7206- Fraud and
False Statements: Net Worth Statement
USTC ¶9481]Tad R. Knowles, Appellant v.
United States of America
In the United States Court of Appeals for the Tenth Circuit, No.
5039--May Term, 1955, 224 F2d 168,
May 25, 19
Appeal from the United States District Court for the District of
[1939 Code Sec. 3809--changed in 1954 Code Secs. 7206(1), 7207]
Criminal prosecution: False return: Comment on failure of taxpayer to
testify: Statutory meaning of "false statements".--In a
jury trial resulting in the conviction of taxpayer on charges of making
and filing a false income tax return and of knowingly making a false and
fraudulent statement to agents of the Internal Revenue Service, it was
held on appeal that the following grounds were not reversible errors:
(1) that the Government's counsel's comment to the jury called attention
to the fact that taxpayer had failed to testify on his own behalf, (2)
that the evidence failed to prove that the omission of certain income in
taxpayer's return resulted in a knowingly false return, and (3) that the
statement of net worth submitted to the Revenue Agent in the course of
his investigation was not a "statement made within the jurisdiction
of a department or agency of the United States" within the meaning
of 18 U. S. C. A. §1001.
E. Smith for appellant. Robert S. Wham (Donald E. Kelley and Robert D.
Inman were with him on the brief) for appellee.
PHILLIPS, Chief Judge, and MURRAH and PICKETT, Circuit Judges.
is an appeal from a conviction and concurrent sentences on an indictment
containing two counts, the first of which charged the appellant with
having made and filed a materially false income tax return with the
Collector of Internal Revenue for the District of Colorado, for the
calendar year 1950 in violation of 26 U. S. C. A. §3809(a). The second
count charged the appellant with knowingly making or causing to be made
a false and fraudulent statement and representation to agents of the
Internal Revenue Service of the United States Treasury Department in
violation of 18 U. S. C. A. §1001.
Failure to Testify]
appellant did not choose to be a witness in his own behalf in the trial
of the case, and in the first point on appeal he charges that the
argument of counsel prejudicially called the jury's attention to his
failure to take the witness stand.
evidence showed, without dispute, that in the taxable year 1950,
appellant received the sum of $3,570.00 from the sale of sheep which he
did not report in his return for that year. On argument, counsel for
appellant intimated to the jury that the appellant received the item as
an agent for someone else, and was therefore not reportable as income.
In the closing argument, counsel for the government answered the
insinuation by saying that there was "not the slightest bit of
explanation given to the Internal Revenue Department about it, or given
to you. Now it was easy to explain to Mr. Coard [Internal Revenue
Agent]; could be easy to explain to you, but it hasn't been done."
The jury was asked to consider the matter from a standpoint of a
statement having been filed with the government by the taxpayer both on
a return and a net worth statement. And then counsel said, "He had
every opportunity in the world given to make an explanation of it, to
prove it was in error, to cast doubt upon it. And it wasn't done.
Consider the sheep sale item, and opportunity given there, and no
explanation given of that. And it was so easy to do if it were the
is concededly improper and reversible error to comment on the failure of
a defendant to testify in his own behalf, and the test is whether the
language used was manifestly intended or was of such character that the
jury would naturally and necessarily take it to be a comment on the
failure of the accused to testify. Morrison v.
, 6 Fed. (2d) 809. It is not improper for the government to draw
attention to the failure or lack of evidence on a point if it is not
intended to call attention to the failure of the defendant to testify.
Thus, when counsel for the defendant moved for a mistrial or objected to
the statement of counsel after the jury had been instructed, the court
observed that it was perfectly proper to comment on the lack of evidence
if he didn't comment on the failure of the defendant to give it, and
that in his judgment counsel for the government did not refer to the
failure of the defendant to testify. The jury was also told as a part of
its instructions that anyone charged with a crime had a right to testify
in his own behalf or not, and the mere fact that he failed to testify in
his own behalf should not be counted against him or influence the jury
in any manner. Appellant concedes the general rule, applicable in
federal courts, that prompt and emphatic condemnation by the trial judge
may cure an improper argument of government counsel. See Annot. 84 A. L.
R. 784, Sub-section VI, p. 795. He contends, however, that here the
comment of counsel was so palpably improper as to be incurable by the
the first place, the trial court was correct in its view that the
comment of counsel was not directed to the failure of the appellant to
testify, but was primarily directed to the failure of the evidence of
furnish any explanation for the unreported receipt of the $3,570.00.
Counsel for the government merely answered appellant's insinuation that
he had received the money as an agent for someone else. If, however, the
challenged comment can be said to have the effect of focusing attention
on appellant's failure to testify, we think it was cured by the court's
instructions in that respect.
Omission of Income]
appellant next challenges the sufficiency of the evidence to prove that
the omission of the $3,570.00 item constituted a knowingly false return.
Of course failure to file a correct return does not necessarily
constitute a fraudulently false return. See
v. Commissioner, 184 Fed. (2d) 86 [50-2 USTC ¶9427]. The
omission or inaccuracy must relate to a knowingly material matter. But
here the evidence shows without dispute that the appellant received the
money from the sale of the sheep and deposited it in his account; and,
his work sheets show that it was income to him. There was only an
insinuation that he received it for someone else, and the jury was fully
justified in finding that it was income and that the appellant knew that
it was reportable income. This is not a case like
v. Commissioner, supra, it is simply a case where the failure to
report a large item of income justified a permissible inference that it
was material and knowingly omitted.
Statement to Revenue Agent]
an investigation by the Internal Revenue Department of appellant's
income tax liability for the years 1945 to 1950, inclusive, the
appellant was examined orally by the Internal Revenue Agent. During one
of these examinations he was asked to submit a net worth statement for
the five years in question. In collaboration with his certified public
accountant, and based upon information furnished by the appellant, the
accountant submitted the net worth statement signed by the appellant and
his wife. This statement showed the sale in 1949 of land in
, for the sum of $45,000.00 with a cost basis in 1943 of $25,000.00, and
an additional cost of $5,000.00, making a total cost of $30,000.00 and a
net gain of $15,000.00. The evidence showed without much dispute that
the cost of the land in question was $10,000.00, not $25,000.00, and
that any additional cost was in the form of improvements contributed by
his own labors. The evidence also showed that while the investigation
was in progress, the appellant contacted the real estate agent who
handled the transaction, suggesting that he gave $10,000.00 in cash and
"$10,000.00 in bulls and wet cows". When the agent replied
that he paid cash for the land, the appellant said in effect,
"well, I guess you can't help me."
attacks his conviction on count 2 on two grounds. First, that Section
1001, under which the indictment is laid, does not reach oral and
voluntary statements made to investigating officers which are not
required by law, rule or regulation to be given to an agency or
department of the
government. The statute says in effect that whoever, in any manner
within the jurisdiction of any department or agency of the
knowingly and willfully falsifies, conceals or covers up by any trick,
scheme or device a material fact, or makes any false or fraudulent
statements or representations, shall be punished as provided therein.
Until the enactment of Section 1001, the law condemned only the making
of false claims for the purpose of pecuniarily defrauding the
government, and the purpose of the Amendment in 1934 (Act of
June 18, 19
34, 40 Stat. 1015) was "to protect the authorized functions of
governmental departments and agencies from the perversion which might
result from the deceptive practices described."
v. Gilliland, 312
86. See also United States v. Bramlett, decided
April 4, 19
55, -- U. S. --. The Gilliland case involved false statements
made to the Department of Interior in pursuance of valid rules and
regulations. The Bramlett case involved false and fraudulent
representations made to the Disbursing Office of the House of
Representatives, apparently for the purpose of obtaining disbursements
for the defendant's benefit.
Meaning of "Statement"]
is said, however, that a statement not made in obedience to law, rule or
regulation is not a matter within the jurisdiction of a department or
agency of the United States within the meaning of the statute, and
taking that view in United States v. Levin, an unreported case
from the District of Colorado, Judge Pickett dismissed an indictment
based upon a false statement made to an agent of the Federal Bureau of
Identification. Judge Chesnut was of like mind in United States v.
