Expert
Witness Page4
[86-1
USTC ¶9402]
United States of America
, Plaintiff-Appellee v. Donald Herbert Windfelder, Defendant-Appellant
(CA-7),
U.S.
Court of Appeals, 7th Circuit, 85-1780, 5/7/86, 790 F2d 576, Affirming
unreported District Court decision
[Code
Secs.
7201 and 7206
]
Crimes: Tax evasion: Fraud and false statements: Admission of
evidence: Jury instructions: Convictions upheld.--Convictions for
income tax evasion and willfully failing to supply information and pay
tax were upheld against an individual who had gradually transferred the
wealth of his elderly aunt to himself and had made false representations
to a law firm, which he had retained to handle the preparation of the
aunt's federal estate tax return. The testimony of attorneys of the law
firm and materials subpoenaed from the firm, which had discontinued
their representation of the estate, were correctly admitted into
evidence by the district court. The information given to the attorneys
by the defendant was transferred to them for the purpose of preparing a
tax return, and thus, was not within the scope of the attorney-client
privilege. Also, opinion testimony of three IRS experts, consisting of
an analysis of the transfers of the aunt's assets to the defendant and
opinions that the transfers had not been authorized by the aunt, was not
improper. Although the statement of one witness as to the defendant's
knowledge or willfulness was improperly admitted, the error was harmless
in view of the overwhelming evidence of guilt presented by the
government. Finally, the jury instructions did not impermissibly place
the burden of proof on the defendant regarding his supposed role as a
fiduciary of the estate and did not compel the jury to find that the
defendant had embezzled the aunt's assets. In view of the entire record,
the instructions were not "plain error."
Joseph
P. Stadtmueller, United States Attorney, Melvin K. Washington, Assistant
United States Attorney, Milwaukee, Wis. 53202, for plaintiff-appellee.
William M. Coffey, Coffey, Coffey & Geraghty,
1100 W. Wells Street
,
Milwaukee
,
Wis.
53233
, for defendant-appellant.
Before
CUMMINGS, Chief Judge, and BAUER and POSNER, Circuit Judges.
BAUER,
Circuit Judge
Defendant
Donald Herbert Windfelder was convicted of understating his income in
his 1978 federal income tax return, in violation of 26 U.S.C. §7201
, and of understating the estate of his deceased aunt, Lauretta
Windfelder, in preparing her estate tax return, in violation of 26
U.S.C. §7206(1) .
Defendant was sentenced to eighteen months imprisonment on the first
charge to be followed by five years probation for the second charge. He
was also ordered to make restitution in the amount of $409,714.13 to the
estate of his deceased aunt. Defendant appeals his conviction on three
grounds. First, he contends that the trial court erroneously permitted
the government to subpoena certain documents and witnesses protected by
his attorney-client privilege. Second, he contends that the trial court
erroneously admitted into evidence opinion testimony of several of the
government's expert witnesses. Finally, he contends that the trial
court's jury instructions regarding the definitions of
"embezzlement" and "fiduciary relationship" violated
his constitutional rights. We reject all of defendant's arguments and
affirm the judgment of the district court.
I.
On
April 21, 1978, Lauretta Windfelder was admitted to a nursing home in
Milwaukee
,
Wisconsin
, suffering from a variety of mental and physical debilities
exacerbated, if not caused by, her age of 90 years. Some three weeks
before, she had been discovered in dire condition in her home by a
visting nurse and had been hospitalized. Lauretta Windfelder had raised
her nephew, the defendant in this case, from 1934, when he moved in with
her at the age of twelve, until defendant married in 1950. In 1978 the
defendant was a vice-president at the Northwestern Mutual Life Insurance
Company in
Milwaukee
,
Wisconsin
. On April 24, 1978, three days after Lauretta Windfelder's admission
into the nursing home, defendant presented a Power of Attorney form
purportedly signed by Lauretta Windfelder to two of his co-workers to
sign as witnesses and to a third for notarization. None of the three
workers saw Lauretta Windfelder sign the form.
At
the end of 1977, Lauretta Windfelder's net worth was approximately
$664,856.87. By the end of 1978, her net worth had fallen to
$150,829.80. Lauretta Windfelder died on October 23, 1979, and by the
time her federal estate tax return was filed her assets had further
dwindled to approximately $58,332.47. The government presented extensive
evidence at trial detailing the defendant's transfer of approximately
$506,937.70 of Lauretta Windfelder's assets in 1978 and 1979 into
various accounts opened by the defendant in his name or jointly with his
wife. IRS experts testified at trial that $397,876.70 of these transfers
were unauthorized.
Shortly
after Lauretta Windfelder's death, the defendant retained the
Milwaukee
law firm of Godfrey & Kahn to assist him in probating Lauretta
Windfelder's estate. Pursuant to
Wisconsin
law, the defendant was appointed personal representative of the estate.
The defendant represented to attorney John Byers that the estate
consisted solely of $3,300 in a local bank and approximately $40,000 in
U.S. Treasury Notes. A paralegal with the law firm engaged in numerous
telephone conversations with the defendant regarding the information
that was to be contained in the estate tax return and other probate
documents, but the defendant did not mention any transfer of assets from
the estate other than a $69,000 gift in 1978 and another $69,000 gift in
1979, both to the defendant. The law firm then prepared a federal estate
tax return for the estate based on the information given by the
defendant, which he signed on July 22, 1980.
In
March 1981, the IRS contacted the law firm, notifying the attorneys that
it was reviewing Lauretta Windfelder's estate tax return and requesting
copies of her income tax returns for the years immediately preceding her
death. Byers relayed this information to the defendant and arranged for
a conference to determine why the assets in the estate were so much less
than those listed in Lauretta Windfelder's last income tax returns. The
defendant engaged in several conferences with the law firm and supplied
additional information regarding the estate. Several weeks later the IRS
requested the law firm to supply it with a list of U.S. Treasury Bonds
that had been redeemed at various times and that were reflected in
Lauretta Windfelder's prior income tax returns. The law firm asked the
defendant to supply it with the list for this purpose, and on May 21,
1981, he tendered to the law firm a copy of what purported to be bank
records for accounts held by Lauretta Windfelder and himself, along with
a summary of what the defendant represented as transfers to and from
those accounts. Even with these documents, the law firm was unable to
account for approximately $200,000 in assets listed in Lauretta
Windfelder's prior income tax returns.
When
the law firm advised the defendant of this discrepancy, he provided the
law firm with additional records. On June 8, 1981, the defendant
provided the law firm with even more records. Nonetheless, a discrepancy
still existed, and the law firm concluded that the different sets of
figures were irreconcilable. Shortly thereafter, the law firm notified
the defendant that it would no longer represent him.
The
defendant obtained new counsel and engaged in a new series of
conferences and document production, but the defendant's figures still
refused to align themselves with those of the IRS. On July 15, 1981 the
defendant and his new counsel met with an IRS attorney and submitted a
modified explanation, based on unincluded "underlying
documents," purporting to account for the erstwhile assets of
Lauretta Windfelder's estate. The unpersuasive nature of this
explanation led to a conference in
Washington
,
D.C.
on March 12, 1984 between the defendant's counsel and an attorney for
the Criminal Tax Section of the Department of Justice regarding the
defendant's personal tax liability for 1978 and his participation in the
filing of Lauretta Windfelder's estate tax return. The report by the
attorney for the Department of Justice states that at this meeting
defendant's counsel took the position that, because the defendant was
not an expert estate tax preparer, he had trusted his attorneys to
prepare the return correctly and had answered the questions put to him
by these attorneys truthfully. The problem, the defendant's counsel
asserted, was that these attorneys had not asked him "the right
questions." After this explanation, the defendant was finally
indicted.
II.
The
defendant first argues that the district court erred in allowing the
government to subpoena the attorneys and paralegal from the law firm of
Godfrey & Kahn who worked on Lauretta Windfelder's estate tax return
and the documents in their possession relating to the preparation of
that tax return. Defendant asserts that under
Wisconsin
law he engaged the law firm to represent himself, as personal
representatives of the estate, as well as to represent the estate, when
he hired the firm to prepare the estate tax return. Thus, the defendant
contends that the testimony of the witnesses from Godfrey & Kahn and
the materials that were subpoenaed were privileged from disclosure under
the attorney-client privilege.
Even
accepting the defendant's argument that he personally stood in an
attorney-client relationship with Godfrey & Kahn in regard to the
preparation of Lauretta Windfelder's estate tax return, we do not
believe that the information sought by the subpoenas was protected by
the attorney-client privilege because that information was not
confidential. In United States v. Lawless [83-1
USTC ¶13,527 ], 709 F.2d 485 (7th Cir. 1983), this court held that
"information transmitted for the purpose of preparation of a tax
return, though transmitted to an attorney, is not privileged
information." 709 F.2d at 488. One of the reasons underlying this
holding was that "[w]hen information will be transmitted to a third
party (in this case on a tax return), such information is not
confidential."
Id.
at 487. Lawless further held that "disclosure of tax
information effectively waives the privilege 'not only to the
transmitted data but also as to the details underlying that
information.' "
Id.
at 488 (quoting United States v. Cote [72-1
USTC ¶9268 ], 456 F.2d 142, 145 (8th Cir. 1972)).
In
this case the government also sought information transmitted after the
estate tax return was filed, but the defendant has failed to meet his
burden of showing that this information was confidential. See, e.g.,
Lawless, 709 F.2d at 487. To the contrary, the evidence shows that
the defendant transmitted this information to Godfrey & Kahn with
the intent that it would be used to explain to the IRS the gross
disparity between the figures in Lauretta Windfelder's estate tax return
and her last income tax returns. Godfrey & Kahn expressly informed
the defendant that the IRS was requesting information to explain the
discrepancies and that the law firm intended to comply with these
requests. The defendant repeatedly supplied the law firm with the
records and documents for this purpose. Further, defendant himself
submitted a "modified explanation" of the estate tax return
directly to the IRS on July 15, 1981. We therefore hold that the
information submitted after the estate tax return was filed was also not
privileged.
III.
At
trial, the government called three expert witnesses to testify regarding
Lauretta Windfelder's estate tax return and defendant's 1978 income tax
return: IRS Special Agent William Gardiner, IRS Revenue Agent Richard
Breitzman, and IRS Attorney Leo Miller. The defendant does not contest
that each witness was properly qualified as an expert or that each
witness properly testified as to the transfer of Lauretta Windfelder's
assets to the various accounts held by the defendant. The defendant
contends, however, that the trial court improperly admitted into
evidence opinion testimony by the three experts regarding the intentions
of both Lauretta Windfelder and the defendant.
Under
Rule 702 of the Federal Rules of Evidence, expert testimony is
admissible when "specialized knowledge will assist the trier of
fact to understand the evidence or to determine a fact in issue."
An expert's testimony may take the form of an opinion if it "
'serves to inform the [trier of fact] about affairs not within the full
understanding of the average man.' " United States v. West,
670 F.2d 675, 682 (7th Cir. 1982) (quoting United States v. Webb,
625 F.2d 709, 711 (5th Cir. 1980)). An expert's opinion is not
inadmissible simply because it addresses an ultimate issue to be decided
by the trier of fact, FED. R. EVID. 704(a), but a recent amendment to
Rule 704 added the following provision:
No
expert witness testifying with respect to the mental state or condition
of a defendant in a criminal case may state an opinion or inference as
to whether the defendant did or did not have the mental state or
condition constituting an element of the crime charged or of a defense
thereto. Such ultimate issues are for the trier of fact alone.
FED.
R. EVID. 704(b). Although this provision was added to Rule 704 to limit
psychiatric testimony when a criminal defendant relies upon the defense
of insanity, see S. Rep. No. 225, 98th Cong., 1st Sess. 230 (1983), 1
Congress intended this provision to extend "beyond the insanity
defense to any ultimate mental state of the defendant that is relevant
to the legal conclusion sought to be proven . . . e.g.,
premeditation in a homicide case, or lack or predisposition in
entrapment."
Id.
at 231. Finally, we note that the trial judge has wide discretion in
ruling on the admissibility of expert testimony. West, 670 F.2d
at 682.
The defendant objected to the following testimony by Agent Gardiner:
[A]fter
Ms. Windfelder went in the nursing home, [defendant] took control of her
affairs, transferred her wealth to him for his own personal use. There
was no--any other evidence disclosed during the investigation or
presented which would indicate that she had earmarked any additional
monies of her wealth to Mr. Windfelder. TR. 828-29. The defendant
objected again when Gardiner later reiterated this testimony. TR. 846.
Defendant also objected to the following testimony by Attorney Miller:
There
were transfers made to Donald Windfelder without consideration that are
assets that should have been included in decedent's estate. As a
consequence, the estate has a claim against these transfers in view of
the fact that the decedent, Lauretta Windfelder, apparently did not make
them herself or approve of them.
TR.
904. Finally, the defendant objects to Agent Breitzman's testimony that
he believed certain monies received by the defendant should have been
declared in his income tax return because
[t]here
were no representations made to the effect that that amount was a gift
until later in the investigation, after Mr. Gardiner had contacted
certain individuals. The initial representation of that amount made at
the meeting with Mr. Gardiner, Mr. Windfelder and [defendant's counsel],
I believe, was that these amounts were payments out of the estate for
the benefit of Lauretta Windfelder.
TR.
961. The defendant asserts that this testimony was inadmissible because
it concerned the intentions of the defendant and Lauretta Windfelder,
and the experts did not have expertise "in the area of human
intention." The defendant also asserts that these opinions were not
helpful to the jury in resolving the issue of whether the defendant
misappropriated Lauretta Windfelder's assets because the jury could
adequately decide this issue based on the documents alone. The defendant
did not mention Rule 704(b) in his brief or at oral argument, and the
record does not indicate that Rule 704(b) played any part in the
defendant's objections at trial or the trial judge's rulings upon the
evidence.
