U.S. v. Ludwig

• Decision Date: 21 March 1990
• Docket Number: Nos. 89-1424,89-1425,s. 89-1424
• Parties: -842, 90-1 USTC P 50,152 UNITED STATES of America, Plaintiff-Appellee, v. Joseph D. LUDWIG and Lois V. Ludwig, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 875

897 F.2d 875

65 A.F.T.R.2d 90-842, 90-1 USTC P 50,152

UNITED STATES of America, Plaintiff-Appellee, v. Joseph D. LUDWIG and Lois V. Ludwig, Defendants-Appellants.

Nos. 89-1424, 89-1425.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 12, 1989.

Decided March 8, 1990.

As Amended March 12

and March 21, 1990.

Mel S. Johnson, Asst. U.S. Atty., Milwaukee, Wis., for plaintiff-appellee.

Marna M. Tess-Mattner, Gimbel, Reilly, Guerin & Brown, Milwaukee, Wis., for defendants-appellants.

Before CUMMINGS, WOOD, Jr., and COFFEY, Circuit Judges.

COFFEY, Circuit Judge.

Joseph D. Ludwig and Lois V. Ludwig appeal from a judgment of guilty convicting each of them of one count of conspiracy to defraud the government in violation of 18 U.S.C. Sec. 371 and one count of tax evasion for the 1981 taxable year in violation of 26 U.S.C. Sec. 7201. We affirm.

I.

Joseph D. Ludwig owned three discount furniture stores in the cities of Neenah, Kaukauna, and Little Chute, Wisconsin, each operating under the name of Factory Outlet Furniture (hereinafter F.O.F.). Following an Internal Revenue Service investigation, Joseph Ludwig and his second wife, Lois Ludwig, were charged with conspiracy to defraud the government and tax evasion as a result of underreporting cash received from F.O.F. furniture sales.

Prior to the founding of Factory Outlet Furniture, Joseph Ludwig owned a bowling alley operated under the trade name of Ludwig Lanes. In 1971 Ludwig and wife # 1, Beatrice Ludwig, sold the bowling alley and received a net profit of between $65,000 and $75,000. ¹ Ludwig told Internal Revenue Service Special Agent Lawrence Hart that because he did not trust banks, he kept the $65,000 to $75,000 cash proceeds from this bowling alley sale in a box in a closet in his Freedom, Wisconsin, home from 1971 until 1981 when he built the Kaukauna furniture store. The ensuing facts recited herein cast doubt on Ludwig's statement concerning his mistrust of banks and his alleged keeping of the $65,000 to $75,000 in cash in his home. Furthermore, at trial Ludwig's first wife, Beatrice, did not corroborate Ludwig's story concerning the storage of the bowling alley proceeds, stating that she never saw a box of currency in their home during the five years after the sale of the bowling alley. In addition, several of the financial statements (personal records) Ludwig furnished during the course of the government investigation between 1976 and 1982 made no mention of the cash proceeds from the bowling alley sale. Furthermore, the stipulated property settlement entered into during the 1976 divorce proceedings of Joseph and Beatrice Ludwig failed to reflect the $65,000 to $75,000 or any significant amount of cash on hand. Also, statements made for the purposes of securing loans in 1979, 1981 and 1982 listed cash amounts on hand ranging between $20,000 and $30,000, significantly less than the amount Ludwig supposedly kept in the mystery box in the closet in his home. In addition, the April 1980 pre-marital agreement between Joseph Ludwig and his second wife, Lois Ludwig, failed to specifically mention a significant level of cash on hand. Moreover, the government alleged that the absence of a rider in the Ludwig's home insurance policy protecting this cash and the likely presence of start-up costs accompanying Ludwig's entry into the furniture business in the early 1970s, for which this money might have been used, cast further doubt on Ludwig's statements concerning the bowling alley proceeds.

Factory Outlet Furniture was founded by the Ludwigs in the early 1970s, just after the sale of Ludwig Lanes with the business originally operating out of the garage and basement of the Ludwigs' home. Thereafter, a store was opened in Little Chute, Wisconsin and later stores were opened in Neenah and Kaukauna, Wisconsin. ² Former F.O.F. employees testified concerning the store's unconventional sales and accounting practices in years beginning with 1982. ³ According to the former F.O.F. employees, store policies required differing treatment for cash and non-cash sales. Employees were instructed to fill out receipts with notations of "G" for cash sales and a check ("/") for check sales. When cash was accepted, it was put in an envelope with the amount of cash received and the customer's name written on the envelope. These envelopes were kept in a drawer behind the sales counter and at the end of each day Joseph Ludwig would transfer the envelopes containing cash to his home and would count and store the money there.

