246 F.2d 563 (6th Cir. 1957), 13034, Epstein v. United States

Docket Nº:13034.
Citation:246 F.2d 563
Party Name:William EPSTEIN, Appellant, v. UNITED STATES of America, Appellee.
Case Date:July 02, 1957
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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246 F.2d 563 (6th Cir. 1957)

William EPSTEIN, Appellant,


UNITED STATES of America, Appellee.

No. 13034.

United States Court of Appeals, Sixth Circuit.

July 2, 1957

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[Copyrighted Material Omitted]

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Hal Gerber, Memphis, Tenn., William Gerber, Eugene Bernstein, Memphis, Tenn., on brief, for appellant.

Millsaps Fitzhugh, Memphis, Tenn., Edward N. Vaden and Warner Hodges, Memphis, Tenn., Charles K. Rice, Asst. Atty. Gen., on brief, for appellee.

Before ALLEN, McALLISTER and STEWART, Circuit Judges.

ALLEN, Circuit Judge.

Defendant 1 was convicted in jury trial on all four counts of an indictment charging willful evasion of income taxes for the years 1949, 1950, 1951, and 1952. The indictment charged that defendant under-reported his income in 1949 in the amount of $40,527.62; in 1950 in the amount of $29,216.09; in 1951 in the amount of $52,799.25; and in 1952 in the amount of $24,397.29, or a total for the four years of $146,940.25.

During all of the period in question and for over 30 years previously defendant had operated a pawnshop and a store in Memphis, Tennessee. Up to January, 1949, he kept his own books in the pawnshop business. Thereafter he delegated this task to professional bookkeepers. While defendant's counsel claims that the evidence is 'overwhelming' that defendant's books were adequate, the testimony of his own witnesses indicated that they were not adequate. After January, 1949, the books were posted by one Leonard Weis, defendant's witness, who made up periodical statements from memoranda received from defendant and his wife, which Weis said he was given 'once a month * * * to put on the books.' While Weis computed purchases from checks, the loans were paid out of cash and the memoranda were the only record Weis had as to the loans. A similar system where the books of a business were merely a computation of slips from the totals of a cash register which had no tapes was held by the Tax Court of the United States not to correctly reflect the taxpayer's income and this court affirmed that holding in Kurnick v. Commissioner of Internal Revenue, 6 Cir., 232 F.2d 678, 680.

Defendant's income tax returns from 1945 on were prepared by W. C. Summers, defendant's witness, a bookkeeper attached to the accounting firm of Homer K. Jones & Company. Summers prepared the income tax returns partly from records made by Weis and from information furnished to Summers by defendant and his wife. This system of making up income tax returns of income derived from extensive business operations based on oral statements or monthly memoranda is subject to the same criticism as the manner of posting the books by Weis.

Summers stated that he made 'No verification in any way' and put on the return whatever they told him. Summers told defendant that there should be a 'better system' and suggested that defendant keep more accurate records and that defendant have Summers's accounting firm 'set up a good set of books.' This advice was not followed.

An agent of the Internal Revenue Service who examined defendant's books testified that most of defendant's expenses 'were paid by cash' and he knew of no way to check the books. He testified, 'I feel that the figures on the books are not correct.' Summers stated to Norris, Special Agent with the Intelligence Division of the Internal Revenue Service, that there was no way 'to verify sales' from these books and that no one could 'verify expenditures made in currency.' This being the case, the Commissioner was authorized under the regulations and statute to compute petitioner's income in a way that would clearly reflect his income. The net worth method was employed. Defendant's tax accountant, Homer Jones,

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agreed that this was the proper method in view of the condition of the books.

Defendant contends that because defendant kept books and no specific false entries were shown, the net worth method of proof is not applicable. However, Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150, which affirmed a conviction for fraudulent evasion of income tax computed under the net worth method, decides this point squarely in favor of the Government. In the Holland case the conviction was attacked upon the specific ground that the Government was unable to point out any false entries. The Supreme Court stated: 'Nevertheless, if we believe the Government's evidence, as the jury did, we must conclude that the defendants' books were more consistent than truthful, and that many items of income had disappeared before they had even reached the recording stage.' Holland v. United States, supra, 348 U.S. 132, 75 S.Ct. 133.

The net worth method as used by Norris employed many items of independent evidence such as defendant's income tax returns as to merchandise and inventory, bank statements furnished by defendant, cancelled checks, and other bank records as well as testimony from numerous witnesses as to the purchase by defendant of from defendant of valuable pieces of land and amounts paid for them during the years in question.

The court did not err in overruling defendant's motion for acquittal. While the evidence was in controversy the government, through many witnesses and exhibits, presented evidence of substantial understatement of income for each of the taxable years. The Government also presented evidence of the existence of a current tax source, namely, income from the pawnbroker business, the store, and substantial income from other sources. The consistent understatement of large amounts of income for a number of years is evidence of willful intent to evade. Kurnick v. Commissioner, supra, 232 F.2d 681; Drieborg v. Commissioner of Internal Revenue, 6 Cir., 225 F.2d 216. In Holland v. United States, supra, 348 U.S. 139, 75 S.Ct. 137, the Supreme Court declared that 'evidence of a consistent pattern of underreporting large amounts of income' will support 'an inference of will-fulness.'

Norris's computation as to assets and liabilities for the years under indictment, other than cash, he testified were almost identical with the figures calculated for the same items by Homer Jones, head of Summers's accounting firm prior to the early summer of 1955. This was not denied. It was shown that defendant's total expenditures during the taxable years over and above the cost of operating his business were $368,951.85. The total net income reported by defendant during that time was $88,170.19. 2

These calculations, which the jury evidently believed, showed that defendant's private expenditures exceeded his total available income and entitled the jury to find that defendant had large unreported income. Exhibit 11 Norris showed the total income of Epstein (1920 to 1948) per filing record was $320,848.50; of Pearl Epstein (1937 to 1948), $35,138.18; of J. P. Kirschner (1937 to 1948), $128,977.98; total for these three people, $484,964.66. The total expenditures as shown by the same exhibit, during the same period, were $514,010.90. Similar circumstances were held in United States v. Johnson, 319 U.S. 503, 517, 63 S.Ct. 1233, 87 L.Ed. 1546, cited with approval in Holland v. United States, supra, 138,

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to support the finding that defendant in that case had some unreported income which was properly attributable to his earnings. When questioned by Norris, defendant herein declared that there were no nontaxable sources for large net worth increases such as gifts, loans, or inheritances. Cf. Holland v. United States, supra, 348 U.S. 137, 75 S.Ct. 136. The important leads particularly stressed in the Holland case were lacking. Moreover, the jury could reasonably find from this...

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