We
first note that none of the testimony recounted above expressed an
opinion or conclusion as to the defendant's willfulness or knowledge in
preparing or filing the false tax returns, but related only to whether
the transfers of assets in question were authorized by Lauretta
Windfelder for her expenses, were gifts to the defendant, or were
utilized by the defendant without authorization and the resulting tax
consequences. Expert testimony by an IRS agent which expresses an
opinion as to the proper tax consequences of a transaction is admissible
evidence. See
United States
v. Gold, 743 F.2d 800, 817 (11th Cir. 1984), cert denied, 105
S.Ct. 1196 (1985). Similarly, we find that an IRS expert's analysis of
the transaction itself, which necessarily precedes his or her evaluation
of the tax consequences, is also admissible evidence.
To
the extent that this testimony reflected the intent of Lauretta
Windfelder, we do not believe that these witnesses needed to have been
qualified as experts in psychiatry or philosophy before rendering the
conclusions to which the defendant objects because these conclusions
were limited to whether the documents in evidence indicated that
Lauretta Windfelder had authorized the transfer of her assets to
defendant or whether, in view of these documents, the defendant
transferred her assets into his accounts on his own. See Kelsay v.
Consolidated Rail Corp., 749 F.2d 437, 449 (7th Cir. 1984) (expert
had reasonable factual basis for his conclusions). The experts utilized
their expertise in accounting and tax matters in making these
determinations, not their knowledge of the workings of the human mind.
Moreover, these opinions are not precluded by Rule 704(b) because
Lauretta Windfelder is not a defendant in this case and her intent is
not an element of the crimes charged. We therefore find that the trial
court did not abuse its discretion in admitting this testimony into
evidence because the IRS experts had a sufficient foundation for their
testimony. See Kelsay, 749 F.2d at 449.
Similarly,
we disagree with defendant's position that this testimony was not
helpful to the jury because we find that the IRS experts' conclusions
were based on their evaluation of evidence (the tax returns and related
financial documents) that was within the area of their special
expertise. The defendant does not contest that the basis for the
experts' opinions involved an area beyond the full understanding of the
average person, and we therefore find that the district court did not
abuse its discretion in ruling that their informed conclusions as to the
meaning of that evidence may also have been helpful to the jury in
interpreting that evidence. See
United States
v. McCoy, 539 F.2d 1050, 1062 (5th Cir. 1976) (expert drew
conclusions as to meaning of conversation with defendant based on
expert's knowledge of bookmaking business); MCCORMICK, EVIDENCE §13 (2d
Ed. 1972) (expert may draw inferences from the facts).
The
defendant also objected to testimony by Agent Gardiner that the
defendant "intentionally understated his income" in his 1978
income tax return, TR. 843, and to the following testimony, also by
Agent Gardiner:
[I]t
was my opinion, at the time [the defendant] signed his tax return, he
was well aware of what happened to [Lauretta Windfelder's] assets prior
to her dying, and he continued to or attempted to purport something
other than what really happened with these assets during the meeting
with [IRS Agent] Beighton.
TR.
858-59. We disagree with the defendant's arguments that this testimony
was inadmissible for the same reasons that we found the trial judge did
not abuse his discretion in admitting the opinion testimony about
Lauretta Windfelder's intent. See Torres v.
County
of
Oakland
, 758 F.2d 147, 150-51 (6th Cir. 1985) (questions calling for
opinion testimony as to intent proper); United States v. Bishop,
534 F.2d 214, 221 (10th Cir. 1976) (prior to enactment of Rule 704(b),
expert opinion testimony as to defendant's guilty knowledge or intent
not per se inadmissible). 2
Under Rule 704(b), however, it was error to admit the testimony that the
defendant intentionally understated his income and that "he was
well aware of what happened" to Lauretta Windfelder's assets. These
statements impermissibly state an opinion as to the defendant's
knowledge or willfulness, a mental state which constitutes an element of
the crimes charged.
As
stated above, the defendant did not raise a Rule 704(b) argument at
trial and thus has waived this argument on appeal. United States v.
Sentovich, 677 F.2d 834, 837 (7th Cir. 1982) (citations omitted). We
therefore need only evaluate this error to determine whether it amounted
to plain error, id., but even if the defendant's objection can be
construed as raising an argument under Rule 704(b), we nevertheless find
that the error in admitting this testimony does not require reversal
even under the harmless error standard. We hold that this error was
harmless because the other evidence supporting the government's
contention that the defendant willfully evaded his income tax and
falsified Lauretta Windfelder's estate tax return was overwhelming. See
e.g.,
United States
v. Koopmans, 757 F.2d 901, 905 (7th Cir. 1985); United States v.
Metcalfe, 698 F.2d 877, 883 (7th Cir.), cert denied, 103
S.Ct. 1886 (1983). The defendant created a tangled web of documents,
figures and explanations during the several years he sought to convince
the IRS that the tax returns were in order from which we do not believe
he could have extricated himself at trial even if these two statements
had been stricken.
IV.
The
defendant's final contention is that the trial court improperly
instructed the jury with respect to the charge of income tax evasion.
The trial court instructed the jurors that they could not find the
defendant guilty unless they found beyond a reasonable doubt that the
defendant had embezzled the assets that were transferred to his
accounts. In its definition of "embezzled," the court stated
that
[e]mbezzled
means willfully to take or to convert to one's own use others' money or
property, of which the wrongdoer acquired possession lawfully, by reason
of some office of employment or position of trust. To convert money or
property to one's own use means to apply or appropriate or use such
money or property for the benefit or profit of the wrongdoer.
The
court also instructed the jurors as to the meaning of a fiduciary
relationship as it pertained to the power of attorney allegedly obtained
by the defendant from Lauretta Windfelder. The court stated:
The
fiduciary must show specific language in the power of attorney document
in order to claim that any of his authorized powers may be exercised for
the benefit of the fiduciary as well as the principal.
Now,
an agent occupying a fiduciary relationship is guilty of wrongdoing when
he engages in self-dealing by which he gains financial benefit out of a
financial transaction with the corpus, that is, with the principal or
the money, that he is supposed to oversee in his fiduciary capacity.
The
defendant contends that the instruction on fiduciary relationships
impermissibly shifted the burden of persuasion as to an element of the
crime to the defendant by requiring him to show specific language in the
power of attorney document authorizing his actions. The defendant also
claims that the combination of these two instructions may have directed
a verdict against him because the embezzlement instruction refers to a
"wrongdoer"and the power of attorney instruction states that a
fiduciary who engages in self-dealing "is guilty of
wrongdoing." Thus, defendant claims that the jury, in finding that
the defendant was a fiduciary who engaged in self-dealing, may have felt
compelled to find that he had embezzled.
As
the government points out, the defendant's counsel failed to make this
objection with sufficient specificity before the instructions were read
to the jury, as required by Rule 30 of the Federal Rules of Criminal
Procedure. The defendant's counsel merely stated: "I object to the
last three instructions on the power of attorney." TR. 1290. This
objection plainly did not give the trial court an opportunity to address
the grounds for the defendant's objection. See, e.g., United States
v. Verkuilen [82-2 USTC ¶9618 ], 690 F.2d 648, 652-53 (7th Cir. 1982).
The defendant claims that the court was advised of the specific grounds
on the previous day, but the court informed the defendant's counsel that
the previous day's discussion was of no import and that there was no
objection on the record. TR. 1290. After this admonishment, counsel made
only the general objection quoted above. We therefore review defendant's
claim on appeal under the standard of "plain error." See
Verkuilen, 690 F.2d at 652.
"In
deciding whether a defect in a jury instruction constituted a 'plain
error,' we must examine the entire record before us, and determine
whether the instructional mistake had a probable impact on the jury's
finding that the defendant was guilty."
United States
v.
Jackson
, 569 F.2d 1003, 1010 (7th Cir. 1978). In this case we do not
believe that the defendant assumed any burden of proof regarding his
supposed role as a fiduciary. Although this part of the power of
attorney instruction begins "The fiduciary must show specific
language. . .," this choice of wording does not alter the import of
the instruction, which merely informed the jury that the power of
attorney document must contain specific language authorizing the
fiduciary to exercise that power for his own benefit, or he may not do
so. Moreover, the record reveals that the government met its burden of
proof in this regard by introducing the document into evidence and
pointing out to the jury that the power of attorney supposedly held by
the defendant contained no such language. The defendant was not required
to show the presence of such language in the document at trial, buy any
argument defendant made to the effect that he was empowered to make the
transfer of Lauretta Windfelder's assets to himself was in the nature of
an affirmative defense, and was not an assumption of the burden of
proof. It is clear from the record that the government shouldered the
burden of proof as to this element.
We
also reject the defendant's claim that the combination of these two
instructions directed a verdict against him as to the income tax charge.
We do not believe that simply using the term "wrongdoer" in
the embezzlement instruction signaled to the jury that it had to find
that the defendant embezzled funds if it found that he had engaged in
any other type of wrongdoing. The defendant's interpretation of the
possible effect of this wording is strained and does not consider
"all of the jury instructions together 'as a connected series
without undue emphasis given to any one of them.' " Verkuilen,
690 F.2d at 653 (quoting United States v. Hamilton, 420 F.2d
1096, 1098 (7th Cir. 1970)).
Moreover,
in view of the entire record, we do not find that these instructions
were "plain error". First, the jury was instructed that the
defendant was presumed innocent throughout the trial and that the
government carried the burden of proof as to each element of the crime
charged. See Verkuilen, 690 F.2d at 653. Further, the defendant
does not claim that either of the contested instructions misstates the
area of law it addresses, id., or that the law upon which the
jury was instructed was not relevant to the facts of the case. Finally,
in view of the overwhelming evidence presented of the defendant's guilt,
we are not persuaded that the jury's understanding of the evidence or
the issues was clouded by the instructions or that these instructions
had any probable impact on the jury's finding of guilt.
For
the reasons stated above, the conviction of Donald Herbert Windfelder is
AFFIRMED.
1
The Senate report stated: "The purpose of this amendment is to
eliminate the confusing spectacle of competing expert witnesses
testifying to directly contradictory conclusions as to the ultimate
issue to be found by the trier of fact."
Id.
2
The defendant relies on Bishop as support for his position,
citing the court's holding that "the requisite elements of
knowledge and intent [were] clearly beyond the pale of [the witness's]
expertise" and also impermissibly invaded the province of the jury.
534 F.2d at 221. The defendant's argument ignores the reason underlying
the court's holding: that the testimony was excluded because the expert
"could not in anywise testify to facts lending any credence
to [defendant's] guilty knowledge or intent."
Id.
(emphasis in original). Further, Rule 704(a) provides that testimony as
to an ultimate issue to be decided by the jury is not excludable for
that reason alone.
[72-1
USTC ¶9111]
United States
, Appellee v.
Rob
ert J. Callanan, Appellant
(CA-4),
U. S. Court of Appeals, 4th Circuit, Nos. 71-1377, 71-1582, 450 F2d 145,
12/10/71, Affirming unreported District Court Decision
[Code Sec. 7201--Result unchanged by '69 Tax Reform Act]
Attempt to evade tax: Failure to report income: Evidence:
Admissibility: Trial: Miscellaneous assertions of error.--The
evidence tended to show that the taxpayer was guilty beyond a reasonable
doubt of willfully attempting to evade taxes by knowingly omitting a
substantial portion of his income. The District judge properly overruled
the objections to the testimony of a revenue agent. Even if his
statements about the omissions were deemed conclusory, the witness was
competent, as a duly qualified expert, to express an opinion based on
underlying facts which had been admitted into evidence. Furthermore, the
payments to members of the
County
Commissioners
' office were properly admitted where the judge did not permit the
deductions to be characterized as illegal or as bribes or payoffs.
Finally, the conduct of the government's attorney was not so unfair and
prejudicial that the taxpayer was entitled to a new trial.
George
Beall, United States Attorney, Baltimore, Md., Fred B. Ugast, Acting
Assistant Attorney General, Richard B. Buhrman, Meyer Rothwacks, Crombie
J. D. Garrett, John P. Burke, Department of Justice, Washington, D. C.
20530, for appellee. Norman P. Ramsey, Randy H. Lee, 10 Light St., 17th
Floor, Baltimore, Md., for appellant.
Before
BUTZNER, RUSSELL and FIELD, Circuit Judges.
BUTZNER,
Circuit Judge:
Rob
ert J. Callanan was convicted of
attempting to evade income taxes in 1962 and 1963 in violation of 26 U.
S. C. §7201. 1
His assignments of error challenge the sufficiency of the evidence, the
admission of certain testimony, and the denial of motions for a mistrial
and for a new trial on the ground of perjudice. During the course of the
trial the district judge painstakingly considered these points. His
rulings were proper, and we affirm the convictions for both tax years.
[Evasion
of Tax]
I.
To establish that a taxpayer has violated §7201 of the Internal Revenue
Code the government must show a substantial tax deficiency, an
affirmative act by the taxpayer to attempt evasion of the tax, and that
the taxpayer acted willfully. Sansone v. United States [65-1 USTC
¶9307], 380
U. S.
343 (1965). These requirements have been met, the government contends,
because the evidence showed that Callanan attempted to evade additional
taxes amounting to $21,642.41 in 1962 and $9,274.05 in 1963 by filing
false returns from which he knowingly omitted specific items of income
aggregating $34,878.93 in 1962 and $15,011.15 in 1963.
[Facts]
Callanan,
a lawyer, maintained two bank accounts for his office in
Baltimore
,
Maryland
and one bank account for his office in nearby
Glen Burnie
. Receipts deposited in one of the
Baltimore
accounts and the
Glen Burnie
account were recorded in cash books which identified the source and
nature of the funds. Income noted in these cash books was properly
reported.
