327 F.2d 189 (9th Cir. 1964), 18736, Armstrong v. United States

Docket Nº:18736.
Citation:327 F.2d 189
Party Name:Ellen ARMSTRONG and David, J. Armstrong, Appellants, v. UNITED STATES of America, Appellee.
Case Date:January 21, 1964
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 189

327 F.2d 189 (9th Cir. 1964)

Ellen ARMSTRONG and David, J. Armstrong, Appellants,

v.

UNITED STATES of America, Appellee.

No. 18736.

United States Court of Appeals, Ninth Circuit.

January 21, 1964

Rehearing Denied March 18, 1964.

Page 190

John J. Bradley and Max Solomon, Los Angeles, Cal., for appellants.

Francis C. Whelan, U.S. Atty., Thomas R. Sheridan, Asst. U.S. Atty., Chief Criminal Section; and Jo Ann Dunne, Asst. U.S. Atty., Los Angeles, Cal., for appellee.

Before JERTBERG, MERRILL and BROWNING, Circuit Judges.

JERTBERG, Circuit Judge:

Following trial to a jury, the appellants Ellen Armstrong and David J. Armstrong, Husband and wife, were convicted on each count of a four count indictment. The indictment charged that appellants did willfully and knowingly attempt to evade and defeat a large part of the income tax due and owing by them to the United States of America for the calendar years 1956 through 1959, respectively, in violation of Title 26 U.S.C. § 7201, which in pertinent part provides:

'Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by

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law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, * * *.'

In each of the four years in question, appellants filed a joint income tax return reporting as taxable income only the earnings received by appellant David J. Armstrong, as a bus driver for the Los Angeles Metropolitan Transit Authority. Taxable income reported for the year 1956 was the sum of $2,047.13, and the amount of tax due thereon was $409.44; taxable income reported for the year 1957 was the sum of $1,101.25 and the amount of tax due thereon was $220.15; taxable income reported for the year 1958 was the sum of $1,365.80 and the amount of tax due thereon was $273.16; taxable income reported for the year 1959 was the sum of $1,450.02 and the amount of tax due thereon was $290.00.

The record discloses that during the tax years in question, appellants maintained no books or records of account.

Using the so-called 'net worth plus expenditures' theory of proof, the government established a net worth increase for appellants for each of the years 1956 through 1959, to which increase of net worth for each year was added the non-deductible expenditures of appellants for each of said years. The following computations resulted:

Calendar Year 1956 December 31, 1955--Net Worth $12,609.57 December 31, 1956--Net Worth $19,416.47 Net Worth Increase $ 6,806.89 Expenditures not appearing in Net Worth Statement 6,017.08 ---------- Net Worth Increase plus personal Expenditures equals Gross Income $12,823.97 Calendar Year 1957 December 31, 1957--Net Worth $26,626.24 Net Worth Increase $ 6,845.78 Expenditures not appearing in Net Worth Statement 6,777.45 ---------- Net Worth Increase plus personal Expenditures equals Gross Income $13,623.23 Calendar Year 1958 December 31, 1958--Net Worth $44,184.29 Net Worth Increase $17,922.05 Expenditures not appearing in Net Worth Statement 4,437.20 ---------- Net Worth Increase plus personal Expenditures equals Gross Income $22,359.25 Calendar Year 1959 December 31, 1959--Net Worth $51,530.12 Net Worth Increase $ 7,354.93 Expenditures not appearing in Net Worth Statement 12,165.77 ---------- Net Worth Increase plus personal Expenditures equals Gross Income $19,511.60

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The appellants concede:

1) The accuracy of the net worth computations adduced by the government;

2) That the unreported gain in the net worth of appellants for the years covered by the indictment is as follows:

1956 -- $ 7,894.26
1957 -- $ 9,687.35
1958 -- $17,984.29
1959 -- $15,029.02; and

3) Assuming that the unreported gain in each year represents taxable income, the additional tax due for each of the years is as follows:

1956 -- $1,775.32
1957 -- $2,184.89
1958 -- $4,785.87
1959 -- $3,792.87

As a likely source that the unreported increases in the appellants' net worth were derived from an undisclosed illicit business, that is, the sale of 'pep' pills, the government introduced the testimony of four local law enforcement officers attached to the narcotics detail of the County Sheriff's Office and the narcotics division of the local Police Department. One of these officers testified that on September 17, 1956 he took from the appellant, Ellen Armstrong, a bag containing some 650 5-milligram tablets referred to as benzedrine or amphetamine and a small quantity of marijuana. Appellant stated that she had purchased the contents of the bag for $10.00. Another officer testified that on October 27, 1956, he and another person with him purchased $30.00 worth of pills from the appellant, Ellen Armstrong; that shortly thereafter he returned to the appellants' apartment where both appellants were present; that he observed in appellant Ellen Armstrong's purse the $30.00 which he had paid her, plus twenty-three $1.00 bills. On a search of the apartment he recovered 500 amphetamine tablets, some dexedrine tablets, 103 amphetamine tablets, some nembutol capsules and some codeine tablets. Another officer testified that on May 30, 1957 he searched the apartment of appellants while both were present and recovered several bottles containing various pills. He also found $1,031.00 in currency in a dress hanging in the closet. Appellant, Ellen Armstrong, stated that she had obtained the money from selling pills, with the exception of $400.00 which she had won at Las Vegas. Appellant Ellen Armstrong stated to the officer that she purchased the pills for $35.00 a bottle and that the usual sales price was ten pills for a dollar. Another officer testified that he searched the premises of the appellants on June 25, 1959. In the basement he found three sacks of twelve bottles of assorted pills. In the apartment he recovered several bottles of pills and an envelope containing $953.00 in currency. As a part of the government's case, government agents testified as to pretrial interviews with the appellants in which appellants stated in substance: that their only source of income was from David Armstrong's employment as a bus driver; that they had only two bank accounts, consisting of a checking account in the name of Ellen Armstrong and a small savings account in trust for their son; later when confronted with the existence of other accounts, they admitted the existence of two other savings accounts under the name of Ellen Fletcher, an alias. The net worth increases for each of the years in question was established by the following evidence: loans receivable, purchase of 1957 automobile in November 1956, loans payable, Trust Deeds of the approximate value of $4,400.00 purchased under the name of Helene Sabatelli, and net bank deposits of $54,570.07, of which cash deposits consisted approximately of 74%. These bank deposits were made to the various accounts above mentioned. Proof of the non-deductible expenses consisted of the following evidence: living expenses, payment of insurance premiums, fees paid to an attorney in the amount of $9,300.00, bond premiums in the amount of $3,375.00, and other nondeductible Page 193 expenditures in the approximate amount of $675.00. While the record discloses that the bond premiums were, in fact, bail bond premiums, and that the expenditures in the approximate sum of $675.00 were, in fact, expended to pay fines for violations of the Business and Professions Code of the State of California, the District Judge refused to permit the government to show that the expenditures were made for bail bond premiums and for payment of fines. On their own behalf appellants, in substance, testified: that the unreported increases in net worth adduced by the government comprise money which had been received from one Clifford Bell, which they deposited in the various accounts; that they did not believe that they owned the money delivered to them by Mr. Bell, or had responsibility for any income tax on such money or any interest it might earn while in the bank; that Mr. Bell was a tenant in the apartment building in which appellants lived; that he was single; that in 1956, Bell gave to appellant Ellen Armstrong from twelve to fifteen hundred dollars; that she eventually deposited it in the bank account under the name of Ellen Fletcher, an alias; that in 1957 she opened another savings account under the name of Fletcher, and thereafter made deposits in said accounts with moneys accumulated from funds given to her periodically by Bell; that at one particular time Bell gave her $3500.00; that she had no idea how much money Bell had given to them; that she kept no record of...

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