem it advisable to mention briefly several specific points raised.

[Grand Jury Minutes]

During the trial of the case the court permitted the use of grand jury minutes in questioning the witness, Edward Gallagher. In its charge, the court cautioned the jury that it might consider those questions and answers read from the grand jury minutes only in so far as they tended to impeach Gallagher. That statement was part of the charge to the jury relating to the impeachment of witnesses. A cautionary instruction was necessary in view of the use of the grand jury minutes and the charge given correctly stated the law.

The charge with respect to accomplice testimony was a correct statement of the law, United States v. Echeles, 7 Cir., 222 F. 2d 144, cert. denied 350 U. S. 828; Delvalley v. United States, 7 Cir., 88 F. 2d 579, and was necessary to present the testimony of George Smith to the jury in proper perspective.

The charge given with relation to the fact that defendants did not testify was in compliance with the principles stated in Bruno v. United States, 308 U. S. 287, and was essentially identical to the instruction which we approved in United States v. Fleenor, 7 Cir., 162 F. 2d 935.

The charge given with respect to the weight to be given to character witness testimony is essentially identical to the charge which we approved in United States v. Echeles, 7 Cir., 222 F. 2d 144, cert. denied 350 U. S. 828. We distinguish United States v. Semeniuk, 7 Cir., 193 F. 2d 508, upon authority of the Echeles case.

In summary, upon consideration of the court's charge to the jury as a whole, we find that the jury was correctly instructed as to the elements of the offense charged, as to the rules for the jury's consideration of, and weight to be given to, the evidence, as to the respective functions of jury and trial judge, as to the use of the evidence against the various defendants and as to the proper respective positions of the government and the defendants with relationship to the burden of proof and the presumption of innocence. We find the court's charge to have been eminently fair to the defendants and complete in every necessary respect. We therefore reject all contentions of defendants with relation to the propriety of the court's charge, and the rulings upon tendered instructions.

[Access to Agent's Reports]

Finally, defendants contend that written reports made by agent Sharp to the government reveal that the affairs of the witnesses, Smith, Kaziny and Gallagher, were under investigation by the Bureau of Internal Revenue simultaneously with the investigation of the affairs of Bernard Bros. By their supplemental brief, defendants contend that the court's ruling denying them access to such reports prevented them, on cross-examination of Sharp, from exposing and developing any promise of leniency, or other relationship, between Sharp and the government, on the one hand, and Smith, Kaziny and Gallagher, on the other. ²

In United States v. Killian, 7 Cir., 275 F. 2d 561, Pet. cert. pend'g, we held that the Jencks Act, 18 U. S. C. §3500, requires the production only of such written statements and reports as are related to the subject of a witness' direct testimony. The fact and the timing of any investigation of Smith, Kaziny and Gallagher have no relevant relationship whatsoever to Sharp's direct testimony. The demand for production of the statements in question was properly denied.

This is not a case comparable to United States v. Sheer, 7 Cir., 278 F. 2d 65, or United States v. Berry, 7 Cir., 277 F. 2d 826, in which there was a failure to produce for the court's examination statements and reports made by government witnesses which related to the subject matter of the issues of the trial.

We have carefully considered the many other contentions, and subcontentions, of defendants' shot-gun approach to their attack upon the judgment of conviction. We have concluded that all are without merit, and that further specification or discussion thereof would only lengthen an already overlong opinion.

The judgment is reversed as to Charles E. Bernard. The judgment as to the defendants, Leonard M. Bernard and James B. Jackson is affirmed.

¹ The indictment also named the former cashier and bookkeeper of Bernard Bros., Adelaide Locke Adsit, as a defendant. The court directed her acquittal at the close of the government's case.

² After Sharp had testified on direct examination, defendants invoked the Jencks Act, 18 U. S. C. §3500, and demanded that all written statements and reports made by Sharp and related to his Bernard Bros. investigation be produced for their inspection and use. The trial judge ordered that all such statements and reports be produced by the government for inspection by the court in camera. See United States v. Killian, 7 Cir., 275 F. 2d 561, Pet. cert. pend'g. After his in camera inspection of the reports, the trial judge ordered that certain reports, and parts of other reports, be delivered to defendants. The court then ordered that all other statements and reports to which defendants had been denied access be sealed in order that they might be available for any appeal.

Through oversight, one of two envelopes containing such reports was not sealed when the record was transmitted to this court. Defendants' examination of the contents of that unsealed envelope forms the basis for their Jencks Act argument.

 

 

 

[75-1 USTC ¶9269] United States of America v. Julius L. Celentano, Defendant

U. S. District Court, So. Dist. N. Y., 73 Cr. 259, 391 FSupp 1252, 2/19/75

[Code Sec. 7201]

Evasion or avoidance of tax: Burden of proof: Beyond a reasonable doubt.--The government's suit was dismissed for failure to prove beyond a reasonable doubt that the taxpayer attempted to evade or defeat the payment of tax. While the taxpayer did omit some income from his tax return for 1969, he also failed to take advantage of certain legal deductions to which he was entitled. Since the government failed to prove beyond a reasonable doubt that the taxpayer knowingly and willfully evaded reporting and paying the tax, the taxpayer was acquitted.

Paul J. Curran, United States Attorney, T. Barry Kingham, Assistant United States Attorney, New York, N. Y., for U. S. Murray Appleman, for defendant.

Opinion

DUFFY, District Judge:

This criminal case was tried to the Court without a jury. This opinion will constitute findings of fact and conclusions of law as required by Rule 23 of the Federal Rules of Criminal Procedure, 18 U. S. C.

The defendant, Julius L. Celentano, was charged in a 5 count indictment with violations of the Internal Revenue Code. Count 2, which charged that the defendant had understated his income (not tax) by $637.10, for the year 1968, was dismissed at the outset of the trial. In the four counts remaining the governmental alleges that the defendant owes taxes for the years 1966, 1967 and 1969 totalling $2,671.41.

The defendant, born in 1909, is a retired tailor, who graduated from 8B from a public school in the Bronx . A joint tax return was filed for each year with his wife, who worked as a "sales person" in a major metropolitan department store, and reflected her income along with some earnings from a two family house the defendant and his wife owned in the Bronx . The government alleges that the defendant failed to report that he was paid $3,896.33 in 1966, and $4,419.60 in 1967, for running a valet service at the Hotel Ten Park Avenue. The valet service was leased by the owner of a dry cleaning establishment, who in effect hired the defendant to do the work for the valet service. The owner of the dry cleaning establishment received the monies for the valet work directly from the hotel but apparently considered the defendant as an independent contractor and did not withhold taxes and provided him with neither a Form W-2 or a Form 1099.