Stark, -- Fed. Supp. --, decided
April 18, 19
55, also involving a statement to an agent of the Federal Bureau of
Identification. Applying the rule of ejusdem generis, he construed the
critical word "statement" in the statute as partaking of the
word "representation" which followed it in the text. Given
this connotation, the court took the view that in its statutory sense,
the word "statement" contemplated an affirmative statement
voluntarily made for the "purpose of making claim upon or inducing
improper action by the government against others."
identical question was presented under facts indistinguishably similar
to ours in Cohen v. United States, 201 Fed. (2d) 386 [53-1 USTC
¶9165]. There, the court referred to Marzani v. United States,
168 Fed. (2d) 133 (aff'
by an equally divided court, 335
985), where a state department employee voluntarily sought an interview
with his superior officer to discuss a request which had been made for
his resignation. The court sustained the prosecution for false oral
statements made in that interview despite the fact that the employee was
not required to attend such an interview or make the statements. And,
after observing that the statements in both cases were voluntarily made,
the court in the Cohen case stated, "The Treasury Department
had been investigating appellant's income tax liability. Treasury agents
had requested a statement relating to his financial affairs. The
document in question was signed only after a discussion of nearly an
hour as to various items therein." The court pointed out that the
defendant was fully conscious of the consequences of his willfully false
statements, and the conviction was sustained on the theory that an
investigation of income tax liability by an authorized internal revenue
agent was a matter within the jurisdiction of a department or agency of
within the meaning of Section 1001.
the court in the Cohen case intended to embrace the full sweep of
the Marzani case, it was under no necessity of doing so in the
affirmance of the conviction there, for there is undoubtedly a decisive
difference in a voluntary oral statement made to a superior officer in
an informal interview as in the Marzani case and a deliberate
statement made by a taxpayer concerning his taxable income to a revenue
agent whom he knew was conducting an investigation of the correctness of
his returns. In any event, we recognize a valid difference in the two
cases, and we prefer to place our affirmance of this judgment squarely
upon the premise that the statement was made in pursuance of statutory
individual having for a taxable year a gross income for a prescribed
amount is required to make a return under penalty of perjury. 26
C. A. §51. And, every person liable to pay any tax or for the
collection thereof is required to "keep such records, render under
oath such statements * * * and comply with such rules and regulations,
as the Commissioner * * * may from time to time prescribe." 26
C. A. §54. And, every internal revenue agent "shall see that all
laws and regulations relating to the collection of internal revenue
taxes are faithfully executed and complied with, and shall aid in the
prevention, detection, and punishment of any frauds in relation
C. A. §3654. In the pursuance of these statutory duties, the internal
revenue agent is not only authorized to inquire in an investigative
capacity, but to "administer and enforce" the revenue laws. Carroll
Vocational Institute v.
, 211 Fed. (2d) 539; Cf.
v. Zavala, 139 Fed. (2d) 830. It follows, we think, that a
"statement" to an internal revenue agent in the course of an
authorized inquiry into the correctness of the taxpayer's returns is a
statement "made within the jurisdiction of a department or agency
." See United States v. Beacon Brass Co., 344
43 [52-2 USTC ¶9528]; Walker v. United States, 192 Fed. (2d) 47;
, 143 Fed. (2d) 953. We therefore conclude that count 2 stated an
offense against the laws of the
materiality of the statement was challenged, but there can be no doubt
judgment is affirmed.
United States of America
, Appellee v. Staniford A. Sorrentino, Defendant, Appellant
U. S. Court of Appeals, 1st Circuit, No. 83-1260, 726 F2d 877,
, Remanding an unreported district court opinion
[Code Secs. 7201 and 7206]
Crimes: Tax evasion: False statements in return: Trial: Production of
records:--In a case where an individual was convicted of tax evasion
and filing false returns, the District Court's failure to require
production of an IRS special agent's report summarizing his pre-trial
net worth investigation of the individual pursuant to the latter's
request under the Jencks Act, 18 USC §3500, was error. Thus, the case
was remanded to the District Court with instructions to examine the
report and determine which portions, if any, relate to the agent's trial
testimony and are producible, make them available to the individual, and
determine if the government's failure to turn over the report at trial
materially prejudiced the indivudual. Various taxpayer challenges to
jury instructions, evidentiary rulings, and the trial courtroom seating
arrangement were rejected because they did not prejudice the taxpayer.
F. Weld, United States Attorney, Boston, Mass. 02109, Glenn L. Archer,
Jr., Assistant Attorney General, Deborah Wright Dawson, Michael L. Raup,
Robert E. Lindsay, Department of Justice, Washington, D. C. 20530, for
appellee. Francis J. DiMento, Carolyn M. Conway, DiMento & Sullivan,
CAMPBELL, Chief Judge, BOWNES, Circuit Judge, and MALETZ, * Senior
Staniford Sorrentino is charged with eight counts of tax evasion for the
years 1975, 1976, 1977, and 1978. In each year he is alleged to have
willfully attempted to evade a substantial part of his individual
federal income tax liability in violation of 26 U. S. C. §7201, and
also to have willfully subscribed a materially false small business
corporation income tax return in violation of 26 U. S. C. §7206(1).
Following a thirty-day jury trial in the United States District Court
for the District of Massachusetts, Sorrentino was convicted on all eight
counts. On appeal, he challenges three jury instructions, sundry
evidentiary rulings, the trial courtroom seating arrangement, and a
Jencks Act ruling.
elements of attempted tax evasion under §7201 are (1) an additional tax
due and owing, (2) an attempt to evade or defeat that tax, and (3)
willfulness. Sansome v. United States [65-1 USTC ¶9307], 380
343, 351 (1965). The Government makes out a prima facie case under the
net worth method of proof if it establishes the defendant's opening net
worth (computed as assets at cost basis less liabilities) with
reasonable certainty and then shows increases in his net worth for each
year in question which, added to his nondeductible expenditures and
excluding his known nontaxable receipts for the year, exceed his
reported taxable income by a substantial amount. See Holland v.
United States [54-2 USTC ¶9714], 348
121, 125 (1954); McGarry v. United States [68-1 USTC ¶9204], 388
F. 2d 862, 864 (1st Cir. 1967), cert. denied, 394
921 (1969). The jury may infer that the defendant's excess net worth
increases represent unreported taxable income if the Government either
shows a likely taxalbe souece, Holland, 348 U. S. at 137-38, or
negates all possible nontaxable sources, United States v. Massei
[58-1 USTC ¶9326], 355 U. S. 595 (1958); the jury may further infer
willfulness from the fact of underreporting coupled with evidence of
conduct by the defendant tending to mislead or conceal.
the present case, the Government conducted an extensive pretrial
investigation of Sorrentino's financial affairs for the years in
question. Government agents interviewed the defendant, his two sisters,
his business associates and contacts, and numerous bank and commercial
employees who dealt with Sorrentino. The agents analyzed the defendant's
banking and investment accounts in detail to ascertain the nature and
extent of his assets and liabilities. They also checked local real
estate and probate records, as well as the IRS's own records. The
investigation showed that Sorrentino held or acquired the following
major assets, among others, during the indictment years: telephone bonds
and Treasury notes; three parcels of improved real estate, including a
new home constructed by Sorrentino in 1975-79 at a cost of over
$330,000; and undistributed income from the Crown & Anchor, a motel
with several bars of which Sorrentino was manager and half owner. There
was also documentation of substantial personal, nondeductible
expenditures for automobiles, antiques, and travel. Aside from a $5,000
trust fund and some jewelry valued at $8,000 left him in his mother's
will twenty years previously, there were no records of gifts or
results of the Government's investigation were summarized in a net worth
and expenditures schedule based on evidence admitted at trial and
revised in the course of the trial to reflect the testimony actually
given before the jury. The net worth schedule shows an opening net worth
for Sorrentino of $17,074.86 on
December 31, 1974
, with increases in the following amounts in the indictment years:
$46,752.56 in 1975; $13,198.44 in 1976; $74,767.19 in 1977; and
$70,602.19 in 1978. This translates, according to the Government's
calculations, when nondeductible expenditures are added and nontaxable
receipts subtracted, to the following figures for taxable income:
$110,194.17 in 1975; $31,223.11 in 1976; $90,352.92 in 1977; and
$66,240.84 in 1978. 1 The
corresponding figures reported as income by Sorrentino were: $10,979.60
in 1975; none in 1976; $5,378.00 in 1977; and none in 1979.
