U.S. v. House

• Decision Date: 17 October 1975
• Docket Number: No. 74-1450,No. 74-1451,74-1451,Nos. 74-1450,74-1450,s. 74-1450
• Citation: 524 F.2d 1035
• Parties: 75-2 USTC P 9782, 76-2 USTC P 9616 UNITED STATES of America v. Eugene F. HOUSE, Appellant inAppeal of Evelyn M. HOUSE in
• Court: U.S. Court of Appeals — Third Circuit

Page 1035

524 F.2d 1035

75-2 USTC P 9782, 76-2 USTC P 9616

UNITED STATES of America v. Eugene F. HOUSE, Appellant in No. 74-1450 Appeal of Evelyn M. HOUSE in No. 74-1451.

Nos. 74-1450, 74-1451.

United States Court of Appeals Third Circuit.

Argued Sept. 11, 1975.

Decided Oct. 17, 1975.

S. John Cottone, U. S. Atty., James W. Walker, Asst. U. S. Atty., Scranton, Pa., for appellee.

Robert W. Maris, Solomon Fisher, Dilworth, Paxson, Kalish & Levy, Philadelphia, Pa., for appellants.

Arlene R. Popkin, American Civil Liberties Foundation of Pennsylvania, Philadelphia, Pa., amicus curiae.

Before ALDISERT, GIBBONS and WEIS, Circuit Judges.

OPINION OF THE COURT

GIBBONS, Circuit Judge.

The appellants Eugene F. House and Evelyn M. House, his wife, appeal from a judgment of sentence ¹ on three counts of wilfully and knowingly attempting to evade payment of their federal income tax for the years 1964, 1965 and 1966 in violation of § 7201 of the Internal Revenue Code of 1954, 26 U.S.C. § 7201. They contend that the district court should have granted their motion for a judgment of acquittal on each count because there was insufficient evidence of wilfulness with respect to any year and because there was no evidence sufficient to establish a deficiency in two years. They also contend that their convictions must in any event be set aside because they are based upon evidence illegally obtained by agents of the Internal Revenue Service. With respect to the counts covering the years 1964 and 1965, we reverse because we agree that the government did not prove a deficiency in taxes. The appellants do not suggest on this appeal that there was insufficient evidence of a deficiency in 1966, but argue (1) that evidence produced at trial was derived from evidence illegally obtained and that there is no legally obtained evidence of a deficiency, and (2) that the jury's determination of wilfulness with respect to 1966 does not enjoy any untainted evidentiary support. We conclude that the evidence of a deficiency for 1966 was not the fruit of illegally obtained evidence, and that the evidence does not support the jury's finding of wilfulness with respect to Eugene House. We believe, however, that there is evidence sufficient to support the jury's finding of wilfulness with respect to Evelyn House, but that on this record a new trial on the 1966 count is appropriate.

I. COUNTS I AND II (1964 AND 1965)

The taxpayers have since 1948, as proprietors, operated a wood pallet manufacturing business. They maintained only one checking account for their business and private affairs. Mrs. House, a high school graduate, kept the records for the business in a simple but customary manner. ² Mr. House, who has a ninth grade education, was primarily responsible for the manufacturing end of the business. The taxpayers reported their income for federal income tax purposes on a calendar year cash basis. For the year 1964 and for about ten years prior thereto they had their federal income tax returns prepared by Orville Mase, a banker and public accountant. For the years 1965 and 1966 they had the returns prepared by Charles Spuler, a certified public accountant. The government has made no contention that the returns as filed reflect any overstatement of expenses or other deductions. Its sole contention is that in each of the years in question the gross receipts reported on the return were understated because the taxpayers withheld for deposit in later years, or for negotiation other than through a bank, checks received from customers. As cash basis taxpayers they should properly have included in cash receipts for the tax year all checks actually received from customers in time for deposit in the year covered by the return. ³ E. g., United States v. Coblentz, 453 F.2d 503 (2d Cir.), cert. denied, 406 U.S. 917, 92 S.Ct. 1766, 32 L.Ed.2d 116 (1972).

The elements of a § 7201 offense are (1) wilfulness, (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, supra, 380 U.S. at 351, 85 S.Ct. 1004; United States v. Petti, 448 F.2d 1257 (3d Cir. 1971). The government has the burden of proving each element beyond a reasonable doubt, including the element of tax deficiency. The evidence discloses that Mrs. House kept a record of payments received from customers by marking "paid" on the retained copy of the invoice to customers when payment was received. She also kept in a spiral notebook a record of bank deposits. When it came time to prepare a tax return she made a tabulation of the "paid" invoices and furnished this tabulation to Mase and Spuler to assist them in preparing the tax returns. The accountants reported the total from this tabulation as total sales (gross receipts for a cash basis taxpayer) on Schedule C of the Houses' Form 1040.

