Bursten v. United States

• Decision Date: 27 May 1968
• Docket Number: No. 23725.,23725.
• Citation: 395 F.2d 976
• Parties: Leonard L. BURSTEN, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

395 F.2d 976 (1968)

Leonard L. BURSTEN, Appellant, v. UNITED STATES of America, Appellee.

No. 23725.

United States Court of Appeals Fifth Circuit.

May 27, 1968.

Richard Booth, Miami, Fla., Virgil M. Wheeler, Jr., New Orleans, La., Walters, Moore & Costanzo, Miami, Fla., and Sehrt, Boyle & Wheeler, New Orleans, La., for appellant.

Mitchell Rogovin, Asst. Atty. Gen., Joseph M. Howard, John M. Brant, Attys., Dept. of Justice, Washington, D. C., James O. Murphy, Jr., Asst. U. S. Atty., Miami, Fla., for appellee.

Before COLEMAN and SIMPSON, Circuit Judges, and DAWKINS, District Judge.

BEN C. DAWKINS, Jr., District Judge:

This appeal is from a conviction for willful income tax evasion. 26 U.S.C. § 7201.¹ For the reasons hereinafter indicated, we reverse and remand for a new trial.

Appellant, Bursten, a non-Florida lawyer, but who engaged in legal and financial activities there, and was apparently quite a "wheeler-and-dealer," was indicted for evading federal income taxes for 1957. Specifically, the indictment charged him with reporting he had no taxable income in 1957, when in fact he knew that his income for that year was $152,767.14. Income tax which would have been due on this amount would have been $93,093.40.

After a one-week trial, defendant was found guilty as charged. He was sentenced to eighteen months (fifteen months of which was suspended) and fined $5,000. In this appeal Bursten complains of various errors, said to have been committed by the trial court, which will be discussed hereinafter.

Appellant's financial transactions, as detailed in the record, were somewhat complicated. Consequently, we set forth here only the salient facts necessary for clear understanding of the case.

A. The Kadison Corporation. In 1950, three people, appellant, Walter Sawyer (his uncle), and Milton Kadison formed the Kadison Corporation. Each party owned a one-third interest in the stock of that company. Bursten performed necessary legal work for organizing and operating the corporation and also secured its financing. The bulk of its capital was obtained through a $7,000 bank loan upon endorsements of appellant and Sawyer; and also through loans totaling $88,000 from Sawyer's Downtown Motors, a corporation owned by Sawyer. Initially, the purpose of Kadison Corporation was to engage in manufacturing products for the Korean War effort. It was planned that ultimately Kadison was to go into manufacturing non-defense materials. To this end, Kadison secured a contract from the Navy for manufacture of a five-inch rocket motor igniter ring. Profits expected to materialize from this contract did not accrue and the corporation soon went into receivership.

Subsequently, during 1952, 1953, and 1954, Bursten claimed various losses in connection with Kadison's failure. During those years the Internal Revenue Service allowed appellant various amounts of actual losses. After filing his 1954 income tax return, he was left with $5,084.40 in losses which could be deducted in future years.

B. The East Corporation. In 1950, East Corporation was formed to take title to Bon-Air Apartment Buildings, then under construction. Appellant and his wife, Lucile Bursten, held 16 of the 80 shares of stock issued by this corporation, for which appellant paid the nominal sum of $300.00. Sawyer was also a stockholder therein, as well as other persons whose interests are not pertinent to this prosecution. In 1951 appellant borrowed some $10,000 from Sawyer and gave a note secured by pledge of the 16 shares of East Corporation stock owned by appellant and his wife to Sawyer as collateral for the loan. When the note was not paid timely, Sawyer had these 16 shares transferred to his Sawyer's name on the books of the corporation.

C. The Boca Ciega Land Contract. January 25, 1955, appellant entered into a contract with Hyman Green, of Irving Green & Associates, whereby the Greens were to purchase certain tracts of land in Florida and appellant was to perform legal services connected with development of that real estate. Both parties were entitled to a fifty per cent interest in the land to be acquired, contingent upon repayment of all funds advanced by the Greens. (Government Exhibit No. 1). August 26, 1957, appellant assigned all of his interest in this contract to the Greens for $160,000.

D. The 1957 Tax Return. May 9, 1960, I.R.S. received an income tax return from appellant marked "Amended" 1957 Return. This return was dated November, 1959. The Service had no record of any prior return from him for the year 1957.

