McGarry v. United States, 6925.

• Decision Date: 02 February 1968
• Docket Number: No. 6925.,6925.
• Citation: 388 F.2d 862
• Parties: Bernard G. McGARRY, Defendant, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — First Circuit

388 F.2d 862 (1967)

Bernard G. McGARRY, Defendant, Appellant, v. UNITED STATES of America, Appellee.

No. 6925.

United States Court of Appeals First Circuit.

December 27, 1967.

Rehearing Denied February 2, 1968.

Edward Bennett Williams, Washington, D. C., with whom Peter R. Taft, Washington, D. C., and John Warren McGarry, Boston, Mass., were on brief, for appellant.

Edward F. Harrington, Asst. U. S. Atty., with whom Paul F. Markham, U. S. Atty., was on brief, for appellee.

Before ALDRICH, Chief Judge, McENTEE and COFFIN, Circuit Judges.

COFFIN, Circuit Judge.

Appellant appeals from his conviction for income tax evasion, in violation of 26 U.S.C. § 7201, for the calendar years 1959, 1960, and 1961. Error is alleged in the district court's refusal to admit into evidence a net worth chart and supporting testimony prepared by appellant's expert witness; in the admission into evidence of certain statements allegedly made by appellant to revenue agents; in the court's refusal to suppress certain evidence obtained through allegedly wrongful seizure; and in the court's refusal to hold hearings on motions to suppress and dismiss based on wiretapping and other alleged invasions of privacy.

Appellant's Net Worth Chart

The first question is whether, this being a case in which the government utilized the net worth method of proving unreported taxable income, the court erred in excluding a net worth statement submitted by an expert witness of appellant. The net worth method seeks to derive taxable income in any given year by determining from all available evidence of assets and liabilities the increase (or decrease) in taxpayer's net worth over a twelve month period, adding to it his non-deductible expenses for that year, and subtracting from that sum any amount attributable to non-taxable sources. For example, if a taxpayer begins the year with a net worth (cost of property less liabilities) of $40,000, ends it with $50,000, and has spent $7,500 during the year on living expenses, his receipts must have been at least $17,500. And if there is no likely non-taxable source of funds, such as gifts or inheritance, this set of facts constitutes strong circumstantial evidence that the receipts were taxable income.

The critical foundation for the computation is the starting net worth position. The government, to derive its point of beginning in 1959, the first taxable year, used net worth statements given by appellant some years before to revenue agents who were then investigating him. They covered the years ending December 31, 1945 through December 31, 1954. For part of this period appellant made a civil settlement for additional tax, fraud and other penalties, and interest. Appellant's net worth reported by him, as of December 31, 1954, was $36,377.75.

This the government took as its starting point making several adjustments, mostly in appellant's favor (such as adding loans receivable), resulting in a beginning net worth figure of $55,346.07. The government then proceeded to analyze appellant's net worth each year thereafter through the tax years in issue, making detailed studies of his investment in or loans due from five or six corporations, together with his interest in other property, and liabilities. Drawing upon the testimonial and documentary evidence given at trial, an expert prepared and testified from a chart showing taxable income for each of the years in question considerably above that shown in the returns.¹

The defense was based principally on appellant's contention that in 1950 he had received a cash gift from his father in the amount of $300,000. This cash hoard, he argued, not only accounted for increases in his assets but was available for and should have been credited to his non-deductible living expenses. Since both his increases in assets and his personal expenditures were explainable by a non-taxable source, there existed no basis for concluding that he failed to report any taxable income.

The existence of this alleged cash hoard was not only appellant's case on the merits below, but exclusion from evidence of a net worth chart assuming its existence, is a major basis for this appeal. We review, therefore, the evidence on this point.

The initial evidence of the alleged gift came from appellant's brother who testified that he witnessed the transfer of $300,000 by his father to appellant in the basement of McGarry's Tavern one day in 1950. As to the subsequent history of the cash hoard, he further testified as follows:

"Q. Now, whether or not, sir, as a result of that gift you know whether or not your brother spent any of it? A. Yes, he has.

"Q. Right up to the present time? A. Through the years."