In December of 1967 Revenue Agent Viard commenced a routine audit of the Houses' 1965 return. He was able to reconcile the gross receipts reported on the return with the record kept by Evelyn House (118a-20a). He found, however, that bank deposits in 1965 exceeded reported gross receipts. Since he was leaving for military service Viard turned over the results of his partially completed field audit to Revenue Agent Klenkosky. He informed Klenkosky that Eugene House had said he would send his records to Mr. Spuler to have Spuler try to reconcile the differences between the 1965 reported gross receipts and the 1965 deposits. Klenkosky examined the taxpayers' records at Spuler's office and was unable to reconcile the differences between the 1965 total invoices, the 1965 total deposits, and the 1965 reported gross receipts. He concluded that an examination of the 1964 and 1966 records and tax returns would be required for such a reconciliation. He copied from the invoices and the spiral notebook a list of House customers and obtained from these customers copies of all checks which they had sent in payment of House invoices during the three years.

In response to a bill of particulars the government contended that it could prove an understatement, and hence a deficiency, by totaling the customer checks dated in a given year, and contrasting that total with the gross receipts shown in Schedule C. This contention may be summarized:

                      Customer Checks                  Alleged
                        dated in a        House     understatement
                        given year     Schedule C
                1964      $295,510.84  $246,720.40    ($48,790.44)
                1965      $312,527.51  $283,602.89    ($28,924.62)
                1966      $439,596.31  $363,419.93    ($76,176.38)
                

There is no evidence, other than the date on the face of each customer check, tending to show when it was mailed, or when it was received by the Houses. The actual checks, however, show that checks dated in one year were deposited in a later year as follows:

                Checks dated in 1964 deposited early in 1965  $80,883.07
                Checks dated in 1965 deposited early in 1966  $78,832.42
                Checks dated in 1966 deposited early in 1967  $40,905.40
                

There is no evidence as to whether any checks dated in 1963 were deposited early in 1964. The government made no attempt in the evidence to reconcile the 1964 deposits with the invoices which Evelyn House marked "paid" in 1963 or in 1964. The sole evidence of the $48,790.44 1964 understatement relied on by the government was the deposit, in 1965 of $80,883.07 in checks dated in 1964. Since the alleged understatement for 1964 is only $48,790.44, some $32,092.63 of the checks dated in 1964 but deposited in 1965 must have been included in the receipts reported on the 1964 Schedule C, even on the government theory. But if these cash basis taxpayers did not receive $48,790.44 of these checks until after December 31, 1964, there clearly was no understatement of gross receipts in that amount, and there was no proof of a deficiency for 1964.

The complete absence of any evidence as to whether the taxpayers received checks totaling $48,790.44 in time to deposit them prior to January 1, 1965 leaves a critical gap in the government's proof of deficiency for 1964. The same gap applies with respect to the claimed deficiency for 1965. In that year, on the government's theory, the reported receipts included $49,907.80 of checks dated in 1965 but deposited in 1966, and there is no proof that the $28,924.62 difference was received by the taxpayers prior to January 1, 1966.

The government also proved that in 1964 and 1965 Eugene House instead of depositing twelve checks in the sum of $21,881.49, negotiated them to third parties. ⁴ This contrasts with total reported gross receipts for those two years of $530,323.29. The government did not show that the checks negotiated rather than deposited were excluded from reported gross receipts in either year. Indeed, it did not in its calculation of deficiency treat these items specifically. The negotiated checks do not serve to remedy the lack of evidence of deficiency for the years 1964 and 1965, even though evidence of negotiation rather than deposit may have been evidentiary on the issue of wilfulness.

In ruling on the Houses' motion for a judgment of acquittal the district court said:

An analysis of invoices and cancelled checks of defendants' customers revealed, as noted above, substantial understatement of income for 1964, 1965 and 1966. Furthermore, approximately $80,000 in checks received in 1964 was withheld and not deposited or negotiated until 1965; $78,000 in 1965 was not deposited until 1966, and $40,000 in 1966 was not deposited until 1967. (376a; emphasis supplied).

The flaw in the district court's reasoning is the assumption, without evidentiary support, that all customer checks dated in one year were received in that year. Such an assumption belies common experience with the Postal Service during the month of December, and takes far too much for granted with respect to the business practices of the taxpayers' customers. Making the assumption of...