Fowler v. United States

• Decision Date: 04 November 1965
• Docket Number: No. 17881.,17881.
• Citation: 352 F.2d 100
• Parties: John S. FOWLER et al., Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

352 F.2d 100 (1965)

John S. FOWLER et al., Appellants, v. UNITED STATES of America, Appellee.

No. 17881.

United States Court of Appeals Eighth Circuit.

November 4, 1965.

William H. Bowen, Little Rock, Ark., for appellants.

James W. Gallman, Asst. U. S. Atty., Little Rock, Ark., Robert D. Smith, Jr., U. S. Atty., Little Rock, Ark., for appellee.

Charles O. Galvin, Dallas, Tex., amicus curiæ.

Before VOGEL, MATTHES and RIDGE, Circuit Judges.

VOGEL, Circuit Judge.

John S. Fowler and his wife, Jimmie Lea Fowler, appellants herein, were indicted and convicted in a jury trial on three separate counts for evasion of federal income taxes for the years 1957, 1958 and 1959 in contravention of 26 U.S.C.A. § 7201.¹ On the three counts John S. Fowler was fined $2,000 and sentenced to 90 days' imprisonment. Additional sentence was suspended but Fowler was ordered placed on probation for a two-year period beginning with his release from prison. Jimmie Lea Fowler was fined $2,000 and placed on probation for a two-year period. Appellants perfect this appeal from the judgments of conviction.

Appellants were indicted for knowingly and willfully filing false and fraudulent income tax returns, with intent to evade and defeat substantial portions of their income tax liability for the years 1957, 1958 and 1959, by substantially understating their true taxable income and income taxes due thereon. Appellants were charged in the indictment with stating their 1957 taxable income as being $820.90 and their 1957 tax due and owing as being $164.18, whereas the figures should have been $10,747.99 and $2,677.98, respectively. For 1958 appellants reported a taxable income of $147.18 and a tax due and owing of $29.44, whereas these figures allegedly should have been $19,399.27 and $5,359.25, respectively. For 1959, it was charged that appellants had taxable income of $43,056.80 and a tax due and owing of $16,523.40, whereas they reported only $3,973.18 and $943.52, respectively.

Prior to and during the indictment period appellants resided in North Little Rock, Arkansas, and derived income from the Broadway Motel and Restaurant and from other small hotels and motels owned by them. Appellants also earned income from other rental property and sources in or near Little Rock and North Little Rock, Arkansas. Dorothy Calva, a daughter-in-law of appellants, and appellant Jimmie Lea Fowler maintained two sets of books, one applying to the Broadway Motel and Restaurant and the other, with appropriate divisions, applying to the remaining hotels and rental properties. Neither Dorothy Calva nor Mrs. Fowler had any formal training as bookkeepers. The books apparently can best be described as being a single entry system with columnar headings. Receipts were recorded and general business expenses were classified in the books.

The government proceeded under the net worth plus nondeductible expenditures method of proof for showing income tax evasion. The net worth method of proof is described in Holland v. United States, 1954, 348 U.S. 121, 125, 75 S.Ct. 127, 130, 99 L.Ed. 150, as follows:

"In a typical net worth prosecution, the Government, having concluded that the taxpayer\'s records are inadequate as a basis for determining income tax liability, attempts to establish an `opening net worth\' or total net value of the taxpayer\'s assets at the beginning of a given year. It then proves increases in the taxpayer\'s net worth for each succeeding year during the period under examination and calculates the difference between the adjusted net values of the taxpayer\'s assets at the beginning and end of each of the years involved. The taxpayer\'s non-deductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the Government claims the excess represents unreported taxable income. * *"

In the instant case net worth was determined as of January 1, 1957, December 31, 1957, December 31, 1958, and December 31, 1959. Net worth for prior years was also determined to further substantiate the figure of January 1, 1957. Further facts will be set out as needed.