The
second
Baltimore
account, for which no corresponding cash book was kept, was called the
"escrow" account. Initially, it was designed to receive and
disburse real estate settlements and loans. Soon, however, large sums of
money unrelated to sales and mortgages of real estate were deposited in
the escrow account. Other sums of money were deposited in savings
accounts or received as cash. Through documentary evidence and the
testimony of clients and other lawyers, the government introduced proof
that these sums of money were legal fees. An internal revenue agent
testified (over objection of Callanan discussed in Part II) that these
specific fees were not included in the gross income of Callanan reported
in 1962 and 1963.
[Sufficient
Evidence]
Filing
a false return is an affirmative act constituting an attempted evasion
of taxes within the meaning of §7201, Sansone v. United States
[65-1 USTC ¶9307], 380
U. S.
343, 352 (1965). The statute's requirement that the attempt be willful
is not ordinarily met, however, by showing the understatement of income
in the return. Holland v. United States [54-2 USTC ¶9714], 348
U. S.
121, 139 (1954); United States v. Bagdasian [68-2 USTC ¶9501],
398 F. 2d 971, 973 (4th Cir. 1968). The government must also supply
proof that the taxpayer knew of the understatement. Sansone v. United
States [65-1 USTC ¶9307], 380
U. S.
343, 352 (1965). Callanan insists that the government has failed to
prove that he knew that any fees had been omitted from the income
reported on his returns. He did not testify, but during the
investigation preceding the indictment he gave several exculpatory
statements to the effect that only fees from the settlement of real
estate transactions were deposited in his escrow account, that he did
not know his secretary had deposited other fees in this account, and
that he thought the accountant who set up his books and prepared his tax
returns had properly included all of his fees in the amount reported as
gross income.
The
government, however, introduced testimony and documentary evidence
contradicting Callanan's exculpatory statements. Witnesses testified
that he directed his employees to deposit certain fees not related to
real estate settlements in the escrow account. The fees deposited in
this account were not clearly identified as income in any book or
journal or in the records kept in connection with the escrow account.
The government also showed that Callanan, contrary to his explanations,
was familiar with his books and bank accounts.
The
government evidence disclosed that Callanan personally received other
fees which he did not record in any account book or deposit in any of
his office checking accounts. The jury could justifiably conclude that
Callanan's failure to record fees he personally received or to deposit
them in his office bank accounts made it virtually impossible for his
accountant to include them in the tax returns.
In
view of this evidence, neither the trial court nor the jury were
required to find that Callanan was the innocent victim of mistakes made
by his secretary and his accountant. Guilty knowledge and willfulness
may be inferred from "the handling of one's affairs to avoid making
the record usual in transactions of the kind . . .." Ingram v.
United States [59-2 USTC ¶15,245], 360
U. S.
672, 677 (1959), from false explanations, United States v. Wilkins
[67-2 USTC ¶9739], 385 F. 2d 465, 472 (4th Cir. 1967), cert. denied,
390
U. S.
951 (1968), and from a pattern of concealment of true income from one's
accountant. United States v. Madden [62-1 USTC ¶9378], 300 F. 2d
757, 758 (1962).
In
summary, we find no merit in Callanan's contention that the evidence is
insufficient to sustain his conviction. Substantial evidence taken in
the light most favorable to the United States tended to show that he was
guilty beyond a reasonable doubt of willfully attempting to evade taxes
by knowingly omitting a substantial portion of his income from his
return. The district judge, therefore, committed no error by overruling
the motion for a judgment of acquittal and submitting the case to the
jury. Bell v. United States [50-2 USTC ¶9499], 185 F. 2d 302,
310 (4th Cir. 1950).
[Revenue
Agent's Testimony]
II.
Protesting that testimony of a revenue agent was conclusory and
unsupported by the evidence, Callanan claims the district court erred in
permitting the agent to testify that specific items of income mentioned
in the bill of particulars were omitted from the 1962 and 1963 tax
returns.
The
government exhibited all of Callanan's pertinent records, consisting
primarily of the
Baltimore
and
Glen Burnie
office books of account, the records of his checking accounts, records
of certain savings accounts, correspondence concerning certain fees, the
worksheets used by his accountant, and his tax returns. Having examined
these exhibits, the witness testified that the total gross income shown
on each year's worksheets prepared by Callanan's accountant corresponded
with the total gross income reported on each year's tax return. He also
testified that the accountant properly included all of the income
reported in the
Baltimore
and
Glen Burnie
cash books. This income had been deposited in the business checking
accounts for these offices. The accountant also included some of the
fees arising out of real estate settlements that had been deposited in
the escrow account. The omitted items of income, the revenue agent
testified, fell into two classifications: (a) fees that were not
recorded in any cash book and not deposited in any office checking
account; (b) fees that were deposited in the escrow account and not
recorded in any cash book. The bulk of these omitted fees were not
connected with real estate settlements.
Thus,
with the exception of a relatively small amount of omitted real estate
settlement fees, the omitted income could not be readily identified by
examination of any account book or checking account. The government
showed their nature and amount through correspondence relating to them,
the testimony of clients and other lawyers, and the admissions Callanan
made during the course of the investigation.
But
Callahan complains that the government's witness did not sufficiently
analyze the
Baltimore
business account to disprove that omitted items of income were not
included by the accountant in his computation of gross income. We find
no merit in this argument. Deposits in the
Baltimore
business account tallied with the entries in the
Baltimore
cash book where income was adequately identified. The government makes
no claim that the income in the office business account was not
reported. Moreover, the cash book contains no entries showing that the
items, claimed by the government to have been omitted, were in fact
included on the accountant's worksheets or the returns. All of the books
and records were introduced into evidence, and if the revenue agent had
been mistaken, the defendant could have shown on cross examination the
inclusion of any items claimed to have been omitted.
Kirsch
v. United States [49-1 USTC ¶9274],
174 F. 2d 595 (8th Cir. 1949), on which the defendant primarily relies,
dealt with an entirely different situation. There, a revenue agent
contending that all of a money changer's bank deposits were income,
testified: "If Kirsch went to his safety deposit box and took out
$2,000.00 . . . to cash checks and then deposited $2,400.00, we would
include the entire $2,400.00 as income. We included everything that went
into those deposits." 174 F. 2d at 599. Since the witness's
testimony was so patently illogical, the court of appeals, reversing
Kirsch's conviction, refused to allow an expert to base his conclusions
on it.
Here,
in contrast to Kirsch, the government did not designate as income
hundreds of thousands of dollars that flowed through Callanan's checking
accounts during each of the tax years. The specific sums that the
government claimed as unreported income were clearly identified as fees
by documentary evidence and by witnesses who dealt with Callanan. The
vice disclosed by Kirsch is missing. Here the revenue agent did
not base his conclusions about the omitted income on assumptions. He
based it on proof that showed each item was in fact a fee.
The
district judge properly overruled the objections to the testimony of the
revenue agent. Even if his statements about the omission of the items
are deemed conclusory, the witness was competent, as a duly qualified
expert, to express an opinion based on underlying facts which had been
admitted into evidence. Turner v. United States [55-1 USTC ¶9489],
222 F. 2d 926, 932 (4th Cir. 1955); Beaty v. United States [54-2
USTC ¶9466], 213 F. 2d 712, 719 (4th Cir. 1954).
[Payments
to Commissioners]
III.
Callanan also complains that the district court improperly admitted
evidence about payment of large sums of money Callanan made to two
members of the Board of County Commissioner of
Anne
Arundel
County
, one of whom was his accountant. Callanan deducted these payments on
his tax returns as "Legal and Professional Fees to
Associates." Since the government did not disallow these
deductions, Callanan contends that evidence about them was irrelevant
and prejudicial.
Among
the specific items of omitted income claimed by the government were
thousands of dollars which the evidence showed had been paid to Callanan
as fees for obtaining the rezoning of property in
Anne Arundel County
,
Maryland
. These receipts were deposited in the escrow account. They were not
listed on any book of account as fees. During the pre-indictment
investigation, Callanan told a revenue agent that he paid this money to
two members of the board of commissioners who, he said, controlled
zoning. At the trial, the men named by Callanan admitted receipt of the
money, but claimed it was paid for other reasons. They denied any
wrongdoing.
The
district judge permitted the government to show that Callanan had
deducted the payments but he would not permit the deductions to be
characterized as illegal or as bribes or payoffs. The admission of this
evidence was not error. To establish that the zoning fees were income to
Callanan it was imperative for the government to show that he was
not--as he contended--a mere conduit of money to other persons. Clearly,
since Callanan deducted the payments to the board members from his gross
income, testimony about the deductions was relevant to show he should
have included the receipt of the zoning fees as gross income on his
return. The testimony was relevant also because it disclosed a motive
for not depositing these fees in the office account and for not listing
them along with other fees in the defendant's cash book. Although a
defendant's guilt may not be established by proof of unrelated offenses,
relevant testimony is not rendered inadmissible because it may expose
questionable or improper conduct. United States v. Dutsch, 357 F.
2d 331, 333 (4th Cir. 1966); Welch v. United States [66-2 USTC ¶9503],
371 F. 2d 287, 293 (10th Cir.), cert. denied, 385
U. S.
957 (1966).
[Conduct
of Government's Attorneys]
IV.
Callanan asserts that the conduct of the government's attorneys
throughout the proceedings was so unfair and prejudicial that he is
entitled to a new trial. Only two of his complaints merit comment.
Over
objection, the district judge permitted a former United States Attorney
for the District of Maryland to testify that Callanan had stated at a
pre-indictment conference attended by his attorneys that he "never
looked at a book." Also, over objection the court permitted an
Assistant United States Attorney to testify that at another conference
Callanan said he never told his secretary "where to deposit 25
cents." Callanan claims that the testimony was "a prejudicial
attempt to interject into the proceedings the prestige of the office of
the witnesses."
Callanan's
charge is untenable. The attorneys who testified did not otherwise
participate in the trial of the case. Since no revenue agent was present
at the conferences, the government lacked other witnesses to Callanan's
denials. His exculpatory statements were relevant to prove willfulness, United
States v. Wilkins [67-2 USTC ¶9739], 385 F. 2d 465, 472 (4th Cir.
1967), cert. denied, 390
U. S.
951 (1968), and the government should not be deprived of this essential
evidence because of the prominence of its witnesses. We conclude,
therefore, that the district judge committed no error by overruling
Callanan's objections to their testimony.
Just
before the final argument, the prosecutor asked the court whether he
could describe the payments Callanan made to the county commissioners as
"payoffs." The court admonished him not to use inflammatory
language. 2
During the course of the argument the prosecutor said the deductions
were "not lawful" and not "legitimate." He also told
the jury that the government did not charge Callanan with taking false
deductions, but that the deductions were relevant to show intent. 3
After the second reference to the illegality of the deductions, the
defendant objected and moved for a mistrial. The judge sustained the
objection, but denied the motion for a mistrial. He reprimanded the
prosecutor and immediately gave the jury a special charge in which he
explained that the legitimacy of the payments and the deductions was not
an issue in the case.
Insinuation
and innuendo about collateral matters should play no part in the
prosecution of a criminal charge. United States v. Elmore [70-1
USTC ¶9275], 423 F. 2d 775, 780 (4th Cir.), cert. denied, 400
U. S.
825 (1970). And the prosecutor's argument must be specially scrutinized
when the trial judge, alert to potential prejudice, has cautioned
restraint. If it is probable that a prosecutor's argument has engendered
prejudice, the defendant must be afforded a new trial. Berger v.
United States, 295
U. S.
78, 89 (1935); Wallace v. United States [60-2 USTC ¶9661], 281
F. 2d 656, 668 (4th Cir. 1960). The remarks of the government's attorney
were improper. The legitimacy of the deductions had not been raised in
the bill of particulars and it should not have been introduced into the
case. Whether the untoward remarks prejudiced Callanan must be tested by
"the closeness of the case, the centrality of the issue affected by
the error, and the steps taken to mitigate the effects of the
error." Gaither v.
United States
, 413 F. 2d 1061, 1079 (D. C. Cir. 1969).
The
record discloses that this was not a close case. The government proved
that time and again Callanan received fees without recording them in any
book of account and indeed often without depositing them in any of his
office checking accounts. Callanan's explanations were discredited, and
he offered neither his own testimony nor the testimony of any accountant
to disprove the government's evidence. The legitimacy of the deductions
did not directly bear on the central issue of the case. The deductions
were relevant to show intent, and, therefore, fair comment about them
was permissible. Only their characterization as unlawful was forbidden.
Moreover, the zoning fees, with which the deductions were linked, were
not the only items of omitted income on which the government relied. For
each tax year the evidence disclosed substantial unreported income that
in no way was connected with Callanan's payments to the county
commissioners. Finally, we believe the measures taken to mitigate the
effects of the prosecutor's remarks were sufficient to protect Callanan
from prejudice. When the prosecutor assailed the deductions as illegal
her told the jury that the government was not charging Callanan with
false deductions. The court, too, in a special charge given in the midst
of the prosecutor's closing argument told the jury that the legality of
the payments to the county commissioners and the lawfulness of the
deductions were not issues in the case. 4
In view of these circumstances we deem it unlikely that the prosecutor's
remarks misled the jury or produced a wrongful conviction.
[Conclusion]
We
find no grounds for reversal because of other incidents of trial which
Callanan claims prejudiced his case. The trial judge carefully
considered these matters when he heard Callanan's motion for a new
trial. His denial of the motion was proper. The judgment is affirmed.
AFFIRMED.
1
§7201. Attempt to evade or defeat tax.
Any
person who willfully attempts in any manner to evade or defeat any tax
imposed by this title or the payment thereof shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, shall be fined not more than $10,000, or imprisoned not more
than 5 years, or both, together with the costs of prosecution.
2
The district judge instructed the prosecuting attorney as follows:
"I
do not want you to use inflammatory language in terms of the payments to
[the county commissioners]. You can talk about them in connection with
the zoning problem, but I ask you not to use inflammatory language.
"It
is quite clear that the evidence which [the defendant's attorney]
obpected to came in for purposes of establishing intent and in
connection with motive, not reporting certain specific items of income
that are involved in this case, but I do not want any inflammatory
langauge used.