The charges relating to 1969 involve capital gains of $10,214.60 resulting from stock transactions. Needless to say, the defendant did not receive any tax form from his stock broker in connection with these transactions and did not report them on his income tax return.

On the other hand it is apparent that the defendant had a number of legitimate tax deductions which his commercial tax preparer did nit disclose (including the payments made for the preparation of these returns). In determining the tax liability of the defendant, the government's investigating agent ignored all of these possible deductions stating that they were merely adjustments which could be made in a civil proceeding but did not affect his criminal investigation. It is also interesting that the government called an expert, an I. R. S. official, to detail for the Court how he arrived at the total of $2,671.41 in the tax liability of the defendant. The defendant conceded the witness' expertise. The calculations produced by the government--as a matter of fact and of law--were wrong. The tax liability of defendant, if anything, is less than that contended by the government. ^*

Under the circumstances presented in this case I find that the government has not proven beyond a reasonable doubt the alleged knowing, willful violations of the Internal Revenue Code. Accordingly, a verdict of acquittal will enter.

SO ORDERED.

^* I make no finding as to be civil tax liability of the defendant.

 

 

 

[60-1 USTC ¶9199] United States of America , Plaintiff v. Albert M. Bridell and American Carbon Paper Corporation, Defendants

U. S. District Court, No. Dist. Ill. , East. Div., Nos. 58 CR 475, 59 CR 157, 180 FSupp 268, 1/4/60

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

Willful attempt to evade tax: Close corporation's payments of stockholder's living expenses: Failure of stockholder to report income from corporation's payments.--All the stock of the American Carbon Corporation was owned by the president of the corporation, his father-in-law, and members of their families. During the taxable years, the corporation paid the salaries of the caretaker and maintenance man, outside laborers, and cookhousekeepers, all employed at the president's home, and charged them on its books as business expense. Similar treatment was given payments by the corporation for a yacht and Miami Beach , Florida , properties used by the president and his family for entertainment of their personal friends. It is held that, although these expenditures represented income of the president, having resulted in direct benefit to him and his wife constituting an economic benefit and income to them, the Government did not prove beyond a reasonable doubt a willful attempt to defeat or evade tax, or that a conspiracy existed to attempt to evade and defeat income tax due by the president and his wife.

A. F. Manion and Harvey M. Silets, Assistant United States Attorneys, Chicago , Ill. , for plaintiff. George D. Crowley, 135 South LaSalle Street , Chicago 3, Ill. , for Albert M. Bridell. John F. Kelly, 135 South LaSalle Street , Chicago 3, Ill. , for American Carbon Paper Corporation.

[Income Tax Violation]

CAMPBELL, District Judge:

THE COURT: This consolidated cause, consisting of Case No. 58 CR 475 and Case No. 59 CR 157, having come on for trial upon the stipulations, testimony and exhibits of the parties, is presently before me for disposition. Cause No. 58 CR 475 is an indictment consisting of two counts, the first of which I dismissed November 20, 1958. The second and remaining count charges that defendant Albert M. Bridell "did willfully and knowingly attempt to evade and defeat a large part of the income tax due and owing by him and his wife to the United States of America for the calendar year 1952 by filing a . . . false and fraudulent income tax return . . . in violation of Section 145(b) of the Internal Revenue Code of 1939; to be found in Title 26 U. S. C. Section 145(b)."

Cause No. 59 CR 157 is an indictment consisting of six counts, the first five of which charge the defendant, Albert M. Bridell, with willfully and knowingly attempting to evade and defeat income tax due and owing the United States for the years 1953, 1954, 1955, 1956, and 1957, respectively, by filing false and fraudulent returns for those years in violation of Section 145(b) as to 1953, and in violation of Section 7201 of the Internal Revenue Code of 1954; Title 26 U. S. C., Section 7201, as to the remaining years. The sixth count charges a conspiracy between defendant Bridell, defendant American Carbon Corporation and Rob ert J. Blauner to attempt to evade and defeat income tax due and owing the United States by Bridell and his wife from April 4, 1949, up to and including June 13, 1958, in violation of Title 18, U. S. C., Section 371.

It appears from the evidence that defendant, Albert M. Bridell, after practicing law for a year, entered the continuous form printing business in 1935 and in 1936, joined the newly formed American Lithofold Corporation (hereinafter referred to as "Lithofold") of St. Louis, Missouri, as a salesman.

In 1937 he was sent by that corporation to Chicago , Illinois , where he has since remained. He is presently vice president of Lithofold and is also in charge of its advertising program, promotional efforts and salesman education.

In 1943, defendant, American Carbon Corporation (hereinafter referred to as "Carbon"), an Illinois corporation, was formed for the purpose of manufacturing carbon paper, inked ribbons and items related thereto and more specifically, for the manufacture of "one-time carbon paper" to be sold and supplied to Lithofold.

Since its inception, defendant, Bridell, has been president, a director and shareholder of Carbon. Bridell's father-in-law, R. J. Blauner, was vice-president of Lithofold when Carbon was incorporated, and is presently president and treasurer. R. J. Blauner, since its incorporation, has been treasurer, a director and shareholder of Carbon. Since September 15, 1945, no person unrelated to the Bridell or Blauner families has acquired, owned or held any of the capital stock of Carbon. Nor has any unrelated person to the Bridells or Blauners served as a director. Since 1947, the majority of the capital stock of Lithofold has been held by the Bridells, Blauners and Carbon. From 1944 through 1957, the percentage of sales by Carbon to Lithofold out of total sales ranged between 96 per cent in 1944 to 28 per cent in 1957.

In 1946, R. J. Blauner purchased a home in Highland Park , Illinois , named " Tara " at his wife's suggestion and in which they lived, until October, 1950. Later the word " Tara " was and is currently used as a trade name for Carbon. In 1948, Bridell and his wife sold their Wilmette home and moved to " Tara " where they have since resided with their children. On April 6, 1949, " Tara " was conveyed to the Bridells as joint tenants.

[Shareholders' Personal Expenses Paid by Corporations]

During December of 1946, one, Virlon Furrow, began working at " Tara " as caretaker and maintenance man and was paid personally by Blauner for that month. On December 30, 1946, he made application for employment with Carbon and was subsequently placed, at Bridell's direction, upon the Carbon payroll. Furrow continued working exclusively at " Tara " until his death, February 17, 1958. During this entire period his wages were paid by Carbon.

One, Frank Carretta, was employed as an outside laborer at " Tara " from June 11, 1951, until April 10, 1952. One, Pat Kline, was employed at " Tara " as an outside laborer from May 16, 1951, until November 1, 1951. One, Morris Nygaard, employed by Carbon from November 24, 1950, until April 17, 1952, also did some work at " Tara ." One, Ellarea McKinney, was employed as a cook and housekeeper at " Tara " from January 2, 1951, until December 20, 1951. One, Elfreda Peters, was employed as a cook and housekeeper at " Tara " from December 1, 1951, until April 15, 1952. All the above-named persons received wages from Carbon during the respective periods of their employment.

