Taglianetti v. United States

Decision Date18 July 1968
Docket NumberNo. 6829.,6829.
PartiesLouis J. TAGLIANETTI, Defendant, Appellant, v. UNITED STATES of America, Appellee.
CourtU.S. Court of Appeals — First Circuit

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John A. Varone, Providence, R. I., with whom Bruce M. Selya and John F. McDonough, Providence, R. I., were on brief, for appellant.

John P. Burke, Atty., Dept. of Justice with whom Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and Joseph M. Howard, Attys., Dept. of Justice, and Edward P. Gallogly, U. S. Atty., were on brief, for appellee.

Before ALDRICH, Chief Judge, McENTEE and COFFIN, Circuit Judges.

COFFIN, Circuit Judge.

This is an appeal from a conviction under 26 U.S.C. § 7201 for income tax evasion during the calendar years 1956, 1957, and 1958. Appellant alleges failure of proof of an essential element of the government's prosecution under the "cash expenditure" method of establishing unreported taxable income, errors in various rulings and in the instructions of the district court at trial, and error in the court's consideration and disposition, pursuant to our earlier remand, of the question of possible taint occasioned by a wiretap of telephone conversations in which appellant took part. We affirm.

The Net Worth Issue

Appellant filed joint tax returns with his wife for the years in prosecution, showing income from two sources: his employment as a "locations" man for a cigarette vending machine company and his net winnings from parimutuel betting. Relevant data from these returns are set forth in the margin.1 The government's evidence at trial showed substantially larger amounts of income and tax due.2

The government proceeded on a "cash expenditure" theory. This is a variant of the net worth method of establishing unreported taxable income. Both proceed by indirection to overcome the absence of direct proof. The net worth method involves the ascertaining of a taxpayer's net worth positions at the beginning and end of a tax period, and deriving that part of any increase not attributable to reported income.3 This method, while effective against taxpayers who channel their income into investment or durable property, is unavailing against the taxpayer who consumes his self-determined tax free dollars during the year and winds up no wealthier than before. The cash expenditure method is devised to reach such a taxpayer by establishing the amount of his purchases of goods and services which are not attributable to the resources at hand at the beginning of the year or to non-taxable receipts during the year.4 The beginning and ending net worth positions must be identified with sufficient particularity to rule out or account for the use of a taxpayer's capital to pay for his purchases. If the end-of-year net worth position is equal to that at the beginning of the year, and if there are no non-taxable sources of income during the year, such as gifts or inheritances, the totality of the year's expenditures reflects total taxable income. If ending net worth shows an increase, the increase reflects an added component of income. If ending net worth shows a diminution, the decrease reduces pro tanto the extent to which expenditures reflect income.

In this case the government's evidence, based on appellant's admissions at several interviews and its own independent investigation, tended to establish that appellant and his wife owned very little property. They lived in rented premises until mid-1957 when they moved into a house inherited by his wife and sister-in-law. He owned a 1955 Cadillac which he traded in 1956 for a 1956 Cadillac, which was traded in 1957 for a Lincoln. He owned a boat which he sold in 1956, using the proceeds as part payment for a much more expensive boat. He owned no stocks, bonds, life insurance (except for $2,000 coverage in connection with a sickness benefit policy), or any other property. He had no checking account or savings account. His wife had one savings account opened in 1957 with a deposit of $1.00, and showing deposits totalling $212.50 in 1958. During the tax years he purchased a living room set and a sofa. His wife owned a fur coat which in 1956 was six years old and various items of jewelry purchased from individuals at undisclosed prices. In terms of day-to-day living, he and his wife lived frugally, took no vacations except for weekends, and did no entertaining. He gave his wife money for the household which, as of 1962, would amount to $40-$45 a week for food.

As for cash on hand, appellant during the taxable years would have about $10,000, borrowed from several banks or loan companies at 8 per cent interest for financing his parimutuel betting. He would have on his person at any one time $300 to $400. These funds were not used for his personal needs. As appellant expressed it, "The money I borrowed from the banks I cannot touch for anything at all. It's used expressively (sic) to finance my horse betting at the tracks. * * * I cannot, in no way, touch that money, even to buy food, for I would be licking myself." At the beginning of 1956, he owed $3,300 on an outstanding loan. During the taxable years he received $13,770 and paid back $18,700 in connection with such loans.

