U.S. v. Pomponio

• Citation: 563 F.2d 659
• Decision Date: 06 October 1977
• Docket Number: No. 74-1758,74-1758
• Parties: 77-2 USTC P 9677 UNITED STATES of America, Appellee, v. Peter POMPONIO, Paul Pomponio, Appellants. . Re
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 659

563 F.2d 659

77-2 USTC P 9677

UNITED STATES of America, Appellee, v. Peter POMPONIO, Paul Pomponio, Appellants.

No. 74-1758.

United States Court of Appeals, Fourth Circuit.

Resubmitted after remand April 18, 1977.

Decided Oct. 6, 1977.

Alan Y. Cole, Washington, D. C. (Lee A. Schutzman; Cole & Groner, Stuart E. Seigel, Cohen & Uretz, Washington, D. C., Philip J. Hirschkop and Leonard S. Rubenstein, Washington, D. C., Philip Hirschkop & Associates, Ltd., on brief), for appellants Peter Pomponio and Paul Pomponio.

Thomas K. Moore, Asst. U. S. Atty. (David H. Hopkins, U. S. Atty., Frank W. Dunham, Jr., Justin W. Williams, Asst. U. S. Attys., and Charles E. Brookhart, Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., on brief) for appellee.

Before RUSSELL, FIELD and WIDENER, Circuit Judges.

WIDENER, Circuit Judge:

Peter and Paul Pomponio were convicted in the district court of willful evasion of federal income taxes for the years 1969, 1970, and 1971. ¹ Their appeal challenging the validity of the convictions is now before us for the second time. In United States v. Pomponio, 528 F.2d 247 (4th Cir. 1976), we reversed on the ground that the district court inadequately instructed the jury on the essential element of willfulness. The Supreme Court granted the government's petition for certiorari and reversed in 429 U.S. 10, 97 S.Ct. 22, 50 L.Ed.2d 12 (1976), holding that the trial court's instruction on criminal intent was proper, thus reinstating the convictions. The case was remanded to us with instructions to consider the assignments of error raised which we found unnecessary to reach in our previous disposition. In obedience to the mandate, we have considered the remaining contentions on appeal, and conclude that the convictions should be affirmed.

The appellants, together with a third brother, Louis Pomponio, ² owned and operated several closely-held corporations engaged in real estate development in the vicinity of northern Virginia. They and their attorney, Charles Piluso, ³ were charged in a thirteen count indictment with three counts each of willfully filing false income tax returns (one count for each year in question for each defendant), and one count of conspiring to defraud the United States. The substantive counts related to the Pomponios' individual income tax returns, and consisted of: (1) failing to report as income certain monetary advances received from closely-held corporations controlled by the Pomponios; and (2) deducting The conspiracy count related to the alleged falsification of corporate tax returns and, for that reason, was severed from the trial on appellants' motion following the government's opening statement, as we will discuss in more detail below. ⁴

from personal income a claimed partnership loss of $119,000 in 1971, which the government claimed was properly allocable to one of the Pomponio corporations.

The Pomponios' position is that the advances received from their corporations were merely loans, not reportable as income, and were correctly treated as such for income tax purposes. They claim that, even if the advances should have been treated as income, the error was not willful, in that they relied on their accountant, Bates, who was responsible for preparing the returns. They further assert they were entitled to deduct as a partnership loss on their individual returns a loss sustained by one of the Pomponio corporations, the Virginia Corporation, for the reason that, when the corporation sustained the loss, it was acting only as an agent of PHB Associates, a partnership in which the appellants were partners.

I. SUFFICIENCY OF THE EVIDENCE

We reject the Pomponios' defense of reliance on their accountant in treating the advances as loans, ⁵ as well as their reliance on the principle that, when it is problematical as a matter of law whether a taxpayer's unreported income is taxable, mere errors in judgment will not give rise to criminal liability. United States v. Critzer, 498 F.2d 1160 (4th Cir. 1974). Both assertions are applied to the proposition that the criminal law concerns itself only with willful violations of the tax laws, not with inadvertent errors made in good faith. United States v. Bishop, 412 U.S. 346, 360-61, 93 S.Ct. 2008, 36 L.Ed.2d 941 (1973); Spies v. United States,317 U.S. 492, 496, 63 S.Ct. 364, 87 L.Ed. 418 (1943). But in this case, they constitute no more than defenses which were rejected by the jury as the triers of fact; for, as to the first defense, the sine qua non of a bona fide non-reportable loan is the taxpayer's own intention to repay. See Estate of Taschler v. United States, 440 F.2d 72 (3d Cir. 1971); Livernois Trust v. Commissioner, 433 F.2d 879 (6th Cir. 1970); Commissioner of Internal Revenue v. Makransky, 321 F.2d 598 (3d Cir. 1963); 1 Mertens, Law of Federal Income Taxation § 9.21. As to the second defense, that loans which are not actually such are income, is beyond argument. If the Pomponios intended to repay the advances, the sums advanced to them did not constitute reportable income, as the jury was instructed. While there may be instances in which an accountant's interpretation of the tax laws can justifiably be relied upon by a taxpayer, even if erroneous, see United States v. Pechenik, 236 F.2d 844 (3d Cir. 1956), certainly these cannot include cases where the only real question bearing on the correctness of the returns, as here, is one of the taxpayer's own intent.