I

Appellants contend there was non-compliance with the edict in Holland v. United States, supra, that the concept of the net worth approximation of income "* * * is so fraught with danger for the innocent that the courts must closely scrutinize its use." 348 U.S. 125, 75 S.Ct. 130. Appellants feel that the government did not correctly apply, and that the trial court did not correctly interpret, the net worth method as a matter of law. More specifically, appellants allege, in substance, the following enumerated errors:

1. Appellants contend that the government agents erred in that they admitted their net worth computation did not consider accounts receivable as an asset nor accounts payable as a liability in determining net worth as of January 1, 1957. There was no error here. Appellants admit that they were on a cash basis for purposes of paying income taxes. The government was bound to follow appellants' method of accounting in computing taxable income. Morrison v. United States, 4 Cir., 1959, 270 F.2d 1, certiorari denied, 361 U.S. 894, 80 S.Ct. 196, 4 L.Ed.2d 150. Under a cash basis method, accounts receivable and payable are not included as part of net worth. As stated in United States v. Vardine, 2 Cir., 1962, 305 F.2d 60, 64:

"* * * If a taxpayer disregards his accounts payable in reporting income on his annual tax return, i. e., reports as a cash basis taxpayer, then the government in computing his net worth in order to check the income reported on his tax return must also disregard these amounts."

2. In arriving at what were non-deductible personal expenses as opposed to what were deductible business expenses (the former being added to net worth), appellants contend that the investigating agent for the government made his decision simply by examining the faces of the checks reflecting the expenditures. The facts do not bear appellants out on this point. The appellants themselves identified most of a list of 535 checks submitted to them for identification during the investigation. Many of the checks used to pay for personal expenses had a notation in the form of the word "personal" written on them. It appears that the government's characterization of the checks was primarily based on the appellants' own characterization of the nature of the expenditure and on the obvious nature of the items purchased with the checks (such as clothing from a department store). The government had the burden of persuasion to establish characterization of the checks in proving net worth. Mighell v. United States, 10 Cir., 1956, 233 F.2d 731, certiorari denied, 352 U.S. 832, 77 S.Ct. 47, 1 L.Ed.2d 52. Here the government met this burden in light of the evidence discussed. The jury could reasonably have agreed with the government's classification.

3. By way of illustration, appellants make the following accusation against the trial judge, who they allege was hindering appellants' attack against the use of the net worth method:

"* * * Disregarding the clear mandate of and caution expressed by the Supreme Court in Holland, the trial Court cut off an attempt by the expert of the taxpayers Mr. Raymond R. Morris to demonstrate one pitfall to accuracy of the net worth statement — the absence of the check and balance available in any double entry system of accounting. This next related exchange made crystal clear to the jury that the trial Court thought well of the net worth technique and would brook no attack upon it: (R. 746-747)

"The Court: Now wait a minute. You say there are no checks or balances on the accuracy of a balance sheet or net worth computation?

"Mr. Bowen appellants\' counsel: No, contrasted, your Honor, with a double entry system of bookkeeping.

"The Court: An accountant or no, there are some checks on any system. You at least can add it up twice. Let\'s not go that far, gentlemen, Go ahead and qualify your statement; I\'m afraid I don\'t understand all the qualifications.

"Here the Court not only challenged any attack upon the accuracy of the technique, it equated the net worth computation with a balance sheet which is broadly and widely accepted in business and commerce."

Appellants failed to quote what took place immediately prior to this:

"Q. Mr. Morris, the practice to this single entry bookkeeping system used by appellants says it is approved by tax authorities and auditors and recommended by leading accountants; is this single entry system a type that you would recommend or install?

"A. No, sir, I wouldn\'t. Now, I might add that probably that refers to the book itself, that so far as the columns are concerned and the income and expense allocation, it can be converted into a double entry system; but the breakdown and maintenance of those books, if the information is put on correctly, would reflect the income. Now, I might add this, that the only difference between a double entry set of books and a single entry is a determination of mathematical accuracy of those books. If a single entry and everything put down correctly it will reflect the correct result; but it\'s just like adding two columns of figures, put the same figures down twice and add them twice. It\'s for the purpose of seeing your totals are right in the first place; so if you put down everything in the credit and everything in the debit and add them up together you know they will come out. That is the mechanical accuracy and not the accuracy of the figures themselves.

"Q. So this single entry system that was here used is an accurate system if all the details are correct, but there is no way to check because you don\'t have the double entry.

"A. No way to check the mechanical accuracy.

"Q. How would you characterize the net worth estimate of income; is it a single or double entry

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