U.S. v. Curtis

• Decision Date: 28 January 1986
• Docket Number: No. 85-5070,85-5070
• Parties: -753, 86-1 USTC P 9195, 19 Fed. R. Evid. Serv. 1219 UNITED STATES of America, Plaintiff-Appellee, v. James C. CURTIS, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 593

782 F.2d 593

57 A.F.T.R.2d 86-753, 86-1 USTC P 9195,

19 Fed. R. Evid. Serv. 1219

UNITED STATES of America, Plaintiff-Appellee, v. James C. CURTIS, Defendant-Appellant.

No. 85-5070.

United States Court of Appeals Sixth Circuit.

Argued Oct. 25, 1985.

Decided Jan. 28, 1986.

James A. Shuffett (argued), Shuffett and Shuffett, Lexington, Ky., for defendant-appellant.

Thomas L. Self (argued), Lexington, Ky., for plaintiff-appellee.

Before KRUPANSKY and MILBURN, Circuit Judges and JOINER, Senior District Judge. ^*

JOINER, Senior District Judge.

This is the appeal of James C. Curtis from his conviction for income tax evasion pursuant to 26 U.S.C. Sec. 7201. The appeal raises three questions: 1) the sufficiency of the evidence supporting the conviction; 2) the correctness of the jury instructions regarding the definition of income; and 3) the correctness of the trial judge's refusal to allow expert testimony and refusal to give an instruction on the unsettled and complex nature of the law.

Defendant was indicted on October 3, 1984, on three counts of income tax evasion for the calendar years 1978, 1979, and 1980. Count I of the indictment charged that for the year 1978, defendant reported adjusted gross income of $5,234 and paid taxes of $4, when his true adjusted gross income was $37,920.35 and the taxes due were $7,282.07. Count II of the indictment charged that defendant reported adjusted gross income of $4,773 for the year 1979 and paid no taxes, when he should have declared an adjusted gross income of $48,088.15 and paid $11,288.05 in taxes. Count III of the indictment charged that for the year 1980, defendant reported an adjusted gross income of $11,762 and paid $1,043 in taxes, when his true adjusted gross income was $63,208.43 and his tax liability was $20,325.27.

The charges against defendant arise from his operation of the Meat Shop, a wholesale meat retailer. Curtis is the president and sole shareholder of the business. Most of the Meat Shop's revenue comes from its sales of meat to the Fayette County Detention Center, which paid for its purchases by issuing monthly checks to the Meat Shop.

This case concerns portions of thirty-five checks from the Detention Center to the Meat Shop that Curtis deposited in his personal checking and savings accounts during 1978, 1979, and 1980. Curtis did not include this money as income when filing his individual tax returns. Instead, defendant declared only his salary from the Meat Shop, a small amount of income from a second job in 1978, and some interest income from the bank. The Meat Shop declared and paid taxes on all of its proceeds from the Detention Center, including the amounts Curtis deposited to his individual accounts, with one exception. That exception was a check dated May 17, 1978 in the amount of $5,381.14. Neither Curtis nor the Meat Shop declared that money as income.

During 1978, 1979, and 1980, Curtis also made some payments to the Meat Shop by writing checks or depositing his paychecks. The checks that defendant wrote back to the corporation had the word "loan" written on them. The money Curtis paid to the Meat Shop was deducted from the Detention Center checks deposited in Curtis' accounts in calculating the undeclared amounts of adjusted gross income charged in the indictment.

Curtis maintains that the amounts that were transferred to his personal accounts were interest-free loans to him from the Meat Shop. He contends that the money he paid to the Meat Shop was in partial repayment of these loans. The government disagrees, arguing that Curtis received income from the corporation. According to the government, the checks Curtis wrote to the Meat Shop were initial loans from him to the corporation.

At the trial the government produced the relevant corporate and individual tax returns, and established the flow of money from the Detention Center to the Meat Shop and Curtis. The government called as its final witness an Internal Revenue Service field auditor who testified that in his opinion the money that Curtis received from the Meat Shop was taxable income.