Former F.O.F. employees also testified that a ledger was used to compile the monthly sales figures. Each month some, but not all, of the cash receipts were commingled with the receipts paid for by check to produce the monthly sales figures. These figures were then submitted to the Ludwigs' accountant, Duane Kalm, who prepared the Ludwigs' taxes. The Ludwigs' accounting practices also carried over to the storage of the sales slips. Testimony also revealed that the sales slips generated from the receipts paid for by check and the sales slips from the receipts paid by cash that had been integrated to produce the monthly sales figures were kept in one area. The sales slips generated from the cash receipts that were not incorporated in the monthly sales figures were kept in a separate area. Both the accounting and sales slips storage practices assisted in the Ludwigs' accumulation of unreported income.

Further evidence pointed toward the presence of significant amounts of possibly unaccounted for cash in the Ludwigs' possession. Evidence was presented at trial establishing that Joseph Ludwig relied heavily on cash to purchase expensive items, including purchases of boats and cars, as well as an addition to his home. Evidence was also submitted concerning the Ludwigs' storage of cash in safes at home and in safety deposit boxes, apparently in banks. Lois Ludwig told a former F.O.F. employee that there was $200,000 to $500,000 kept in a safe at the Ludwigs' home and in her children's safety deposit boxes, apparently located in a bank. Lois Ludwig also told the F.O.F. employee that the cash was kept in the children's safety deposit boxes rather than in an interest bearing account because the Ludwigs were not supposed to have the money. This statement reflected an apparent knowledge on Lois Ludwig's part that the cash had not been reported to the IRS and went to establish her intent to defraud the government.

In establishing its case, the government utilized the "bank deposits" method of proof. This method of proof permits the investigating officer to reconstruct a taxpayer's income, including his expenses and purchases, thus allowing the government to attempt to establish the amount of unreported income. In United States v. Hall, 650 F.2d 994, 996-97 n. 4 (9th Cir.1981), the Ninth Circuit described this method as follows:

"The bank deposits method of proof is ... a circumstantial way of establishing unreported income. It purports to demonstrate that excess income must exist by showing excessive unaccounted for bank deposits. The bank deposits for the tax year are totaled, with adjustments made for funds in transit at the beginning and end of the year. Non-income deposits are excluded, and non-deposited income is included. This constitutes a reconstructed gross income. Calculation of taxable income then proceeds in the usual way, taking into account the legitimate deductions, exceptions, exclusions and credits. In the case of a business this would exclude the business' cost of goods sold and other expenses. If the resultant figure differs from what the taxpayer has reported, the government will contend that the difference is unreported income."

Utilizing the bank deposit method, the government asserted that the defendants underreported taxable income in the amounts of $67,866.25 in 1980, $69,077.93 in 1981, and $18,962.46 in 1982. Thus, the defendants underreported their tax liability by $33,816 in 1980, $36,863 in 1981 and $9,451 in 1982. It was also determined that in 1983 the defendants underreported a tax liability in the amount of $21,873.

Following trial, the jury found Joseph and Lois Ludwig each guilty of one count of conspiracy to defraud the government in violation of 18 U.S.C. Sec. 371 as well as one count of tax evasion for the taxable year 1981 in violation of 26 U.S.C. Sec. 7201. The court sentenced Joseph Ludwig to fifteen months of incarceration, two years of probation consecutive to his release from custody and a $10,000 fine. Sentence was withheld for Lois Ludwig who was placed on two years' probation and fined $5,000.

II.

As previously discussed, the government relied upon the bank deposits method to establish its case against the Ludwigs. The Ludwigs contend that the government failed to make a complete and adequate investigation of their financial situation and, thus, presented an inaccurate picture of their financial situation under the bank deposits method. Specifically, the Ludwigs allege two deficiencies in the government's proof: (1) the government failed to adequately investigate Joseph Ludwig's explanation that he had a large amount of cash on hand as a result of his 1971 sale of the bowling alley and (2) the government erroneously characterized certain deposits received in Mrs. Ludwig's personal bank account as taxable income.

In approaching the question of whether the government adequately proved its "bank deposits" case, the Ludwigs assert that we should direct our attention to the question of the quality of the investigation the government conducted and whether the government investigators appropriately followed all the "leads" in determining whether certain items were "income" or "non-income" receipts. In contrast, the government contends that the controlling question is the sufficiency of the evidence, thus meaning that the only question this court need address is whether the "bank deposits" method...