A government witness, Nasif, had testified that in September of 1952, during the course of the investigation for the years 1946-1951, appellant was asked if he had ever received any inheritances and answered that he may have although he was not certain at the time. It was after this conversation that appellant's accountant, who had been present at the interview, prepared the first series of net worth statements. The accountant testified that he knew of the $300,000 gift, that he told the investigators about it, but that he did not include it in the net worth statements because he considered the gift non-taxable.² Nasif denied being told of any gift and said that had such a gift been reported there would have been no additional tax assessed against appellant. A civil settlement was entered into for the years 1949-1951, in the amount of $5,204, covering additional tax and a 50 per cent fraud penalty.

The government, attempting to negate the existence of the cash hoard, introduced evidence that in 1940 appellant's father, the alleged source of the $300,000 gift, lost his home by foreclosure, the outstanding mortgage then being $1,600; that from 1943 to 1945 his annual wage as an employee of Bethlehem Steel Company was $3,000; that from 1946 to 1951 his sole reported source of income was his salary from his own establishment, McGarry's, Inc., the highest amount being $2,600 in 1947; that at the time of his death he was living in a Veterans Housing Project apartment leased to a son, appellant's brother; and that on his death he left no estate and that no inheritance tax, gift tax, or estate tax return was filed on his behalf. Appellant himself had a mortgage on his own home from 1947 until he sold it in 1960 and obtained a mortgage on his summer home in 1953 which remained in effect until he sold it in 1963.

Committed to the cash hoard theory as the only explanation of his true wealth, appellant sought to introduce into evidence a net worth chart prepared by his own expert witness. This chart commenced with an "equity" or net worth figure for December 31, 1954 of $357,283.72, compared to the government's figure of $55,346.07. It showed a steady diminution of net worth to a figure in 1961 of $299,336.95, compared to the government's showing of increases to a 1961 figure of $244,490.17. The end result was a showing of no unreported income between 1955 and 1961, compared to the government's showing of unreported income in each year, aggregating $190,885.15. The critical difference between the appellant's exhibit and that of the government lay in the figures for cash on hand as of December 31, 1954 — $288,000 in appellant's exhibit and $6,000 in the government's exhibit.

While the government took its figure from appellant's own 1954 net worth statement to which we referred earlier, appellant's expert testified that he began his computations as of December 31, 1951 by adding the $300,000 cash gift to appellant's cash figure of $18,000, reported on his net worth statement for that date. He then worked forward from that starting point of $318,000 in 1951 and arrived at a cash figure of $288,000 at the end of 1954 by doing a net worth analysis on the basis of appellant's tax returns and net worth statements.³

The district court excluded this chart. In a post-trial memorandum and order addressing appellant's motion for a new trial, the court cited as the most important reason for the rejection of the summary exhibit the fact that it was not based on the evidence.⁴ This had also been the chief thrust of the argument of government counsel.⁵

Appellant charges that this ruling, excluding his expert's net worth chart and testimony, was error because the court applied standards to this chart which were more strict than those applied to the government's chart or those required by law. He argues that his expert's cash figure of $288,000 as of the critical starting point, December 31, 1954 (and, for that matter, the cash figure for each successive year), was supported by the evidence. Starting with $318,000 of cash as of December 31, 1951 (the cash gift of 1950 plus the $18,000 reported in appellant's net worth statement for 1951), which was "spent through the years", appellant reasons that the evidence of outflow from this reservoir between 1951 and the starting point was supplied by the same expenditure data used by the government. He contends that the court misunderstood the law when it declared (see n. 4) that there had been no evidence showing to what extent, if at all, the cash hoard remained unspent in any particular year. Appellant urges that he is entitled to the benefit of what he calls "The single paramount rule * * * that cash-on-hand must be applied against expenditures unless there is affirmative evidence of some other disposition."

Our difficulty is not with this principle but with its application to the facts of this case. What is lacking here is the predicate for its invocation, i. e., proven cash on hand. To put it another way, appellant seeks to use a method for attributing expenditures to known available resources to prove the existence of those resources. To view his argument starkly, he asserts that, as a matter of law, the district court had to assume (1) that nothing was spent from the...