the issue of the source of the unreported income, the Government offered
the testimony of Robert Hedrick, the former general manager of the Crown
& Anchor during the period in question. Hedrick testified that he
observed the regular collection of substantial amounts of cash door
receipts, which were not reported as income on the Crown & Anchor's
corporate tax returns but instead were distributed under the table to
Sorrentino and his co-owner. Hedrick also testified to the existence of
a similar "skimming operation" with respect to the cash
receipts from the Crown & Anchor bars, which were allegedly used to
fund a cash payroll with the purposes of evading federal withholding
taxes. Hedrick's testimony was corroborated in material respects by John
Henry, another Crown & Anchor employee.
the issue of willfulness, the Government showed not only a regular
failure on Sorrentino's part to report taxable income from his
securities and a complete failure to report income in previous years,
but also a predilection for undocumented cash transactions and a pattern
of registering his own assets in the name of his intimate friend,
trial, the principal defense was that the net worth increases and
expenditures shown by the Government actually came not from the Crown
& Anchor skimming operations, but from nontaxable sources which the
Government failed to take into account, namely gifts and inheritances.
Specifically, defendant claimed that he had received substantial cash
gifts from his father, and that, after the father's death in January,
1976, he had received an inheritance of valuable antiques with a basis
stepped up to fair market value. Although defendant produced some
evidence of antique sales, he could not document their nontaxable
nature, for all transactions had purportedly been made in cash, and both
his father and the purchaser of his antiques were no longer alive.
reject at the outset the notion that the Government's evidence was
insufficient to go to the jury because of any failure to track down
"leads" to nontaxable sources. 2 Defendant
points to a newspaper article which mentioned in passing a statement
made by Sorrentino to the effect that he had inherited his father's
antique collection, and claims that this should have been treated by the
Government as a lead. In his single pretrial interview with an IRS
special agent, however, Sorrentino expressly denied receiving any gifts
or inheritances except from his mother, and refused to offer any leads
whatsoever concerning nontaxable sources of income. We hesitate in these
circumstances to apply the leads doctrine at all. Even assuming, though,
that the newspaper article provided a lead, we hold that the
Government's exhaustive investigation of county probate registers,
federal social security records, federal estate and gift tax returns and
antique dealers' records was clearly adequate to support the
Government's prima facie case. The investigation revealed no trace of a
probated will or taxable estate for Sorrentino's father, much less a
bequest of valuable antiques; rather, it indicated that Sorrentino's
father lived in straitened circumstances and was dependent on social
security payments. This supported the inference, apparently made by the
jury, that Sorrentino's unreported receipts did not come from a
nontaxable source such as gifts or inheritances. See United States v.
Goldstein [82-2 USTC ¶9507], 685 F. 2d 179, 182 (7th Cir. 1982); United
States v. Giacalone [78-1 USTC ¶9350], 574 F. 2d 328, 332 (6th
Cir.), cert. denied, 439 U. S. 834 (1978); United States v.
Penosi [72-1 USTC ¶9103], 452 F. 2d 217, 219-20 (5th Cir. 1971), cert.
denied, 405 U. S. 1065 (1972).
now turn to the four areas in which the defendant assigns substantial
his charge to the jury, Judge Caffrey set forth the elements of
attempted tax evasion under §7201, and explained the Government's
burden of proof under the net worth method. On the issue of taxable
source, he stated: "The burden of proof is on the government to
establish beyond a reasonable doubt that the funds reflected by his
increased net worth or by his nondeductible expenditures came from
taxable rather than nontaxable sources." He further explained that
taxable income would include compensation for personal services, gain
from business or commercial dealings, and interest or dividends, while
nontaxable receipts would include gifts, inheritances, life insurance
proceeds, loans, and reimbursement for purchases made on behalf of other
people. Judge Caffrey properly instructed the jury that in deciding
whether the Government had met its burden it should consider evidence of
a likely source of taxable income and evidence tending to negate any
nontaxable source, as well as any failue on the Government's part to
track down any leads reasonably susceptible of being checked.
the specific issue of antique sales, which the defendant claimed as a
nontaxable source of funds, Judge Caffrey explained that the proceeds of
any antique sales would not necessarily be nontaxable unless the basis
was equal to or greater than the sales price. He instructed the jury
that if they found that Sorrentino had failed to provide leads before
trial as to when the antiques in question were originally purchased and
how much was paid for them, then the Government was not required to have
investigated the basis of the alleged antiques and was permitted to
assume that the proceeds were taxable.
you find that no reasonable lead was given to the government which was
adequate to enable them to investigate or to discover [Sorrentino's
father's] basis and you further find antiques were, in fact, sold during
'75 to '78 by Sorrentino, the government is entitled to treat the
proceeds of any antique sales in those years as a long-term capital gain
. . ..
complains that these instructions impermissibly shifted to him the
burden of proving a basis in the antiques that he claimed to have
received from his father. He argues that his father's cost basis in the
antiques, though unascertainable, is irrelevant under his version of the
facts: he supposedly received the proceeds of antiques before his
father's death in the form of a nontaxable cash gift from his father,
and received negligible gains from those sold after his father's death
due to the automatic step-up in basis to fair market value under 26 U.
S. C. §1014(a). Therefore, he concludes, his father's basis in the
antiques as well as his failure to give leads in that respect are both
beside the point.
contention is ingenious, but we think it reflects a misreading of the
charge as given. With respect to antiques sold before his father's
death, defendant's claim is essentially that he was given cash by his
father: this would clearly be treated as a nontaxable gift under Judge
Caffrey's enumeration of nontaxable sources earlier in the charge.
Likewise, with respect to antiques sold after his father's death,
defendant's claim is basically that the antiques were a nontaxable
inheritance and that the taxable appreciation in value between the time
of the father's death and the time of sale was de minimis. This,
too, was covered in the instruction on nontaxable income.
situation to which Judge Caffrey's charge on basis was directed was
neither of those advanced by defendant, but rather the possibility that
Sorrentino had sold antiques given him by his father during his father's
lifetime. In that case, the basis of the antiques would have been the
same in Sorrentino's hands as in his father's, and proof of the father's
basis would have been essential to determine taxability of the proceeds
when the antiques were sold. "[W]here relevant leads are not
forthcoming, the Government is not required to negate every possible
source of nontaxable income, a matter peculiarly within the knowledge of
the defendant. . . . Once the Government has established its case, the
defendant remains quiet at his peril." Holland, 348 U. S. at
138-39 (citations omitted). The burden of producing evidence of basis,
in the absence of verifiable leads, would therefore lie with the
defendant. See Siravo v. United States [67-1 USTC ¶9446], 377 F.
2d 469, 473-74 (1st Cir. 1967); United States v. Vardine [62-2
USTC ¶9624], 305 F. 2d 60, 63 (2d Cir. 1962). This in no way affected
the burden of persuasion. Judge Caffrey reminded the jury immediately
before giving the instruction in question that Sorrentino was "not
required to prove anything in this case, including the source of his net
worth . . .." He also phrased the inference of a taxable source in
permissive terms: the Government was "entitled to treat" the
proceeds as taxable, and the jury was told, "you may treat all the
proceeds of selling antiques as capital gains which are taxable . .