"It
seems to me that understatement . . . sometimes can be as effective as
overstatement."
3
The prosecutor stated in his closing argument:
'So
in effect, what the defendant is doing with respect to this Ritchmount
fee, this $6,291.66 fee, is he took an expense for paying it out to [the
county commissioners], because he said they controlled the County--the
zoning activities, and he didn't report it as income, so he got a double
tax benefit, and I submit to you, ladies and gentlemen, that the is
absolute greed, and that is the mark of tax evasion, greed, taking a
deduction which was not lawful in the first instance because it was a
payment to a County Commissioner, which he said was made because these
commissioners controlled the various zoning activities, and then not
even reporting the zoning fee itself.
But
[the defendant's attorney] told you on opening statement that this case
does not involve fraudulent deductions. And he's right. The Government
does not charge Mr. Callanan with a false deduction in this case. But I
only tell you about the item to point up the intent. It's relevant to
show intent. We are not claiming that he took a false deduction, but we
are stating this fact to show the whole scheme, his whole method of
operation with respect to this item.
.
. .
Again
I submit that there is a real motive for him to not report certain of
these zoning fees. Again I refer to my double tax benefit theory. It's
my own phrase.
With
respect to the Ritchmount item, for example, he's receiving a $6,291.66
fee and he tells Agent Sikorsky on several occasions by way of saying
this is not income, I gave this money to [the county commissioners].
Well,
it's still income to him and he didn't report it but he did take a
deduction for the monies he paid to [the county commissioners], which
was not a legitimate deduction, again with which the Government is not
charging him, but it wasn't a legitimate deduction."
4
The court gave the following special charge:
"Ladies
and gentlemen of the jury, [the prosecutor] has told you that certain
payments made by Mr. Callanan to [the county commissioners] were
unlawful.
Whether
such payments were or were not unlawful is not in issue in this case. .
. .
There
is no issue in this case as to whether any deduction taken by Mr.
Callanan on either of the returns was or was not legally taken or was
not legitimate or illegitimate.
On
the other hand, if in fact you find that Mr. Callanan claimed a
deduction for a payment of part of a sum of money allegedly received by
him, the fact that he claimed that deduction can be taken into account
by you.
Nevertheless.
I want to repeat to you--and this was the basis upon which [the
defendant's attorney] came to the Bench to object--I want to repeat to
you that [the prosecutor] has told you that certain payments made by Mr.
Callanan to [the county commissioners] were unlawful.
Whether
such payments were or were not unlawful is not in issue in this case,
nor is there any issue in this case as to whether any deduction taken by
Mr. Callanan on the 1962 return or the 1963 return was or was not
legally taken or what or was not legitimate or illegitimate."
[59-2
USTC ¶9784]John C. Barber, Appellant v.
United States of America
, Appellee
(CA-6),
U. S. Court of Appeals, 6th Circuit, No. 13,653, 271 F2d 265, 11/4/59,
Aff'g an unreported decision of the District Court
[1954 Code Sec. 7201]
Crimes: Income tax evasion: Frivolous appeal.--In view of oral
arguments of counsel, the briefs, and the record on appeal, an appeal
from a jury verdict convicting taxpayer of income tax evasion was held
to be without merit and frivolous.
[1954 Code Sec. 7201]
Crimes: Income tax evasion: Analysis of testimony by expert witness:
Impairment of jury's verdict.--Where nothing was done to impair the
jury's freedom to exercise its judgment upon the worth and weight of
testimony, it was not error to permit the Government's expert witness to
identify and explain charts summarizing his testimony and that of
others.
[1954 Code Sec. 7201]
Crimes: Income tax evasion: Identification of defendant.--On the
evidence, the claim that the defendant was not sufficiently identified
was without merit.
Clifford
E. Enger, 9405 Brighton Way, Beverly Hills, Calif. (Leo W. Grant, Jr.,
Clinton, Tenn., with him on brief), for appellant. Fred Ellege, Jr., R.
Hunter Cagle, United States Attorney, Nashville, Tenn., for appellee.
Before
MARTIN, MILLER, and WEICK, Circuit Judges.
PER
CURIAM:
The
appeal in this case is from a jury verdict of guilty as charged in an
indictment for unlawful income tax evasion and sentence pronounced
thereon of fifteen months' imprisonment and $500 in fines.
After
hearing the oral arguments of counsel and considering the briefs and the
three-volume record in the case, we find no merit whatever in the
appeal. Indeed, in the circumstances, the appeal could be classified as
frivolous. The evidence adduced by the government was ample to support
the verdict of guilty. See Ross, et al. v.
United States
, 197 F. (2d) 660, 664, 665 (C. A. 6), certiorari denied 344
U. S.
832; Gariepy v. United States, 220 F. (2d) 252, 258 (C. A. 6)
[55-1 USTC ¶9267], certiorari denied 350
U. S.
825.
There
is no point to the argument of appellant that the district court erred
in permitting the expert witness, Leibowitz, to identify and explain
charts summarizing his testimony and that of other witnesses. In United
States v. Johnson, 319 U. S. 503, 519, [43-1 USTC ¶9470], the
Supreme Court said: "* * * The worth of our jury system is
constantly and properly extolled, but an argument such as that which we
are rejecting tacitly assumes that juries are too stupid to see the
drift of evidence. The jury in this case could not possibly have been
misled into the notion that they must accept the calculations of the
government expert any more than that they were bound by calculations
made by the defense's expert based on the defendants' assumptions of the
case. So long as proper guidance by a trial court leaves the jury free
to exercise its untrammeled judgment upon the worth and weight of
testimony, and nothing is done to impair its freedom to bring in its
verdict and not someone else's we ought not to be too finicky or fearful
in allowing some discretion to trial judges in the conduct of a trial
and in the appropriate submission of evidence within the general
framework of familiar exclusionary rules."
The
argument that the defendant here was not sufficiently identified is, on
the evidence in the case, completely without merit.
The
verdict of the jury being abundantly supported by substantial evidence
and there being found no prejudicial error in the record, the judgment
of conviction and sentence is affirmed.
[56-1
USTC ¶9111]Paul Dillon v.
United States
In
the Supreme Court of the United States, No. 37.--October Term, 1955, 350
US 906, 76 SCt 191, December 5, 1955
On Writ of Certiorari to the United States Court of Appeals for the
Eighth Circuit.
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201; 1939 Code Sec.
145(a)--similar to 1954 Code Sec. 7203; 1939 Code Sec. 3616(a)--changed
in 1954 Code Sec. 7207]
Tax evasion: Trial: Admission of evidence: Lesser offense:
Instructions.--Taxpayer was convicted on charges of tax evasion
under 1939 Code Sec. 145(b) for failure to report substantial amounts of
income. By a per curiam opinion, the Supreme Court dismissed the writ of
certiorari and remanded the case to the Eighth Circuit which had ruled
against taxpayer on all of the following assignments of error: (1) that
the trial court erred in instructing the jury that questions of
taxpayer's counsel should be disregarded as evidence when based on the
assumption that all the money represented by checks for legal fees did
not belong to taxpayer, (2) that there was no foundation laid for the
introduction of checks in evidence so as to shift the burden of proof to
taxpayer to show that they did not represent income, (3) that the
Government agent was not entitled to testify as an expert witness on the
identity of certain checks, (4) that the court improperly refused to
instruct the jury that it might find taxpayer guilty of the lesser
offense of a misdemeanor under either 1939 Code Sec. 145(a) or 3616(a),
(5) that the trial court refused to declare a mistrial because of
newspaper publicity, and (6) that the court erred in refusing to direct
a verdict for taxpayer at the close of all the evidence.
Morris
A. Shenker, Sidney M. Glazer,
408 Olive Street
,
St. Louis
2,
Mo.
, for petitioner. Simon E. Sobeloff, Solicitor General, H. Brian
Holland, Assistant Attorney General, Ellis N. Slack, John H. Mitchell,
Joseph M. Howard, and George Willi, Special Assistants to the Attorney
General, for respondent.
PER
CURIAM:
The
writ of certiorari is dismissed and the case is remanded to the Court of
Appeals for such further action as law and justice may require.
[55-1
USTC ¶9131]Paul Dillon, Appellant v.
United States of America
, Appellee
(CA-8),
In the United States Court of Appeals for the Eighth Circuit, No.
15,048, 218 F2d 97, January 5, 1955
Appeal from the United States District Court for the Eastern District of
Missouri.
[1939 Code Sec. 145(b)--similar to 1954 Code Sec. 7201; 1939 Code Sec.
3616(a)--changed in 1954 Code Sec. 7207]
Tax evasion: Trial: Admission of evidence: Instructions.--Taxpayer
was convicted on charges of tax evasion under 1939 Code Sec. 145(b) for
failure to report substantial amounts of income. The Appeals Court ruled
against taxpayer on all of the following assignments of error: (1) that
the trial court erred in instructing the jury that questions of
taxpayer's counsel should be disregarded as evidence when based on the
assumption that all the money represented by checks for legal fees did
not belong to taxpayer, (2) that there was no foundation laid for the
introduction of checks in evidence so as to shift the burden of proof to
taxpayer to show that they did not represent income, (3) that the
Government agent was not entitled to testify as an expert witness on the
identity of certain checks, (4) that the court improperly refused to
instruct the jury that it might find taxpayer guilty of the lesser
offense of a misdemeanor under either of 1939 Code Secs. 145(a) or
3616(a), (5) that the trial court refused to declare a mistrial because
of newspaper publicity, and (6) that the court erred in refusing to
direct a verdict for taxpayer at the close of all the evidence.
Morris
A. Shenker and Sidney M. Glazer for appellant. Charles H. Rehm,
Assistant United States Attorney (Harry Richards, United States
Attorney, and
Rob
ert C. Tucker, Assistant United States Attorney, were with him on the
brief), for appellee.
Before
GARDNER, Chief Judge, and COLLET ANDVAN OOSTERHOUT, Circuit Judges.
COLLET,
Circuit Judge:
The
defendant was convicted by a jury of attempting to defeat and evade the
payment of income taxes for the years 1950 and 1951. The Government
presented evidence showing that defendant's receipts for 1950 were
substantially in excess of the amount reported for that year, and that
his receipts for 1951 were approximately $5,700.00 more than reported.
The defendant did not testify. Counsel sought to convince the jury that
the Government's evidence was consistent with the hypothesis that all of
the money shown to have been received by defendant was not income to
him. He was an attorney. The argument was made that probably the portion
of the receipts which was not reported as income went to associate
counsel as fees, or did not belong to defendant, or that at least the
Government had not shown the contrary. The court, in its charge to the
jury, referring to that argument, instructed the jury that the questions
of counsel which may have assumed that possibility were not evidence and
that as the court understood the testimony, there was no evidence that
the defendant had shared any fees with anyone. That part of the charge
is assigned as error here.
[Comment
on Evidence]
As
to this first assignment, it is argued that the court's charge was
"one-sided" and constituted "advocacy against the
defendant." The charge included the usual cautionary admonition
that anything contained in it which might be construed by the jury as a
comment on the evidence which differed from the jury's understanding of
the evidence should be disregarded--that it was the jury's sole province
to find the facts. The charge was not argumentative and did not go
beyond pointing out the factual situation portrayed by the evidence. The
situation here was very different from that in the cases of Boatright
v. United States, 105 Fed. (2d) 737, andBilleci v.
United States
, 184 Fed. (2d) 394, cited by defendant.
[What
Part of Receipts Constituted Income]
Error
is assigned on account of the admission as evidence of seven checks
payable and delivered to defendant during the years covered by the
indictment. Defendant contends that there was no foundation laid for the
introduction of those checks in evidence, because there was no testimony
to the effect that the checks represented taxable income to the
defendant. Two of them were marked "legal services", two were
marked "fees", and three were not marked. The gravamen of
defendant's contention is that before evidence of this nature should be
admitted it should be first shown that the money was received under such
circumstances as to "strongly" indicate it was actually
taxable income, and that the burden of proof or the burden of going
forward with the evidence to show that it was not income should not be
shifted to the defendant, absent such initial showing. If the word
"fairly" be substituted for "strongly", the
principle is correct. If the foundation or initial evidence does fairly
indicate that the receipts were income, the Government is not required
initially to adduce positive evidence to support a negative hypothesis
that it was not money received for someone else or that it was not
received for some purpose which would prevent it from being income to
the person to whom it was paid. The rule is not a new one. The
explanation of the reason supporting it and the limitations of its
application were stated by Mr. Justice Cardozo in Morrison v.
California, 291
U. S.
82, 88, and reiterated by Chief Justice Vinson in United States v.
Fleischman, 339
U. S.
349, 360. For a transfer of the burden--"experience must teach that
the evidence held to be inculpatory has at least a sinister
significance." 291
U. S.
82, 90. It may be said with considerable force and logic, as defendant
now says, "that in view of the nature of the legal profession the
mere receipt of money does not represent income," and that the
"sinister significance" that it was income does not arise in
an income tax prosecution from its receipt alone. But there is another
exception so closely related that for practical purposes, at least under
circumstances such as these, it is a part and parcel of the exception
stated. The latter is--"if this [the sinister significance] be
lacking, there must be in any event a manifest disparity in convenience
of proof and opportunity of knowledge. * * * The decisive considerations
are too variable, too much distinctions of degree, too dependent in last
analysis upon a common sense estimate of fairness or of facilities of
proof, to be crowded into a formula. One can do no more than adumbrate
them; sharper definition must await the specific case as it
arises." 291
U. S.
82, 91.
In
the present case the Internal Revenue agent assigned to investigate this
case prior to the indictment appears to have made inquiry of defendant
seeking to determine if all of the amount of the checks in question did
represent income or whether part was received for some other purpose,
and that defendant declined to give any information other than that all
of it was not income, which latter the agent was unable to substantiate.