The Pomponios knew, at the time they signed their tax returns, whether they had received funds from their corporations with the intention of repaying them. On the question of their own state of mind, a matter of fact, they can hardly claim reliance on their accountant, for it was incumbent upon them to inform Bates that the advances were not loans if they had no intention of repayment. As one court has repeated, "a taxpayer cannot shift the responsibility for admitted deficiencies to the accountants who prepared his returns if the taxpayer withholds vital information from his accountants . . . ." United States v. Lisowski, 504 F.2d 1268, 1272 (7th Cir. 1974); United States v. Scher, 476 F.2d 319, 321 (7th Cir. 1973).

The nature of that intent was a question of fact for the jury's resolution. See Livernois Trust, at 883. In this criminal prosecution, the principal question that presently concerns us with respect to the advances is whether the evidence was sufficient for the jury to have found beyond a reasonable doubt that the advances were not loans, that is, that no intent to repay them existed, and that the defendants knew they were not loans. We think the evidence was ample to sustain such findings. For example: although the advances were treated as loans on the books of the Pomponio corporations, it is undisputed that no date was fixed for repayment, and no notes were executed by the Pomponios as evidence of indebtedness; neither was any security given to guard against the contingency of default, nor was interest charged or paid with respect to the advances. ⁶ We have approved reference to similar criteria in distinguishing loans from contributions to capital for the purpose of bad debt deductions, see Road Materials, Inc. v. Commissioner of Internal Revenue, 407 F.2d 1121, 1125 (4th Cir. 1969), and the jury here was entitled to conclude on the basis of such factors that the loans, approximately in the aggregate 2.5 million dollars, in the three pertinent years, were not made as loans in these circumstances.

We realize that a course of self-dealing between individuals and their closely-held corporations must be considered from both sides. On one hand, the need to examine closely the substance of the transactions, as well as the form in which they are couched, is especially acute; thus, the fact that the advances were formally treated as loans on the corporate books is not controlling. Road Materials, Inc., supra. On the other hand, the possibility exists that bona fide loan transactions may be carried out in the informal manner presented here within closely held corporations. But these are circumstances for the jury to have weighed and have less force on appeal where our reviewing role as to factual matters is limited to ascertaining whether the jury's verdict is supported by substantial evidence, viewed in the light most favorable to the government. Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 86 L.Ed. 680 (1942); United States v. Sherman, 421 F.2d 198, 199 (4th Cir.), cert. den. 398 U.S. 914, 90 S.Ct. 1717, 26 L.Ed.2d 78 (1970).

The inclusion of the 1971 loss on account of the PHB partnership requires inquiry into this additional basis for conviction on the 1971 tax evasion counts.

The Virginia Corporation was formed by the Pomponios in 1970 for the purpose of constructing a building on land to be acquired in the District of Columbia. The defense contends that, as a condition for providing additional, necessary financing for the project after construction had commenced, a New York financier named Ginsberg required that ownership of the land and building be placed in partnership form. Thus a limited partnership, PHB Associates, was formed, with the three Pomponio brothers, attorney Piluso, and Ginsberg as partners, as well as PHB Realty, Inc.

In addition to the limited partnership agreement, a nominee agreement was executed which provided that, in this real estate transaction, the Virginia Corporation would act as an agent for PHB, and would hold title to any real property belonging to the partnership. Although it appears that a deed was executed conveying the Washington, D. C. property from the Virginia Corporation to PHB Associates, record as well as actual title to the property was retained in the corporation's name. The deed to PHB was never recorded.

Accountant Bates testified that, based on the limited partnership agreement furnished him by the Pomponios, and acting pursuant to their instructions, he treated...