Paddock v. United States, 7598.

• Decision Date: 04 November 1935
• Docket Number: No. 7598.,7598.
• Citation: 79 F.2d 872
• Parties: PADDOCK v. UNITED STATES.
• Court: U.S. Court of Appeals — Ninth Circuit

79 F.2d 872 (1935)

PADDOCK v. UNITED STATES.

No. 7598.

Circuit Court of Appeals, Ninth Circuit.

November 4, 1935.

Henderson Stockton, Thomas A. Flynn, F. C. Struckmeyer, Irving A. Jennings, Emmett R. Feighner, and Eli Gorodezky, all of Phœnix, Ariz., for appellant.

Clifton Mathews, U. S. Atty., and F. E. Flynn, Asst. U. S. Atty., both of Phœnix, Ariz., for the United States.

Before WILBUR and GARRECHT, Circuit Judges, and CAVANAH, District Judge.

WILBUR, Circuit Judge.

Appellant was indicted for the violation of the Internal Revenue Act of May 29, 1928, § 146 (a, b), 26 USCA § 2146 (a, b). The indictment consisted of three counts, the first charging the willful attempt to evade and defeat the tax upon his net income for the calendar year 1930; the second charging the willful failure to make a return for the calendar year 1931; the third charging a willful attempt to evade and defeat the tax upon his net income for the calendar year 1931. Demurrers to the several counts of the indictment were interposed and overruled. Upon a trial, a verdict of guilty was returned against the appellant upon the first and second counts, and a verdict of not guilty upon the third count. The sufficiency of each of the first and second counts of the indictment was further questioned by a motion in arrest of judgment, as well as by a motion for new trial, which were denied. From the judgment imposing sentence, this appeal is prosecuted.

As to the first count of the indictment, the government claimed, among other things, that appellant in his return for the year 1930 failed to return certain items of income, and further claimed that appellant took credit as an expense for a salary paid to his daughter, which was unreasonable and fictitious, and also had taken credit for certain expenses which the government claimed were not deductible.

As to the second count, appellant was required by law to make his income tax return by March 15, 1932, for the calendar year 1931, unless the time was extended by the Collector of Internal Revenue in accordance with the rules prescribed by the Secretary of the Treasury. The evidence shows that three separate extensions were granted. These extensions expired prior to September 15, 1932. The return for the year 1931 was not filed until March, 1933.

Appellant assigns as error the admission in evidence over his objection of Government's Exhibits Nos. 16 and 17 with notations made thereon by the witness Carroll with reference to amounts paid as salary to appellant's daughter. The question as to whether or not the amounts paid as salary to appellant's daughter were purposely made unreasonably large in order to avoid payment of income taxes was highly important. In support of the government's case, witness Carroll was called and testified that he was payroll auditor for the United States Fidelity & Guaranty Company, which carried the appellant's compensation insurance; that he made an audit of the appellant's payroll records for the purpose of determining and adjusting premiums upon the insurance. The audits were signed "Lily Ice Cream Company, by S. R. Staniforth, Manager." These audits were upon separate sheets and were introduced as Exhibits Nos. 16 and 17. After the audits had been signed, as the witness stated, "Perhaps at the hotel in the evening," he wrote upon Exhibit No. 16, audit for the year 1931, concerning the salary of Florence Paddock, "It is large in proportion to her responsibilities, but for income tax purposes she is given this large salary," and upon Exhibit No. 17, audit for the year 1930, he wrote, "The clerical office above seems out of proportion, but is accounted for by reason of fact that Mr. Paddock, assured, credits his daughter with a salary of $400.00 a month in order to help his tax statement." The witness testified that he never saw Mr. Paddock while making these audits and never talked to his daughter Florence in connection therewith; that the statements which he wrote in the reports were the result of a conversation with Mr. Staniforth; that he did not know whether Mr. Staniforth was manager of the business or not, but was told by him that he was the one who managed plant operations and office details. The witness further stated that what he had written was not exactly what somebody said to him, but his own words. It nowhere appears that these statements were made with the knowledge of the appellant. The jury was called upon to decide whether or not this salary was a reasonable compensation for services actually rendered by defendant's daughter or whether it was paid or augmented willfully with the intent and purpose of defeating a tax upon his net income. On this point the written statements made by witness Carroll on the Exhibits Nos. 16 and 17 must be considered as having had persuasive force with the jury. The manner in which the written memorandum was made on each exhibit and the circumstances surrounding it were not such as rendered these documents admissible in evidence and their reception as evidence over the appellant's objection was clearly prejudicial. The statement in effect asserts that the appellant is guilty of the offense charged. The government contends that the particular objection made to this evidence was not well taken, and hence that the ruling of the court admitting it was not erroneous. The objection stated was that "what someone makes in his own words is not * * * evidence against the defendant. It would be what someone in authority, if anyone, said, rather than what he (meaning the witness) concludes and words in his own handwriting." This objection sufficiently pointed out to the court that the written statement by the witness of his own conclusion that the salary was excessive for taxation purposes was inadmissible, but even if the objection fails to point out with technical nicety the fact that the evidence was hearsay, we would consider such evidence so palpably prejudicial as to require reversal, notwithstanding the fact that the objection was inaptly expressed. See, Davis v. U. S. (C. C. A.) 9 F.(2d) 826; Kelly v. U. S. (C. C. A.) 76 F.(2d) 847.