Under these circumstances the exception to the general rule that the
burden of making an explanation will not ordinarily be shifted to the
defendant in a criminal case applies, and the problem of the trial court
became one of evaluating the circumstances and determining whether in
fairness to both parties the evidence should be admitted upon the
initial showing and leave to the defendant the opportunity to dispell
the inference which could reasonably follow, absent explanation.
[When
Burden of Proof Shifts]
Great
care should be observed in the exercise of judicial discretion to the
end that no shifting of the burden placed upon the prosecution to prove
guilt result in requiring to any degree or extent that a defendant prove
his innocence. The burden of proof must remain on the prosecution to
establish guilt. The
admin
istration of justice is not a game of chess or of hide-and-seek. It is a
search for truth and the application of the law to the true facts in
order that substantial justice be done under the law. The prosecution
must not be permitted to introduce evidence which is not so indicative
of guilt as to fairly point to guilt and cast the burden on the
defendant to disprove an unfair implication or inference. One charged
with a crime may testify in his own behalf or not, as he chooses. In
making the choice he must weigh the considerations in favor of a
decision not to testify against the possibility or probability that
evidence fairly adduced against him will be accepted at its face value
with damaging results. If he decides not to explain, when absent an
explanation he will appear to be guilty, he shall not be criticized for
his choice. But if the evidence is of such a nature that it fairly
indicates guilt, a defendant may not be heard to complain that an
explanation reposing, comparatively speaking, particularly and
peculiarly in him, has not been given by another. We have condemned the
use of evidence which in fairness should not under the circumstances
have been admitted and the burden cast upon the defendant to explain or
suffer the possible consequences. But that is not the situation here.
The checks were made payable to the defendant. They were either marked
"fees" or "legal services" or were given to him
under circumstances indicative that they were for legal services. They
were all endorsed by defendant and cashed. The discretion involved in
determining that this evidence was fairly indicative of income received
by defendant, and permitting its introduction in evidence, was not
abused in this instance.
A
case involving a factual situation requiring a converse ruling will
illustrate the limitation of the exception. In Kirsch v.
United States
, 174 Fed. (2d) 595 [49-1 USTC ¶9274], the defendant was charged
with having received income in an amount equal to his bank deposits. The
Government's witness was permitted to assume that all of the bank
deposits represented income, when the Government's investigation had
disclosed that a large part of those deposits represented pay checks
cashed for customers out of funds theretofore drawn from the bank for
that purpose. Under those circumstances it was held unfair to admit the
evidence of total deposits, characterized as income, and permit the
inference from the proof of the amount of the deposits that all of those
deposits constituted income, thereby casting the burden on defendant to
disprove that inference.
[Expert
Witness]
It
is asserted that the court committed reversible error in permitting the
revenue agent to testify that Exhibits 4 and 10, two of the checks
heretofore referred to, were not recorded in defendant's records and
that Exhibits 5, 6, 8, and 9, four of those checks, were understated in
those records. The complaint that in made is that the witness was
testifying as an expert, that expert testimony is only admissible when
the facts are so complicated that expert testimony is needed to assist
the jury, that the defendant's records and the facts to be gleaned
therefrom were not complicated and the jury did not need expert
guidance. The argument is ingenious but lacks substance and merit. The
records were in evidence before the jury. They were not voluminous. The
cash receipt book, which the witness was familiar with, was handed to
him and he was asked whether Exhibits 4 and 10 were recorded therein.
Over defendant's objection that the question called for "a
conclusion and opinion and comparison of documents," and that it
had not been shown that the checks represented income, the witness
answered that Exhibits 4 and 10 were not recorded. When asked about
Exhibits 5, 6, 8, and 9, he testified that Exhibits 5 and 6, which were
in evidence, totaled $4,500.00 and were recorded in the record as
$1,500.00; that Exhibits 8 and 9, also in evidence, totaled $3,500.00
and were entered in the books as $1,500.00. These records were not very
legible or orderly. The witness had made a calculation of the total
receipts of the defendant. If the records were so abstruse as not to be
readily understandable by the jury, an explanation was appropriate. But
if it be assumed that the records were not of such a nature as to
justify expert testimony to decipher or simplify them, then the checks
and the records clearly showed for themselves what they alluded to and
there was no possible prejudice in the witness so stating. And if, as
defendant contends, the latter be the situation, the witness' testimony
was admissible for the purpose of explaining how his total figure of
defendant's income was arrived at from these books. There was no
prejudicial error in permitting this testimony.
[Lesser
Offense Not Included]
Defendant
was charged with a felony under §145(b), 26
U. S.
C. A. §145(b). He requested an instruction that the jury might find him
guilty of a lesser offense--specifically, a misdemeanor under §145(a),
26
U. S.
C. A. §145(a), or §3616(a), 26
U. S.
C. A. §3616(a). The request was denied. He contends that the lesser
offenses defined in §145(a) and §3616(a) are included in the greater
defined by §145(b) and that under Rule 31(c) of the Federal Rules of
Criminal Procedure, 1
he was entitled to the instruction. The pertinent portions of §145(a),
§145(b), and §3616(a) are quoted in the footnote. 2
As
stated in Spies v. United States, 317
U. S.
492, 493 [43-1 USTC ¶9243], "Section 145(a) makes, among other
things, willful failure to pay a tax or make a return * * * a
misdemeanor. Section 145(b) makes a willful attempt in any manner to
evade or defeat any tax * * * a felony." The indictment did not
charge, nor did the evidence show, that defendant merely failed to pay a
tax or failed to make a return. On the contrary, the evidence showed
that a return was filed and a tax was paid. No evidence was offered that
defendant failed to file a return or to show the willful failure to pay
the tax when due, except insofar as willfulness was involved in the
charged willful and felonious attempt to evade the payment of taxes
owed. Hence the universal rule that it is not error to fail to instruct
on an offense not presented by the evidence applies. There consequently
was no error in failing to instruct that defendant might have been
convicted of either of the misdemeanors defined by §145(a), of willful
failure to pay a tax when due or willful failure to file a return.
[Purpose
of Sec. 3616(a)]
As
the quoted portion of §3616(a) shows, that section makes a misdemeanor
the filing of a false or fraudulent list or return with intent to defeat
or evade the assessment of taxes. Was this misdemeanor included in the
felony defined by §145(b)? Defendant cites Kirsch v. United States,
174 Fed. (2d) 595 [49-1 USTC ¶9274], as authority that it was.
The
question of whether evidence which the defendantclaimed only
showed a violation of §145(a), coupled with evidence of a violation of
§3616(a) of filing a false or fraudulent list or return, would sustain
a conviction of feloniously attempting to evade or defeat the payment of
a tax under §145 (b), was presented in Kirsch v.
United States
. Upon the record in that case the question was found to be abstract
because, as was stated in the opinion, "If there was need
for proof of affirmative acts other than those defined as misdemeanors
in Sections 3616(a) and 145(a) in furtherance of an attempt to evade
taxes, it is contained in the record." The present question not
being presented by the record in the Kirsch case, it was not
decided. Now we are confronted with the problem of determining whether
§3616(a) really applies to income tax returns. If it does not apply to
income tax violations, the offense it defines was not included in the
felony charge based on §145(b) and Rule 31(c) did not authorize a
conviction under the felony charge of the lesser offense defined by §3616(a).
And, if that be true, an instruction authorizing a conviction for the
misdemeanor, not embraced in the felony charge, was not appropriate. The
question has not been passed upon directly. We take note of cases cited
by defendant.
In
Cave v.
United States
, 159 Fed. (2d) 464[47-1 USTC ¶9171], this court sustained a
conviction under §145(b) upon proof that the defendant willfully filed
a false and fraudulent return. No exceptions were taken to the
instructions at the time of trial. On appeal, complaint was made of the
instructions on the ground that they were so indefinite, inconsistent
and prejudicial as to require reversal, although no exceptions were
taken. The precise point now presented, that the defendant was entitled
to an instruction on the misdemeanor defined in §3616(a) in the event
the jury found a false return had been filed but failed to find that it
was willfully false, was not raised. InMyres v.
United States
, 174 Fed. (2d) 329 [49-1 USTC ¶9275], the situation was the same.
In
Taylor
v.
United States
, 179 Fed. (2d) 640[50-1 USTC ¶9151], on an appeal from a denial of
habeas corpus, one convicted under §145(b) contended that §145(b) had
been repealed by implication by §3616(a). In that case note was not
taken of the fact that §145(b) involves willfulness while §3616 does
not. The court rested its denial of the contention on the fact that §3616(a)
was originally enacted long prior to the enactment of §145(b) and could
not have repealed by implication §145(b). Our attention has not been
directed to any other reported cases in which there was any contention
that §3616(a) applied to income tax violations.
The
language of §3616(a), which appears under the heading
"Penalties", differs from that customarily applied to income
tax returns. Its juxtaposition to statutes relating to the duty of
collectors to canvass their districts for taxable persons and objects,
26 U. S. C. A. §3600; the entry of premises for examination of taxable
objects during the day or night (§3601); search warrants (§3602); the
making of a"list or return" by a taxpayer of articles,
objects, goods, wares and merchandise made or sold, charged with a tax,
the rates of the tax and aggregate amount thereof, and if such list is
not made by the taxpayer, the list should be made by the collector (§3611);
the provision for penalties for failure to file "returns or
lists" (§3612) without reference to similar penalties found in
connection with that part of the code relating specifically to income
taxes; rewards to informers with respect to illegally produced petroleum
(§3617); all would appear to indicate a relationship of §3616 to
subjects other than income taxes. The fact, as pointed out in the
Taylor
case, 179 Fed. (2d) 640 [50-1 USTC ¶9151], that §3616 was enacted long
prior to §145 and does provide a penalty for submitting a false return
(or list) without willfulness, and none of the later prohibitions of §145
do so, would be some indication that the existence and application of
the older §3616 to all tax matters, including income tax returns, was
recognized by Congress when §145 was enacted, and that the reason for
not making provision in §145 for a penalty for nonwillful filing of a
false return was to avoid duplicating §3616(a), if Congress had not
indicated such was not the intention when it revised the entire tax code
by the Internal Revenue Code of 1954.
[Treatment
in 1954 Code]
When
the Internal Revenue Code was revised in 1954, 3
§3616 (including §3616(a)) was dropped from the code. The only
reference to it in the revision is found in Table 1 where §3616 is
shown to be incorporated in new §7207 of Chapter 75 of the 1954 Revised
Code. §7207 is entirely different from §3616. It reads:
"§7207.
Fraudulent Returns, Statements, or Other Documents. Any person who
wilfully delivers or discloses to the Secretary or his delegate any
list, return, account, statement, or other document, known by him to be
fraudulent or to be false as to any material matter, shall be fined not
more than $1,000, or imprisoned not more than 1 year, or both."
Internal Revenue Code of 1954, 68A Stat. 853.
§7207
appears in the statutory context with other offenses relating to income
tax offenses. It is sufficiently broad to apply to both income tax
derelictions as well as to those subjects other than income taxes with
which §3616 was in juxtaposition. The only substantive portion of §3616
which was retained and carried forward in the 1954 revision was placed
with income tax derelictions. And then the element of willfulness,
absent in §3616 but previously consistently present in offenses
relating to income tax violations, was inserted.
We
are convinced, both from the language of §3616 and the statutory
context where it was formerly placed, that it was never intended to
apply to income tax violations. If it had been intended to apply to
income tax returns, the nonwillful making of an incorrect statement in
the making of an income tax return, in the honest belief of its legal
justification but which would operate to defeat the assessment of income
taxes, would have constituted a crime. In Spies v. United States,
317 U. S. 492, 497-498 [43-1 USTC ¶9243], the Supreme Court said that
without the clearest manifestation of Congressional intent it would not
be assumed that the mere knowing and intentional default in the payment
of income tax, where there had been no willful failure to disclose the
liability, was intended by Congress to constitute a criminal offense of
any degree. The Supreme Court said that the willfulness required to
constitute the offense of willful failure to pay income taxes when due,
defined by §145(a), would be expected to include some element of evil
motive and want of justification in view of all the financial
circumstances of the taxpayer. See also United States v. Kahriger,
210 Fed. (2d) 565 [54-1 USTC ¶49,023]. The same reasoning applies here.
We conclude that Congress did not intend by §3616(a) that a nonwillful
inaccurate and ipso facto false statement in an income tax return,
frequently very complicated, should constitute a crime. It only made
such a false statement a misdemeanor when, by §7207, it required that
the statement be willfully made and known to be fraudulent or false as
to a material matter. §3616(a) not being applicable, there was no error
in failing to instruction concerning it.
[Newspaper
Publicity]
There
was no error in refusing to declare a mistrial because of newspaper
publicity. Such matters are within the sound discretion of the trial
court and, absent an abuse of discretion, such decisions are not
reviewable. The court interrogated the jury after defendant's counsel
called attention to the newspaper articles. Only one juror had read
either article. He positively said it "did not make sense to
him" and would not influence him in the least. There was no abuse
of discretion.
[Motion
for Directed Verdict]
The
sixth assignment of error is that the court erred in overruling
defendant's motion for a directed verdict at the close of all the
evidence. The argument is again made that the Government failed to prove
an understatement of income in the return filed and no act of fraud. As
heretofore stated, the evidence fairly justified a finding by the jury
that the money received by defendant was income to him. That evidence,
coupled with evidence that defendant attempted to conceal a portion of
it by not entering it on his books and not reporting a substantial
amount in his returns, was sufficient to show the willful filing of a
false return. Proof of the willful filing of a false return was
sufficient to sustain a conviction under §145(b) of a willful attempt
to defeat or evade income taxes. 4
Cave v.