On or about January 3, 1951, R. J. Blauner leased a furnished residence at 9301 Collins Avenue , Miami Beach , Florida , on behalf of Carbon, for a period extending to May 1, 1951, for a rental of $6,000, which was charged to Carbon as a sales promotion expense at the direction of Blauner.

The Bridells and Blauners, among others, stayed at 9301 Collins Avenue for varying periods during the leasehold. On or about March 7, 1951, R. J. Blauner entered into a contract on behalf of Carbon to buy a house and grounds, later known as "Presque Rio," located at 708 Royal Plaza, Fort Lauderdale, Florida, for $90,000. The sale was completed on April 27, 1951.

In April of 1951, R. J. Blauner bought a yacht, paid for by Carbon, which was later renamed " Tara ." Until its sale in July, 1955, many people were entertained at "Presque Rio" and on the yacht.

Carbon furnished the investment capital for the acquisition of these properties and assumed the indebtedness for their unpaid balance. During the years in question, Carbon paid for: maintenance and repairs; interest; legal and audit fees; capital improvements; admin istrative expenses; telephone expenses; real estate, personal property and franchise taxes; insurance; wages paid to Fort Lauderdale house servants, and the yacht captain; interest and finance charges on the yacht; stationary expenses; and depreciation expenses on both properties.

From 1949 through 1954, Bridell prepared the individual income tax returns on behalf of himself and his wife. Their later individual returns were prepared by Carbon auditors, Ernst & Ernst. No reference was made upon the individual returns of the Bridells as to the employment of Virlon Furrow until their 1957 return was filed in June of 1958 containing a statement to the effect that wages paid Furrow were not considered as income to the Bridells, but as a business expense to Carbon and properly deductible by Carbon, as such. Prior to the 1956 Carbon corporate income tax return which listed Furrow's wages as a "promotional expense" at "Tara," there was no mention in Carbon corporate returns as to Furrow's employment at " Tara ." The 1957 Carbon corporate return listed wages paid to Furrow under "cost of goods sold."

After a series of investigations by revenue agents and special agents of the Internal Revenue Service extending over a period of years, the first of the two indictments here involved was returned against Bridell in July, 1958. In regard to the substantive counts of the two indictments, it is clear, in view of Stipulation, Part I, Pars. 13, 14, 16 and 18, as well as Government's Exhibit 61, that the alleged additional net income to Mr. Bridell and his wife, as alleged in Count II of Cause No. 58 CR 475, during the year 1952, is made up of the actual wages paid to Virlon Furrow, Morris Nygaard, Frank Carretta and Elfreda Peters by American Carbon Corporation during that year.

Likewise, in view of Stipulation, Part I, Par. 13, and Government's Exhibit 61, the additional income charged in Cause No. 59 CR 157, as to Count I for the year 1953, Count II for the year 1954, Count III for the year 1955, Count IV for the year 1956, and Count V for the year 1957, is made up of the actual wages paid to Virlon Furrow by American Carbon Corporation during those years. The conspiracy count relates not only to the employment of Furrow and others who worked at "Tara" and who were paid wages by Carbon, but extends to the use of the herein described Florida property as well. It alleges eleven overt acts.

[Tax Evasion Law]

Section 145(B) of the Internal Revenue Code of 1939, Title 26 U. S. C., Section 145(B) provides:

"Any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined . . . or imprisoned . . .."

Section 7201 of the Internal Revenue of 1954 provides:

"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 . . . or imprisoned . . ."

Title 18, U. S. C., Section 371 provides:

"If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purposes, and any one or more of such persons do any act to effect the object of the conspiracy, each shall be fined . . . or imprisoned . . ."

As pointed out by the Supreme Court of the United States in Spies v. United States, 317 U. S. 492 [43-1 USTC ¶9243], at Pages 496, and 497, Section 145(b), provided the climax of a variety of sanctions existing at that time to insure payment of tax. Likewise today, Section 7201, a derivative section from Section 145(b), provides the climax of a variety of sanctions to insure payment of tax.

[Willfulness]

From a casual reading of Sections 145(b) and 7201, it is obvious that the phrases "willfully attempts" and, "in any manner," do not lend themselves to rigid definition. As to the meaning of the word "willful," much has been written. In United States v. Murdock, 290 U. S. 389 [3 USTC ¶1194], the Supreme Court stated at Pages 395, 396:

"The revenue acts command the citizen, where required by law or regulations, to pay the tax, to make a return, to keep records, and to supply information for computation, assessment, or collection of the tax. He whose conduct is defined as criminal is one who 'willfully' fails to pay the tax, to make a return, to keep the required records, or to supply the needed information. 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."

In Spies v. United States, the Supreme Court stated at Pages 497, and 498:

"The difference between willful failure to pay a tax when due, which is made a misdemeanor, and willful attempt to defeat and evade one, which is made a felony, is not easy to detect or define. Both must be willful, and willful, as we have said, is a word of many meanings, its construction often being influenced by its context. . . . It may well mean something more as applied to non-payment of a tax than when applied to failure to make a return. Mere voluntary and purposeful, as distinguished from accidental, omission to make a timely return might meet the test of willfulness. But in view of our traditional aversion to imprisonment for debt, we would not without the clearest manifestation of Congressional intent assume that mere knowingly and intentional default in payment of a tax, where there had been no willful failure to disclose the liability, is intended to constitute a criminal offense of any degree. We would expect willfulness in such a case to include some element of evil motive and want of jurisdiction in view of all the financial circumstances of the taxpayer."

In Holland v. United States, 348 U. S. 121 [54-2 USTC ¶9714], the Supreme Court stated at Page 139:

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

In United States v. Glascott, 216 F. 2d, 487 [54-2 USTC ¶9652], at Page 490, Judge Schnackenberg of our Court of Appeals stated:

"The key word in this statute is 'willful.' It is an essential ingredient of the crime. Willful is distinguished from accidental. Under this statute that which is willful is an actual, intentional wrongdoing with the purpose of evading the tax. It is not established by negligence, however gross. Willfulness is a subjective state in most instances. This subjective state, of course, may be shown to exist by various statements and conduct."

