U.S. v. Costanzo

• Decision Date: 11 July 1978
• Docket Number: D,No. 838,838
• Citation: 581 F.2d 28
• Parties: 78-2 USTC P 9575, 3 Fed. R. Evid. Serv. 1085 UNITED STATES of America, Appellee, v. Angelo COSTANZO, Defendant-Appellant. ocket 78-1043.
• Court: U.S. Court of Appeals — Second Circuit

Page 28

581 F.2d 28

78-2 USTC P 9575, 3 Fed. R. Evid. Serv. 1085

UNITED STATES of America, Appellee, v. Angelo COSTANZO, Defendant-Appellant.

No. 838, Docket 78-1043.

United States Court of Appeals Second Circuit.

Argued May 5, 1978.

Decided July 11, 1978.

John W. Condon, Jr., Buffalo, N. Y. (Condon & Sedita, P. C., Buffalo, N. Y., of counsel, Louis A. Haremski, Buffalo, N. Y., on the brief), for defendant-appellant.

William M. Skretny, First Asst. U. S. Atty., W. D. N. Y., Buffalo, N. Y. (Richard

J. Arcara, U. S. Atty., W. D. N. Y., Buffalo, N. Y., of counsel), for appellee.

Before MOORE, OAKES and GURFEIN, Circuit Judges.

GURFEIN, Circuit Judge:

This is an appeal by Angelo Costanzo from a conviction for income tax evasion. Appellant and his wife were named as defendants in an eight-count indictment covering the years 1968 through 1971. Counts I through IV charged them with evasion of their joint personal income taxes in the amount of $106,679.93, and Counts V through VIII charged them with the evasion of the corporate income taxes, in the amount of $114,621.11, of Costanzo's Bread, Inc., a corporation owned by the taxpayer. Appellant was engaged in a bakery business in corporate form, employing forty persons. It sold at wholesale and at retail and included a baked goods counter and a snack bar. The jury acquitted Mrs. Costanzo and returned a verdict of guilty on all counts against appellant. ¹ We are asked to reverse the judgment of conviction, and to dismiss the indictment for insufficiency of evidence or to remand for a new trial because of alleged evidentiary errors. We affirm.

We view the evidence in a light most favorable to the Government. United States v. Brawer, 482 F.2d 117, 125 (2d Cir. 1973), Cert. denied, 419 U.S. 1051, 95 S.Ct. 628, 42 L.Ed.2d 646 (1974). The Government, employing the "net worth" method of proof, proved the taxpayer's unreported taxable income by showing that the increase in his net worth in the period from 1968 to 1971, plus his nondeductible expenses for those years, exceeded his reported taxable income and his nontaxable receipts. This familiar method of proving tax evasion has been approved by the Supreme Court. Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954). But in approving the use of the net worth method, the Court also recognized its potential for mistake and abuse. Holland, supra, 348 U.S. at 124-29, 75 S.Ct. 127. Appellate courts have been specifically instructed to "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." Holland, supra, 348 U.S. at 129, 75 S.Ct. at 132. We have accordingly reviewed the record. The taxpayer's principal points on this appeal raise questions about the Government's compliance with the requirements of the net worth method of proof. Though the charge to the jury in such cases is complex, no attack is made upon Judge Curtin's charge.

I PROOF OF THE TAXPAYER'S OPENING NET WORTH

The taxpayer argues that the Government failed adequately to establish his net worth as of December 31, 1967, the opening date of the period. The Supreme Court emphasized the importance of proof of opening net worth in Holland, supra, 348 U.S. at 132, 75 S.Ct. at 134.

"(A)n essential condition in cases of this type is the establishment, with reasonable certainty, of an opening net worth, to serve as a starting point from which to calculate future increases in the taxpayer's assets. The importance of accuracy in this figure is immediately apparent, as the correctness of the result depends entirely upon the inclusion in this sum of all assets on hand at the outset."

The details of the Government's thorough and careful net worth investigation were related to the jury by the Government's witnesses. The Government established an opening net worth of $450,321.13 as of December 31, 1967. There is no merit in the taxpayer's argument that this opening net worth figure was fatally flawed by a failure to take into account a cache of cash in his or in his wife's safety deposit boxes. While such a defense to a net worth tax evasion case can sometimes destroy the Government's case, See, e. g., United States v. Bethea, 537 F.2d 1187, 1189-91 (4th Cir. 1976), the evidence in this case was more than sufficient to negate the existence of such a cash hoard.

