Dupree v. United States

Decision Date20 January 1955
Docket NumberNo. 14659.,14659.
Citation218 F.2d 781
PartiesC. A. DUPREE, Appellant, v. UNITED STATES of America, Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

John D. Cofer, G. Hume Cofer, Austin, Tex., for appellant.

Bradford F. Miller, Asst. U. S. Atty., C. F. Herring, U. S. Atty., San Antonio, Tex., Francis C. Broaddus, Jr., Asst. U. S. Atty., El Paso, Tex., for appellee.

Before HOLMES and TUTTLE, Circuit Judges, and ALLRED, District Judge.

TUTTLE, Circuit Judge.

This is an appeal from a conviction of the accused below in an income tax fraud case in which the government based its prosecution on circumstantial evidence which it considered met the standards required to make out a case on the available funds and expenditure method of proof. Appellant complains of error in the charge of the trial court, in the lack of sufficient evidence of available assets at the starting point, and in the rejection of evidence tendered by him to show absence of intent to do wrong.

The accused was indicted, tried and convicted on six counts under 26 U.S.C.A. § 145(b) of wilfully filing false and fraudulent income tax returns for the years 1946, 1947, 1948 and 1949. In the years 1948 and 1949 they were joint returns filed by the accused and his wife; in 1946 and 1947 the accused is charged with having filed false returns for himself and separate returns for his wife.

The government showed discrepancies in the reporting of income from interest in small amounts by comparison of appellant's returns with records of the bank that made the collection for him, but the principal case relied upon by the Government was that during the years in question the accused's expenditures greatly exceeded the funds that were available to him, taking into consideration his known assets at the beginning of each year.

We have delayed decision of the appeal until we could have the benefit of the opinions of the Supreme Court in the four cases decided December 6, 1954. Holland v. United States, 75 S.Ct. 127; Friedberg v. United States, 75 S.Ct. 138; Smith v. United States, 75 S.Ct. 194; United States v. Calderon, 75 S.Ct. 186.

Although the four cases just decided by the Supreme Court involved prosecution on the increase in net worth method, much of what is said there is applicable to a prosecution in which the Government undertakes to prove that the taxpayer knowingly and willfully attempted to defeat and evade a large part of his income tax by showing that expenditures during the prosecution years in question exceeded the taxpayer's available funds.

We consider equally applicable to this type of case the observation by the Supreme Court in the Holland case, supra 75 S.Ct. 131:

"The net worth method, it seems, has evolved from the final volley to the first shot in the Government\'s battle for revenue, and its use in the ordinary income-bracket cases greatly increases the chances for error."

We also consider equally applicable to a case like the one at bar the mandate of the Supreme Court in the same case stated as follows:

"While we cannot say that these pitfalls inherent in the net worth method foreclose its use, they do require the exercise of great care and restraint. The complexity of the problem is such that it cannot be met merely by the application of general rules. Cf. Universal Camera Corp. v. National Labor Relations Board, 340 U.S. 474, 489, 71 S.Ct. 456, 465, 95 L.Ed. 456. Trial courts should approach these cases in the full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute. Charges should be especially clear, including, in addition to the formal instructions, a summary of the nature of the net worth method, the assumptions on which it rests, and the inferences available both for and against the accused. Appellate courts should review the cases 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."

The need for care in defining the terms and expounding the theory of this method of computation is clearly borne out by an analysis of the proof offered in this case. The words "available funds" are words that have an ordinary meaning and when used in relation to a computation to show that more money was spent than was "available" it would seem that it would require a listing of all the assets of the taxpayer at the beginning of the period. Here, however, the words "available funds" were used in three different senses — by Government counsel, by the Government's expert witness, whose computations were admitted in evidence, and by the Court.

Government counsel asked the witness if he had computed an opening net worth for 1940 — five years before the prosecution years. The witness answered that he had, based on questioning the accused, and he itemized assets specified by the accused totalling approximately $49,500, which he identified, and then added that the accused stated that he also had "bank accounts" and a piece of property at 830 Arthur Street, Houston, Texas, to which he assigned no cost or value. He also said that at his first interview with the accused when he obtained this information, the accused also told him that he had accumulated cash savings of approximately $70,000, later stated by him to be from $65,000 to $80,000.

The Government sought to commence its computation of excess of expenditures over available funds by starting January 1, 1940. In spite of the testimony as to these available assets as of January 1, 1940, the Government's computations which were introduced in evidence did not include a single dollar of the listed items totalling some $49,500 or of the claimed cash accumulations.

In explanation of this computation the Government's witness testified that in making up his entries for "available funds" he used the term in the sense of "reported income" per tax returns. Thus the sources that were available to the taxpayer on January 1, 1940, from which he could make expenditures subsequent to January 1, 1940, and which were not disclosed in his report of income on his successive tax returns, were apparently ignored. A careful analysis of the computation does show that "available funds per return" were adjusted by adding a small withdrawal of bank balances under the heading "From Decrease in Bank Accounts." It is probable that other slight adjustments were made that give some effect to a small part of the taxpayer's opening net worth or available funds in the sense ordinarily used, but such computations as were testified to and as were included in the Government's principal exhibit were highly confusing to anyone not familiar with the technical use of the terminology employed by the Government's witness. For example, the witness listed the small bank balance increase of the accused amounting to $373.76, as well as a small increase of $1.82 in his wife's account, under the heading of "Expenditures" for 1940, instead of listing them under "available funds." In the same manner he listed a mortgage of $1205 owned by Dupree as an "expenditure." The witness also included as "expenditures" all increases in bank accounts — a very substantial item during the first five year period. On careful analysis of the Government's method of proof, this treatment of increase in bank accounts can be understood but the treatment of items in the oral testimony before the jury and in the Government's written computation introduced as its principal documentary proof of its case under terminology quite the opposite of the usual meaning of the terms employed, places on the trial court an unusual burden to clarify the issues, as pointed out by the Holland case, supra.

Having discussed some of the problems presented to the trial court and to the accused by the Government's method of developing its case, we now turn to the appellee's contentions that these problems were solved incorrectly and to his prejudice.

The first element that must be established in this type of prosecution is what funds are available to the taxpayer at the opening date of the prosecution year. In this respect it is similar to a so-called "net worth" case. If there is no established figure showing the source from which expenditures during the year can be made, or the complete lack of such a source, then there is no relevance to proof of expenditures during the year, no matter how large they may be. See Bryan v. United States, 5 Cir., 175 F.2d 223.

The second element that must be shown is the "available funds" acquired during the year, as disclosed on the income tax return filed for the year, since "expenditures" matching such funds indicate only what would be expected of a taxpayer who filed a correct return.

In order to prove a failure to report the full amount of income by the use of this particular method, the Government must then show "expenditures" during the year in excess of the two items mentioned above, i. e., available funds at the beginning of the year and funds becoming available during the year and which were reported on the tax return.

The Government has still a further burden in this type of case. It is elementary that there are sources of funds that make their receipt non-taxable to the recipient. The Government, in proving its prima facie case must therefore exclude such sources of available funds by affirmative evidence.

The trial court below properly charged that each prosecution year must stand alone, and that the Government must prove opening available funds for each year; for, obviously in a prosecution for the year 1946, there would be a complete failure of proof unless the excess expenditures shown were shown to have come from income received during 1946 instead of being expenditures in 1946 of accumulations from prior years, or even of unreported income for 1945 or prior years.

Recognizing fully, as we do, the...

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