U.S. v. Leonard

• Decision Date: 18 November 1975
• Docket Number: No. 1176,D,1176
• Citation: 524 F.2d 1076
• Parties: 75-2 USTC P 9695, 75-2 USTC P 9852, 1 Fed. R. Evid. Serv. 82 UNITED STATES of America, Appellee, v. Jackson D. LEONARD, Appellant. ocket 75-1153.
• Court: U.S. Court of Appeals — Second Circuit

Page 1076

524 F.2d 1076

75-2 USTC P 9695, 75-2 USTC P 9852, 1 Fed. R.

Evid. Serv. 82

UNITED STATES of America, Appellee, v. Jackson D. LEONARD, Appellant.

No. 1176, Docket 75-1153.

United States Court of Appeals Second Circuit.

Argued July 18, 1975.

Decided Aug. 28, 1975.

As Amended on Denial of Rehearing Nov. 18, 1975.

James Schreiber, New York City (Walter, Conston, Schurtman & Gumpel, P. C., and Alan Kanzer, New York City, of counsel), for appellant.

W. Cullen MacDonald, Asst. U. S. Atty., New York City (Paul J. Curran, U. S. Atty., for the Southern District of New York, New York City, and John C. Sabetta, Asst. U. S. Atty., of counsel), for appellee.

Before MOORE, FRIENDLY and VAN GRAAFEILAND, Circuit Judges.

FRIENDLY, Circuit Judge:

Jackson D. Leonard, a successful New York chemical engineer, appeals from his conviction, after trial before Judge Owen and a jury in the District Court for the Southern District of New York, on two counts of an indictment charging him with violation of 26 U.S.C § 7206(1). ¹ The first count charged the omission of $24,168.09 from Leonard's reported 1967 adjusted gross income of $259,051.97; the second count charged the omission of $58,684.42 from reported 1968 adjusted gross income of.$134,276.00. He received a light sentence concurrent terms of 18 months of imprisonment with 15 months suspended, fines of $5,000 on each count and the costs of prosecution.

I.

Of the many claims of error, only a few relate to the basic question of guilt. We shall deal with these in this section of the opinion. In that connection it will be necessary to summarize the evidence, which in view of the verdict we must do in the light most favorable to the Government.

On February 20, 1967, Leonard, "doing business under the name and style of the Leonard Process Company," a sole proprietorship, and Union Carbide Corporation (UCC) entered into a contract for engineering services in connection with the construction of two chemical plants a very large one in Taft, Louisiana, which was built, and a smaller one in South Charleston, West Virginia, which was not. Leonard's fees were to be of two sorts. One sort consisted of initial lump sum payments of $180,000 and later periodic payments of $37,000 each. The indictment did not charge that any such payments had been unreported. The other sort was a 10% override on UCC's reimbursements for amounts paid by Leonard to subcontractors performing detailed engineering services which his office was not equipped to provide. The Treadwell Corporation of New York became the subcontractor. None of these 10% overrides were reported as income for 1967 or 1968.

The general pattern which Leonard established was as follows: UCC would send him a single check covering the total amount owing for the subcontracted services including the 10% override, and in some cases also including the $37,000 periodic payment due to Leonard. Instead of depositing the UCC check in his bank account at First National City Bank ^CB and then paying Treadwell, Leonard endorsed the UCC check and sent it to Treadwell. Treadwell would then send Leonard one or two checks, as the case might be, one for the 10% override and another for the periodic payment due to Leonard when this had been included in the UCC check. While the return checks for the periodic payments found their way into bank accounts, as did other UCC checks not including Treadwell payments, Leonard never deposited the checks representing the 10% override $24,168.09 in 1967 and $58,684.42 in 1968. Instead he cashed them or used them to purchase travelers' checks.

So far as concerns his 1967 return, Leonard's claim is that the Government did not bear its burden of proving that the $24,168.09 of undeposited checks had not in fact been reported. The proof was this: Leonard's 1967 FNCB bank statements bear markings identifying certain deposits as UCC deposits, and others as coming from other jobs he was doing. Marion Bardes, who worked as a freelance bookkeeper for Leonard accountants, testified that she had prepared a first draft of Leonard's 1967 tax return on the basis of these bank statements. The work papers for this draft return show that a figure of $291,000, as income from the UCC contract, was arrived at by adding the lump-sum payments and the periodic payments which had been deposited in 1967. This $291,000 was added to other Leonard income to make a total figure of $461,000 as gross income from Leonard's engineering activities. The figure of $461,000 was carried through each of the several drafts of Leonard's return and appeared as the "gross receipts" figure on Schedule C of the return that Leonard filed. That Schedule C showed a net profit of $256,873.95 which, when combined with a loss of $15,166.48 from his wife's Schedule C, yielded a profit of $241,707.47 which was entered on their Form 1040, as "Business income." That last figure was combined with miscellaneous other income of $17,344.50 to give an adjusted gross income figure of $259,051.94; it is this figure which Leonard is charged with having understated.