In regard to the word "attempt," the Supreme Court in Spies v. United States , supra, at Pages 498, 499, stated:

"It is not necessary to involve this subject with the complexities of the common law 'attempt.' The attempt made criminal by this statute does not consist of conduct that would culminate in a more serious crime but for some impossibility of completion or interruption or frustration. This is an independent crime, complete in its most serious form when the attempt is complete, and nothing is added to its criminality by success or consummation, as would be the case, say, of attempted murder. Although the attempt succeeds in evading tax, there is no criminal offense of that kind, and the prosecution can be only for the attempt. We think that in employing the terminology of attempt to embrace the gravest of offenses against the revenues, Congress intended some willful commission in addition to the willful omissions that make up the list of misdemeanors. Willful but passive neglect of the statutory duty may constitute the lesser offense, but to combine with it a willful and positive attempt to evade tax in any manner or to defeat it by any means lifts the offense to the degree of felony."

As to the provision "in any manner," the Supreme Court stated in the same case, at Page 499:

"Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished, and perhaps did not define lest its effort to do so would result in some unexpected limitation. Nor would we by definition constrict the scope of the Congressional provision that it may be accomplished 'in any manner.' By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal. If the tax-evasion motive plays any part in such conduct, the offense may be made out even though the conduct may also serve other purpose such as concealment of other crime."

[Government's Burden of Proof]

Thus, it is clear that the burden of proof is upon the Government to prove, within the framework that I have discussed, every element of the offenses charged beyond a reasonable doubt, though not a mathematical certainly. The Government in attempting to maintain this burden in this case has introduced certain evidence into the record to show "pattern of conduct," or "intention" on the part of defendant Bridell to which objections have been made of irrelevancy and prejudice. These portions of the record merit some legal discussion before attempting any analysis of the evidence before me. Since, as pointed out in the cases I have just cited, a willful attempt to defeat and evade taxes is often concerned with the intention of subjective state of the defendant, the question may arise as to what conduct or statements on the part of the defendant would be admissible to show the required intention. Since there is talk of "pattern of conduct," in the record, I think a distinction should be drawn.

It is a basic principle of evidence that when the guilt of a party depends upon the intent with which an act was done, it is relevant to show other similar acts by the same person and of the same effect at about the same time or connected with the same subject matter. The legal relevancy of such evidence is based upon logical principles which go to negate innocent intent and is to be distinguished from evidence introduced to establish design or system which is usually invoked when the very doing of the fact charged is still to be proved. Wigmore, Evidence, 3rd Ed. Vol. 2, pp. 196-205; Holland v. United States, supra; and Malone v. United States, supra; and Malone v. United States, 94 F. 2d, 281 [38-1 USTC ¶9032].

Since this cause concerns itself primarily with the subjective state or intention of Bridell, it follows that evidence of collateral, similar or connected conduct with reference to his income tax is admissible to show his intention in regard to the specific counts of the indictments. Defendants have objected to the evidence introduced in support of the conspiracy count as being irrelevant, beyond the substantive counts and prejudicial. Krulevitch v. United States , 336 U. S. 440; United States v. Rosenblum, 176 Fed. 2d, 321 [49-1 USTC ¶9314]. Their objections must fall, since, first, this is not a jury case, and second, much of the evidence presented as to the conspiracy count is likewise relevant to prove intention as to the substantive counts. Defendants also contend that there can be no conspiracy between a corporation and its officers. United States v. Carroll, 144 F. Supp. 939. I am of the opinion that the conspiracy count does not over-extend the fiction of corporate personalty in the instant case. See United States v. Kemmel, 160 F. Supp. 718, and the various cases cited therein.

The theory of the Government may be summarily stated as follows: Carbon is basically a family structure revolving around the defendant Bridell wherein benefits to Carbon flow to the individual members of the family by corporate payment of the salaries and wages of personal employees at defendant Bridell's Highland Park home and by the personal use and enjoyment of the Florida property at Carbon's expense. This personal benefit is taxable income to Bridell upon which, by subtle deception, he has willfully attempted to evade and defeat taxes due and owing the United States .

The theory of defendants may be summarized as follows:

Defendant Bridell hired Furrow as a corporate employee because he believed that his salary was a proper corporate expense, since he provided services of a nature over and above that required for personal needs, first of Mr. Blauner and then those of the Bridell family at their "showplace" estate " Tara ." The additional employees who appear on the payroll were, in defendant Bridell's judgment, in the same category. He expended substantial personal funds for the support and maintenance of his family and acted in good faith without any willful intent to evade his tax obligation.

As to the Florida properties, it is defendants' contention that such properties were acquired for business entertainment and used primarily for business entertainments. The personal use the Bridells received from the use of the Florida properties was incidental to the business use and did not result in taxable income.

I now consider whether or not the Government has proven an additional tax to be due and owing the United States from defendant Bridell for the substantive counts of the two indictments covering the calendar years 1952 through 1957.

[Corporation's Payments Resulted in Income to Shareholders]

I have carefully analyzed the stipulations, exhibits, testimony of the Government agents and defendant Bridell, as well as the individual tax returns of Bridell and his wife. I find that the services rendered by the corporate employees to Bridell and his family at "Tara" resulted in additional income to Bridell upon which there is a tax due and owing the United States for each of the years in question. The service of Furrow directly served the maintenance and preservation of the Bridell home, a direct benefit to Bridell and his wife. The services of Nygaard went to the capital improvement of the Bridell home, a direct benefit to Bridell and his wife. The services of Elfreda Peters included care of the household and the Bridell children while the Bridells were in Florida , again a direct benefit to Bridell and his wife. Carretta's services in assisting Furrow was also a direct benefit to Bridell and his wife. These services constitute an economic benefit and income to Bridell and his wife. The theory of the defendant that the wages paid to these corporate employees represents a proper corporate expense and does not represent income to Bridell is in my opinion, not supported by the evidence.

[Was Omission Willful?]

I now consider whether or not there was a willful attempt on the part of Bridell to defeat and evade these taxes.

[The Government's Argument]

From the Government's viewpoint, the major factors of evidence which go to prove its theory, are:

(1) Bridell is a man possessed of a legal education who up until 1955 prepared his own income tax returns, wherein he deducted unreimbursed business expense items and practiced "percentage deductions" in a meticulous, consistent pattern (Transcript, pp. 408-413, and 422-424). In his 1950 income tax return, Bridell claimed a reimbursed business expense item as an unreimbursed business expense item (Government's Ex. 53, 54.) In his 1953 income tax return, Bridell deducted the expenses of a party at " Tara " on June 10, 1953, as a business expense item. In a conference with Charles A. Yerkes, Internal Revenue Agent, on February 20, 1956, Bridell told him this deduction should be allowed. In reality, this business expense item was a graduation party for his son (Stipulation, Part I, Paragraph 34; Transcript, pp. 356-358, and 418.)

