United States v. DiVarco

• Decision Date: 14 August 1973
• Docket Number: No. 72-1804.,72-1804.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Joseph DiVARCO and Joseph Arnold, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

484 F.2d 670 (1973)

UNITED STATES of America, Plaintiff-Appellee, v. Joseph DiVARCO and Joseph Arnold, Defendants-Appellants.

No. 72-1804.

United States Court of Appeals, Seventh Circuit.

Argued April 26, 1973.

Decided August 14, 1973.

Rehearing Denied October 10, 1973.

COPYRIGHT MATERIAL OMITTED

Raymond J. Smith, Chicago, Ill., for defendants-appellants.

James R. Thompson, U. S. Atty., William T. Huyck, Glynna W. Freeman, Asst. U. S. Attys., Chicago, Ill., for plaintiff-appellee.

Before MOORE, Senior Circuit Judge,^* and CUMMINGS and PELL, Circuit Judges.

PELL, Circuit Judge.

The defendants Joseph DiVarco and Joseph Arnold were charged in separate counts of an indictment with willfully and knowingly making and subscribing to a false statement on their respective 1965 federal income tax returns, which returns were verified by written declarations that they were made under the penalties of perjury, in violation of 26 U.S.C. § 7206(1). The two defendants were also indicted for conspiracy in violation of 18 U.S.C. § 371 in that they conspired with Irwin Davis, an unindicted co-conspirator, in violation of 26 U. S.C. § 7206(1), to report a false source of income from Chemical Mortgage & Investment Corporation, of which Davis was a stockholder and agent, "so as to conceal from the Internal Revenue Service of the United States the true source of the income reported and to prevent examination by the said Internal Revenue Service as to the truth or falsity of the income reported."

A jury found the defendants guilty as charged and each was sentenced to one year on the conspiracy count and to five years on probation on the substantive counts, the probation to run consecutively to the period of imprisonment.

On this appeal, appellants raise three separate grounds for reversal: the impropriety of prosecution under 26 U.S.C. § 7206(1) when there was no showing of an understatement of income; improper activity of the district judge; and the erroneous admission into evidence of defendant Arnold's prior felony conviction.

I

Chapter 75, subchapter A, of the Internal Revenue Code of 1954, as amended, 26 U.S.C. §§ 7201-7241, is concerned with tax crimes. Sections 7201-7207, inclusive, which in the aggregate relate to attempts to evade or defeat tax, to failures to act, and to fraud, all include the word "willfully" in their respective contexts. Specifically, § 7206 is a felony statute and reads:

"§ 7206. Fraud and false statements.

Any person who—

(1) Declaration under penalties of perjury.

Willfully, makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter . . . .

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shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $5,000, or imprisoned not more than 3 years, or both, together with the costs of prosecution."

Appellants contend that since there was no showing by the Government that they had in fact understated their income, 26 U.S.C. § 7206(1) was not applicable and only the general federal false statement statute, 18 U.S.C. § 1001, related to their alleged misconduct. Prosecution under that section was allegedly barred by the statute of limitations.¹ The district court in a memorandum opinion, United States v. DiVarco, 343 F.Supp. 101 (N.D. Ill. 1972), concluded that the source of income was a "material matter" and that the willful and knowing misstatement of the source of income was covered by the prohibition in § 7206(1).

It is true, as contended by the defendants and observed by Judge Will in his opinion, that most, if not all, of the cases involving misstatement of source of income also involved an understatement of taxable income. However, "one of the more basic tenets running through all the cases is that the purpose behind the statute is to prosecute those who intentionally falsify their tax returns regardless of the precise ultimate effect that such falsification may have." 343 F.Supp. at 103.

We agree with and adopt Judge Will's opinion as to materiality. The plain language of the statute does not exclude the matter of the source of income from the definition of "material matter." In light of the need for accurate information concerning the source of income so that the Internal Revenue Service can police and verify the reporting of individuals and corporations, a misstatement as to the source of income is a material matter.²

As to the defendants' argument that they should only have been charged under 18 U.S.C. § 1001, "the choice lies with the Government, and it is not the privilege of the defendant to say that the Government should have proceeded under a different section." United States v. Rayor, 204 F.Supp. 486, 489-490 (S.D.Cal.1962), appeal dismissed, 323 F.2d 519 (9th Cir. 1963), cert. denied, 375 U.S. 993, 84 S.Ct. 632, 11 L. Ed.2d 479 (1964).