The Government examined appellant's income tax returns for the years 1940-1959; the returns showed minimal assets and income insufficient to allow accumulation of a significant cash hoard. See Holland, supra, 348 U.S. at 133-34, 75 S.Ct. 127. In addition, the relevant tax returns, beginning with 1960, including the tax returns of Costanzo's Bread, Inc., beginning in 1962, were examined. The Government agents computed the appellant's net worth increase for each year from 1960-1971, including a cash assets assumption highly favorable to the taxpayer. ² In the period from 1960 to 1971, appellant expended or accumulated $665,047.13 more than his reported income. Other evidence inconsistent with the cash hoard claim showed that Mrs. Costanzo earned only $3100 as secretary of the corporation beginning in 1962; that the taxpayer and his wife received no large inheritances or gifts; and that the taxpayer made eight borrowings from 1960, also borrowed on his insurance policy, and had a chattel mortgage on the trade fixtures placed in his business in 1960. In addition, the evidence showed that an inventory of Mrs. Costanzo's safety deposit box during the investigation revealed contents of $37; no records exist of the contents of the box, or of the taxpayer's deposit box, at earlier times. Although Mrs. Costanzo testified that shortly after 1940 she saw a sizeable cash hoard in a tool box belonging to the taxpayer, the evidence showed that the taxpayer and his wife had had eleven savings accounts and two checking accounts.

The foregoing circumstantial evidence inconsistent with the existence of a cash hoard corroborated the taxpayer's admissions proved by the prosecution. Appellant had stated to investigators that he was "out of cash" as of December 31, 1967, and that he gave his wife only housekeeping money, an admission which negated the possibility that she could have accumulated any substantial amount of money. In view of these admissions, and the Government's corroborating evidence, we think that the evidence was adequate to establish the taxpayer's opening net worth with sufficient certainty.

Appellant contends, at least inferentially, that some of the expenditures made during the taxable period could have derived from the earnings of the bakery business in years preceding 1967. The agents proved the amounts of income reported in the 1960-1967 period and properly credited the taxpayer with such amounts. It is true that some of the cash expended after 1967 could have been derived from earlier tax evasion rather than from current income. But it is obvious that this is simply a variation of the "favorite" defense of a cash hoard in existence at the beginning of the period covered by the indictment. Holland, supra, 348 U.S. at 127, 75 S.Ct. 127. Proof of such a cash hoard would have to be tendered by the defendant, or at least given to the Government as a lead for investigation, for it would otherwise be beyond the reach of the Government, Rossi v. United States, 289 U.S. 89, 53 S.Ct. 532, 77 L.Ed. 1051 (1933). See United States v. Kiamie, 258 F.2d 924 (2d Cir.), Cert. denied, 358 U.S. 909, 79 S.Ct. 236, 3 L.Ed.2d 230 (1958). Once the Government had presented its evidence negating the existence of a cash hoard, Supra, "the defendant remain(ed) quiet at his peril." Holland,supra, 348 U.S. at 139, 75 S.Ct. at 137. If an earlier tax evasion is the defense, it is the defendant who must prove it; otherwise the court and the jury may presume that the defendant acted in accordance with the law in his earlier dealings with the Government.

In fact, the appellant tried to introduce the reports of the revenue agents who audited Costanzo's Bread, Inc. in 1963 and 1969, with findings that only small changes from the income tax returns were required. If the reports, tendered by the defendant as a true reflection of his affairs, had been allowed into evidence, the 1963 report would have tended to show that the expenditures in the taxable period proved by the Government did Not have as their source unreported income during the period preceding the taxable period.

Appellant argues, nevertheless, that it was error to exclude the agent's reports. Such reports generally have an internal verity which keeps them from necessarily being objectionable hearsay. Fed.R.Evid. 803(8)(C). ³ Though the reports were not hearsay, however, they were not relevant to the issues in this tax evasion prosecution. The reports show only a correspondence between the corporation's records and the returns that it filed, while the Government's case turned on convincing the jury that the corporation's records did not reflect the true receipts of the business. There was no error in this exclusion of irrelevant evidence. In any event, the substance of the reports was elicited upon cross-examination of the agents, and the reports themselves were cumulative evidence which the trial judge could exclude in his discretion.

II PROOF OF A LIKELY SOURCE OF UNREPORTED TAXABLE INCOME

In Holland, supra, the Supreme Court indicated that in addition to proving an increase in the taxpayer's net worth, the Government was required in that case to prove a likely source of unreported taxable income. 348 U.S. at 137-38, 75 S.Ct. 127. But the Government is not required to prove a likely source of unreported taxable income in every net worth case; rather, it may either prove a likely source of taxable income or negate any possible source of nontaxable income.

"In Holland we held that proof of a likely source was 'sufficient' to...