United States v. Costello, 83

Citation221 F.2d 668
Decision Date05 April 1955
Docket NumberNo. 83,Docket 23149.,83
PartiesUNITED STATES of America, Appellee, v. Frank COSTELLO, Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

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Arthur Garfield Hays, Hays, St. John, Abramson & Schulman, Joseph Leary Delaney, New York City, for appellant. Osmond K. Fraenkel, Joseph Leary Delaney, Morris Shilensky, New York City, of counsel.

Lloyd F. MacMahon, Chief Asst. U. S. Atty., J. Edward Lumbard, U. S. Atty., New York City, for appellee. Powell Pierpoint, Whitney North Seymour, Jr., Leonard B. Sand, Asst. U. S. Attys., New York City, of counsel.

Before CLARK, Chief Judge, and L. HAND and FRANK, Circuit Judges.

L. HAND, Circuit Judge.

The defendant, Costello, appeals from a judgment entered upon the verdict of a jury, finding him guilty upon three of four counts in an indictment under § 145 (b) of the Internal Revenue Code, Title 26, U.S.Code: i. e., of wilful attempts "to evade or defeat a large part of the income tax" for the years 1947, 1948 and 1949, "due and owing by him and his wife," by understating their joint net income tax. (The jury acquitted him on the first count — 1946 —, which was for understating his separate net income tax.) Judge McGohey imposed a sentence of five years upon each of the three counts for 1947, 1948 and 1949 (to be served concurrently), and a fine of $10,000 on each count cumulatively, together with the costs of the prosecution — $4,111.38. On the appeal Costello raises six points, which we shall consider seriatim. First, he challenges the sufficiency of the evidence to prove that he and his wife had received more taxable income in the three years in question than he included in their joint tax returns for those years. Second, he asserts that it was error to refuse his offer in evidence of tax assessments against him for the years 1941-1945, which showed a higher net income received by him than the prosecution computed as his gross income for those years; and which were therefore relevant to show that he might have laid up a cash reserve on January 1, 1946. Third, that it was error to include his wife's expenditures as part of his own. Fourth, that the court erred in the admission of various pieces of evidence offered by the prosecution. Fifth, that the judge's charge to the jury was insufficient. Sixth, that the indictment should have been dismissed because no competent evidence was before the grand jury at the inquest.

The first question is the most important. The prosecution built up its case upon what has come to be known as the "net-worth method," which the Supreme Court has very recently accepted as permissible, though it must be applied with the greatest caution.1 This method presupposes that the prosecution first proves what property the taxpayer had at the beginning of the year in question and what he had at the end of it. To the remainder obtained by subtracting the first from the second it adds whatever sums it can prove that he spent in the year in question. That is the putative gross income for the year; and the remainder, after deducting the amount of gross income reported, is by hypothesis the unreported gross income. However, this is not enough, for it does not follow that all that the taxpayer expended was necessarily taxable income, or indeed income of any kind. Conceding something for the difficulty of establishing by impregnable proof how much was income, the Court is satisfied with "proof of a likely source, from which the jury could reasonably find that the net worth increases sprang". True, a "likely source" may not be the true source, so that it is necessary in addition to exclude the possibility that what he received did not come from gifts, inheritances or loans. Here too the Court does not exact precision, for, "where 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." Nevertheless, in the end the prosecution must "prove every element of the offense beyond a reasonable doubt though not to a mathematical certainty." "The settled standards of the criminal law are applicable to net worth cases just as to prosecutions for other crimes. Once the Government has established its case, the defendant remains quiet at his peril. * * * The practical disadvantages to the taxpayer are lessened by the pressures on the Government to check and negate relevant leads." Finally, it should be remembered that, as in all criminal prosecutions, the prosecution makes out a sufficient case to go to the jury, if the evidence would have been enough in a civil action; the only difference between the two is that in the end the evidence must satisfy the jury beyond any reasonable doubt.2

