Benes v. United States

• Decision Date: 21 March 1960
• Docket Number: No. 13825.,13825.
• Citation: 276 F.2d 99
• Parties: Elmer J. BENES, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

276 F.2d 99 (1960)

Elmer J. BENES, Appellant, v. UNITED STATES of America, Appellee.

No. 13825.

United States Court of Appeals Sixth Circuit.

March 21, 1960.

Allen N. Corlett, Cleveland, Ohio, William A. Welty, of Roudebush, Adrion, Brown, Corlett & Ulrich, Cleveland, Ohio, on brief, for appellant.

James C. Sennett, Jr., Asst. U. S. Atty., Cleveland, Ohio, Russell E. Ake, U. S. Atty., Cleveland, Ohio, on brief, for appellee.

Before SHACKELFORD MILLER, Jr., and WEICK, Circuit Judges, and WILLIAM E. MILLER, District Judge.

WILLIAM E. MILLER, District Judge.

Appellant was tried in the court below upon an indictment in three counts charging that he wilfully and knowingly attempted to evade and defeat a large part of the income taxes owing by himself and his wife for the calendar years 1947, 1948 and 1949. The jury returned a verdict of not guilty as to the first count and guilty as to each of counts II and III. The defendant was sentenced for a period of five years on each of counts II and III to run concurrently. This appeal followed.

In 1941 the appellant began the business of an industrial and commercial contractor in Cleveland, Ohio. In 1946 the business was incorporated under the laws of Ohio under the name of E. J. Benes & Company, Inc., appellant owning all but three of its 503 outstanding shares of common stock and completely dominating its affairs. The office staff of the corporation consisted of Benes, one or two estimators or salesmen, and Mrs. Mary C. Miranda, who at all times pertinent herein was the office secretary, stenographer, receptionist, bookkeeper, and filing and billing clerk.

The appellant and his family lived in a house on Hemlock Point Road near Chagrin Falls, Ohio, for approximately eleven years, but in 1947 he purchased 20 acres of picturesque, suburban, residential property fronting on County Line Road, Hunting Valley Village, Ohio, and had the record title to the land placed in the name of his wife, Frances M. Benes. The cost of the land was $14,871.50 which was paid by means of funds of the corporation which were charged on the corporate books as a debit against the appellant's personal loan account. Soon after the purchase of the land, the construction of an elaborate home was commenced on the property, and in December 1949 Benes and his family moved into the new residence although it was not finally completed until May 31, 1950. The evidence disclosed that the Hunting Valley residence was constructed altogether by the use of corporate funds at a total aggregate cost in excess of $170,000.00.

Under the bookkeeping system used by the corporation, each contract with a customer for a new construction project was assigned a number when received, and a new project ledger sheet bearing the same number was opened in the corporate books of account. Thereafter all costs and expenses incident to such project were identified on the corporate books by the name of the customer followed by the job reference number. It was the practice of the corporation to compute its annual gross income by taking the total billings of the corporation to its customers during the corporation's fiscal year June 1 to May 31, no account being taken of whether the billed accounts were paid within the fiscal year. The net taxable income of the corporation was determined by subtracting from the gross income the total of all the expenditures of the corporation paid in the fulfillment of its contracts with customers, i. e., the aggregate building construction costs for material and labor, office and sales expenses, administrative expenses and salaries, etc.

In connection with the County Line Road or Hunting Valley residence, the appellant directed his office secretary to set up a new corporation record file, which is referred to in the record as the "House File". No corporate reference number or numbered customer job ledger sheet was assigned for this particular project. All costs and expenses for material and labor that went into the construction of the Hunting Valley residence were recorded in the house file which the appellant kept in his desk apart from the other records of the corporation. He gave directions to his secretary to charge all of the costs of the material and labor for the house in Hunting Valley to other projects which the corporation had on its books at the time of construction. She was further directed, however, not to bill any of these charges for the Hunting Valley residence to the respective customers to whose accounts they were charged. In this manner the entire costs of the Hunting Valley residence, consisting of approximately 750 separate items, were carried in the separate house file and were also charged to some 17 separate customer accounts which the corporation had on its books at the time of construction. In accordance with the appellant's directions, no bills, however, were sent to any of the respective customers for the cost of the Hunting Valley project. The items of expense for the house were deducted in determining the profits of the corporation and hence resulted in decreasing, pro tanto, its taxable income.