(2) Bridell denied that his standard of living was increased when he moved to " Tara " (Transcript, pp. 542 to 544.) Yet, he had three growing children who received certain benefits of the estate, such as the animals, including a horse and the use of " Tara " for the entertainment of their friends. Mr. Raymond testified that this is one of the reasons Bridell moved to " Tara " (Stipulation, Part I, Par. 35.)

(3) Bridell had an established pattern of heavy business entertainment before he moved to " Tara " (Transcript, pp. 462-465, 493, 494, and Government's Ex. 65.)

(4) The use of the name "Tara" as a trademark or the publicity advantages to be derived therefrom came about after the acquisition of " Tara " and was not the original reason for its purchase (Transcript, pp. 359, 459.)

(5) It was Bridell's idea that Carbon should pay Furrow's wages when Blauner owned " Tara " and subsequently when he and his wife acquired title to the property (Transcript, pp. 333-336.)

(6) Bridell never mentioned that fact that Furrow worked at "Tara" during the many conferences he had with his auditors or the Internal Revenue Service until after the conference of January 31, 1957, when Halliday told Internal Revenue agents of Furrow's employment at " Tara ."

(7) The wages charged to Furrow on Carbon's books were classified as maintenance and expediter. Nygaard was classified maintenance and leasehold. McKinney and Peters were classified as admin istrative (Stipulation, Part I, Par. 24.) Bridell denied knowing how they were classified, yet understood the meaning of the term, "cost of goods sold." Bridell also knew these services were not charged to his personal account. Bridell's daughter was in charge of the Carbon payroll subsequent to 1950 (Transcript, pp. 352, 353, 439-44.)

(8) The apportionment of Nygaard's wages between Bridell's personal account and Carbon came about because of the suggestion of his auditor. Bridell gave no specific percentage to so apportion (Transcript, pp. 429-435.)

(9) Bridell had a time clock installed at " Tara " which was almost identical to the time clock at Carbon. (Stipulation, Part I, Paragraph 25, 33.) Bridell testified he did this to keep track of his employer's time and then stated he often had to tell Furrow to go home because he stayed too late. (Transcript, pp. 355, 356.)

(10) Bridell stated he never reviewed his personal account at Carbon with Halliday (Transcript, p. 446.) Halliday testified to the same effect, but before the Grand Jury testified that he did review Bridell's personal account with him once a year (Transcript, pp. 594-599.)

(11) Bridell entertained many personal friends at " Tara " such as business customers of prospects. These same people, in many cases, were entertained in Florida , on vacations, at lunches and clubs (Transcript, pp. 474-489, 516-537.)

(12) Bridell entertained an insignificant number of Carbon customers at " Tara " (Transcript, pp. 465-472.) Lithofold customer or sales entertainment had nothing to do with the original purpose in acquiring " Tara " which was to enhance the name of Carbon (Transcript, pp. 481, 482.)

(13) Though Bridell kept personal records of business expense deductions subsequent to 1951, he did not produce them to substantiate his business deductions for those subsequent years (Transcript, pp. 38-382, 413-416.)

(14) The letter Bridell received from Lithofold instructing him to bear business expenses personally was in reality Bridell's idea (Transcript, pp. 536-541; Government's Ex. 6, and 66.)

(15) Bridell stated that " Tara " was of great value to Carbon and that his supplies favored it. Mr. Birely, a supplier, did in fact suggest that " Tara " be sold (Transcript, pp. 461, 462, 588, 589.)

(16) Blauner testified in a conference with Edward J. O'Leary that his original reason for going to Florida in 1951 was for a vacation, but that while he was down there he got the idea to promote Carbon and Lithofold's sales program, which led to the acquisition of the Florida properties (Stipulation, Part II, pp. 149-156.) Bridell testified that he and Blauner discussed the Florida promotion program, and that Blauner went to Florida for that purpose (Transcript, pp. 384 and 385.)

(17) Blauner began the purchase of the yacht " Tara " as a personal enterprise, but later withdrew his earnest money and allowed Carbon to purchase the yacht (Stipulation, Part II, p. 91.)

(18) Thought Carbon paid $5,900 for the Miami Beach , Florida , leasehold, there was a very slight degree of sales promotion connected with that property as to Carbon (Stipulation, Part II, pp. 84-89; Transcript, pp. 548-550.) In 1951, there was a minimal use of the Fort Lauderdale properties for business entertainment of Carbon (Stipulation, Part II, pp. 548-550.) In 1952, the Florida property was used to entertain the Bridells personally, as well as their friends and children's friends on several occasions (Stipulation, Part II, pp. 93-99.) In 1953, the Florida property was also used for personal entertainment, as for example, friends of their children (Stipulation, Part II, pp. 100-106.) In 1954, there is also evidence of personal use of the Florida property as, for example, the entertainment of friends of the Bridell children (Stipulation, Part II, pp. 107-114.) In 1955, the Florida property was used for the personal entertainment of the Bridells, as for example, friends of their children and for their son's honeymoon (Stipulation, Part II, pp. 114-120.)

(19) Bridell stated that his standard of living may have been raised by the acquisition of the Florida properties (Transcript, p. 561.)

(20) The acquisition and use of the Florida properties was not profitable to Carbon (Transcript, pp. 555-557; Government's Ex. 68.)

(21) Bridell testified that the Florida properties were always available for corporate use (Transcript, pp. 396 and 397.) Government's Exhibit 67 indicates that this may not be true (Transcript, p. 578.)

(22) Letters of invitation in regard to the Florida property were addressed formally to Bridell's daughter and husband and informally to Bridell's niece (Transcript, pp. 578-580.)

(23) The accounting procedure of Carbon during 1951 was "not proper" in that it had the effect of understating promotion expense. This was the year of the Florida acquisitions (Transcript, pp. 187-190, 270, 271.)

(24) Nigel Campbell, tax consultant to Carbon from 1950 to 1952, told Bridell that he could deduct as corporate expense that portion of total expense attributable to the entertainment of customers (Stipulation, Part II, pp. 140-142.)

(25) On November 15, 1954, Bridell executed an affidavit which stated that the Florida properties had not been used except for business purposes of Carbon and "matters incidental thereto" (Transcript, pp. 403-406; Government's Ex. 41.)

(26) On May 1, 1955, Bridell submitted a brief to the Internal Revenue Service pointing out business associations listed in the logs of the yacht " Tara " from 1951 through 1954. There were various inaccuracies in this brief, as for example, the reference to persons as business associates who were, in fact, not business associates (Stipulation, Part II, pp. 144, 145; Transcript, pp. 402, 403, 572; Government's Exhibit 42.)

(27) The Government followed all possible leads in attempting to discover the full extent of business entertainment at "Tara" and in Florida (Transcript, pp. 186, 258-260, 268-270.)

