Clark v. United States, 14652.

Citation211 F.2d 100
Decision Date12 April 1954
Docket NumberNo. 14652.,14652.
PartiesCLARK v. UNITED STATES.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Don O. Russell, St. Louis, Mo., for appellant.

H. Brian Holland, Asst. Atty. Gen., Meyer Rothwacks and Joseph M. Howard, Sp. Assts. to Atty. Gen., Harry Richards, U. S. Atty., St. Louis, Mo., and William J. Costello, Asst. U. S. Atty., Washington, D. C., for appellee.

Before JOHNSEN and COLLET, Circuit Judges, and NORDBYE, District Judge.

JOHNSEN, Circuit Judge.

Appellant, an undertaker in St. Louis, Missouri, was convicted of attempted income-tax evasion, 26 U.S.C.A. § 145(b), for the years 1945 to 1949 inclusive, through the filing of false and fraudulent returns. The trial was to the court, without a jury.

The indictment alleged that he had knowingly misstated his net income for 1945, as being $3,437.92, whereas it was $46,808.98; for 1946, as being $5,423.24, whereas it was $30,267.19; for 1947, as being $6,998.34, whereas it was $12,822.31; for 1948, as being $6,178.14, whereas it was $23,239.96; and for 1949, as being $9,381.67, whereas it was $25,236.69. The amount of the tax which he had paid and the amount which it was claimed that he should have paid were also set out for each year. All of appellant's income was admittedly derived from his funeral business.

Each count of the indictment further undertook to show, equivalently as a bill of particulars, how the Government had arrived at its determination of net income for the year. The method employed was the same for all of the years. The computation first took the "Gross Receipts" of the business. From this was subtracted the "Cost of Goods Sold", that is, the merchandise purchased for sale. Next was subtracted "Other Business Deductions", consisting of salaries, interest, taxes, depreciation, rent, and all the other items which appellant had claimed as business expenditures in his returns. The amount remaining was treated as appellant's "Adjusted Gross Income". From this, subtraction was made of the amount of the standard deduction for non-business expenses, which the Internal Revenue Code allowed, and which appellant had used in his returns, to arrive at appellant's "Net Income".

Appellant's principal contention here is that the trial court erred in overruling his motion for acquittal, because the Government's method of computation did not legally establish that any understatement of income had been made in his returns. The gist of his argument is that the Government had improperly taken appellant's Gross Receipts as the foundation of its computation; that Gross Receipts are not the basis of income-tax liability, Southern Pacific Co. v. Lowe, 247 U.S. 330, 335, 38 S.Ct. 540, 62 L.Ed. 1142, because they may include return of capital as well as income; that here they had admittedly included reimbursements of "outlays" made by appellant on behalf of customers, for cemetery lots, clergyman's and organist's fees, extra limousines hired from outside sources, newspaper notices, etc., which were not part of the services covered by his general funeral prices; and that, in any event, while the Government claimed that all such returns of capital had been subtracted from the Gross Receipts in arriving at appellant's Adjusted Gross Income — appellant's returns having showed that he had included such "outlays" as operating expenses in his business deductions, and the Government having accepted all of the deductions so claimed by him, for purposes of its result of Adjusted Gross Income — the Revenue Agents had failed to engage in any audit to establish that appellant had in fact included all of such "outlay" expenditures in his business deductions, and that it therefore had not legally established that its computation of Adjusted Gross Income did not consist of returns of capital.

This argument is without any legal substance on the realities of the situation. Of course, gross income and not gross receipts is the foundation of income-tax liability, for it is only earnings, profits and gains which the statute subjects to tax. And manifestly, gross receipts can not be called gross income, insofar as they consist of borrowings of capital, returns of capital, or any of the other items which section 22 of the Internal Revenue Code, 26 U.S.C.A. § 22, has excluded from gross income. But when all of these things have duly been taken into account, no matter by what process it has been done, the amount remaining of Gross Receipts necessarily may, in its character as a result, properly reflect the taxpayer's Gross Income, which it is his duty to report.

On the Government's evidence, that is what the result of its computation amounted to in the present situation. The fact that the computation started with appellant's Gross Receipts would not prevent the result reached, no matter by what other term in accounting nomenclature it might be possible to designate it, from legally being reflective of appellant's Gross Income for purposes of proving income-tax evasion by him.

The Government is not required to establish income-tax evasion by the same processes and formalities which a taxpayer is required to observe in making his return. The existence of unreported income may be demonstrated by any practical method of proof that is available on the circumstances of the particular situation. Cf. Burka v. Commissioner, 4 Cir., 179 F.2d 483, 485. And it is not necessary, in order to make a case of tax evasion, that the exact amount of such income should be established. United States v. Johnson, 319 U.S. 503, 517, 63 S.Ct. 1233, 87 L.Ed. 1546. Nor is it incumbent upon the Government, in making a prima facie case of evasion to prove the non-existence of any other deductions than those which the taxpayer has claimed in his return. United States v. Link, 3 Cir., 202 F.2d 592, 593, 594. If the taxpayer legally has other deductions than those which he has so claimed, it is his privilege to show them and explain them as part of his defense. Some times the failure to claim deductions in a return may well be a part of the taxpayer's scheme to cover up his unreported income as a matter of not creating suspicion on the face of his return. It does not therefore destroy the Government's prima facie case as a matter of law that the defendant is able to develop on cross-examination of the Government's witnesses that a right to other deductions may exist, or to establish by his own evidence that such deductions do in fact exist, and especially is this true where the unreported income pointed to by the Government's evidence is reasonably capable of being found to have exceeded the amount of the unclaimed deductions. In any event, the attempt to establish unclaimed deductions as a defense against fraud in misstating income will ordinarily of itself present merely a question of fact, first as to the existence and amount of such deductions, and further, as suggested above, as a possible ingredient in the taxpayer's intent to conceal his unreported income by partially neutralizing the face of his returns.

What has been said is controlling of the present situation. The Government's computation, as has been indicated, did not use appellant's Gross Receipts as his Gross Income but simply took the Gross Receipts as the starting point of its method of arriving at his Adjusted Gross Income, in convenient approach and correlation to his manner of doing business, of keeping records, and of making his returns. The Revenue Agents subtracted the cost of all the merchandise which he had bought for sale, such as caskets, etc., and thus took account of any returns of capital from this source which were involved in his Gross Receipts. As to the "outlays" which appellant had made for cemetery lots, clergyman's and organist's fees, extra...

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