United States v. Stayback, 11100.

• Decision Date: 21 April 1954
• Docket Number: No. 11100.,11100.
• Citation: 212 F.2d 313
• Parties: UNITED STATES v. STAYBACK.
• Court: U.S. Court of Appeals — Third Circuit

212 F.2d 313 (1954)

UNITED STATES v. STAYBACK.

No. 11100.

United States Court of Appeals Third Circuit.

Argued December 7, 1953.

Decided April 21, 1954.

John E. Toolan, Perth Amboy, N. J. (Toolan, Haney & Romond, Perth Amboy, N. J., on the brief), for appellant.

Frederic C. Ritger, Jr., Asst. U. S. Atty., Newark, N. J. (William F. Tompkins, U. S. Atty., Newark, N. J., on the brief), for appellee.

Before KALODNER, STALEY and HASTIE, Circuit Judges.

KALODNER, Circuit Judge.

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

Before discussing the errors complained of a brief statement of the factual background is in order.

The defendant, William B. Stayback, was indicted on a two-count indictment charging him with filing false and fraudulent income and victory tax returns for 1943 (Count I) and 1944 (Count II). He was found guilty on both counts and sentenced to imprisonment for 18 months and fined $3,000 and costs.²

The evidence adduced at the trial established that the defendant during the years covered by the indictment was engaged in the manufacture and sale of metal novelties and souvenirs.

Defendant in his 1943 and 1944 returns listed no other income except that received in the conduct of his business.

In his 1943 return defendant listed his "Total receipts" at $15,000.00. Against this sum he charged, under "Cost of Goods Sold", $3,585.00 for "Material and supplies" and $2,000.00 for reduction in inventory, making "net cost of goods sold", $5,585.00. Under "Other Business Deductions" he claimed a credit of $1,300.00 for "Rent, repairs and other expenses". After applying the $6,885.00 credits claimed against his stated receipts of $15,000.00, the defendant fixed his "Net profit" for 1943 at $8,115.00.

In his 1944 return defendant listed his "Total receipts" at $4,000.00. Against this sum he charged, under "Cost of Goods Sold", $185.61 for "Material and supplies" and $2,000.00 for reduction in inventory, making "Net cost of goods sold", $2,185.61. Under "Other Business Deductions" he claimed a credit of $261.00 for "Rent, repairs and other expenses". After applying the $2,446.61 credits claimed against his stated receipts of $4,000.00, the defendant fixed his "Net profits" for 1944 at $1,553.39.

In both his 1943 and 1944 returns the defendant also took credit for contributions, interest and taxes paid. These deductions, $980.00 for 1943, and $975.00 for 1944, played no part in the determination of the tax evasion issue. They served to reduce his stated "Net income" for 1943 to $7,135.00, and for 1944 to $578.39.

The defendant's tax returns for 1943 and 1944 were prepared by an accountant, John F. Primoshic, at his request.³ Primoshic testified that before he prepared the returns he asked defendant for his books and records and was told that he had none; that defendant advised him he was only able to give him an estimate of $15,000.00 "Total receipts" for 1943 and $4,000.00 for 1944. The calculations stated in the returns as to "Net cost of goods sold" and "Other Business Deductions" (except rent) were computed by Primoshic on a percentage basis based on his familiarity with the defendant's particular type of business and his general accounting experience. Primoshic further testified that at the time the tax returns were prepared the defendant expressed agreement with his calculations and accepted and adopted them as his own.

Various government witnesses testified that during 1943 and 1944 defendant had operated his business not only as the W. S. Novelty Co. but also as Clifford Allen, S. Pannone, George Wilson Specialty Co., Harlem Chromium Plating Co. and Universal Alarm Corp.⁴

Testimony relating to the defendant's operations was given by his employees and those of various concerns to whom he made sales during 1943 and 1944, and by John George Cassidy, Internal Revenue Agent and certified public accountant. Cassidy had made an exhaustive examination of the books and records of concerns to whom the defendant had made sales.

As to 1943: Cassidy testified that his investigation had disclosed that the defendant that year had made sales of $104,667.38 in his operations under the following guises; as W. S. Novelty Co., $4,627.95; as Clifford Allen, $24,549.85; as S. Pannone, $25,321.85; as George Wilson Specialty Co., $46,310.06; as Harlem Chromium Plating Co., $1,656.20 and as Universal Alarm Corp., $2,201.47.⁵ The $104,667.38 sales enumerated exceeded by $89,667.38 the $15,000 "Total receipts" listed by the defendant in his 1943 tax return.

