U.S. v. Fogg, 80-5900

• Decision Date: 06 August 1981
• Docket Number: No. 80-5900,80-5900
• Citation: 652 F.2d 551
• Parties: 81-2 USTC P 9607, 8 Fed. R. Evid. Serv. 1240 UNITED STATES of America, Plaintiff-Appellee, v. Edward Chambless FOGG, III, Defendant-Appellant. . Unit B
• Court: U.S. Court of Appeals — Fifth Circuit

Page 551

652 F.2d 551

81-2 USTC P 9607, 8 Fed. R. Evid. Serv. 1240

UNITED STATES of America, Plaintiff-Appellee, v. Edward Chambless FOGG, III, Defendant-Appellant.

No. 80-5900.

United States Court of Appeals, Fifth Circuit.

Unit B

Aug. 6, 1981.

Rehearing and Rehearing En Banc Denied Oct. 8, 1981.

C. Harris Dittmar, Jacksonville, Fla., for defendant-appellant.

Atlee W. Wampler, III, U. S. Atty., Kevin M. Moore, Stephen B. Gillman, Asst. U. S. Attys., Miami, Fla., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before HILL and VANCE, Circuit Judges, and LYNNE, ^* District Judge.

LYNNE, District Judge:

This appeal concerns the amazing attempt of appellant, the corporate president of a thriving food store chain, to skim approximately $80,000 per year off the wholesale price that his company paid for orange juice and pour it, tax-free, into his own pocket. On March 30, 1980, a grand jury, sitting in the Southern District of Florida, indicted appellant on ten counts of income tax evasion. Appellant's jury trial began on June 11, 1980. At the close of the government's case, the trial judge granted appellant's motion for judgment of acquittal on those counts charging that appellant had assisted in presenting fraudulent corporate tax returns for the years 1973-77. ¹ The jury convicted appellant of personal income tax evasion in violation of 26 U.S.C. § 7201 ² for the years 1973-77. On November 6, 1980, the district judge fined appellant $50,000 and sentenced him to prison for a total of thirty months.

Reduced to its simplest terms, the government's case against appellant consisted of evidence that he received "kickbacks" from the Florida Orange Juice Company (FOJC) which supplied his food store chain with orange juice. Appellant did not report these "kickbacks" as personal or corporate income. The controller for FOJC, Aron Kelton, testified that he drew disbursement checks to Farm Stores (appellant's business) on a regular basis. ³ The amount of each check equalled the number of units of orange juice sold to Farm Stores since the last check, times an allowance or reimbursement figure. ⁴ Kelton personally delivered checks to Farm Stores' offices on two occasions when Frank Knight, the regular courier and the general manager of FOJC, was out of town. The checks were enclosed in envelopes marked "Farm Stores, attention Mr. Ed Fogg." Kelton further testified that the reimbursements sent to Farm Stores were labeled as "promotion" on FOJC's books. FOJC did not have this sort of arrangement with any of its other customers.

Frank Knight worked for FOJC from approximately 1951 until 1977. He explained the reimbursements as the result of appellant's apparent desire "to have more money to spend." Appellant asked Knight in the early 1970's if he could pay extra for orange juice and receive a refund from FOJC at the end of each month. Knight agreed. Knight always delivered the checks to appellant by hand. At appellant's request, each check was made payable to Farm Stores Processing, a division of Farm Stores.

John Rife, an accountant with Farm Stores, also testified for the government. Rife was specifically employed by Dairy Management Service, a partnership consisting of appellant and his brother. Rife testified that appellant gave him the first FOJC check, told him to give him cash for it, and stated that he planned "to use the money for legitimate business purposes." Thereafter, as he received FOJC checks from appellant, Rife deposited them to a bank account entitled Farm Stores, Inc., Milk Processing Division. He testified that he sometimes handled the checks through an exchange or general ledger account by debiting the bank account and crediting the exchange account or petty cash. He would then have a check written to cash, disguising the entire transaction by making the opposite entries in each account. One of Rife's assistants cashed each check. Rife personally transferred the cash to appellant and kept only informal notes on the receipt of each check. He never recorded the amounts as business income to Farm Stores, admitting on the stand that he "used poor judgment in handling it that way." ⁵

The government presented several other witnesses including the agent who had conducted the audit of Farm Stores' 1975 and 1976 tax returns. In the course of that audit, the agent received documents indicating that appellant, because of his education and experience, was an expert accountant. Appellant's defense consisted of testimony by numerous character witnesses. ⁶ He did not testify in his own behalf.