One other source of funds was the subject of contradictory evidence. In 1948 appellant had loaned one Ralph Merola $15,000. Appellant's first version was that the last time he saw Merola, presumably in 1958, Merola gave him $3,000 in cash and some "hot" Canadian bonds which he destroyed, and that Merola's wife paid him between $6,000 and $8,000 in 1959. Appellant's second version was that in 1958 Merola, desiring to repay the loan — now $14,000 — as well as $5,000 which appellant had advanced to the Internal Revenue Service for Merola, gave him an envelope containing Canadian bonds which appellant destroyed on ascertaining that they were stolen. This version made no reference to cash. A third version came from an accountant, Bevilacqua, who helped appellant on his tax returns. He said that $1,000 was paid appellant by Merola in 1956, $6,000 in 1957, around $2,000 in 1958, and that Merola's estate paid $8,000 in 1959. Still another source of confusion stems from the filing of a suit in court against Merola's estate in 1959 for $14,000, the amount of a note executed in 1956.

Against this background, the government introduced evidence of expenditures made and proceeds of loans received (except for the Merola loan) by appellant during the taxable years which resulted in the following totals:

                                                         1956          1957        1958
                  Total cash expenditures             $29,840.41    $23,399.90   $17,004.02
                  Less: non-taxable receipts           14,122.40      9,170.00       --
                                                      __________    __________   __________
                  Corrected adjusted gross income     $15,718.01    $14,229.90   $17,004.02
                  Less: exemptions                      2,400.00      3,000.00     3,000.00
                                                      __________    __________   __________
                                                      $13,318.01    $11,229.90   $14,004.02
                  Less: deductions                      1,000.00      1,488.14     1,251.83
                                                      __________    __________   __________
                  Corrected taxable income            $12,318.01    $ 9,741.76   $12,752.19
                  Unreported taxable income             7,963.51      4,533.76     7,237.19
                

An accountant testifying for appellant presented his analysis which differed in two respects. He included as nontaxable receipts the $3,300 owed at the beginning of 1956 to a loan company, an additional $6,700 to bring appellant's total borrowings up to $10,000, a $1,000 payment by Merola in 1956, $6,000 in 1957, and $2,000 in 1958. He excluded from expenditures several items: food, Blue Cross, support of appellant's sisters, and two major payments for boat supplies.5 The result was non-taxable receipts in excess of cash expenditures of $5,001.99 in 1956, $10,475.09 in 1957, and $9,136.73 in 1958.

Appellant's contention that there was a failure of proof in the government's case is, to follow his position as stated in his brief, "* * * that even assuming, arguendo, that the evidence adduced shows he spent more money during the indictment years than his reported gross income, there is not one scintilla of evidence to show that said expenditures came out of current receipts only and not out of available assets acquired in prior years. This is so because there is absolutely no competent evidence which, in any way suffices to clearly and accurately establish the extent of defendant's prior assets at the beginning of any or all the indictment years; i. e., there is no opening net worth for January 1, 1956, 1957 or 1958."

Appellant mistakes form for substance. In this case, the prosecution presented evidence to support the conclusion that the assets owned by appellant and his wife either remained at a static level, or instead increased over the taxable years, and in any event made no contribution to the expenditures shown. The jury was entitled to accept appellant's statement that he did not touch his loan proceeds for other than betting and to reject the testimony of payments received from Merola. There is no suggestion that cars, boats, furniture, jewels, or other property were disposed of to finance current purchases. The expense items excluded by appellant's accountant presented issues of fact which the jury obviously resolved against appellant.

This state of the proof fully satisfies the requirement in Holland v. United States, 348 U.S. 121, 132, 75 S.Ct. 127, 134, 99 L.Ed. 150 (1954), of "the establishment, with reasonable certainty, of an opening net worth, to serve as a starting point from which to calculate future increases in the taxpayer's assets."6 In a typical net worth case, as Holland, precise figures would have to be attached to opening and...

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