.." The jury was thus free to believe either the defendant or the
Government with respect to the issue of taxable source. The instruction
on basis was not erroneous.
second objection to the jury instructions relates to Judge Caffrey's
definition of proof beyond a reasonable doubt as "proof that you
would not hesitate to act and rely on in the most important of your own
affairs." Defendant's objection in the present case goes to the
comparison of the verdict in a criminal case with the jury's own
personal decisions. We have noted similar criticisms in previous cases,
see Dunn v. Perrin, 570 F. 2d 21, 24 n. 5 (1st Cir.), cert.
denied, 437 U. S. 910 (1978), but we have not held the language in
question to be plain error. United States v. Cranston, 686 F. 2d
56, 62 (1st Cir. 1982); United States v. Drake, 673 F. 2d 15, 20
(1st Cir. 1982). We adhere to our precedent and rule that the use of
such language, though appeal generating, is not plain error.
view of our holdings concerning the jury charge, we also reject
defendant's concharge that the errors assigned in the charge tainted the
verdict with respect to the §7206(1) (false corporation tax return)
third challenged instruction to the jury was a ruling made during trial
concerning the status of the Cape Historical Homes Trust (the Trust), in
which the defendant held a 90% beneficial interest. In calculating the
defendant's net worth, the Government atrributed to him ownership of
Trust assets (including the Bradford Street rental property formerly
used as a museum, and the improved property on which defendant built his
new home) to the extent of his 90% interest. The district court
instructed the jury that the degree of control exercisable by the
defendant was tantamount to ownership of 90% of the Trust.
Trust 3 was set up
with Sorrentino and Warner as sole trustees; in this capacity they had
complete discretion to distribute or withhold Trust income, as well as
to terminate the Trust. Sorrentino and Warner were also the sole
beneficiaries, holding shares in the ratio of 90 to 10 respectively.
Under the Trust agreement, one-quarter of the shareholders constituted a
quorum for annual and special meetings. Trustees could be appointed and
removed by a two-thirds vote of the shareholders; a two-thirds vote was
also required to dispose of real property held by the Trust and to alter
or amend the terms of the Trust.
is clear as a matter of law that the defendant's 90% beneficial interest
enabled him to control the distribution of Trust income and disposition
of Trust assets, if necessary by constituting a shareholder quorum and
removing Warner as co-trustee. Regardless of whether or how it is
exercised, Paxton v.Commissioner [CCH Dec. 31,249], 57 T. C. 627,
633 (1972), the very existence of such powers was sufficient to trigger
the provisions of 26 U. S. C. §677(a):
grantor shall be treated as the owner of any portion of a trust . . .
whose income without the approval or consent of any adverse party 4 is, or, in
the discretion of the grantor or a nonadverse party, or both, may be . .
. distributed to the grantor . . . [or] held or accumulated for future
distribution to the grantor . . ..
power to amend or alter the terms of the Trust also amounted to a power
of revocation under 26 U. S. C. §676(a): "The grantor shall be
treated as the owner of any portion of a trust . . . where at any time
the power to revest in the grantor title to such portion is exercisable
by the grantor or a non-adverse party, or both." See also Treas.
Reg. §1.676(a)-1; Schulz v. Commissioner [82-2 USTC ¶9485], 686
F. 2d 490, 494-96 (7th Cir. 1982).
either §677(a) or §676(a), Sorrentino could be treated as the owner of
at least an undivided 90% interest in the Trust, and the Government
properly allocated to him a pro rata 90% share of each item of income,
deduction and credit in calculating his net worth. See Treas. Reg. §1.671-3(a)(3).
The court's instruction was therefore correct.
also assigns as error several evidentiary rulings. He complains first of
all that a summary exhibit prepared by his accountant, which showed
$60,000 to $80,000 of nontaxable proceeds from antique sales in each
indictment year, was improperly excluded. It is well established that
summary exhibits such as net worth schedules, whether offered by the
prosecution or the defense, are admissible for the convenience of the
jury in understanding and evaluating evidence independently established
in the record; it is equally clear that purported summaries containing
assertions not otherwise supported by the record are not admissible. Oertle
v. United States [66-2 USTC ¶15,722], 370 F. 2d 719, 727-28 (10th
Cir. 1966), cert. denied, 387 U. S. 943 (1967); United States v.
Moody [64-2 USTC ¶9873], 339 F. 2d 161, 162 (6th Cir. 1964), cert.
denied, 386 U. S. 1003 (1967). Here, the prosecution's net worth
schedule was based exclusively on primary evidence which was available
to test the accuracy of the summary; the agent who prepared the chart
was available for cross-examination concerning disputed items; and the
purpose and effect of the chart were made clear to the jury. The
prosecution's net worth summary was therefore admissible. United
States v. Lawhon [74-2 USTC ¶9634], 499 F. 2d 352, 357 (5th Cir.
1974), cert. denied, 419 U. S. 1121 (1975). By contrast, there was
virtually no documentation for the defendant's alleged antique sales:
both the amount of the proceeds and the assumed basis figures were taken
not from documents in evidence but from the defendant's own unsupported
speculation. Under the circumstances, the court acted within its
discretion in excluding the defendant's potentially misleading and
prejudicial exhibit. See Oertle, 370 F. 2d 727-28; United
States v. Shavin [63-2 USTC ¶9584], 320 F. 2d 308, 312 (7th Cir.),
cert. denied, 375 U. S. 944 (1963); United States v. Kiamie [58-2
USTC ¶9817], 258 F. 2d 924, 932-33 (2d Cir.), cert. denied, 358 U. S.
also objects to the scope of direct and cross-examination permitted by
the district court with respect to the prosecution's witness Gerald
Killion, the revenue agent who prepared the Government's net worth
schedule. On cross-examination, defense counsel opened the issue of why
certain proceeds from flea market sales claimed by Chester Warner were
not included as nontaxable funds available to the defendant on the
Government's net worth schedule. On redirect, Killion explained that he
had taken Warner's testimony concerning the flea market sales into
consideration but had not included the sales on the schedule because
there was inadequate corroborating testimony and he did not find
Warner's testimony credible. The district court immediately mediately
instructed the jury that the decision whether to accept Warner's
testimony as credible was to be made by the jury. It was made clear to
the jury on recross that Warner's testimony, if believed, would reduce
the amounts in the Government's net worth schedule by $5,000 to $10,000
per year. On recross, defense counsel also inquired why Killion had not
found Warner's testimony credible, and elicited the answer that Warner
had testified untruthfully before the grand jury and had shown a
selective memory. On re-redirect, Killion elaborated further on his
reasons for disbelieving Warner, including Warner's failure to report
income on his tax returns. On re-recross, defense counsel attempted to
show that prosecution witness Robert Hedrick had also failed to file
income tax returns. The court ruled that Hedrick's credibility had not
been raised on re-redirect and was therefore outside the permissible
scope of re-recross. This was well within the court's discretion, for
"[m]ore strictly than with cross-examination, a court may limit
recross to the subject matter of redirect and may exercise extensive
discretion over its scope." United States v. Honneus, 508 F.
2d 566, 573 (1st Cir. 1974), cert. denied, 421 U. S. 948 (1975); see
also Fed. R. Evid. 611(a), (b).
next objection goes to the court's limitation of his cross-examination
of another prosecution witness, Special Agent Richard Walsh. On
cross-examination, defense counsel offered a photocopied excerpt from a
newspaper or brochure in which the defendant was quoted as saying that
he had inherited the antique collection in his home from his late
father. The excerpt was admitted on the limited issue of the adequacy of
the Government's pretrial investigation, and not to show the value of
antiques or the truth of any quoted statement. On recross, the court
permitted defense counsel to point out the defendant's quoted statement
in the excerpt and question Walsh concerning his investigation, but not
to read the excerpt aloud before the jury. Walsh summarized the passage
in question as suggesting that Sorrentino "inherited antiques from
his father when he passed on," and then described his investigation
of probate and tax records, as well as his interviews with the
defendant's two sisters. The court acted well within its discretion in
refusing to permit defense counsel to read the excerpt aloud: such a
reading was not only outside the limited purpose for which the excerpt
had been admitted, but might well have led the jury to give undue weight
to its unsubstantiated contents. Fed. R. Evid. 611(a).
district court also sustained an objection to defense counsel's question
whether Walsh had asked defense counsel himself for leads in the course
of the investigation. The question was improper under the circumstances
because Walsh's answer would necessarily have brought out the fact that
the defendant had invoked his privilege against self-incrimination
following the initial interview with Walsh. The court's ruling was,
court also sustained objections to defense counsel's questions whether
Walsh had gone through all the records of auctioneers who might have
dealt with the defendant during the indictment years. Walsh had just
indicated that he had spent eight months going through bank records, and
had previously indicated on redirect that it was difficult to locate
dealings with specific individuals among the auctioneers' records
because they were arranged by date rather than name. Although defense
counsel's line of questioning was not clearly irrelevant, it was
potentially cumulative and harassing, and was properly excluded. Fed. R.