Appellant contends that the government failed to construct a prima facie case of personal income tax evasion because it did not prove what Fogg did with the money after he received it from Rife. In his testimony, Rife stated that Fogg told him the money was to be used for "legitimate business expenses." The government's failure to contradict this hearsay statement, so the argument runs, indicates that the jury based its verdict of guilty on mere conjecture. The government argues that it presented substantial evidence of appellant's guilt, more than meeting its burden under 26 U.S.C. § 7201 and the pertinent case law. We agree with the government and affirm the lower court's refusal to grant appellant's motion for judgment of acquittal.

In United States v. Hiett, 581 F.2d 1199, 1200 (5th Cir. 1978), we cataloged and commented upon the elements of a Section 7201 violation:

To establish a § 7201 violation, the government must prove (1) the existence of a tax deficiency, (2) an affirmative act constituting an evasion or attempted evasion of the tax due, and (2) willfulness.... To establish a tax deficiency, the government must show first that the taxpayer had unreported income, and second, that the income was taxable. (Citations omitted).

As did the appellant in Hiett, Mr. Fogg contends that the money he undisputably received from FOJC was not taxable income. Hiett maintained that the government failed to prove the existence of a taxable source ⁷ or the nonexistence of any nontaxable source ⁸ for his unreported income. In allowing the government to present testimony of an Internal Revenue agent that his extensive investigations revealed no possible nontaxable source for Hiett's extra income, ⁹ we noted that Section 7201 does not require the government "to prove a cosmic negative." Id. at 1201. To require the government in the instant case to disprove Fogg's accountant's meager recollection of Fogg's purported use of the money would be absurd. The government met its burden under the statute by demonstrating Fogg's receipt of unreported income and the existence of its taxable source.

Hiett also examines another issue raised by Fogg relating to the government's burden of proof. In Hiett, we affirmed the lower court's placement of the burden of proof on the defense to show that Hiett's expenditures were for business, not personal, purposes. Id. at 1202. It stated clearly that the burden of proving deductions is on the defendant. If Fogg contends that he used the money from FOJC for legitimate business expenses, he must prove it. He chose to remain silent at trial and allow the jury to draw inferences from the evidence without the benefit of his version of the facts.

Appellant goes to great lengths in his brief to distinguish the cases of United States v. Lawhon, 499 F.2d 352 (5th Cir. 1974), and McClanahan v. United States, 292 F.2d 630 (5th Cir. 1961). These cases are similar to Hiett because in each we refused to place the burden of proving the legitimacy of deductions upon the government. Fogg claims that his situation differs from that of Lawhon because he does not assert his right to off-setting deductions; rather, he refused to characterize the money he received as income. The government's point in this regard is well taken. It contends that there is no real distinction between the basic arguments of Fogg and Lawhon. Neither appellant denied receiving money. Each offered a reason why he should not pay taxes on the funds. When the government in the instant case presented evidence indicating that the money received by Fogg was income to him, the court below properly submitted that question to the jury.

Internal Revenue Agent Tepper testified for the government as an expert IRS auditor and accountant. The prosecutor asked Agent Tepper to give his opinion of the tax treatment of the transactions in evidence. Agent Tepper stated that the payments to Fogg would be characterized as constructive dividends from the Farm Stores Corporation. ¹⁰ Without documentation, the Internal Revenue Code would not recognize expenditures as business expense deductions. Appellant emphasizes the impropriety of Agent Tepper's testimony because it was prejudicial and because it stated legal conclusions.

In United States v. Bass, 425 F.2d 161 (7th Cir. 1970), the court remanded the case for several reasons, the least of which was the government's attempt to prove the existence of income through the testimony of an Internal Revenue agent. The agent stated that certain corporate expenses of the appellant's corporation were improper and would be charged as income to appellant. Bass is easily distinguishable from the instant case because the government did not rely solely on Agent Tepper's testimony or upon lack of documentation to establish receipt of income by Fogg. Fogg's counsel cross-examined Rife and elicited the statement that Fogg told him the money was for business purposes. The government took the opportunity to rebut this exculpatory evidence with the agent's testimony.

Moreover, the court below, in denying appellant's motion for a new trial, made several observations about Bass. First, the testimony of the agent was only a superfluous reason for remand. The court remanded the case mainly because of erroneous jury instructions. Second, we had not accepted Bass's teachings...