United States
, 159 Fed. (2d) 464 [47-1USTC ¶9171], Myres v. United States,
174 Fed. (2d) 329 [49-1 USTC ¶9275].
The
last assignment is that the court erred in overruling defendant's
objection to the revenue agent's testimony in which the agent assumed,
for the purpose of calculating the tax due, that the checks heretofore
discussed constituted income. The situation here is said to be similar
to that in Kirsch v. United States, 174 Fed. (2d) 595 [49-1 USTC
¶9274]. That is not correct, for reasons which have been made clear.
The
judgment is affirmed.
1
"The defendant may be found guilty of an offense necessarily
included in the offense charged or of an attempt to commit either the
offense charged or an offense necessarily included therein if the
attempt is an offense."
Fed.
Rules Cr. Proc. rule 31(c), 18
U. S.
C. A.
2
§145(a). "Failure to file returns, submit information, or pay tax.
Any person required under this chapter to pay any estimated tax or tax,
or required by law or regulations made under authority thereof to make a
return or declaration, keep any records, or supply any information, for
the purposes of the computation, assessment, or collection of any
estimated tax or tax imposed by this chapter, who willfully fails to pay
such estimated tax or tax, make such return or declaration, keep such
records, or supply such information, at the time or times required by
law or regulations, shall, * * * be guilty of a misdemeanor * * *."
(b)
"Failure to collect and pay over tax, or attempt to defeat or evade
tax. Any person * * * who willfully attempts in any manner to evade or
defeat any tax imposed by this chapter or the payment thereof, shall, *
* * be guilty of a felony * * *."
26
U. S.
C. A. §145(a) and (b).
§3616.
Penalties.
"Whenever
any person--
"(a)
False returns. Delivers or discloses to the collector or deputy any
false or fraudulent list, return, account, or statement, with intent to
defeat or evade the valuation, enumeration, or assessment intended to be
made * * * he shall be fined not exceeding $1,000, or be imprisoned not
exceeding one year, or both, at the discretion of the court, with costs
of prosecution."
26
U. S. C. A. §3616(a).
3
The date of its approval was August 16, 1954. By §7851(a)(6)(C),
Chapter 75, relating to crimes, became effective as to offenses
committed after the date of enactment of the 1954 Code.
4
We need not and do not consider the effect of the enactment of §7207 of
the 1954 Code with respect to whether proof alone of the willful
delivery or disclosure of a false or fraudulent statement or return to
the Secretary of the Treasury or his delegate will hereafter, in view of
§7207 making such act a misdemeanor, be sufficient to support a
conviction for the felony defined by §145(b), now §7201 et seq. of the
1954 Code.
[87-2
USTC ¶9383]
United States of America
, Plaintiff-Appellee v. Anthony Leonard Scrima, Defendant-Appellant
(CA-11),
U.S. Court of Appeals, 11th Circuit, 85-3521, 6/19/87, 819 F2d 996,
Affirming an unreported District Court decision
[Code Sec.
7201 --Result unchanged by the Tax Reform Act of 1986 ]
Evidence: Net worth increases: Hearsay: Juries, instructions to:
Suits by United States: Trials: Expert witnesses.--Using a summary
chart, based on documentary and testimonial evidence, the government
properly proved under the net worth theory that the taxpayer was guilty
of tax evasion. Such evidence illustrated the taxpayer's increase in
assets and his nondeductible expenditures minus his liabilities to
arrive at his total net worth increases for each of the tax years at
issue. Contrary to the taxpayer's argument, the court correctly excluded
his business associate's testimony of an out-of-court conversation with
him with respect to the amount of his available funds on the grounds
that it was inadmissible hearsay. Moreover, the district court did not
abuse its discretion when it limited the testimony of the taxpayer's
expert witness. Further, the taxpayer was not prejudiced by the
instruction to the jury that the expert witness had reached a
hypothetical conclusion as to the amount of funds that the taxpayer had
on hand.
Rob
ert W. Merkle, United States Attorney,
Stephen J. Calvacca, Assistant United States Attorney, Orlando, Fla.
32801, for plaintiff-appellee. Harrison T. Slaughter, Jr.,
Rob
ert A. Leventhal,
126 E. Jefferson St.
,
Orlando
,
Fla.
32801
, for defendant-appellant.
Before
HILL and HATCHETT, Circuit Judges, and HENDERSON, Senior Circuit Judge.
HENDERSON,
Senior Circuit Judge:
Anthony
Scrima appeals his convictions in the United States District Court for
the Middle District of Florida on four counts of income tax evasion in
violation of 26 U.S.C. ¶7201. Finding no error, we affirm.
Following
an investigation by the Internal Revenue Service, Scrima was indicted in
connection with his income tax returns filed for the years 1978 through
1981. He was charged with underreporting his income by approximately
$350,000.00 during the four-year period. 1
At
the trial, the government sought to prove Scrima's discrepancies in
reported income by means of an indirect method known as the net worth
theory, essentially showing that Scrima enjoyed increases in wealth and
nondeductible expenditures greater than could be justified by his
reported income or any nontaxable sources of funds.
The
defendant did not testify in his own defense. Instead, he sought to
establish through the testimony of a business associate and an
accountant, qualified as an expert witness, that he had an undisclosed
cash hoard of $375,000.00 at the beginning of the indictment period
which explained the accessions in net worth. The district court ruled
the testimony of the businessman, Charles Clayton, inadmissible hearsay.
2
Without this testimony, the defendant's accountant, Jerry Speed, could
not support his summary chart with any evidence presented at the trial.
The trial court instructed the jury that Speed's conclusion that the
defendant had $375,000.00 in available funds at the beginning of 1978
was a hypothetical figure based on his deductive reasoning and was not
to be considered as direct evidence of that fact. The trial court also
prohibited Speed from testifying as to the basis of his conclusion
insofar as it related to the hearsay evidence of Charles Clayton and
credibility attacks on the government's witnesses. The jury convicted
Scrima on all four counts of income tax evasion. On appeal, the
defendant contends that these two evidentiary rulings were erroneous
and, in effect, vitiated his defense, denying him the right to a fair
trial.
To
establish a violation of 26 U.S.C. ¶7201, the government must prove,
beyond a reasonable doubt (1) the existence of a tax deficiency, (2) an
affirmative act constituting an evasion of the tax due, and (3)
willfulness. The tax deficiency may be proved by circumstantial evidence
through the net worth method. United States v. Carter [84-1 USTC
¶9537], 721 F.2d 1514, 1538 (11th Cir.),cert. denied, 469 U.S.
819, 105 S.Ct. 89, 83 L.Ed.2d 36 (1984). The Supreme Court, in upholding
this means of proving willful tax evasion, succinctly described the
theory:
In
a typical net worth prosecution, the Government, having concluded that
the taxpayer's records are inadequate as a basis for determining income
tax liability, attempts to establish an 'opening net worth' or total net
value of the taxpayer at the beginning of a given year. It then proves
increases in the taxpayer's net worth for each succeeding year during
the period under examination and calculates the difference between the
adjusted net values of the taxpayer's assets at the beginning and end of
each of the years involved. The taxpayer's nondeductible expenditures,
including living expenses are added to these increases, and if the
resulting figure for any year is substantially greater than the taxable
income reported by the taxpayer for that year, the government claims the
excess represents unreported taxable income.
Holland
v. United States [54-2 USTC ¶9714 ], 348 U.S. 121, 125, 75 S.Ct. 127, 130,
99 L.Ed. 150 (1954).
Because
of the dangers inherent in this circumstantial method of proof, the use
of the net worth theory is circumscribed by additional burdens. For
example, the government must establish opening net worth with reasonable
certainty and must investigate all leads furnished by the taxpayer.
Holland
, 348
U.S.
at 135-36, 75 S.Ct. at 135, 99 L.Ed. at 163; United States v. Horton
[76-1 USTC¶9219
], 526, F.2d 884, 886 (5th Cir.), cert. denied, 429 U.S. 820,
97 S.Ct. 67, 50 L.Ed.2d 81 (1976). Furthermore, the government must
prove that the net worth increases are attributable to taxable income.
This burden may be carried either by proof of a likely source of taxable
income or by negating all possible nontaxable sources.
Holland
, 348
U.S.
at 138, 75 S.Ct. at 136-37, 99 L.Ed. at 165. United States v. Massei
[58-1 USTC ¶9326 ], 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d
517 (1958). Once the government has established all these elements, it
has proven its prima facie case, and "the defendant remains quiet
at his peril."
Holland
, 548
U.S.
at 139, 75 S.Ct. at 137, 99 L.Ed. at 166.
To
satisfy its burden of proof under the net worth theory, the government
introduced a summary chart, based on documentary and testimonial
evidence, setting forth Scrima's increase in assets and his
nondeductible expenditures minus his liabilities to arrive at his total
net worth increases for each of the taxable years. Using these figures,
the summary witness explaining the chart testified to the further
calculations performed to reach Scrima's taxable income for each year of
the indictment term.
The
government also introduced evidence from Internal Revenue agents to
establish the thoroughness of their investigation in their effort to
substantially negate any possible source of nontaxable income. A likely
source of taxable income to explain the gap between Scrima's increased
net worth and his reported income could be inferred from the testimony
of two unrelated witnesses who connected Scrima with the illegal
importation of marijuana during the years 1979 and 1980.
Alternative
methods were utilized to show Scrima's opening net worth. On the summary
chart, the government employed the floating cash or dash formula where
cash is an unknown but constant factor throughout the net worth period.See
United States v. Giacalone [78-1 USTC §9350], 574 F.2d 328 (6th
Cir.), cert. denied, 439 U.S. 834, 99 S.Ct. 114, 58 L.Ed.2d 129
(1978) (proof of defendant-taxpayer's involvement in illegal cash
business justified dash method). The government also relied in closing
arguments on Scrima's statement to Revenue Agent Chambliss that he kept
no more than $500.00 on hand during the four-year span. 3
Scrima
does not challenge the sufficiency of the evidence but rather contends
that the erroneous evidentiary rulings of the district court crippled
his attempt to rebut the government's appraisal of his opening net
worth. Scrima cites as error the district court's exclusion of Charles
Clayton's testimony of an out-of-court conversation with the defendant
with respect to the amount of his available funds on the ground it was
inadmissible hearsay. He claims that the statement was admissible under
Fed.R.Evid. 803(3), 803(1), or 803(24). 4
Federal
Rule of Evidence 803(3) authorizes the admission of "[a] statement
of the declarant's then existing state of mind, emotion, sensation or
physical condition (such as intent, plan, motive, design, mental
feeling, pain, and bodily health). . . ." Scrima argues that the
conversation was admissible to prove his state of mind that he had ample
funds to invest. However, before a statement, otherwise hearsay, can be
admitted under 803(3) to show the declarant's then existing state of
mind, the declarant's state of mind must be a relevant issue in the
case. Prather v. Prather, 650 F.2d 88, 90 (5th Cir. July 1981).
Under these facts, Scrima's subjective belief as to his wealth is
totally irrelevant. The statement was offered to prove the fact that the
defendant actually had the money not that he thought he had it.
Consequently, the statement was not admissible under 803(3).
The
statement is also inadmissible as a present sense impression under
803(1). To fall within the ambit of this exception to the hearsay rule,
the statement describing or explaining the event or condition must be
made while the declarant was perceiving the event or condition or
immediately thereafter. The underlying theory of this exception is that
the "substantial contemporaneity of the event and the statement
negate the likelihood of deliberate or conscious
misrepresentation." United States v. Peacock, 654 F.2d 339,
350 (5th Cir. Aug. 1981), cert. denied, 464 U.S. 965, 104 S.Ct.
404, 78 L.Ed.2d 344 (1983). The inapplicability of this rule is obvious.
Scrima
next seeks to admit Clayton's statement under the residual hearsay
exception codified in Fed.R.Evid. 803(24). The case law of this circuit
requires that five conditions be met to admit hearsay evidence pursuant
to this exception. There must be notice, guarantees of trustworthiness,
materiality, probativeness and a meeting of the interests of justice by
introducing such evidence.
United States
v. Parker, 749 F.2d 628, 633 (11th Cir. 1984);
United States
v. Mathis, 559 F.2d 294, 298 (5th Cir. 1977). While the failure
of the defendant to comply with the notice requirement is not fatal
absent a showing that the government suffered harm and lacked "a
fair opportunity to meet the statements" Parker, 749 F.2d at
633, the district court properly excluded the statement since it lacked
the requisite guarantees of trustworthiness and probativeness. The
reliability of the statement is open to question because of the
possibility that Scrima exaggerated his available funds to impress a
future business associate. Moreover, the statement does not indicate
that Scrima has $375,000.00 concealed in a cash reserve but could refer
to a line of credit or expected returns on illegal activities.
Furthermore, section
803(24) would not be applicable to Clayton's testimony because the
defendant made no showing that reasonable efforts could not have
produced a witness with personal knowledge of Scrima's available funds
at that time. Elizarraras v. Bank of
El Paso
, 631 F.2d 366, 374 n. 24 (5th Cir. 1980). Obviously, the defense
sought to place the defendant's remarks before the jury without
subjecting them to scrutiny of cross-examination. This is precisely what
is forbidden by the hearsay rule.United States v. Willis, 759
F.2d 1486, 1501 (11th Cir.),cert. denied, --
U.S.
--, 106 S.Ct. 144, 88 L.Ed.2d 119 (1985). 5
Scrima
urges as a second ground of reversible error that the trial court abused
its discretion by improperly limiting the testimony of his expert, Jerry
Speed, under Fed.R.Evid. 703. Based on the testimony of Clayton, Speed
concluded that the defendant had available funds of $375,000.00 at the
beginning of the indictment period. During lengthy voir dire, Speed
admitted that the ultimate basis for his conclusion that Scrima's
increased net worth was due to the expenditure of funds equal to
$375,000.00 available to him before 1978 was "the non-testimony of
source of income or availability of funds during that period of time
other than the funds being on hand." (ROA vol. 16 p. 61 lines
15-18.) Speed sought to testify regarding a chart similar to the summary
chart utilized by the government to illustrate Scrima's accession in net
worth. Speed's chart, however, showed a cash availability of $375,000.00
at the beginning of the indictment period which accounted for nearly all
of the defendant's discrepancies. The district court, perhaps in an
abundance of caution to preserve the defendant's rights, admitted the
chart and Speed's testimony but gave the following cautionary
instruction to the jury:
.