The defendant called only one witness, a C.P.A. named David Wilkerson. He stated that the money that Curtis transferred to his personal accounts from the corporation "should have been accounted for as loans" which are not deductible by the corporation or taxable as income to the recipient. Wilkerson reasoned that the money could not be regarded as salary, for the corporation did not take a tax deduction for the amounts received by Curtis. The money also could not be deemed a dividend, for the corporation had no retained earnings and its balance sheet reflected no dividend payments. Wilkerson then stated that he could only conclude that the money was a loan from the Meat Shop to Curtis. He testified that such tax-free loans were common, and that they represented a tax planning opportunity.

The trial court submitted all of these matters as a part of the case to the jury, which convicted Curtis on all three counts. Curtis now appeals his conviction on the several grounds indicated above.

I. Sufficiency of the Evidence

Curtis was convicted of three counts of violating 26 U.S.C. Sec. 7201, which provides that:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony ...

The Supreme Court has stated that there are three elements to the offense described by Sec. 7201. The elements are: 1) willfullness; 2) the existence of a tax deficiency; and 3) an affirmative act constituting an evasion or attempted evasion of the tax. Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 1010, 13 L.Ed.2d 882 (1965). Curtis contends that in the present case, the government failed to show the existence of a tax deficiency, because no taxes were due. Specifically, Curtis argues that all that the government established at the trial was that the corporation had made certain amounts of money available to him. Defendant contends that this is insufficient to establish that he owes taxes on these amounts.

This case is governed by a prior decision of this court, Davis v. United States, 226 F.2d 331 (6th Cir.1955), cert. denied, 350 U.S. 965, 76 S.Ct. 432, 100 L.Ed. 838 (1956). Davis, like the defendant here, was the president and sole shareholder of a corporation. He converted checks made out to himself and the corporation for his personal use, and neither the corporation nor Davis declared that income on their tax returns. The court affirmed Davis' conviction for willfully attempting to evade and defeat tax, in violation of 26 U.S.C. Sec. 146(b). In reaching this conclusion, the court reasoned that the money Davis took from the corporation should have been included in his gross income, as the money represented a gain to Davis. The Davis opinion found that gain constitutes income which should be declared on individual tax returns when

its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it. "That occurs when cash, as here, is delivered by its owner to the taxpayer in a manner which allows the recipient freedom to dispose of it at will, even though it may have been obtained by fraud and his freedom to use it may be assailable by someone with a better title to it." Rutkin v. United States, 343 U.S. 130, 137, 72 S.Ct. 571, 575, 96 L.Ed. 833.

226 F.2d at 334.

Davis also addressed the appellant's argument that the trial court unjustifiably shifted the burden of proof of tax evasion from the government to him:

As for the claim that the trial court erred in placing upon appellant the burden of explaining that the gross receipts of his corporation did not constitute taxable income of appellant, the court did not thrust such a burden upon him. While, of course, the burden of proof does not shift in a criminal case, it is the rule that when the government establishes a prima facie case, it is then for the defendant to overcome the inferences reasonably to be drawn from the proven facts. Thus, evidence of unexplained funds or property in the hands of a taxpayer establishes a prima facie case of understatement of income, and it is then incumbent on him to overcome the logical inferences to be drawn from such proof.... (I)f a man has a business of a lucrative nature and is constantly receiving money and depositing it to his own account and using it for his own purposes, this is proof that he has income, and if the amount exceeds exemptions and deductions, that the income is taxable.

Id. at 335-36 (citations omitted).

In the present case, as in Davis, the government established that defendant took money from the corporation and deposited it to his personal account. Curtis presented no evidence that he had an obligation to repay the corporation for the money he received. He thus failed to overcome the logical inference to be drawn from the government's evidence, which was that the money was income to Curtis.

Curtis distinguishes Davis on the grounds that the Meat Shop declared and paid taxes on the money in dispute here, whereas the corporation in Davis did not declare or pay taxes on the disputed funds. Curtis also argues that the Meat Shop's tax returns and balance sheets indicate that the money could not have been salary or dividends to him, so that the money must be regarded as a loan.

With these arguments, Curtis attempts to focus the attention of this court on the activities of the Meat Shop and away from his own activities. This approach was squarely rejected in Davis:

Appellant contends in this case that, whether the cash which he took from his wholly owned corporation was a "taxable gain," depends upon whether the corporation had sufficient surplus to cover a dividend distribution, as otherwise there would be no way in which he could receive such cash as a gain taxable to him and, since...