In the middle of April 1951 the appellant took the corporate house file to his accountant, Martin F. McQuilkin, advised him that he had built a house and charged the costs to various jobs of the company, and asked him what he should do about it. McQuilkin decided that it was necessary to file amended income tax returns for the corporation and such returns were in fact filed on May 8, 1951, for the fiscal years ending May 31, 1947, 1948, 1949 and 1950. McQuilkin's method of accounting for the house was to carry back the aggregate cost of the Hunting Valley house and to treat it as a corporate profit for the respective fiscal years during which the house was under construction. This method increased the corporate profits for such fiscal years, and this in turn, of course, increased the taxable income of the corporation for each of these years a like amount. The adjustment resulted in a total additional income tax of $74,578.79. The entire tax was later paid by the corporation together with accrued interest upon the additional tax obligation computed from the dates of the filing of the respective original tax returns.

As of May 31, 1951, McQuilkin prepared adjusted journal entries for the corporate books of account which were posted by the bookkeeper in the journal and then the corporate ledger. He also prepared a promissory note from Benes to the corporation which was pre-dated to June 1, 1950, in the amount of $177,178.97, which the appellant executed. A debit to "Notes Receivable" was entered with notation "To record amount of note receivable from E. J. Benes". A credit to surplus in the same amount was entered. The full amount of the note with interest was paid by the appellant to the corporation, with the result that he actually paid to the corporation the full amount of the cost of the Hunting Valley residence.

On May 1, 1951, Harold E. Sullivan, Internal Revenue Agent, who had been assigned to examine the return of the corporation for the fiscal year ending May 31, 1950, contacted the appellant at his office and questioned him as to the residence in Hunting Valley, and it was eight days later that the amended corporate returns were filed as above stated. Approximately three months after the amended corporate returns were filed, a special agent of the Internal Revenue Service, Ben Lewitt, began an investigation of the corporation records in connection with the amended returns. The agent was shown the house file pertaining to the Hunting Valley residence and other corporate records and books of account.

On September 12, 1955, the indictment against the appellant was returned by the grand jury, charging the appellant with wilfully attempting to evade and defeat income taxes owing by himself and wife for the years 1947, 1948 and 1949. The first count charged an understatement of income in the amount of $3,363.46 for the year 1947, resulting in an underpayment of tax in the amount of $1,192.99. The second count charged an understatement of income for the year 1948 in the amount of $75,358.22, resulting in an underpayment of income tax in the amount of $42,974.82. The third count charged an understatement of income for the calendar year 1949 in the amount of $91,400.59, resulting in an underpayment of income tax in the amount of $53,823.96. The understatement of income charged in the indictment corresponds with the amount which Internal Revenue Agent Lewitt computed from the corporation's house file as having been expended during the tax years in the construction of the Hunting Valley residence.

It was the theory of the Government in the trial of the case and is its theory and insistence here that the appellant intended from the beginning that the residence in Hunting Valley should be his; that to the extent of the cost of the residence the appellant and his wife realized an economic gain which should have been reported as income in their joint income tax returns for the tax years during which such cost was incurred or charged; that the effect of the transaction was that the appellant wrongfully diverted the funds of his wholly-owned corporation and applied them in such manner that he realized a personal gain therefrom which is taxable under the doctrine of Davis v. United States, 6 Cir., 226 F.2d 331, and cases of like import.

One ground upon which the appellant seeks to reverse the judgment of conviction is that the instructions of the District Court to the jury exceeded the bounds of fair comment and constituted prejudicial error. Since we are of the opinion that this insistence of the appellant must be sustained, and that the case must for that reason be reversed and remanded for a new trial, it will be discussed first.

A careful examination of the trial court's charge discloses that the general parts of the charge are unexceptionable and that he correctly...