Evid. 611(a). The cases cited by defendant concerning the scope of
cross-examination for bias are inapposite.
next objects to the striking of an appraisal offered by his expert
witness, Robert Luddington. Luddington, manager of Jordan Marsh's
interior design department, was qualified to give expert testimony on
the value of antiques. Although he had visited the defendant's Bradford
Street museum and seen the antiques it contained several years
previously, he had never made an official appraisal of those antiques
because his function at the time involved only interior decoration. At
trial, with his memory refreshed by photographs of the museum rooms in
their former condition, he offered an "overall"
"top-of-the-hat appraisal." Luddington himself conceded that
an "official" appraisal would have involved viewing each
individual antique and writing a description of it, which he had not
done. He stated that he was "not [in court] as an appraiser"
and that he had never made an official appraisal of the museum antiques.
Although he may have been technically qualified, his expertise was
irrelevant: the appraisal lacked a factual foundation, and could not
"assist the trier of fact to understand the evidence or to
determine a fact in issue," Fed. R. Evid. 702.
further assigns as error four occasions on which the district court
limited the defendant's own testimony on direct examination. First, the
court struck defense counsel's question whether the defendant had
"some understanding as to why [Diego, an antique dealer] insisted
on dealing only in cash," on the ground that even if the answer
came within the state-of-mind exception to the hearsay rule, the
defendant's state of mind was irrelevant because Diego was the one who
insisted on cash dealing. Several witnesses had already testified that
Diego dealt only in cash, and defense counsel was permitted to elicit
confirmation of that fact from the defendant.
the second occasion, the court sustained an objection to defendant's
testimony concerning a conversation with a prosecution witness, former
Crown & Anchor manager Hedrick, in which Hedrick allegedly had
demanded a cash salary so that he could avoid reporting it. Defendant
had already testified that Hedrick was responsible for instituting the
Crown & Anchor's cash payroll. The court ruled that the earlier
testimony had already established that the cash payroll originated with
Hedrick, and that the subsequent testimony was merely cumulative.
the third occasion, the defendant began to testify concerning an
incident when Hedrick, having been fired from the Crown & Anchor,
returned seeking a letter of recommendation from the defendant. The
district court permitted defense counsel to elicit the essential facts:
James McNearney, another Crown & Anchor employee, was confronted by
Hedrick with a favorably drafted letter to type up for defendant's
signature; McNearney called the defendant to tell him that the draft was
not acceptable; the defendant instructed McNearney to draft a letter
that he could sign; McNearney did so; and the defendant signed the
resulting letter. The court cut off inquiry into the contents of
Hedrick's original draft and the number of calls between McNearney and
the defendant because McNearney had previously testified to the incident
fourth challenged ruling relates to defense counsel's questions relating
to defendant's testimony that he left the Crown & Anchor bookkeeping
responsibilities to Hedrick and did not maintain records himself. The
court sustained an objection to defense counsel's question as to what
Hedrick told the defendant about his bookkeeping experience, and
rejected an offer of proof that the defendant had difficulty with
district court "retains considerable latitude even with admittedly
relevant evidence in rejecting that which is cumulative, and in
requiring that which is to be brought to the jury's attention to be done
so in a manner least likely to confuse that body." Hamling v.
United States, 418 U. S. 87, 127 (1974). We endorse the general rule
that a trial court's rulings on relevance and admissibility will not be
disturbed unless there is abuse of discretion, see United States v.
Allison, 474 F. 2d 286, 288-89 (5th Cir. 1973), cert. denied, 419 U.
S. 851 (1974). In each of the four instances assigned as error, the
district court excluded testimony on the basis of irrelevance,
redundancy, or confusion. Although a different trial court might well
have allowed the testimony in evidence, we cannot say that there was any
abuse of discretion here, nor can we see any prejudice to the defendant.
defendant objects to the exclusion of an offer of proof relating to the
amount of door receipts. Through the testimony of Chester Warner,
defense counsel offered to prove the door receipts by using the
following formula: total bar receipts from a representative week;
divided by the average expenditure on drinks per customer; minus the
proportion of free netry passes; multiplied by the admission charge;
multiplied by the number of weeks in the summer season. The week's total
bar receipt figure was documented by Crown & Anchor daily sheets,
but the other figures were essentially guesses by Warner. The average
expenditure on drinks per customer, allegedly $5.00, came from a
"study" of unspecified nature put together by Warner and the
defendant; the proportion of free entry passes was loosely estimated by
Warner as 30% for the Crown & Anchor's cocktail show and 50% for the
Disco each evening; and the amount of the admission charge was disputed,
with estimates ranging from $2.00 to $5.00. Moreover, Warner had
repeatedly testified to his lack of personal knowledge concerning
collection and distribution of the cash collected at the door and at the
bars. The court excluded the offered proof as "sheer
speculation." The ruling was entirely proper; Warner could not
testify to transactions of which his personal knowledge was so tenuous
and for which no factual foundation had been laid. See Fed. R. Evid.
therefore hold that there was no error in the court's evidentiary
the outset of the trial, Judge Caffrey ordered the defendant to sit in
the front row of the spectators' section rather than at the counsel
table. Defense counsel complained that this would make it difficult to
communicate with the defendant, but Judge Caffrey assured counsel that
he was "free to go back any time [he] want[ed] and I won't make any
comment of any kind and neither will the government counsel if you with
to confer with him. . . . You can talk to him any time you wish. . .
." Defendant now claims that this seating arrangement violated his
sixth amendment right to effective assistance of counsel.
Caffrey gave no particular reason for his order, but apparently relied
on our decision in United States v. Turkette, 656 F. 2d 5 (1st
Cir. 1981), in which we upheld against a due process challenge his
requirement in a previous case that four defendants sit together in the
spectators' area. 5 We
specifically distinguished the spectators' section from the
constitutionally suspect prisoner's dock used in Massachusetts:
dock is a four-foot high box in which the accused is isolated. . . .
Here, the defendants sat in the front row of the spectator's area of the
courtroom, hardly a place calculated to strip an accused of his
presumption of innocence in the eyes of the jury. The defendants were
no more isolated than they would have been if seated with their
attorneys, as is ordinarily the case.
at 9-10 (emphasis added). Where special circumstances, such as the
number of defendants, see e.g., Turkette, make it impractical for
defendants to sit at the counsel table, "as is ordinarily the
case," the seating arrangement is necessarily "a matter best
left to the discretion of the trial court," id. at 10.
district court here articulated no reasons for refusing defendant's
request to sit at the counsel table. We hold that absent reasons of
security or, as in Turkette, practicality, a defendant has the
right to be seated at the same table as his attorney. We find, however,
that no prejudice resulted here, for there is no evidence that the
seating arrangement prevented or unduly hindered communication between
defendant and his counsel. See Blackwell v. Wolff, 403 F. Supp.
759, 765 (D. Neb.), aff'd, 526 F.2d 1142 (8th Cir. 1975). The
error was therefore harmless, see United States v. Morrison, 449
U. S. 361, 365 (1981).
Jencks Act Material
trial, the Government called Special Agent Richard Walsh as a witness.
According to routine IRS practice, Walsh had prepared a "special
agent's report" summarizing his pretrial investigation. Defense
counsel requested production of the report pursuant to the Jencks Act,
18 U. S. C. §3500, but the motion was denied.
Jencks Act provides:
a witness called by the United States has testified in direct
examination, the court shall, on motion of the defendant, order the
United States to produce any statement (as hereinafter defined) of the
witness in the possession of the United States which relates to the
subject matter as to which the witness has testified. If the entire
contents of any such statement relate to the subject matter of the
testimony of the witness, the court shall order it to be delivered
directly to the defendant for his examination and use.
U. S. C. §3500(b).
term "statement", as used in subsections (b), (c), and (d) of
this sectioin in relation to any witness called by the United States,
a written statement made by said witness and signed or otherwise adopted
or approved by him[.]