(28) Finally, the Government relies on Wolfe v. United States, 261 F. 2d, 158 [58-2 USTC ¶9934].

[The Defense]

The factors which defense urges sustain Bridell's theory are:

(1) Bridell testified that Blauner originally bought " Tara " in a cooperative effort with Bridell to secure a "prestige property" or "showplace" for the purpose of entertaining business guests of Carbon and Lithofold and in order to stimulate the sales promotion picture of both corporations (Transcript, pp. 328-331, 460 and 461.)

(2) The evidence discloses that in the years subsequent to the acquisition of "Tara" up through and including 1957, business guests, prospects and employees of both corporations have been entertained extensively at " Tara ." Sales training for both corporations has also taken place at " Tara " (Defendants' Ex. 1A, 1B, 2A, 2B, 3, 4, 5, 17; Stipulation, Part I, Pars. 36-101; Transcript, pp. 481, and 482.)

(3) Bridell testified that though " Tara " worked out as intended, the financial burden proved too heavy for Blauner. Bridell felt that Carbon should pay those expenses over and above the personal needs of Blauner, since Carbon was the beneficiary of those expenses. Since Blauner, living in an ordinary home, would not require a full-time maintenance man, and since " Tara " required such a man, Bridell testified that this is why he had Furrow placed on the Carbon payroll. Carretta, Kline, Nygaard and Peters fell into this same classification, according to Bridell, though their services ended in the early months of 1952 (Transcript, pp. 333, 334, 341-347, 445, and 446.)

(4) Having once classified Furrow's employment as a business expense of Carbon, Bridell never re-evaluated this classification until 1957 (Transcript, pp. 353, 354.)

(5) " Tara " came to be known as a trade-mark for Carbon and was used extensively in the corporation's promotional and advertising programs, both by way of name and picture (Transcript, pp. 284, 359-361; Defendants' Group Ex. 15.)

(6) During each of the years in question, Bridell expended a substantial amount of his personal funds for the needs of his family at " Tara " (Stipulation, Part I, Par. 101; Defendants' Exhibit 6 and 7.)

(7) Lithofold was a substantial customer of Carbon (Stipulation, Part I, Par. 7.) Entertainment of Lithofold customers is a proper business expense to Carbon. Citing Dinardo v. Commissioner of Internal Revenue, 22 Tax Court 430 [CCH Dec. 20,364].

(8) Reference was made in the personal account of Bridell at Carbon to Nygaard (Stipulation, Part I, Par. 24; Transcript, pp. 87-90; Stipulation Ex. 6) and to Furrow, (Stipulation Ex. 5.) Bridell was never questioned about Furrow's employment. No fictitious names were used. Halliday freely admitted Furrow was employed at " Tara " when questioned (Stipulation, Part I, Par. 26.)

(9) The employment of Furrow was referred to in the 1956 Carbon corporation income tax return (Stipulation, Part I, Par. 109), in the 1957 Carbon corporate income tax return (Stipulation, Part I, Par. 110), and in the 1957 individual income tax return of Bridell and his wife (Stipulation, Part I, Par. 106.) This was done upon the advice of his attorney, Mr. Taylor (Transcript, pp. 373-376.)

(10) Bridell used the proceeds of the sale of his Wilmette home to rescue Carbon from its then financial difficulties (Stipulation, Part I, Par. 10; Transcript, pp. 336-338.)

(1) Mortgages were placed upon " Tara " in 1953 and 1955, by the Bridells, to secure loans from Walter E. Heller & Co. and Butler Paper Co., respectively to Carbon and Lithofold. The Bridells were legally obligated to keep the premises in good repair under threat of foreclosure. Furrow was necessary to the maintenance of " Tara ," in accordance with the requirements of these mortgages. (Stipulation, Part I, Pars. 102-104; Transcript, pp. 376-379.)

(12) Bridell testified that the acquisition of the Florida properties was pursuant to a plan for a sales promotion program on the part of Carbon and Lithofold (Transcript, pp. 384, and 385, 390-395.)

(13) The Florida properties were used extensively for business entertainment (Stipulation, Part II, pp. 92-135.)

(14) The books of Carbon revealed the existence of property in Florida and listed employees who worked in Florida on its payroll (Transcript, pp. 120, and 233.)

(15) In its 1955 corporate return, Carbon reported a gain of $4,621.78 on the sale of the Florida properties (Stipulation, Part II, p. 139(a)).

(16) Bridell kept logs in Florida for signatures of his visitors. No one was told not to sign these logs (Stipulation, Ex. 43-47; Transcript, p. 398.) So much for the defendants' contentions.

[Analysis of Government's Arguments]

In my opinion, certain of the factors raised by the Government are subject to specific rebuttal:

(1) The weight to be accorded that evidence going to show meticulous personal preparation of income tax returns on the part of Bridell wherein instances of reimbursed business expense item deductions and personal deductions occurred should be qualified as follows:

(a) Meticulous preparation of income tax returns is not of itself evidence of a willful attempt to defeat and evade tax.

(b) The specific instances wherein Bridell claimed deductions of reimbursed business expense items or personal expense items are negligible when evaluated in relation to the great volume of business deduction items, made necessary by his business, which occur in his returns over the several years in question.

(c) In Bridell's 1953 income tax return, Bridell overstated his tax which error was corrected by Government (Transcript, pp. 303-305.)

(2) As to Bridell's lack of knowledge pertaining to the classification of wages on Carbon's books and his general lack of knowledge as to how these books were kept, Bridell testified that he never had an accounting course, that he never examined the books, and that he spent very little time at the factory (Transcript, pp. 349-352.)

(3) As to the time clock which was installed at "Tara" and the time cards of the respective Carbon employees who worked at " Tara ," there is abundant evidence of distinguishing features from those cards used by employees working at Carbon (Stipulation Group Exhibits 7, 8, 9, 10; Stipulation, Part I, Par. 25; Transcript, pp. 121, 748, 749.)

(4) As to the production of personal records subsequent to 1951, it appears that Bridell did origmally agree to deliver up those records to the Internal Revenue Service. It was Mr. Taylor, his attorney, who later said that the personal records of Bridell would not be turned over to the Internal Revenue Service. It further appears that this action was Mr. Taylor's responsibility (Transcript, pp. 151, 179, 181-184, 242, 249, 252.)

(5) In regard to the personal use of the yacht " Tara ," Bridell testified that the boat needed "exercise" and that this function was primarily connected with personal usage of the yacht (Transcript, pp. 395, 396, 400, and the case of Hal E. Roach v. Commissioner of Internal Revenue, 20 B. T. A. 919.)