. . it is my understanding that this witness who appears before you as
an expert witness . . . has reached the hypothetical conclusion on funds
at hand as a result of deductive reasoning, and the hypothetical of the
funds on hand which he's reached has not been tendered as a result of
evidence that has been received during the course of this trial.
(ROA
17 p. 14 lines 1-10.) At the request of the government, the district
court later reiterated the instruction to the jury. (ROA 17 p. 47 lines
11-21.)
Scrima
complains that the district court's cautionary instructions to the jury
were erroneous as a matter of law and unduly prejudiced his defense. The
law is clear, however, that evidence summaries, such as Speed's chart,
must be supported by evidence previously presented to the jury, United
States v. Diez, [75-2 USTC ¶9656 ], 515 F.2d 892 (5th Cir.1975),cert.
denied, 423 U.S. 1052, 96 S.Ct. 780, 46 L.Ed.2d 641 (1976). Since
the defense could not point to any admissible evidence to support the
$375,000.00 in available funds shown on the chart, we find no error in
the trial court's admonitions to the jury.
The
defendant further argues that Speed did not testify merely as a summary
witness but qualified as an expert accountant. Since Fed.R.Evid. 703 6
allows an expert to testify based on facts otherwise inadmissible in
evidence, Scrima maintains that the trial court erred in refusing to
allow Speed to refer to the hearsay statement of Charles Clayton as a
basis for his opinion. Rule 703, however, is not an open door to all
inadmissible evidence disguised as expert opinion. Although experts are
sometimes allowed to refer to hearsay evidence as a basis for their
testimony, such hearsay must be the type of evidence reasonably relied
upon by experts in the particular field in forming opinions or
inferences on the subject. United States v. Cox, 696 F.2d 1294 (11th
Cir.), cert. denied, 464 U.S. 827, 104 S.Ct. 99, 78 L.Ed.2d 104
(1983). Scrima made no showing that qualified accountants customarily
rely on statements to casual business acquaintances when calculating net
worth.
The
district court afforded Speed wide latitude to criticize the net worth
theory and point out what he perceived to be inconsistencies in the
government's case against the defendant. The expert's testimony was
precluded only where he sought to rely on Clayton's stricken testimony
or on his conclusions about the veracity of the government's witnesses
to support his opinion. Since assessing the credibility of witnesses is
exclusively within the province of the jury, opinion testimony was
properly excluded. Steinberg v. Indemnity Ins. Co. of North America,
364 F.2d 266 (5th Cir.1966); United States v. Rouco, 765 F.2d
983, 995 (11th Cir.1985) (expert testimony properly excluded where
expert could offer nothing beyond understanding and experience of
average citizen). Due to the limited probative value of Speed's
testimony, we find no error in the parameters placed upon his testimony
by the trial court and no resulting prejudice to the defendant. See
Construction Aggregate Transport, Inc. v. Florida Rock Industries, Inc.,
710 F.2d 752, 789 (11th Cir.1983); Cunningham v. Rendevous, Inc.,
699 F.2d 676, 678 (4th Cir.1983).
The
defendant's convictions are
AFFIRMED.
1
The indictment alleged that Scrima underreported his 1978 taxable income
by $80,357.00, his 1979 taxable income by $197,570.00, his 1980 taxable
income by $32,570.00 and his 1981 taxable income by $37,617.00.
2
Clayton testified: "He said he had monies, at least $375,000.00, to
get started, available in 1978 to get started up here." (Record on
Appeal Vol. 15 p. 12 lines 15-16.)
3
When tax evasion is proved through circumstantial evidence, the
government must establish with reasonable certainty the net worth of the
taxpayer at the beginning of the tax period including the amount of cash
available to him. United States v. Normile [79-1
USTC ¶9151 ], 587 F.2d 784 (1979). Generally, when the government
relies on the taxpayer's admissions to demonstrate his opening net
worth, the government must corroborate that admission.
Id.
at 786, citing Smith v.
United States
[54-2
USTC ¶9715 ], 348 U.S. 147, 75 S.Ct. 194, 99 L.Ed. 192 (1954).
Where the defendant-taxpayer attempts to explain his increase in net
worth by the existence of a secret cash hoard, however, the government
is not required to corroborate the taxpayer's statement with respect to
his cash on hand at the beginning of the tax period. After everything
possible is done to verify the opening net worth, the issue of the
amount of the defendant's cash hoard is properly submitted to the jury. United
States v. Wilson [81-2
USTC ¶9567 ], 647 F.2d 534, 536 n. 1 (5th Cir. Jun. 1981).
4
Fed.R.Evid. 803 provides in relevant part:
The
following are not excluded by the hearsay rule, even though the
declarant is available as a witness:
(1)
Present Sense impression
A
statement describing or explaining an event or condition made while the
declarant was perceiving the event or condition, or immediately
thereafter.
.
. .
(3)
Then existing mental, emotional, or physical condition
A
statement of the declarant's then existing state of mind, emotion,
sensation, or physical condition (such as intent, plan, motive, design,
mental feeling, pain, and bodily health), but not including a statement
of memory or belief to prove the fact remembered or believed. . . .
.
. .
(24) Other exceptions
A
statement not specifically covered by any of the foregoing exceptions
but having equivalent circumstantial guarantees of trustworthiness, if
the court determines that (A) the statement is offered as evidence of a
material fact; (B) the statement is more probative on the point for
which it is offered than any other evidence which the proponent can
procure through reasonable efforts; and (C) the general purposes of
these rules and the interests of justice will best be served by
admission of the statement into evidence. However, a statement may not
be admitted under this exception unless the proponent of it makes known
to the adverse party sufficiently in advance of the trial or hearing to
provide the adverse party with a fair opportunity to prepare to meet it,
his intention to offer the statement and the particulars of it,
including the name and address of the declarant.
5
The defendant complains that the statement should not have been
stricken, even if hearsay, because the government failed to make a
timely objection. The record discloses, however, that the government's
previous hearsay objection to Clayton's testimony as to the defendant's
statements regarding his background and financial posture was overruled
just prior to the statement in issue. Since the government also advanced
arguments asking the trial court to change its position in a
contemporaneous manner, the district court did not err in striking the
hearsay testimony. See generally, Murphy v. City of Flagler Beach,
761 F.2d 622, 626 (11th Cir. 1985) (subsequent proffer at evidentiary
conference satisfied purposes of contemporaneous objection and proffer
rule which include a chance for trial judge to correct errors).
6
Fed.R.Evid. 703 provides:
Bases
of Opinion Testimony by Experts
The
facts or data in the particular case upon which an expert bases an
opinion or inference may be those perceived by or made known to him at
or before the hearing. If of a type reasonably relied upon by experts in
the particular field in forming opinions or inferences upon the subject,
the facts or data need not be admissible in evidence.
[49-1
USTC ¶9274]Grover M. Kirsch, Appellant v.
United States of America
, Appellee
(CA-8),
United States Court of Appeals for the Eighth Circuit, No. 13,785, 174
F2d 595, May 13, 1949
Appeal from the United States District Court for the Southern District
of Iowa.
Penalties: Attempt to evade taxes: Misdemeanor and felony
distinguished.--Proof that taxpayer willfully filed false and
fraudulent income tax returns, coupled with proof that he received and
did not report income from a tavern which he operated in the name of a
relative, was sufficient to sustain conviction of a felonious attempt to
evade or defeat the payment of federal taxes, since a combination of
acts constituting misdemeanors coupled with other affirmative acts
designed to evade payment of taxes will support a conviction for
felonious attempt to evade the payment of taxes.
Penalties: Circumstantial evidence of income tax evasion:
Hypothetical question.--It is proper to permit an expert witness to
testify as to what income taxes would be upon a hypothetical state of
facts which have been proved by circumstantial evidence, but the
hypothetical question may not assume as true that which is known to be
false. In this case, it was improper to assume that all of the deposits
in taxpayer's accounts constituted income for tax computation purposes,
where the evidence disproved such assumption and no attempt was made to
determine how much of the deposits constituted income. Reversing an
unreported judgment of the District Court.
Frank
J. Comfort (Walter F. Maley was with him on the brief) for appellant.
William R. Sheridan, Assistant United States Attorney (Maurine F.
Donegan, United States Attorney, and Cloid I. Level, Assistant United
States Attorney, were with him on the brief) for appellee.
COLLET,
Circuit Judge, delivered the opinion of the Court.
This
is an appeal from a conviction and sentence under a charge of violating
Section 145(b) of the Internal Revenue Code, 26 U. S. C. A. Section
145(b). 1
The
indictment, in five counts, related to each of the calendar years 1941,
1942, 1943, 1944, and 1945. Count Four is typical of all five. It
charged that defendant "did wilfully and knowingly attempt to
defeat and evade a large part of the income tax due and owing by him to
the United States of America for the calendar year 1944 by filing and
causing to be filed * * * a false and fraudulent income tax return
wherein he stated that his net income for said calendar year was the sum
of $1,269.42 and that the amount of tax due and owing thereon was the
sum of $176.96, whereas, as he then and there well knew, his net income
for the said calendar year was the sum of $71,028.46, upon which said
net income he owed to the United States of America an income tax of
$44,663.92." The jury found the defendant not guilty on all but the
fourth count.
[Felonious
Attempt to Evade Taxes]
The
sufficiency of the indictment and the evidence is challenged on the
ground that the indictment did not charge and the proof did not show
that defendant committed any act other than to wilfully file a false and
fraudulent return reporting a lesser tax than he actually owed, and that
such allegation and proof is insufficient to constitute a felony under
Section 145(b). It is argued that the wilful filing of a false or
fraudulent return with intent to defeat or evade taxes constitutes a
misdemeanor under Section 3616(a) of the Internal Revenue Code, 26 U. S.
C. A. 3616(a), and hence that transgression may not constitute a
felonious attempt to evade or defeat the payment of taxes under Section
145(b). Section 3616(a) reads:
"Whenever
any person * * * delivers or discloses to the collector * * * any false
or fraudulent * * * return * * * with intent to defeat or evade the * *
* assessment intended to be made * * *, he shall be fined not exceeding
$1,000, or be imprisoned not exceeding one year, or both * * *"
As
to that part of the charge and proof relating to the report in his
return of less tax than was due, defendant says that such a dereliction
is defined as a misdemeanor by Section 145(a) 2
and that the two misdemeanors of filing a false return defined by
Section 3616(a) and by Section 145(a) may not be combined to constitute
the felony of attempting to evade taxes "in any manner"
defined by Section 145(b). An examination of the record reduces that
issue to an abstract question. The conviction did not rest alone upon
the allegation and proof of a wilful filing of a false return falsely
reporting taxes due. The sufficiency of such allegation and proof to
sustain a conviction under Section 145(b) is therefore not presented.
There was evidence by the Government, the truth of which was admitted by
formal stipulation at the trial, that defendant was the owner of the
Park Avenue Tavern during all of the vears covered by the indictment and
that he was the owner of a bank account carried in the name of the Park
Avenue Tavern. The proof showed, and defendant admitted in his
testimony, that the tavern license was issued in the name of his cousin,
Joseph Wagner, who had no interest in the business and gave it no
attention. He admitted that although the net income from the tavern
belonged to him alone, the income tax returns for the business were made
in the name of Joseph Wagner, which Wagner did not even sign. There was
proof, corroborated by the testimony of defendant himself, that he was
engaged in the illicit sale of liquor during the years 1944 and 1945,
from which he made commissions amounting to $1,859.00 during the two
years, no part of which was reported in his return for the year 1944. It
is true that the defendant denied that the splitting of his income and
reporting part of it in the name of Joseph Wagner was wilfully done for
the purpose of evading taxes, and explained that action by stating that
he had a misunderstanding with the City authorities in 1941 and could
not himself obtain a beer license, leaving the inference that the return
of the income tax in Wagner's name was to conceal from the City
authorities the fact that he owned and actually operated the tavern. It
is also true that he explained that the reason for not reporting the
commissions on the illicit liquor sales was because his tax accountant
advised him not to report those commissions until he terminated those
operations or those illicit operations would be sure to be discovered.
He testified that after he was caught and convicted he reported all of
the commissions in his return for 1945 and paid the tax on the whole as
income for that year. But those explanations went to the question of the
wilfullness of an attempt to evade taxes, which was a question for the
jury. If there was need for proof of affirmative acts other than those
defined as misdemeanors in Sections 3616(a) and 145(a) in furtherance of
an attempt to evade taxes, it is contained in the record. His conviction
therefore did not rest entirely upon proof of acts defined as
misdemeanors by Sections 3616(a) and 145(a). A combination of acts
constituting misdemeanors coupled with other affirmative acts designed
to evade payment of taxes will support a conviction for felonious
attempt to evade the payment of taxes under Section 145(b). As stated in
Spies v.
United States
, supra, l.c. 500 [43-1 USTC ¶9243]:
"If
on proper submission the jury found these acts [other than the failure
to file a return or pay the tax due], taken together with willful
failure to file a return and willful failure to pay the tax, to
constitute a willful attempt to evade or defeat the tax, we would
consider conviction of a felony sustainable."
[Income
from Tavern]
The
defendant earnestly insists and forcefully argues that the Government
did not prove that he received income upon which the tax was not paid,
and that the assumption of that fact in a hypothetical question was
error. As heretofore noted, defendant owned a tavern. A checking account
was maintained in the name of the tavern. The tavern was operated in
1944 by a manager named Thomas Hanlon. It was located in an industrial
district in
Waterloo
. Many of its customers were employees of industries located in the
nearby vicinity. On pay days at the industries a large amount of checks
were cashed by the tavern for the employees of the industries. In order
to have sufficient cash on hand at the tavern with which to cash these
checks, before pay days Hanlon generally got it from defendant who got
it from his deposit box where he kept a considerable amount of cash.