U. S. C. §3500(e)(1).
order to meet the requirements of the Act, the material must be a
written statement signed, adopted or approved by the prosecution witness
which relates to the subject matter of the witness's testimony. In the
present case, the record does not clearly show the basis for the
district court's ruling. Judge Caffrey merely said, "I don't think
it's Jencks Act material. You have got his statement of interviews with
the witnesses, but I don't think the case agent's report is the type of
thing that comes under that." It is also unclear whether the
district court ever examined the report to determine which portions, if
any, were producible. The Government stated at trial that the report
consisted mostly of a net worth analysis of the defendant and that all
material concerning Walsh's interview with the defendant was already
included in an interview memo made available to the defense. Defense
counsel stipulated that the net worth analysis could be excised, and
limited his request to the remaining material.
appeal, the Government concedes that it was error for the district court
not to require production of appropriate sections of the report. We are,
therefore, at a loss to understand why the Government did not produce
the report on its own initiative at trial. The report is clearly a
"statement" under 18 U. S. C. §3500(e)(1), see United
States v. Cleveland [73-1 USTC ¶9357], 477 F. 2d 310, 315-16 (7th
Cir. 1973), cited in United States v. Del Toro Soto, 676 F. 2d
13, 16-17 (1st Cir. 1982). The district court should, therefore, have
examined it to determine which portions were producible; if the district
court failed to do so, because it either thought the report was not a
statement or assumed that the material was identical to the interview
memo already turned over to the defense, this was error. United
States v. Johnson, 521 F. 2d 1318, 1320 (9th Cir. 1975).
the circumstances, we decline the Government's invitation to review the
report and rule on it at this stage. That is not our task. See Goldberg
v. United States, 425 U. S. 94, 108 (1976). Under our case law, the
appropriate procedure is to remand to the district court with
instructions to examine the report and determine which portions, if any,
relate to Walsh's trial testimony and are thus producible. 6 Del Toro
Soto, 676 F. 2d at 17. We further direct the district court to make
the producible portions of the report available to defense counsel and
then to hold a hearing to determine whether the Government's failure to
turn over the report at trial materially prejudiced the defense. If
there was material prejudice, a new trial must, of course, be granted.
If, on the other hand, the producible portion of the report "is
merely duplicative of material already in the defendant's
possession," United States v. Medel, 592 F. 2d 1305, 1316-17
(5th Cir. Court rejected this approach because the from Walsh's trial
testimony, United States v. Sink, 586 F. 2d 1041, 1051 (5th Cir.
1978), cert. denied, 443 U. S. 912 (1979), or could not have
materially enhanced defense counsel's cross-examination of Walsh, see Del
Toro Soto, 676 F. 2d at 16; Johnson, 521 F. 2d at 1320, then
the error was harmless and the verdict and judgment will stand. See Rosenberg
v. United States, 360 U. S. 367, 371 (1959).
case is remanded to the district court for further proceedings
consistent with the foregoing. If the district court finds that a new
trial is necessary, then the verdict will be set aside and the judgment
of conviction reversed. If the district court finds that the error was
harmless, then the verdict and judgment of the district court is
Of the United States Court of International Trade, sitting by
The amounts for 1977 and 1978 were revised during the trial to
$88,802.42 and $65,640.84, respectively. This does not affect the
adequacy of the Government's proof, for the Government need prove only
that the amount of tax evaded was substantial. It is not necessary to
prove the exact amount. United States v. Nunan [56-2 USTC ¶9876],
236 F. 2d 576 (2d Cir. 1956), cert. denied, 353 U. S. 912 (1957).
Under the "leads doctrine," the Government is obligated to
"track down relevant leads furnished by the taxpayer--leads
reasonably susceptible of being checked, which, if true, would establish
the taxpayer's innocence. When the Government fails to show an
investigation into the validity of such leads, the trial judge may
consider them as true and the Government's case insufficient to go to
the jury." Holland, 348 U. S. at 135-36. Leads, of course,
must be given a sufficient amount of time before trial to permit
investigation; where there is no evidence that the defendant gave leads
to the Government before trial, the issue is properly left to the jury. United
States v. Vardine [62-2 USTC ¶9624], 305 F. 2d 60, 65 (2d Cir.
We reject as spurious the defendant's attempt to recast the Trust as a
corporation under Treas. Reg. §301.7701-2. Four of the characteristics
listed by the defendant--centralization of management, continuity of
life, free transferability of interests, and limited liability--are
common to both corporations and trusts, and are therefore not material
in attempting to distinguish between the two forms of taxable entities. Id.
Furthermore, although the IRS may look past the declared form of a
taxable entity to determine its actual nature, the taxpayer is not free
to disregard a tax characterization which he has adopted for his own
purposes and for reasons sufficient to him. See Moline Properties,
Inc. v. Commissioner [43-1 USTC ¶9464], 319 U. S. 436, 438-39
An "adverse party" is defined in 26 U. S. C. §672(a) as a
"persno having a substantial beneficial interest int he trust which
would be adversely affected by the exercise or nonexercise of the power
which he possesses respecting the trust." Warner could in no event
qualify as an adverse party to an extent greater than his 10% beneficial
interest, if at all. See Laganas v. Commissioner [60-2 USTC ¶9657],
281 F. 2d 731, 735 (1st Cir. 1980); Treas. Reg. §1.672(a)-1(b).
No sixth amendment issue was raised in Turkette; the defendants
raised no claim that they could not communicate effectively with their
attorneys during the trial. 656 F. 2d at 10.
In addition to portions of the report which are not relevant to Walsh's
trial testimony, see United States v. Medel, 592 F. 2d 1305, 1317
(5th Cir. 1979), the portions which merely set out the net worth
analysis introduced in the Government's net worth schedule at trial may
be excised, according to defense counsel's stipulation.
USTC ¶50,470] United States of America, Plaintiff-Appellee v. Patrick
J. Notch, Defendant-Appellant
U.S. Court of Appeals, 10th Circuit, 90-1172,
, 939 F.2d 895. Affirming an unreported District Court decision
446 and 7206 ]
Fraud: Reconstruction of income: Net worth method: Burden of proof:
Conspiracy to defraud.--An individual taxpayer's conviction on three
counts of filing false income tax returns was not improper because
evidence was sufficient under the net worth method of reconstructing
income to establish that he underreported income from an adult video
arcade in which he was a 50 percent partner. The government was not
required to negate all possible nontaxable explanations of the
taxpayer's increase in net worth, only those explanations offered by the
taxpayer. The taxpayer's assertion that his net worth was inflated
because it took into account only 50 percent of partnership liabilities
was unsupported by any evidence, and was negated by testimony of the
taxpayer's partner and accountant. The taxpayer's assertion that loan
amounts shown in his books were inaccurate was similarly unsupported and
a factual determination for the jury. It was not error for the district
court to allow testimony of a government expert that the reconstruction
of income did not take into account personal expenses because such
expenses are nondeductible. The government's conservative approach
worked for the taxpayer's benefit rather than against him. Finally, the
conspiracy count against the taxpayer was proper in that its object went
beyond filing false tax returns; it was to conceal taxable income.
Several methods were used to prevent the IRS from accurately
ascertaining and collecting income tax, including filing of false
returns, but the taxpayer and his partner also concealed income through
false accounting records and paying salaries and bonuses in cash.
J. Norton, United States Attorney, William R. Lucero, Assistant United
States Attorney, Denver, Colo. 80294, for plaintiff-appellee. Rick Budd,
Benjamin Spitzer, Budd & Spitzer, P.C., 2170 S. Parker Rd., Denver,
Colo., for defendant-appellant.
