Bell v. United States

• Decision Date: 08 November 1950
• Docket Number: No. 6121.,6121.
• Parties: BELL v. UNITED STATES.
• Court: U.S. Court of Appeals — Fourth Circuit

185 F.2d 302 (1950)

BELL v. UNITED STATES.

No. 6121.

United States Court of Appeals Fourth Circuit.

Argued October 2, 1950.

Decided November 8, 1950.

As Corrected January 26, 1951.

Writ of Certiorari Denied February 26, 1951.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

G. C. A. Anderson, Baltimore, Md. and George L. Hart, Jr., Washington, D. C. (Anderson & Barnes, Baltimore, Md., on the brief), for appellant.

Norman P. Ramsey, Asst. U. S. Atty., Baltimore, Md. (Bernard J. Flynn, U. S. Atty., Baltimore, Md., on the brief), for appellee.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

Benjamin Bell was indicted in three counts under Section 145 (b) of the Internal Revenue Code, 26 U.S.C.A. § 145(b), for attempting to defeat and evade a large part of the income and victory tax owing by him to the United States for the years 1943, 1944 and 1945 by filing false and fraudulent returns for each year wherein he knowingly understated his net income and the amount of the tax. It was charged that for the year 1943 he reported a net income of $11,135.39 and a tax of $2,912.28 whereas his income was $69,836.83 and his tax $41,125.84; and for the year 1944 he reported a net income of $13,887.71 and a tax of $3,378.96 whereas the income was $41,115.81 and the tax $18,771.73; and for the year 1945 he reported a net income of $18,667.14 and a tax of $5,593.57 whereas the income was $25,203.85 and the tax $8,940.28.

He was tried and convicted in a jury trial in the District Court and sentenced to a fine of $10,000 and imprisonment for six months on the first count; $5,000 and six months imprisonment on the second count; and $2,500 and six months imprisonment on the third count, the sentences of imprisonment to run concurrently and the fines to be cumulative.

The government's case consisted in part of estimates of the net income of the defendant in the taxable years based upon calculations of his net worth at the beginning and end of each year derived from available records, and also the statements of the defendant to the revenue agents who investigated the case. The defendant offered no evidence whatsoever on his own behalf and bases his appeal mainly on the grounds (1) that a conviction of tax evasion may not be based on a mere increase in net worth and therefore the court erred in refusing the defendant's motion for a directed verdict of not guilty; and (2) that the net worth statements for the years in question were erroneously admitted in evidence over the objection of the defendant because (a) they were replete with errors; (b) because the agent in preparing them ignored the records of the defendant and the records of a corporation controlled by the defendant, which purported to show his income; and (c) because the court made numerous errors in restricting the scope of the cross examination of the government's agent, and in the charge to the jury.

Since the defendant offered no witnesses on his behalf although he employed accountants who kept the books of the corporation and an auditor who conferred with the revenue agents, the following resume of the facts is necessarily based upon the evidence produced by the United States. Bell was an auctioneer. He had carried on the business since 1933 at 722 13th St., N. W. Washington, D. C., through a corporation called Washington Art Galleries and Auction Rooms, of which he was the virtual owner. He was also the sole owner in his personal capacity of an auction business for used furniture, which was carried on in Alexandria, Va., under the name of Mt. Vernon Galleries. The business at this location was closed and removed to the 13th Street store of the corporation in Washington in November, 1942. During the years 1943 to 1945 under investigation, Bell continued to use the name of the Mt. Vernon Galleries to denominate his personal business in his personal income tax return and reported the net income therefrom in addition to the salary and dividends which he drew from the corporation. Bell kept no books of account or records of the income of his individual business except his bank deposit book, in which some descriptive entries were made, his personal check book and certain cancelled checks; but the corporation kept books which included a cash book, a journal and a ledger; and the ledger contained separate accounts which purported to show transactions between the corporation and Bell, and between the corporation and the Mt. Vernon Galleries respectively. There were, however, no records except in a minority of instances to support the entries on the books of the corporation. There were only 50 or 60 invoices during the period 1943 to 1945 covering the consignment of goods for sale and the commissions paid thereon, which varied in amount from time to time; and except for certain cancelled checks there were no other documents or cash register tapes to support the entries in the books. Moreover, the entries in the books except those in the cash book, were not made daily; but the entries in the journal and ledger were made some time during the year from the cash book, check books and other data.¹

