660 F.2d 1145 (7th Cir. 1981), 80-2114, United States v. Scott

Docket Nº:80-2114.
Citation:660 F.2d 1145
Party Name:UNITED STATES of America, Plaintiff-Appellee, v. William J. SCOTT, Defendant-Appellant.
Case Date:September 18, 1981
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 1145

660 F.2d 1145 (7th Cir. 1981)

UNITED STATES of America, Plaintiff-Appellee,

v.

William J. SCOTT, Defendant-Appellant.

No. 80-2114.

United States Court of Appeals, Seventh Circuit

September 18, 1981

Argued Feb. 20, 1981.

Certiorari Denied Jan. 18, 1982.

102 S.Ct. 1252.

Page 1146

Philip B. Kurland, Rothschild, Barry & Myers, Chicago, Ill., for defendant-appellant.

Scott F. Turow, Asst. U.S. Atty., Thomas P. Sullivan, U.S. Atty., Chicago, Ill., for plaintiff-appellee.

Before CUMMINGS, Chief Judge, FAIRCHILD, Senior Circuit Judge, and PELL, Circuit Judge.

Page 1147

FAIRCHILD, Senior Circuit Judge.

On April 9, 1979, defendant William J. Scott, Attorney General for the State of Illinois, was indicted for wilfully understating his adjusted gross income on his personal income tax returns for the calendar years 1972 through 1975 and for filing a false amended return for 1974. His trial began on January 8, 1980. On March 19, 1980, after five days of deliberations, the jury returned a verdict finding Scott guilty of Count One of the indictment, relating to his 1972 return, but not guilty on Counts Two through Five, relating to his 1973, 1974 and 1975 returns. It is from judgment on this verdict that Scott appeals. 1

In reviewing Scott's arguments on appeal, we have followed the Supreme Court's admonition that prosecutions such as this should be analyzed "bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation." Holland v. United States, 348 U.S. 121, 129, 75 S.Ct. 127, 132, 99 L.Ed. 150 (1954). Nevertheless, we have found no error, constitutional or otherwise, in Scott's trial. Accordingly, we affirm.

I. The Government's Case Against Scott

Count One of the indictment charged Scott with violating 26 U.S.C. § 7206(1) 2 by wilfully and knowingly preparing and filing a false United States Individual Income Tax Return (Form 1040) for the calendar year 1972 and then verifying this return as true under penalties of perjury. The indictment charged that although Scott stated in his return that his adjusted gross income was $31,643.00, he knew and believed that his adjusted gross income for 1972 was substantially in excess of that sum.

To sustain a conviction under 26 U.S.C. § 7206(1), the proof must show: (1) that Scott knowingly prepared and filed a Form 1040 for the year 1972 which he verified as true; (2) that the return was false in some material way in this case, that Scott falsely reported his adjusted gross income for the year 1972; and (3) that Scott's actions in falsifying his return were wilful.

In this case, the government relied on two types of proof that Scott falsely reported his adjusted gross income for 1972: the net worth and expenditures method of proof, as approved by the Supreme Court in Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954), and the specific items approach.

Under the net worth method of proof, the government was first required to establish Scott's "opening net worth" or total net assets at the beginning of the prosecution year, here, January 1, 1972. The government was then obliged to prove that Scott's net worth increased between January 1 and December 31, 1972, the end of the prosecution period for purposes of this appeal. This it did by calculating the difference between net worth at the beginning and end of the year. To that figure, the government added Scott's expenditures for the year, yielding putative income. The government was then required to show that the likely source of the difference between Scott's reported adjusted gross income and his putative income was taxable income, or that no nontaxable source for the difference existed. United States v. Massei, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517 (1958). Finally, because the net worth method of proof rests solely on circumstantial and indirect evidence, the government was required to negate all reasonable explanations offered by Scott which were inconsistent with his guilt. See Holland v. United States, supra; United States v. Hamilton,

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620 F.2d 712, 714 (9th Cir. 1980); Taglianetti v. United States, 398 F.2d 558, 562 (1st Cir. 1968), aff'd, 394 U.S. 316, 89 S.Ct. 1099, 22 L.Ed.2d 302 (1969); Davis v. Commissioner, 239 F.2d 187, 189 (7th Cir. 1956), cert. denied, 353 U.S. 984, 77 S.Ct. 1284, 1 L.Ed.2d 1143 (1957).

Pursuant to the specific items approach, the government attempted to show that Scott excluded several material items of his 1972 income from his 1972 Form 1040. Proof that Scott wilfully omitted any one of these items would be sufficient to sustain a conviction under 26 U.S.C. § 7206(1).