(6) As to the affidavit executed by Bridell on November 15, 1954, Bridell contends that the words "matters incidental thereto" contemplated family use as he had previously discussed it with Mr. Yore, an Internal Revenue Agent (Transcript, p. 406.) Bridell contends this was not taxable income, citing Paulina DuPont Dean v. Commissioner of Internal Revenue, 9 Tax Court 256 [CCH Dec. 15,989]. Bridell further testified that he referred to no records in the preparation of the May 1, 1955 brief (Transcript, pp. 402, 403.)

(7) The facts in Wolfe v. United States , supra, relied upon by the Government, are readily distinguishable from the facts presented by this consolidated cause.

The rest of the evidence presented by the Government is inferential as to the question of whether or not there was a willful attempt on the part of Bridell to defeat and evade income tax and, as such, it is subject to the argument of contrary or innocent interpretation urged by defendant.

In resolving this question, I have taken into consideration the fact that the law is more clearly delineated today, as to the offense charged, than it was during the years in question and also the fact that the receipt of income to Bridell in the instant cause is unusual in that it does not fall within the specifically enumerated sources of income, as contained in Section 22(a) of the 1939 Internal Revenue Code and Section 61 of the 1954 Internal Revenue Code. I have also taken judicial notice of the general practice on the part of corporations, particularly during the years in question here, pertaining to business deductions for business entertainment. That practice is now, as counsel are aware, being corrected by the Internal Revenue Service.

The summary I have given of the evidence I do not feel is complete. There are many lesser points of evidence that might be raised and discussed, for one side or the other. I have, however, carefully considered all of the evidence in arriving at my verdict. The Government has prosecuted this case in a most competent and sincere effort to achieve justice.

[Judgment]

It is my considered judgment, however, upon my evaluation and analysis of all of the evidence before me, that the Government has failed to prove, beyond a reasonable doubt, that Bridell has willfully attempted to defeat or evade his tax. Accordingly, I find the defendant, Bridell, not guilty as to Count II of Cause No. 58 CR 475 and Counts I, II, III, IV and V of Cause No. 59 CR 157.

As to Count VI, of Cause No. 59 CR 157, I find that the Government has likewise failed to prove, beyond a reasonable doubt, that a conspiracy existed between Bridell, Carbon, and R. J. Blauner, willfully to attempt to evade and defeat income tax due and owing the United States by Bridell and his wife for the years in question.

Accordingly, I find defendants Bridell and Carbon not guilty as to Count VI of Cause No. 59 CR 157.

Let judgment enter accordingly, and the defendants may go hence without day.

 

 

 

[53-1 USTC ¶9230] United States of America v. Leo Link, Alias J. W. Donaldson, Appellant

(CA-3), United States Court of Appeals for the Third Circuit, No. 10,749, Filed February 26, 1953, (202 F. (2d) 592)

Appeal from the United States District Court for the District of New Jersey.

Penalties: Sec. 145(b): Prejudicial instructions to the jury.--On a trial for tax evasion under Sec. 145(b) against taxpayer engaged in "bookmaking" activities, where his defense was that he was acting only as agent, certain of the trial court's instructions to the jury were held to be prejudicial to taxpayer and reversible error, in respect to a statement of the rule of reasonable doubt based on the evidence, and in respect to inclusion of a statement that the "people * * * are entitled to be assured of this conviction". A third instruction, objected to by taxpayer, was held proper.

John E. Selser, 210 Main St. , Hackensack , N. J., for appellant. John G. Thevos, Federal Bldg., Newark 1, N. J., for appellee.

Before MCLAUGHLIN, KALODNER and STALEY, Circuit Judges.

Opinion of the Court

KALODNER, Circuit Judge:

This is an appeal from a conviction for income tax evasion under Section 145(b) of the Internal Revenue Code, 26 U. S. C., Section 145(b). ¹

The appeal is directed at specific instructions in the trial court's charge to the jury and a statement in the charge which the defendant asserts was particularly prejudicial to him. Before discussing the errors complained of a brief statement of the factual background is in order.

[The Facts]

The defendant, Leo Link, was tried on a four-count indictment charging him with filing false and fraudulent income tax returns for 1946, 1947, 1948 and 1949. He was found guilty on all four counts and sentenced to jail for four years and fined $10,000 and costs.

The evidence adduced at the trial established that the defendant engaged in "bookmaking" activities under the name of J. W. Donaldson using the facilities of the Western Union Telegraph Company. The methods pursued were as follows: Bettors wired money orders to the defendant with instructions to bet on their choices at various race tracks; when the bettors won they were paid via Western Union money orders; when horses were "scratched" (failed to start) refunds were made by money orders or by check on a Hudson County bank. It is perhaps needless to add that the defendant did not actually place the bets at the various race tracks but "booked" them himself.

The government offered in evidence books and records of the defendant and the Western Union which clearly proved the scope and nature of the defendant's operations. Moreover currency in the amount of $127,000 was found in a safe in the home of defendant's mother-in-law with whom he lived. He claimed that $102,000 of the money belonged to the mother-in-law and that only $25,000 belonged to a mysterious principal for whom he worked on a fee basis--25 cents on each bet placed.

Government witnesses submitted calculations, based on testimony of Western Union employees and available records, fixing defendant's gross receipts for the four taxable years involved at approximately $1,063,000 and his net income at approximately $257,000. In its calculations the government allowed deductions in the amount of some $800,000--amounts paid to winners and refunds on "scratches". It also allowed an additional $6,000 comprised largely of defendant's standard deductions allowable by law.

The crux of defendant's contention at the trial was that he was merely the "front" through whom the "bookmaking" operations were carried on; that he merely retained a commission of 25 cents on each bet and that he had reported his entire income in his tax returns and paid the tax due thereon. ²

Three questions are raised by the defendant on this appeal. We will dispose of them in the order presented.

I

[Burden of Proof]

The defendant first urges the trial court erred in its instructions on burden of proof. The trial judge in his instructions to the jury charged that: ". . . the burden is upon the defendant to prove that he had other deductions and lawful expenses not shown in his return." This instruction, the defendant urges, was erroneous. We do not agree. The government by its testimony established unreported income and allowed deductions claimed by defendant and other deductions that it could calculate without his assistance. It is well-settled that "Evidence of unexplained funds or property in the hands of a taxpayer establishes a prima facie case of understatement of income" and that "It is then incumbent on the defendant to overcome the logical inferences to be drawn from the facts proved." United States v. Hornstein, 176 Fed. (2d) 217, 220 [49-2 USTC ¶9326] (7th Cir. 1949). In Gariepy v. United States , 189 Fed. (2d) 459, 463 [51-1 USTC ¶9318] (6th Cir. 1951), it was held that ". . . the government if not required to prove a negative. . . ." Here too, the government is not required to prove the negative, i.e. that the defendant did not have any other deductions. Other deductions, if there were any, could have easily been established by the defendant. By its proof the government established its prima facie case, and the burden of going ahead with the evidence of additional expenses which equalled or exceeded gross income was on the defendant. Cf. United States v. Venuto, 182 Fed. (2d) 519 [50-1 USTC ¶9333] (3d Cir. 1950).