MCKAY and ANDERSON, Circuit Judges, and CHRISTENSEN 1, District
Notch appeals from a jury verdict convicting him on three counts of
filing a false income tax return for 1983, 1984, and 1985 in violation
of 26 U.S.C. §7206(1) (1988). He also
appeals his conviction on one count of conspiracy to defraud the United
States in violation of 18 U.S.C. §371
trial, the government used the net worth method of proof to establish
that defendant understated his income on his personal income tax
returns. After the jury returned its verdict, the defendant filed a
Motion for Judgment of Acquittal on the basis of sufficiency of the
evidence. He also filed a Motion for New Trial and a Motion for Judgment
Notwithstanding the Verdict. The district court denied the motions.
this appeal, defendant attacks his conviction on three grounds, alleging
that: (1) there was insufficient evidence to establish the net worth
method of proof for 1983, 1984 and 1985; (2) the district court erred
when it allowed the government to introduce evidence that permitted the
jury to improperly speculate as to his personal expenses; and (3) the
government incorrectly charged him with conspiracy to defraud the United
Internal Revenue Service began an investigation of defendant and his
partner, Walter Burkey, in 1986. The investigation focused on a scheme
by the defendant and Mr. Burkey in which they agreed to conceal and not
report to the IRS money generated from six adult bookstores in the
Denver, Colorado area. Eighty to ninety percent of the money came from
customers viewing pornographic videos in private booths, also known as
video arcades, located in the bookstores.
financial relationship between defendant and Mr. Burkey began in 1974
when Mr. Burkey hired defendant to work as a part-time clerk in his
adult bookstores. By 1976, Mr. Burkey, through his business entitled
Burkey Management, owned four stores. He promoted defendant to general
manager to run them.
businesses were very profitable under defendant's direction. Burkey
Management added a fifth adult bookstore. In 1983, Mr. Burkey and
defendant entered into a number of business transactions as equal
partners. They purchased a sixth store called the Ward Road Bookstore.
They also purchased real estate in Missouri and on South Federal Street
in Denver. Their partnership operated during 1981, 1982, and the first
three months of 1983. They then liquidated the partnership and formed a
corporation called Ward Road Bookstore, Inc., in which they were equal
and sole shareholders. The corporation owned Ward Road Bookstore and the
properties on South Federal Street and in Missouri.
the period from 1976 to 1985, defendant was paid fifteen percent of the
net profits from the adult bookstores as compensation for managing them.
The six stores grossed approximately $20,000 per week from the video
arcades. Mr. Burkey and defendant agreed they would not report these
funds to the IRS. Testimony at trial showed that fifty percent of the
arcade money was not reported. To hide the evidence of their income, Mr.
Burkey and defendant used perforated accounting sheets on which the true
amount of cash generated daily from the bookstores appeared on a bottom
portion that was discarded, and another false figure was maintained as a
record on the top portion. In addition, unreported income was placed in
a safety deposit box. A third method to hide income was to falsify the
total compensation to employees on their W-2 forms.
defendant's records were inadequate to accurately establish his income,
the government used the net worth method of proof. The government's
expert testified that defendant had understated his income on his
personal income tax returns for 1983, 1984, and 1985 in the amounts of
$4,582, $70,744, and $32,992 respectively. The likely source of the
increase in defendant's net worth was cash generated from the video
reviewing the district court's denial of defendant's Motion for Judgment
of Acquittal, we must examine all the evidence--both direct and
circumstantial, together with the reasonable inferences to be drawn
therefrom--in the light most favorable to the government. United
States v. Hooks, 780 F.2d 1526, 1529 (10th Cir.), cert. denied,
475 U.S. 1128, 106 S.Ct. 1657, 90 L.Ed.2d 199 (1986). We must then
determine whether a reasonable jury could find the defendant guilty
beyond a reasonable doubt. United States v. Bowie, 892 F.2d 1494,
1497 (10th Cir.1990); Hooks, 780 F.2d at 1531. When direct
evidence is lacking, a criminal conviction can be sustained solely on
circumstantial evidence. Hooks, 780 F.2d at 1531.
net worth method of reconstructing income relies on circumstantial
evidence whereby the defendant's liabilities are subtracted from his
assets to establish a starting net worth at a particular time, usually
the beginning of a tax year. The same calculation is made at the end of
the year and compared to the starting net worth to determine defendant's
increase in net worth over that time. See United States v. Terrell
[85-1 USTC ¶9249 ],
754 F.2d 1139, 1144 (5th Cir.), cert. denied, 472 U.S. 1029, 105
S.Ct. 3505, 87 L.Ed.2d 635 (1985). An increase or "bulge"
greater than the increase in reported income for the corresponding tax
year creates an inference of unreported income. Holland v. United
States [54-2 USTC ¶9714 ],
348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954).
the net worth analysis the government must accurately establish
defendant's opening net worth, identify a likely source of taxable
income, and reasonably investigate any leads that suggest defendant
properly reported his income. United States v. Gomez-Soto [84-2
USTC ¶9584 ], 723 F.2d 649 (9th Cir.), cert. denied,
466 U.S. 977, 104 S.Ct. 2360, 80 L.Ed.2d 831 (1984). We must closely
scrutinize the net worth analysis due to "the difficulties that
arise when circumstantial evidence as to guilt is the chief weapon of a
method that is itself only an approximation." Holland [54-2 USTC ¶9714 ],
348 U.S. at 129, 75 S.Ct. at 132.
alleges several flaws in the government's net worth calculation, each of
which concerns the bookkeeping of Ward Road Bookstore, Inc. His first
contention is that the evidence failed to accurately establish his
liabilities. He argues that the government incorrectly allocated to him
only fifty percent of a Loans Payable amount listed on the corporation's
tax returns. The government did so because he and Mr. Burkey were equal
partners, but defendant asserts that no evidence was presented
establishing that he, in fact, owed only fifty percent of the money. 2
also argues that the government's net worth calculation is flawed
because the loan amounts were listed on the corporation's books for
March 31 of 1984, 1985, and 1986 yet the government assigned these
liabilities to December 31 of 1983, 1984, and 1985. He therefore
contends that the government failed to produce any evidence sufficient
for the jury to determine the liability balances that defendant owed
Ward Road Bookstore, Inc., on December 31 of 1983, 1984, and 1985.
burden of persuading the jury beyond a reasonable doubt that defendant
wilfully falsified his tax returns remains with the government at all
times. Holland [54-2 USTC ¶9714 ],
348 U.S. at 138, 75 S.Ct. at 136; United States v. Scott [81-2 USTC ¶9663 ],
660 F.2d 1145, 1160 (7th Cir.1981), cert. denied, 455 U.S. 907,
102 S.Ct. 1252, 71 L.Ed.2d 445 (1982). In a net worth case, however, the
government makes out a prima facie case when it has proved income
greater than the income reported, the existence of a likely source of
taxable income, and an effective negation of reasonable explanations by
defendant inconsistent with guilt. Holland [54-2
USTC ¶9714 ], 348 U.S. at 135-38, 75 S.Ct. at 135-37; Scott
[81-2 USTC ¶9663 ],
660 F.2d at 1160-61. It is defendant's burden to furnish leads that
might explain the increases in net worth so the government can
investigate these leads before trial. United States v. Caswell [87-2 USTC ¶9452 ],
825 F.2d 1228, 1234 (8th Cir.1987); Terrell [85-1 USTC ¶9249 ],
754 F.2d at 1146. Once the government has established its case, a
defendant who elects to rely on the jury finding some reasonable doubt
remains quiet at his peril. Id. at 138-39, 75 S.Ct. at 137; Scott
[81-2 USTC ¶9663 ],
660 F.2d at 1161; United States v. Cramer [71-2 USTC ¶9565 ],
447 F.2d 210, 218 (2d Cir.1971), cert. denied, 404 U.S. 1024, 92
S.Ct. 680, 30 L.Ed.2d 674 (1972).
the government's thorough investigation made out a prima facie
case. At trial, the government presented the testimony of defendant's
partner, Mr. Burkey. He stated that the mortgage payments on three
properties owned equally by defendant and himself (the Ward Road
Bookstore and the properties on South Federal Street and in Missouri)
were made by Ward Road Bookstore, Inc. In addition, one of defendant's
witnesses, an accountant retained to prepare his tax returns, testified
that the loan amounts listed on the corporation's tax returns
represented mortgage payments on these properties. These sums were also
included on the corporation's accounting worksheets as loans to
shareholders, a group comprised of defendant and Mr. Burkey whose
ownership interests were equal. The evidence also showed that they
agreed not to report the money from the video arcades to the IRS.