Appellants also contend that, as in Spies v. United States, 317 U.S. 492, 63 S.Ct. 364, 87 L.Ed. 418 (1943), it was incumbent on the Government to prove specific intent and evil motive and purpose. Since the Government never proved that appellants had other sources of income which they were seeking not to disclose, it is argued that the proof of evil purpose was insufficient. While Spies involved a violation of the predecessor to 26 U.S.C. § 7201, § 145(b) of the Revenue Act of 1936, which proscribed attempts to "evade or defeat any tax" and not false swearing on a return, nevertheless, it is clear that willfulness under § 7206(1) also requires proof of bad purpose or evil motive. United States v. Bishop, supra, 412 U.S. at 359, 93 S.Ct. 2008. This is not to say, however, that the evil motive must have been to evade the payment of taxes, which was what was involved in Spies. Here there was evidence from which the jury could have found, and apparently did, that the defendants reported income but falsely reported the source. Evil motive, of course, was not admitted. It seldom is. Of necessity, it is ordinarily proven by other evidence from which the inference may fairly be drawn that the evil motive existed at the pertinent time.

While the district court in its charge to the jury did not advert to bad purpose or evil motive in haec verba, we find no difficulty in discerning from the thorough coverage afforded by the instructions that the jury was told of the necessity of the mens rea. The following extracts from the charge sufficiently demonstrate the point:

"That is the statute. Any person who wilfully makes and subscribes any return, statement or other document which contains or is verified by a written declaration that it is made under the penalties of perjury and which he does not believe to be true and correct as to every material matter, shall be guilty of an offense against the United States.

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"Second, that the maker of the return did not believe the return to be true and correct as to a material matter. Obviously, that is what the statute says. Has to be a knowing and willful filing of a document which contains a statement which the maker does not believe to be true and correct.

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"If, on the other hand, you are not satisfied the government has established both of those propositions beyond a reasonable doubt, if they fail to establish either one, that is, that the return was false as to the source of the income, and that the defendant did not reasonably believe it to be true and correct as to a material matter, then you will find the defendant innocent, not guilty as charged.

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"I used the word `false\' for example, talking about a false statement. Well, false means a statement, if untrue when made and then known to be untrue by the person making it or causing it to be made. In law, false is something a little bit more than just an inaccurate statement. It is an inaccurate statement known to be inaccurate.

"People make inaccurate statements accidentally. That is not a false statement in law. That is just an incorrect statement, inaccurate statement. When you say `false\' you mean an inaccurate statement which the maker knows is inaccurate.

"I have talked about knowing and willfully. You should understand what knowing and willfully are all about.

"Well, they are just about what you think they are. Knowing and willfully means that you are doing something deliberately, not accidentally, not inadvertently, not mistakenly; that you are doing something—you know, the reason why we put this in the law is that people won\'t be convicted for accidental, inadvertent, mistaken acts. They will only be convicted for doing something knowingly and willfully, deliberately, intentionally, with a purpose to do something which the law forbids, or to fail to do something which the law requires.

"Which brings me to the subject of intent.

"Under our system of justice, two things are required to make a person guilty of violating the law. He has to do an act and he has to do it with the requisite criminal intent. Specific intent is what is talked about in cases of this kind.

"As that term implies, specific intent means more than just the intention to do an act. It means not only the intention to do the act, but to do the act knowingly and knowing that it is an act which the law forbids, purposely. In other words, intending to violate the law."

The evidence was more than sufficient to sustain the charge of violation of § 7206(1).

II

Appellants next contend that the district judge's participation in the trial of this case violated the principles of fair trial enunciated in United States v. Hill, 332 F.2d 105 (7th Cir. 1964). In Hill, the district judge participated extensively in the cross-examination of the defendant and his witnesses while asking only two questions of Government witnesses, both of which brought out answers highly favorable to the Government. Further, the judge knew that the answers...