The prosecution's proof started with a supposed "net worth" at the beginning of the year 1946, made up of four items which, less liabilities, aggregate $250,0003, and among which there is no item of cash on hand. Concededly the "net worth" at the beginning of each year would be falsified to the extent that any such sum was omitted; and with it would fall the computations for later years. However, we will disregard this possibility for the time being; and proceed on the assumption that the figure for "net worth" was accurate. Next, the prosecution proved that either Costello or his wife made large purchases in each of the four "indictment years," varying from nearly $60,000 in 1948 to over $90,000 in 1949. Then it proved the "net worth" at the beginning of 1947, and subtracted it from that at the beginning of 1946, which resulted in a minus quantity ($8500). This it deducted from the sum of the purchases; and the difference between what remained and the amount returned as gross income by Costello it asserted to have been fraudulently concealed. He raises a number of objections to this computation in addition to the omission of a concealed cash reserve. One of these is the failure to show a "likely source, from which the jury could reasonably find that the net worth increases sprang." There was no difficulty in the case at bar in pointing to such a source. By his own admission Costello was a gambler, though he had no other occupation. He had substantial interests in "slot machines" and "juke boxes" in Louisiana companies; and these were not his only ventures, for he gambled in "horses, cards and fights"; and there was evidence that he received $30,000 for keeping bookmakers away from a race tract for two years; which of itself showed him to have been a man of powerful undisclosed influence. Gambling is an occupation with indeterminate possibilities that might well have brought in more than $100,000 in a single year — the highest with which he was charged in the four "indictment years." If there were no accumulated reserve and no loans, gifts or inheritances, gambling and such payments as the $30,000 we have mentioned, were a "likely source" of the money that he spent during the year. To exclude the possibility that loans, gifts and inheritances might have contributed, the prosecution searched all likely records for inheritances and for gifts and found none. Similarly, it found no credits on the returns of either Costello or his wife for the payment of interest on loans. The same method was followed for each of the "indictment years"; and it fulfilled the tests laid down in Holland v. United States, supra. Upon any issue it is nearly always true that the party having the affirmative does not, and cannot, shut the door against every possible exception; and it would be idle to deny that there were no possible exceptions on the present occasion; but we cannot see how it can be doubted that a man, having no resources in loans, gifts or inheritances, could have spent what Costello did in these four years, unless it was out of his income or his wife's, or unless he had a cash reserve accumulated from past years. As to his wife's income, the evidence justified a finding that the money had not come out of it, except in 1946 when she was credited with about $16,000 gross income, which she separately returned. In 1937 Costello had sworn that she had no income; in 1939 that, whatever money went into her bank account, he gave her; and in 1943 he told his lawyer that in 1941 she bought a motor car with his money, as well as "all the living expenses." In applying for insurance in 1940 she stated that she was supported by her husband. Furthermore, the prosecution traced many cheques received by him into her bank account and in 1943 two payments of Costello's estimated income tax were paid out of her account. From all this it was a permissible inference that in the four "indictment years" she had no separate income beyond what was credited to her in 1946.

Thus, the issue is narrowed to whether Costello had an accumulated cash reserve at the beginning of 1946, out of which the purchases might have come that were shown to have been made, and not declared. Since the aggregate of the net income omitted during the "indictment years," when computed as we have described, came to more than $100,000, perhaps it might have been fair to start with an assumption that no such hypothetical reserve covered the unreported income for at least the year 1949. However, the prosecution did not rely on such an assumption; it undertook to establish that Costello had no reserve whatever on January 1, 1946. It started with a statement of his "net worth" on October 18, 1937, the day of a sworn statement made by him to an official of the Tax Bureau. On that day he said that he had a cash reserve of between $25,000 and $30,000 which he kept in currency. His bank deposits, investments and receivables, when added to this, made $45,600, from which was deducted loans of $6,000. Thus, he started with a "net worth" on that day of substantially $40,000. As we have said, on January 1, 1946, a little over eight years later,...

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