This evidence was adduced primarily in support of the first and third counts in the indictment charging an attempt to evade and defeat the tax upon the appellant's net income by claiming false credits against the gross income. It was also germane, to, although not so persuasive as, the second charge that the delay in making an income tax statement for the year 1931 was willful, as it tended to show a deliberate purpose to escape a portion of the tax of 1931 from which the jury might infer that the failure to make any return was for the deliberate purpose of escaping any tax whatever for that year. In order to meet the charge that the amount claimed as a deduction by reason of salary paid the daughter was false and fraudulent, the defendant undertook to prove by his own testimony and by that of his daughter the contract he made with his daughter with reference to the nature of her duties and the amount of her compensation. This evidence was objected to and ruled out. The appellant had a right to prove this contract. No specific objection was made to the testimony of the defendant; neither did the court give a reason for sustaining the objection, nor did the appellant state the nature and purpose of the evidence. Apparently the court regarded the statements of the defendant made to his daughter as self-serving statements, and hence inadmissible, overlooking the fact that the conversation between the father and daughter fixed the terms of the employment, and these terms were necessarily involved. As the appellant did not make any offer of proof, and the colloquy between court and counsel did not clearly raise the question of the appellant's right to prove the contract, we deal with this matter for the information of the trial court in the event of a new trial. As to the daughter's testimony on that subject, the court ruled that the initial contract of employment made in 1926 between her father and herself was "too remote." The arrangement may have contemplated such a raise in salary as was later given. The defects in the offer of proof apparently resulted from the attitude of the trial judge.

Error is also claimed in the instruction given by the court upon reasonable doubt and later supplemented in answer to a query from a member of the jury. Before attempting to analyze the instructions in regard to reasonable doubt, we quote from the charge to the jury, dividing the quotation into paragraphs for convenience, as follows:

"I.

"No greater degree of certainty is required when circumstantial evidence is relied upon than where direct evidence is relied upon. If the issue is whether or not I have gone across the street there, and if it is proven that I am here now and in a little while later that I will cross the street. No man will be found who saw me going. Nevertheless, there is an example of circumstantial evidence more convincing than the testimony of some possibly unreliable witness that I have gone across the street. Evidence about circumstances, but this is the same with all circumstances, must at all times be consistent with guilt only and inconsistent with innocence, but since you are required to believe the defendant guilty beyond a reasonable doubt, it, so far as I can see, makes little difference what form of evidence you are relying upon.

"II.

"Now, another element in this matter is the salary of the daughter. I do not know whether anything further is necessary to be suggested to you on that score. You are at liberty and are bound to consider all of the evidence in the case, and all of the facts surrounding it. Was that a bona fide piece of business? Was it the real intention of the parties that the young lady was to receive the four hundred dollars a month, or was it punitive, putative, pretended only, and for the purpose of evading this income tax? The money is paid, that...