Sometimes Hanlon would get it from the bank from the tavern's checking
account. When the checks were cashed ordinarily they would be endorsed
by the tavern and taken to the bank with the receipts from the tavern
business and cashed. If it was convenient to do so, defendant was repaid
then in cash or with checks for his advances. If it was not convenient
to do that, all of the proceeds of the checks were deposited in the
tavern's checking account or a portion taken "in change" for
use at the tavern. If more cash was obtained in advance of a pay day for
the purpose of cashing checks than was needed therefor, the excess was
handled in the same manner. The deposit of the proceeds of these checks
to the tavern account was frequent and in comparatively large amounts.
Hanlon estimated the amount of the checks cashed at from $2,000.00 to
$3,500.00 each week. The expenses of operating the tavern and
expenditures for supplies were paid in cash. Each such expenditure was
noted on a slip of paper and put in the cash register. At the end of
each week a tax accountant regularly employed for that purpose came by
the tavern and picked up these records of expenditures and the tape from
the cash register showing income receipts from sales. The accountant
kept the books of the tavern and made up the income tax for the tavern
business (in Joseph Wagner's name) from these records. For the year 1944
the cash receipts reported were $35,431.26; the expenses, $30,090.76;
the net profit, $5,340.50, upon which a tax of $1,333.75 was paid in
Wagner's name. For the year 1944 defendant filed a tax return showing
gross income of $3,186.70, expenses of $1,916.42, and a net income of
$1,269.42, upon which a tax of $176.96 was paid. The return which the
defendant made in his own name for the year 1944 showed five items of
rent from buildings owned by him in Des Moines and Waterloo, a
"corn and hog A. A. A. check" for $100.00, and $600.00 in
profits from real estate sales. The Government's proof showed purchases
of liquor from defendant in 1944 totaling more than $16,900.00. Its
evidence also showed that defendant purchased drafts and cashier's
checks from the bank in 1945 on the following dates and in the following
amounts: May 3, 1945, $6,680.00; October 11, 1945, $9,000.00; October
11, 1945, $5,000.00; October 11, 1945, $13,000.00; October 16, 1945,
$6,500.00; October 18, 1945, $7,000.00; November 21, 1945, $3,375.00;
November 21, 1945, $3,125.00. The Government offered in evidence the
bank's record of the tavern's checking account and deposit slips showing
all deposits made to that account. Mr. LeCocq was the zone Deputy
Collector in
Waterloo
for the Internal Revenue Service who investigated defendant's returns.
He testified that from the bank records the amount of
"unidentified" deposits made in the tavern account were for
1944, $54,880.57, and for 1945, $40,029.06. From the bank's records he
testified that defendant's personal account showed total deposits for
1941, $9,094.35; for 1942, $12,013.15; for 1943, $23,527.84; for 1944,
$11,378.49; and for 1945, $9,445.00. Mr. LeCocq computed the net income
for the tavern for 1944 by checking the tax accuntant's records of
expenditures for expenses of operation and supplies and accepting his
figures therefor in the amount of $30,090.76. While the exact method of
computation is not stated in the record, it appears that the total
amount of the deposits in the tavern account during 1944, consisting of
approximately $90,000.00, was treated as gross income. $35,431.26 of
that total, representing the receipts of the tavern as shown by the cash
register tape and the tax return made in the name of Joseph Wagner, was
treated as identified income and the balance of $54,880.57 was treated
as income, but "unidentified". From that total of
approximately $90,000.00 income the tavern expenses of $30,090.76 was
deducted, leaving as net income from the tavern approximately
$60,000.00. To that figure of approximately $60,000.00 of assumed net
income from the tavern was added the total deposits in defendant's
personal checking account of $11,378.49, giving the figure of
$71,028.46, alleged in the indictment to have been defendant's income
for the year 1944. After allowing credit for certain deductions and
exemptions not now material, the taxes due for 1944 were computed at
$44,663.92, and so alleged in the indictment.
At
the trial Mr. LeCocq, testifying as a Government witness, stated that he
"endeavored to identify the deposits made in each of these
accounts", but being unable to do so, "we have included them
as income because they have not been identified". He further
stated, "These unidentified deposits represent income to me for the
purpose of conducting an audit of income." He stated that he had
been told that "a lot of labor checks" had been cashed at the
tavern but that he made no investigation to find out whether or not that
was true. He said: "We had no way of determining whether or not
part of the deposits were income and the rest was for money cashing
checks, and have charged up the entire bank account as income." As
an illustration, he testified that, "If Kirsch went to his safety
deposit box and took out $2,000.00 and turned it over to Mr. Hanlon, who
was working at the tavern to cash checks, and then deposited $2,400.00,
we would include the entire $2,400.00 as income. We included everything
that went into those deposits."
Mr.
Darland, an employee of the bank, testifying as a Government witness,
stated that he frequently waited upon defendant at the bank and that on
an average of about three or four times a month defendant cashed
"payroll checks" and tavern checks and on some occasions,
after cashing the checks, defendant would go to his safety deposit box
in the bank.
Mrs.
Seger, another employee of the bank and another Government witness,
testified that both defendant and Hanlon brought checks issued by
various manufacturing industries in Waterloo [to the bank] which they
had apparently taken in at their tavern and brought to the bank for
conversion into cash. She said: "I can't remember what he or they
did with them. Sometimes they were deposited and sometimes he would take
the cash. Don't recall how often he did either. Maybe once a week he
took the cash and other times he would deposit the payroll checks into
the acount of the Park Avenue Tavern." She further stated that she
estimated that she waited on Mr. Kirsch more than two or three times a
week and on Mr. Hanlon "several times a week".
[Hypothetical
Income Tax Question]
It
is readily obvious from the foregoing facts that the Government was
fully cognizant of the fact prior to the trial that a large part of the
deposits made to the credit of the tavern account did not represent
income. At the trial, the senior Internal Revenue Agent for that
District was called as an expert witness to testify to the tax owed by
defendant for each of the years covered by the indictment. To him was
propounded the following question:
"Mr.
Ogden, assuming that a resident of Iowa who during the calendar year
1944 and on December 31st of that year was a widower with no dependents
and whose residence and principal place of business was at Waterloo,
Iowa, whose regular annual accounting period was on the basis of the
calendar year, and assuming that such person derived and received a
gross income during the calendar year 1944 as follows: Gross rent
from store building, Des Moines, Iowa $450.00, dwellings Des Moines,
Iowa $220.00, Park Avenue building Waterloo, Iowa $900.00, Ankeny Street
dwelling $150.00, and Peverill Apartments, Waterloo, Iowa $766.70, and
corn-hog AAA check $100.00, and profits from real estate sales $600.00,
and unidentified deposits in his personal account of $11,378.49, and
unidentified deposits in the Park Avenue Tavern account $54,880.57,
and assume further that such was entitled to and allowed by the
provisions of the Revenue Acts of the United States the following
deductions: Taxes $884.90, Insurance $135.00, Travel expense $150.00,
Attorneys and abstract fees $110.00, depreciation $580.00, sales tax
$19.76, gas tax $5.76, auto license $31.00, and Iowa income tax $0.86,
or a total of $1917.28. What would be the amount of the income tax of
that person?"
To
that question the following objection was made:
"Mr.
Maley: Just a minute. The objection interposed to that question, and the
form of the question, your Honor, is that it is incompetent in form, and
the witness is incompetent to answer in the form addressed to the
witness, because there is no proper foundation laid for the various
items that are included in the question. It assumes items which are not
included by proof in the record. It does not distinguish nor attempt to
distinguish the items of taxable income or refer to any proof or failure
of proof regarding said items, and upon the whole permits the witness to
characterize in the form of a conclusion and characterize his testimony
in the same method in a way that invades the ultimate conclusion and
judgment of the jury in this case."
The
following then occurred:
"The
Court: Well, are you assuming that the unidentified deposits were
income?
"Mr.
Sheridan: Yes, sir.
"The
Court: Well, you have got to put that in. Assuming that they were
actually income, why then what would be the return?
"Mr.
Sheridan: I thought I had that in, your Honor.
"The
Court: You had it the unidentified deposits were income, but you have to
assume they are income.
"Mr.
Sheridan: Assuming the unidentified deposits were income?
"The
Court: Maybe the jury will find those are not income, and then of course
his answer would have no effect, but assuming they were income, then
make your return.
"(Exception.)
"A.
$41,813.06.
"Mr.
Maley: What was that amount, please?
"A.
$41,813.06.
"Mr.
Maley: For the purpose of the record may I suggest, your Honor, you
forgot to make a ruling on the last objection.
"The
Court: I beg your pardon. Yes. Overruled, on the objection, with that
amendment of the Court's there. I think the jury understands that what
counsel is asking here, he is putting in these unidentified deposits as
being income. Now, he is assuming that that is income, and he is giving
his answer on that assumption, so that if you find that it is not income
and the amount isn't the same on those unidentified deposits, why then,
of course, this computation wouldn't be correct and you shouldn't
consider it.
"(Exception.)
"Mr.
Maley: Thank you."
It
is proper to permit an expert witness to testify to what income taxes
would be upon a hypothetical state of facts which have been proven by
competent evidence. United States v. Johnson, 319
U. S.
503 [43-1 USTC ¶9470], l.c. 519. And that competent evidence may
consist entirely of circumstantial evidence. Gleckman v. United
States, supra [80 Fed. (2d) 394, 35-2 USTC ¶9645]. Nor is it
necessary in a prosecution under Section 145(b) that the Government
prove the exact amount of the tax attempted to be evaded. Cave v.
United States
, supra [159 Fed. (2d) 464, 47-1 USTC ¶9171]. But the question of
whether the fact that a defendant had unreported taxable income may be
established by the circumstance alone that his checking account at his
bank totaled more than the gross income reported by him need not be
determined. It may be conceded here, as it was in the Gleckman
case, (l.c. 399), "that the bare fact, standing alone, that a man
has deposited a sum of money in a bank would not prove that he owed
income tax on the amount." The foregoing question need not now be
determined because there was other circumstantial evidence, heretofore
noted, of income in excess of that reported. And in addition, there was
the admitted income in 1944 from illicit liquor sales which was not
reported that year.
But
none of the foregoing considerations will justify the unqualified
assumption of a fact as true that is known to be false. The hypothetical
question assumed without qualification that all of the deposits in the
tavern account and in defendant's personal account constituted income
for tax computation purposes. That assumption of fact was not only
without evidentiary support even from permissible inference from proven
facts, but was definitely disproved by the Government's own evidence. It
is one thing for a party to say in effect as was done in the Gleckman
case, that he had exercised all of the means he reasonably could to
determine how much of a bank account was income, had eliminated all that
he could determine was not income, and was therefore assuming for the
purpose of calculating taxes due that the remainder was income, and
quite another and different thing to say, in effect, as was done in this
case--My evidence shows that all of these deposits were not income, but
I do not know how much was not, I have made no effort to find out. So I
am assuming that all are income and am casting the burden on the
defendant to show, if he can, how much is not, or suffer the
consequences. The latter procedure cannot be approved. It should never
be necessary for the Government to negative a defendant's defense in a
hypothetical question such as this. But it should always be necessary
that the facts and circumstances put in evidence by the Government
justify, by reasonable inference at least, the truth of the assumed
fact. What constitutes a reasonable effort to establish the truth of the
fact assumed, and what facts or circumstances will constitute a proper
foundation for the asumption and permit a reasonable assumption of the
truth of the fact assumed in the hypothetical question may not be
narrowly circumscribed, but must be left to a considerable extent to the
discretion of the trial court. But in this instance, there was no
foundation for the assumption that all of the deposits constituted
income.
[Jury
Instructions]
The
trial court, sensing the innate impropriety of the question, went far to
eliminate its error and injurious effect by informing the jury that the
truth of the fact that the "unidentified" deposits was income
was for it to determine. But in doing so there was an inevitable
invitation to the jury to assume that there was evidence upon which it
could find that all of the deposits were income when there was no such
evidence.
The
situation is the same here as it was in Winebrenner v. United States,
147 Fed. (2d) 322, l.c. 329, when this court in condemning an improper
admonition given a jury, the effect of which was impossible of
ascertainment, said:
"The
effect of the admonition given in this case is, of course, impossible of
ascertainment, but as it violates the principle that an accused is
entitled to be heard before he is condemned, and the essentials to a
fair trial, the judgments appealed from must be reversed"
In
view of our decision on the foregoing question, it is deemed unnecessary
to consider other contentions of defendant, as the alleged errors
complained of are not likely to occur on a retrial of the case.
The
judgment appealed from is reversed and the cause remanded to the
District Court with directions to grant defendant a new trial.
1
26
U. S.
C. A. Section 145(b):
"(b)
Failure to collect and pay over tax, or attempt to defeat or evade tax.
Any person required under this chapter to collect, account for, and pay
over any tax imposed by this chapter, who willfully fails to collect or
truthfully account for and pay over such tax, and any person who
willfully attempts in any manner to evade or defeat any tax imposed by
this chapter or the payment thereof, shall, in addition to other
penalties provided by law, be guilty of a felony, 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
26
U. S.
C. A. Section 145(a):
"(a)
Failure to file returns, submit information, or pay tax. Any person
required under this chapter to pay any estimated tax or tax, or required
by law or regulations made under authority thereof to make a return or
declaration, keep any records, or supply any information, for the
purposes of the computation, assessment, or collection of any estimated
tax or tax imposed by this chapter, who willfully fails to pay such
estimated tax or tax, make such return or declaration, keep such
records, or supply such information, at the time or times required by
law or regulations, shall, in addition to other penalties provided by
law, be guilty of a misdemeanor and, upon conviction thereof, be fined
not more than $10,000, or imprisoned for not more than one year, or
both, together with the costs of prosecution."