In filing this return, appellant reported a capital gain of $156,000 ($160,000 less certain sales expenses) on disposition of his interest in the Boca Ciega Land Contract. As an offset against this gain he claimed a carry-over capital loss of $140,000, described in the following manner (Government Exhibit No. 8):

"Carry-over Loss from previous returns of Kadison Corp. Loss, which was determined in Internal Revenue Service audit of 1959 to be a Capital Loss — Fair market value of property in excess of $140,000."

Appellant also claimed a $14,000 "loss"² on his 1957 return resulting from his legal practice. Thus he reported no taxable income on his return for 1957.

Upon receipt of this 1957 income tax return, I.R.S. conducted a thorough investigation in an attempt to find the basis for the $140,000 capital loss. When their investigation failed to substantiate appellant's claim of that loss, this prosecution ensued.

At trial, the Government offered testimony from Special Agent George Vilas which tended to show that his investigation of the $140,000 loss revealed that this loss could not be substantiated in any manner. Moreover, the Government presented the testimony of Michael Zier, who was accepted as an expert in the field of income tax declarations. Zier reiterated the Government's contention that there was no basis for the $140,000 loss carry-over. He also testified that, under the law and regulations, the $160,000 treated as capital gain from the Boca Ciega Land Contract should have been treated as ordinary income instead of capital gain. He based his analysis on the fact appellant received these monies for legal services performed by him in consummation of that land contract. Zier concluded that a complete analysis of appellant's return showed that he should have reported a net income of $145,497.96. The tax due on this amount would have been $87,871.85. En passant, we must note that Zier's computations were not in exact accord with the charges in the indictment, although they were not materially different.

Bursten defended by seeking to show that the $160,000 reported as capital gain resulted from his alienation of an interest in immovable property. When questioned about the $140,000 capital loss carry-over, Bursten attempted to explain that loss in the following manner:

He asserted that the $140,000 loss claimed for 1957 was not actually a carry-over loss from Kadison Corporation. Instead he testified that in 1957 his wife threatened to sue both him and Sawyer for the sixteen shares of stock which had been transferred to Sawyer as a result of his prior loan to appellant. In order to pay his wife for her stock, appellant transferred to her a two-thirds interest in certain Florida real estate which he had acquired. Further testimony revealed that appellant acquired this property from one Wells, after assuming the debt Wells owed upon it. Bursten then testified that he borrowed money from two banks to pay off the indebtedness on the property and thus acquired title thereto from the actual owners, whose names were Lightsey. He testified that he paid some $220,000 for this property and that a two-thirds interest therein, which he transferred to his wife, would have a value of approximately $140,000. According to appellant, this was the basis of the capital loss carry-over which he reported on his 1957 tax return.

Bursten further stated that he claimed this loss in 1957 because he was specifically advised to do so by his tax counsel, William J. Goldworn. Goldworn, accepted by the Court as an expert in income tax matters, testified that he had represented both Mr. and Mrs. Bursten in their tax affairs through 1957, and in some instances thereafter. He further declared that Mrs. Bursten initially came to him because she was unhappy with what had happened to the East Corporation stock.

Concerning the 1957 return, Goldworn testified that Bursten brought to him several contracts dealing with his various land transactions. They then discussed the propriety of appellant's reporting certain of these transactions as gains and losses on his 1957 income tax return. Goldworn said that, since the purchase price of the land from the Lightseys was $220,000, and "since his Bursten's wife had a two-thirds interest in it which had been — he had purchased certain stock from her for that interest — then the value of the stock would be what he Bursten paid her for it if it was an arm's length transaction and that, therefore, two-thirds of $220,000 was approximately $140,000." (Tr. 676) Goldworn then stated that, in his opinion, the transaction was indeed an arm's length transaction.

The Government countered by asking Goldworn whether he knew such losses were not deductible under Section 267 of the Internal Revenue Code of 1954. Goldworn replied that in his opinion such an "arm's length transaction" as the one he had described was not within the reach of Section 267.

As noted, at the close of the evidence and after the jury was charged by the Court as to the law, appellant was convicted of willful evasion of income tax due in 1957. We now proceed to consideration of the specific issues presented by this appeal. While appellant has set forth a nine-point argument in brief, we find it necessary to rule upon only three of these, which are definitely dispositive of the appeal.³

I.

The first question presented is whether this prosecution was barred...