II

[Rule of Reasonable Doubt]

The defendant also complains that the trial judge erred in his instructions as to the rule of reasonable doubt. There is merit to this complaint.

Although the trial judge correctly defined the rule at the beginning of his charge, and referred to it again repeatedly, he unfortunately added the following:

"You are further instructed that if you find the evidence as to this defendant equally balanced, that is, that it is as consistent with innocence as it is with guilt, you must acquit the defendant and find him not guilty. In other words, if after you consider all of the evidence and you put it in the scales and you weigh it in your minds you honestly and conscientiously find and believe that the evidence as it has been produced here is as equally consistent with the innocence of this man as it is with his guilt, you must acquit him and find him not guilty, because as I said, he must be proven guilty beyond a reasonable doubt."

And again, near the conclusion of his charge, the trial judge said:

"And so . . . if you find the evidence respecting the defendant is as consistent with his innocence as with his guilt, you must acquit him."

In our opinion the added instructions quoted might well have served to confuse the jury. ³ As was recently said by Judge Goodrich, speaking for this Court in United States v. Martell, 199 Fed. (2d) 670, 672 [52-2 USTC ¶9541] (1952):

"No one can know for certain what a given portion of a charge does to the collective minds of the jury but this particular point complained of was in a charge made after the jury had been recalled and constituted the last thing they were told when they retired to consider their verdict. We think the probability of confusion was such as to create reversible error." ⁴

III

[Prejudicial Comment]

A further and final complaint of the defendant is directed at the following statement of the trial judge in the very last portion of his charge: ⁵

". . . But if on the other hand you find that the law has been violated as charged in this indictment, then you should not hesitate, because of sympathy, prejudice or any extraneous consideration of any kind, to render a verdict of guilty as a clear warning to all that crime cannot be committed with impunity in the United States and go unpunished. The people of this State and of the United States are entitled to be assured of this conviction." (Italics supplied)

In our opinion the statement that "The people of this State and of the United States are entitled to be assured of this conviction" was prejudicial to the defendant and was clearly erroneous for it may well have been construed by the jury as an instruction to render a verdict of guilty. At the very least it could well have been construed by the jury as an emphatic expression by the trial judge of the defendant's guilt and it is needless to say that such a construction would perforce weigh heavily in the jury's deliberations.

While it is true that in exceptional cases a trial judge may express his opinion that the evidence established the defendant's guilt beyond a reasonable doubt, it is well-settled that in doing so he must in unequivocal terms caution the jury that it is not bound by his opinion and that it is the jury's exclusive function to determine the question of the accused's innocence or guilt. ⁶

Trial judges must always keep in mind the possible, if not probable, effect of any statement which they may make in the course of a trial or in their instructions to the jury. As was said in Starr v. United States, 153 U. S. 614, 626 (1894):

"It is obvious that under any system of jury trials the influence of the trial judge on the jury is necessarily and properly of great weight, and that his lightest word or intimation is received with deference, and may prove controlling."

In Bollenbach v. United States, 326 U. S. 607, 612 (1946), the Supreme Court quoted with approval this statement in Starr v. United States and in doing so noted that ". . . jurors are ever watchful of the words that fall from him (the trial judge). Particularly in a criminal trial, the judge's last word is apt to be the decisive word." (Italics supplied)

In the instant case there was a dispute, albeit a fragile one, as to basic facts. Defendant contended he was merely a "front" man in a "bookmaking" operation headed by others he could not or would not name; that his only profit was a 25 cent service charge on each bet; and that the $127,000 found by the New Jersey authorities belonged partly to those who owned the illegal business and partly to his mother-in-law. It is conceivable, however unlikely, that the jury might have believed the defendant.

[Conclusion]

For the reasons stated we are constrained to reverse and to direct a new trial. It is regrettable that we are compelled to do so because the record clearly discloses that there was ample evidence to support the jury's verdict of guilty and on this appeal no question was raised with respect to the correctness of the trial judge's rulings on the admission of evidence and the conduct of the trial except with respect to his charge.

For the reasons stated the judgment of the District Court will be reversed and the case remanded for further proceedings consistent with this opinion.

¹ This section provides:

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

² The aggregate net income reported by the defendant for the taxable years involved was $9,553.77 on which he paid a tax of $748.00. According to the government's testimony he should have paid a tax of $136,291.20 on a net income of $257,000.

³ Indeed, in United States v. Matsinger, 191 Fed. (2d) 1014, 1016 (1951), we pointed out that ". . . a case may not be submitted to a jury when the actions of the accused are as consistent with innocence as with guilt. . . ."

⁴ In Boatright v. United States , 105 Fed. (2d) 737 (8th Cir. 1939), the trial judge charged (page 740): "If . . . there should arise in this case a reasonable doubt as to the guilt of the defendants . . . it would be your duty to . . . acquit them as the doubt might justify or warrant you in doing." In reversing a judgment for the United States , the Court said (page 740): "Just what is meant by the limitation 'as the doubt might justify or warrant you in doing' is not clear, and we think the defendants were entitled to an instruction on reasonable doubt without such limitation."

⁵ The statement was made in the trial judge's additional charge to the jury in the course of ruling on the defendant's exceptions to the court's charge in chief.

⁶ The rule on this subject was clearly stated in United States v. Murdock, 290 U. S. 389, 394 (1933):

"In the circumstances we think the trial judge erred in stating the opinion that the respondent was guilty beyond a reasonable doubt. A federal judge may analyze the evidence, comment upon it, and express his views with regard to the testimony of witnesses. He may advise the jury in respect of the facts, but the decision of issues of fact must be fairly left to the jury, Patton v. United States, 281 U. S. 276, 288; Quercia v. United States, 289 U. S. 466. Although the power of the judge to express an opinion as to the guilt of the defendant exists, it should be exercised cautiously and only in exceptional cases." (Italics supplied)

[Exceptional cases have been held to be ones in which the facts are virtually undisputed.] United States v. Meltzer, 100 Fed. (2d) 739, 747 (7th Cir. 1938); Hartzell v. United States , 72 Fed. (2d) 569, 586 (8th Cir. 1934); United States v. Raub, 177 Fed. (2d) 312 [49-2 USTC ¶9422] (7th Cir. 1949); Billeci v. United States, 184 Fed. (2d) 394, 402, 403 (D. C. Cir. 1950).