An investigation of the income tax liabilities of the defendant during the years in question was instituted in March, 1946 by Charles H. Knight, a special internal revenue agent, who interviewed the defendant and learned from him some things in respect to the nature of his business and his investments. His business records were made available to the agent. Knight had been connected with the Bureau of Internal Revenue in the statistical section of the Corporation Tax Division since 1938, had secured a degree in accountancy and had been working on books and accounts in income tax matters since 1940. He concluded from his investigation that the corporate books and other data submitted to him by the defendant did not reveal the taxable income of the defendant because the corporate books were kept on a fiscal year basis whereas Bell's income was reported on the calendar year basis and especially because of the deficiencies of the corporate records in support of the entries on the corporate books above described.

These inadequacies led the agent to prepare a net worth statement to ascertain Bell's true income for the years in question. The defendant not only conducted an auction business but also dealt in securities and in real estate. Accordingly, the agent made an extended examination of real estate records, bank records, stockbrokers' records, Treasury Department records, Insurance Company records, mortgage and lending institution records, in order to ascertain the defendant's assets and liabilities. From this data he prepared a net worth statement showing the total assets of the defendant, including cash in bank,² United States bonds, stock, real estate, loans receivable, life insurance and other investments amounting to a total of $129,991.17, and liabilities consisting of mortgages on real estate and reserve for depreciation in the aggregate sum of $47,722.20, or a net worth on December 31, 1942 of $82,218.97.

A copy of this statement was made available to Bell's accountant. Bell made no claim at the time that he possessed other assets than those shown on the statement and he offered no evidence at the trial to contradict this statement of his net worth at the beginning of the period under examination.

By resort to similar records, the agent found Bell's net worth at the end of 1943, 1944 and 1945 to be $141,208.48, $175,950.06 and $201,482.78 respectively; and by subtracting the net worth of the preceding year the increases in net worth during the taxable years were found to be $58,989.51, $34,741.58 and $25,532.72 respectively.

In order to find the taxable income for these years, the disbursements of the taxpayer for living expenses, taxes, insurance premiums and miscellaneous expenses were added and the allowable deductions from income and the non-taxable long term gains were subtracted so that the taxable net income for the years in question was found to be $69,836.83, $40,615.81 and $24,703.85 respectively.

In order to make certain that the increases in net worth during these years constituted earnings of the taxpayer, Bell was questioned by the agent as to gifts or inheritances which he might have received. He told the agent at his first interview that he had received no gifts or inheritances. Six months later at a second interview he told the agent that his mother customarily gave his wife $4,000 on their wedding anniversaries and a like amount to each of the three children on their respective birthdays during the years in question. However, in his income tax returns Bell claimed his mother, his wife and his three children as dependents. At the trial of the case no testimony was offered and no records were produced by the defendant as to these gifts.

The statement prepared by the agent showed that the greatest increase in net worth during the period under examination was in real estate, At the end of 1942 Bell owned real estate in the sum of $77,546.57. This item was increased to $138,761.20 at the end of 1943, $147,887.24 at the end of 1944, and $219,220.91 at the end of 1945. The testimony as to the source of the funds with which Bell increased his real estate holdings has an important bearing upon the sufficiency of the proof to take the case to the jury. In 1943 Bell purchased real estate in Atlantic City for the sum of $45,038.76 and paid for it with two checks on his personal bank account in the aggregate sum of $5,188.76 and one check for $39,850 on the bank account of his corporation which sum Bell had deposited to the corporation's credit. When asked as to the source of this money Bell told the agent that he had gotten it in the form of a loan from his mother who paid it to him in cash. No check or promissory note or other record evidence of the loan was shown to the agent or produced at the trial. Bell told...