defendant did not put on evidence rebutting the government's evidence
that the loans were not made during the calendar tax year. Nor did he
attempt to rebut the showing that the amount he owed was fifty percent
of the loans. Defendant's assertion that the net worth analysis is
fatally flawed because of the possibility that the loans could have been
made during a time other than the tax years charged, or the possibility
that the loans might have been in a proportion different than the equity
interests of defendant and Mr. Burkey, does not rise to the level of a
reasonable explanation inconsistent with guilt that the government has
the burden to negate. See Holland [54-2 USTC ¶9714 ],
348 U.S. at 135, 75 S.Ct. at 135; Scott [81-2 USTC ¶9663 ],
660 F.2d at 1160-61. The government is not required to disprove every
possible source of nontaxable income. Holland [54-2 USTC ¶9714 ],
348 U.S. at 138, 75 S.Ct. at 137; United States v. Beasley [79-1 USTC ¶9107 ],
585 F.2d 796, 799 (5th Cir.1978), cert. denied, 440 U.S. 947, 99
S.Ct. 1426, 59 L.Ed.2d 636 (1979). Nor is the government required to
document defendant's financial affairs to an absolute certainty before
he can be convicted, particularly when the corporation itself did not
keep records on the amounts loaned during the calendar tax year. Holland
[54-2 USTC ¶9714 ],
348 U.S. at 138, 75 S.Ct. at 136; United States v. Dwoskin [81-1 USTC ¶9416 ],
644 F.2d 418 (5th Cir.1981). The net worth method of proof is itself an
on all the evidence, the jury could draw the conclusion that fifty
percent of the loans were attributable to defendant. Likewise, the jury
could infer that the loan amounts were attributable to loans made during
the calendar tax years. Viewing the evidence in the light most favorable
to the government, Hooks, 780 F.2d at 1529, we conclude that the
evidence was sufficient to support defendant's conviction.
also argues that the loan amounts are inaccurate because the
corporation's cash entry in its books was never reconciled with the
amount of cash on deposit in its bank account. Defendant asserts that
the loan amounts were adjusted to make these two amounts match and that
the loan figures do not accurately reflect the amount owed by defendant.
the loan figures were accurate is a factual determination for the jury.
On one hand, the government presented evidence showing the figures on
the corporation's returns and what these amounts were used for.
Defendant cast doubt on their accuracy during cross-examination of the
government's expert witness and during direct testimony of his own
expert by emphasizing that the corporate cash account and the bank
account had not been reconciled. The defendant did not, however, present
evidence conclusively demonstrating that the loan figures were
inaccurate. The government need not prove the increase in defendant's
net worth to a mathematical certainty. Holland [54-2 USTC ¶9714 ],
348 U.S. at 138, 75 S.Ct. at 137. It was permissible, therefore, for the
jury to infer that the loan figures were accurate. The evidence was
sufficient to support the jury's verdict.
next argument is that the district court erred by allowing the
government to introduce evidence that permitted the jury to improperly
speculate as to his personal expenses. At trial, the government's expert
witness testified that she did not take into consideration defendant's
personal expenditures for food and clothing in arriving at her net worth
computation. Such expenses are non-deductible and, if included in the
net worth analysis, would increase the amount of total income defendant
was charged with failing to report.
objected to this testimony because it allegedly invited the jury to
speculate that his increase in net worth was greater than the amount the
government was attempting to prove. The district court's decision to
allow the government's expert to testify on this matter will not be
overturned absent an abuse of discretion. See LeMaire v. United
States, 826 F.2d 949, 953 (10th Cir.1987); United States v.
Cooper, 733 F.2d 1360, 1366 (10th Cir.), cert. denied, 467
U.S. 1255, 104 S.Ct. 3543, 82 L.Ed.2d 847 (1984).
expenditures for food and clothing are usually included in the net worth
calculation. Holland [54-2 USTC ¶9714 ],
348 U.S. at 125, 75 S.Ct. at 130. The government's expert did not
include food and clothing expenditures in her net worth analysis because
she could not verify these figures. This conservative approach to the
net worth computation made the analysis appear more credible. Although
defendant characterizes the expert's testimony as an invitation to the
jury to speculate that defendant's net worth was greater than the amount
charged in the indictment, it can also be viewed as showing that the
jury need not consider personal expenses in order to conclude that
defendant understated his income. In these circumstances, we cannot say
that the district court abused its discretion.
final argument is that the government charged him under the wrong
provision of 18 U.S.C. §371 . The statute
provides that it is unlawful for "two or more persons [to] conspire
either to commit an offense against the United States, or to defraud the
United States . . . ." Count IV of the indictment charged defendant
with conspiring to defraud the United States by impeding, impairing,
obstructing, and defeating the lawful efforts of the IRS to ascertain,
compute, assess, and collect income taxes. See 18 U.S.C. §371
. Defendant contends that he should have been charged under
the offense provision of 18 U.S.C. §371
, not the fraud provision, because the evidence at trial was
directed at proving that he had committed an "offense" against
the United States, specifically, the offense of filing a false income
tax return. He argues that he was wrongly charged and that his
conviction must therefore be reversed.
principally relies on United States v. Minarik [90-1
USTC ¶50,085 ], 875 F.2d 1186 (6th Cir. 1989). In that case,
the United States Court of Appeals for the Sixth Circuit held that the
defendants could not be convicted when they had been indicted under the
"defraud" clause of 18 U.S.C. §371
but the evidence showed only that they conspired to commit
the specific statutory offense found in 26 U.S.C. §7206(4)
(1988)--concealing assets upon which the IRS may impose a
levy for taxes owed. The court in Minarik was particularly
concerned that the broad language of the defraud provision prejudiced
the defendant's ability to prepare for trial by allowing the prosecutor
to indict without precisely setting forth the alleged crime. Id.
at 1196; United States v. Reynolds [91-1
USTC ¶50,267 ], 919 F.2d 435, 439 (7th Cir. 1990), cert.
denied, --U.S.--, 111 S.Ct. 1402, 113 L.Ed.2d 457 (1991); see also McNally
v. United States, 483 U.S. 350, 361, 107 S.Ct. 2875, 2882, 97
L.Ed.2d 292 (1987) (refusing to interpret criminal fraud statute
"in a manner that leaves its outer boundaries ambiguous"); Tanner
v. United States, 483 U.S. 107, 107 S.Ct. 2739, 97 L.Ed.2d 90 (1987)
(section 341 should not be
broadly construed to criminalize activity not within its plain
the situation in Minarik, the facts of this case did not
constitute only a conspiracy under the offense clause to violate
26 U.S.C. §7206(1) . See United
States v. Bilzerian, 926 F.2d 1285, 1302 (2d Cir. 1991), petition
for cert. filed, (May 22, 1991) (indictment under defraud clause
proper where criminal activity broader than specific statutory
prohibition). The object of the conspiracy went beyond filing false tax
returns; it was to conceal taxable income in order to prevent the IRS
from accurately ascertaining and collecting income taxes. Several
methods were used so the IRS could not trace gains generated from the
adult bookstores if it were to conduct a tax audit. One of these was the
filing of false income tax returns. In addition, the defendant and Mr.
Burkey concealed their income by using perforated accounting sheets on
which the daily income from the video arcades was recorded and then
discarded. Another device was the payment of salaries and bonuses in
cash. Defendant also purchased cashier's checks with cash in order to
buy property and hide the source of his income.
the indictment did not prejudice defendant's ability to prepare for
trial. It listed numerous overt acts, including those discussed above.
Defendant cannot complain that he was unaware of the activities on which
the government based the conspiracy charge. Under these circumstances,
the district court did not err in denying defendant's Motion for
Judgment of Acquittal on Count IV.
the foregoing reasons, the district court's denial of defendant's Motion
for Judgment of Acquittal is AFFIRMED.
Honorable A. Sherman Christensen, United States Senior District Judge
for the District of Utah, sitting by designation.
One of the line items in the liability section of the government's net
worth computation was "Loans Payable: Ward Road Bookstore,
Inc." in the following amounts:
Year Ending Amount
December 31, 1983
December 31, 1984
December 31, 1985
to defendant, he may have owed all of the loans, which, if true, would
reduce his net worth and result in an overstatement of income for 1983.
He argues that it would also cast sufficient doubt on the net worth
calculations for 1984 and 1985 so that a jury could not find him guilty
beyond a reasonable doubt.