As to 1944: Cassidy testified that his investigation had disclosed that the defendant that year had made sales of $59,373.40 in his various trading identities; as W. S. Novelty Company, $35,807.11; as Clifford Allen, $18,143.53; as Harlem Chromium Plating Company, $5,422.16.⁶ The $59,373.40 sales enumerated exceeded by $55,373.40 the $4,000.00 "Total receipts" listed by the defendant in his 1944 tax return.

Defendant does not dispute the accuracy of the government's testimony that he understated his gross income by $89,667.39 in 1943 and $55,373.40 in 1944.

But says he, it is not enough for the government to establish that his gross sales exceeded that which he reported in his tax returns; it must go further and establish that his net income was in excess of that which he reported. On this score he complains that while the government established that his gross sales were almost seven times the amount which he reported for 1943 and fifteen times the amount reported for 1944, it failed to take into account that his costs of operation must have been proportionately in excess of that which he reported. Had the government, says the defendant, established his costs of operation and given him credit for them against the total of his gross sales, there would have been no excess of net income over that which he reported.

The crux of the defendant's contention is that the government was charged under the law with the burden of establishing (1) defendant's gross sales were higher than reported; (2) his deductible operating costs; and (3) that his net income (after deduction of his operating costs from gross sales) was in excess of that which he had reported.

Because of his view that the government was under the burden stated, the defendant made virtually no attempt to establish that his deductible operating costs exceeded those which he reported in his tax returns.

Defendant has made his bed and he must lie in it. He was wrong in his view that the burden is on the government to establish his allowable operating costs and other deductions.

It is well settled that once the government establishes unreported income of the defendant and allows deductions claimed by him in his tax return and others that it can calculate without his assistance, the burden is on the defendant to prove that he had other allowable deductions which were not shown in his return: United States v. Smith, 3 Cir., 1953, 206 F.2d 905; United States v. Link, 3 Cir., 1953, 202 F.2d 592; United States v. Hornstein, 7 Cir., 1949, 176 F.2d 217. The government is not required to prove the negative, i. e. that the defendant did not have any other deductions. Gariepy v. United States, 6 Cir., 1951, 189 F.2d 459.

Here the government, by its testimony established unreported income of almost $90,000 in 1944 and more than $55,000 in 1943. For 1943 it allowed the operating costs claimed by the defendant in his return for that year and an additional $16,000 or so which it calculated he had spent for payroll costs that year although his return was blank on that score. For 1944 the government allowed the exact operating cost deductions claimed by the defendant in his return for that year. It was unable, it said, to calculate his payroll cost for that year and consequently did not allow him any deductions in that respect as it did for 1943. The defendant had made no claim for payroll costs in 1944.

Under analogous circumstances, it was said in United States v. Hornstein, supra, 176 F.2d at page 220:

"The figures of cost of goods sold, as they were used in preparing his tax returns, were at least admissions by the defendant which the government could utilize in making a prima facie case. The defendant was chargeable with them until he offered credible evidence to show that the figures were in error, and that his costs were greater. * * * The defendant herein was under an obligation to keep correct books and records; he did not do so. Having adopted that course he cannot now sit back and insist that the government prove a complete debit and credit account."

As to defendant's remaining points.

He contends that the trial judge erred in overruling his objection against permitting Primoshic to "refresh" his recollection as to the circumstances attending his preparation of the defendant's tax returns in 1946, by looking at an affidavit which he had given to the government in 1951. The basis of the objection was that the affidavit had not been executed "contemporaneously with the event." It was premised on the holding in Putnam v. United States, 1895, 162 U.S. 687, 695, 16 S.Ct. 923, 926, 40 L.Ed. 1118, that "The very essence * * * of the right to thus refresh the memory of the witness is that the matter used for that purpose be contemporaneous with the occurrences as to which the witness is called upon to testify."

On the score of this objection we observe that we stated in United States v. Riccardi, 3 Cir., 1949, 174 F.2d 883, 888, certiorari denied, 1949, 327 U.S. 941, 69 S.Ct. 1519, 93 L.Ed. 1746:

"It is important to note that Putnam v. United States * * * does not distinguish between past recollection recorded and present recollection revived. Insofar as the condition of contemporaneity is concerned, that decision is no longer construed as stating an unyielding rule. United States v. Socony-Vacuum Oil Co., 1940, 310 U.S.

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