The defendant raises three objections: First, he claims there is no testimony to show that it was Leonard who identified the various income items on his bank statements as a basis for the preparation of his tax return. Second, he claims there is no evidence that the missing $24,168.09 was not included as part of the other $170,000 of income (i. e., the difference between $291,000 and $461,000). Third, he stresses that Miss Bardes did not prepare the final return and contends that, since the government did not put the final preparer on the stand, the evidence is insufficient to connect the earlier draft forms with the return ultimately filed with the IRS.

All these were arguments for the jury, not for us. The jury was entitled to infer that Leonard had given the bank statements to the accountants for the purpose of preparing his return, knowing that the statements contained some but not all the UCC payments. The second point is frivolous; an exhibit shows the items that made up the other $170,000, and the Treadwell 10% payments were not among them. On the third point while the Government's case would have been stronger if it had called the person who prepared the final form and elicited that he had relied on the initial drafts, Miss Bardes' testimony showed that she had formulated the $461,000 figure that appeared on the final return, using bank records which Leonard knew did not contain the $24,168.09 of Treadwell checks he had cashed or used for buying travelers checks. In the absence of any contrary evidence, this was enough to permit the jury to infer that the $24,168.09 was not included on the final return, and that Leonard knew it was not included. If any further evidence of wilfulness were needed, it would be furnished by Leonard's clumsy attempt to delete the 10% override provision from the copy of the contract that was exhibited to Revenue Agent Laski in the course of the audit.

Leonard's argument about the 1968 return is quite different. Conceding that he directed that the 10% payments from Treadwell, and for that matter the $37,000 payments subsequent to January, not be included in his 1968 personal income tax return, he says they were not required to be. This result follows, he claims, because in January, 1968, he formed a corporation entitled The Leonard Process Co., Inc. (hereafter Leonard Inc.) to which he transferred the business of his sole proprietorship, The Leonard Process Company. On January 18, 1968, The Leonard Process Co., Inc. filed Form 2253, electing to have its income taxed directly to its shareholders as a small business corporation under Subchapter S of the Internal Revenue Code, for the taxable year beginning January 1, 1968. By letter of March 22, 1968, UCC agreed to an assignment of its contract from Leonard Process Company to Leonard Inc., effective February 1, 1968. ² After February 1, 1968, Leonard deposited the $37,000 checks from UCC in a Leonard Inc. bank account. However, both before and after February 1st, he continued the practice of cashing the 10% checks from Treadwell $6,229.20 for January and $52,455.22 for later months although the checks after February 1 admittedly belonged to Leonard Inc. In response to the Government's contention that this simply meant that the checks were embezzled income reportable in the year of embezzlement, James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961), Leonard argues that, under this court's decision in DiZenzo v. C. I. R., 348 F.2d 122 (2 Cir. 1965), they are to be treated rather as constructive dividends. Acceptance of this still does Leonard no good unless, as he asserts, Leonard Inc. had no earnings or profits, IRC §§ 301(c), 316. He contends that it had none in the year beginning February 1, 1968, and that a properly instructed jury could find that the failure to include the $6,229.20 for January, 1968, was not material.

The Government introduced no evidence on the subject except to show that Leonard Inc. did not file a Subchapter S corporate tax return (Form 1120S) for 1968, 1969 or 1970. The defense offered two exhibits purporting to be copies of a proposed corporate income tax return for the period February 1, 1968, to January 31, 1969, see note 2, showing a loss of $73,742.33; both copies were subscribed by the accounting firm, and one was also signed "Jackson D. Leonard." The return was presented through a member of the accounting firm but without any testimony by any person who had prepared it; the judge admitted it only for the purpose of showing that such a return had been prepared but not as evidence of the truth of the matter asserted. The Government countered with another unfiled form showing a loss of only $29,017.77, for the year beginning February 1, 1968, which the judge admitted on the same limited basis. This latter form was of little weight since it was wholly unsigned and was...