The government's net worth proof combined with one of the specific items of income, the Wirtz-Cooper payments, indicated that Scott understated his 1972 adjusted gross income by more than $22,153, for an adjusted gross income of at least $53,796.

A. Scott's 1972 Form 1040

There can be little doubt that Scott had personal knowledge of the contents of his 1972 tax returns. His accountants prepared his return from worksheets he personally completed. Scott signed the return after verifying it in a private meeting with his accountant. According to Scott's 1972 Form 1040, he earned $30,887 in wages, salaries, tips and other employee compensation, and $756 in interest income, for a total adjusted gross income of $31,643.00. His itemized deductions totaled $13,237, including $12,000 in alimony payments, $150 in medical and dental expenses, $996 in deductible taxes (general sales, state and local income taxes), $140 in charitable contributions, $100 in casualty or theft losses, $175 for the preparation of his tax returns, and $62 for the maintenance of his safe deposit boxes. According to Scott's calculations, $5,448 had been withheld for federal income taxes, but he was required to pay only $4,296. He thus claimed that he was entitled to a $1,198 refund.

B. Evidence that Scott's 1972 Form 1040 Was False: The Net Worth Case

The government's net worth proof indicated that Scott's net worth increased from approximately $30,253 at the close of 1971 to approximately $51,420 at the end of 1972. 3 The government claimed that the likely source of this increase was campaign contributions which Scott converted to his personal use in 1972. Accordingly, it argued that these contributions became taxable income in 1972 which Scott should have reported on his Form 1040. E.g., United States v. Miriani, 422 F.2d 150, 152 (6th Cir.), cert. denied, 399 U.S. 910, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970); O'Dwyer v. Commissioner, 266 F.2d 575, 586 (4th Cir.), cert. denied, 361 U.S. 862, 80 S.Ct. 119, 4 L.Ed.2d 102 (1959); Paschen v. United States, 70 F.2d 491, 500 (7th Cir. 1934). Scott, on the other hand, introduced evidence from which the jury could have inferred that the source of the cash expenditures relied on by the government in establishing his net worth increase was nontaxable cash "gifts" he received prior to and during 1972. See William G. Stratton, 54 T.C. 255, 280-81 (1970). The government attempted, largely by cross-examination, to bring out that most of the so-called "gifts" were motivated by concern for Scott's needs because of his political career, and, in some

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instances, as a reward for official action beneficial to the donor. 4

  1. Opening Net Worth

    As its starting point in proving Scott's net worth, see United States v. Hamilton, 620 F.2d 712, 714 (9th Cir. 1980); Kramer v. Commissioner, 389 F.2d 236, 238 (7th Cir. 1968), the government offered a letter dated April 16, 1968, that Scott wrote to his first wife, now Dorothy Humphrey, from whom he was then separated. In this letter, an apparent effort to arrange a property settlement, Scott described his assets and liabilities in detail. The letter indicated that the Scotts, together, had total assets of approximately $122,000. Their assets included their home, personal furnishings, savings and checking accounts, and stock in Holiday Travel House, Inc., a travel agency they owned jointly. Their only liability was a $28,000 mortgage on their home. Scott proposed that he transfer $93,000 of these assets to Dorothy, including the house, automobiles and bank accounts totaling $10,000, and keep $29,000 in assets for himself, consisting of $18,000 in bank deposits and cash, and the $11,000 worth of stock in Holiday Travel House, Inc. Scott offered to retain the $28,000 mortgage on their house as a liability, which left him with a total net worth in 1968 of $1,000. Scott stated in his letter that he would place this remaining $1,000 in their children's savings accounts. 5

    The government then traced Scott's net worth from April 16, 1968 to December 31, 1971, the eve of the prosecution period. The government's evidence indicated that at the end of 1971, Scott had a net worth of approximately $30,253.

  2. The Net Worth Increase

    Between December 31, 1971 and December 31, 1972, the relevant year for purposes of this appeal, Scott's net worth increased by approximately $21,000, giving him a total net worth at the end of 1972 of approximately $51,420. The evidence showed that most of this increase was reflected in increased savings: in 1972 Scott deposited $21,877 in savings accounts and certificates of deposit. The primary source for these deposits was Scott's paychecks. Indeed, the evidence showed that Scott did not cash a single paycheck in 1972. Instead, he deposited each paycheck in one of his checking accounts or invested them in certificates of deposit, savings accounts or interest bearing securities. Another source for Scott's investments was his reimbursement warrants for state travel, which totaled $2,657 in 1972. When he received them...

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