U.S. v. Sorrentino, 83-1260

• Decision Date: 10 April 1984
• Docket Number: No. 83-1260,83-1260
• Citation: 726 F.2d 876
• Parties: 84-1 USTC P 9196, 15 Fed. R. Evid. Serv. 194 UNITED STATES of America, Appellee, v. Staniford A. SORRENTINO, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 876

726 F.2d 876

84-1 USTC P 9196, 15 Fed. R. Evid. Serv. 194

UNITED STATES of America, Appellee, v. Staniford A. SORRENTINO, Defendant, Appellant.

No. 83-1260.

United States Court of Appeals First Circuit.

Argued Dec. 5, 1983.

Decided Jan. 31, 1984.

Memorandum and Order of April 10, 1984.

Francis J. DiMento, Boston, Mass., with whom DiMento & Sullivan, and Carolyn M. Conway, Boston, Mass., were on brief, for appellant.

Deborah Wright Dawson, Atty., Tax Div., Dept. of Justice, Washington, D.C., with whom Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Robert E. Lindsay, Attys., Tax Div., Dept. of Justice, Washington, D.C., and William F. Weld, U.S. Atty., Boston, Mass., were on brief, for appellee.

Before CAMPBELL, Chief Judge, BOWNES, Circuit Judge, and MALETZ, ^* Senior Judge.

BOWNES, Circuit Judge.

Defendant Staniford Sorrentino is charged with eight counts of tax evasion for the years 1975, 1976, 1977, and 1978. In each year he is alleged to have willfully attempted to evade a substantial part of his individual federal income tax liability in violation of 26 U.S.C. Sec. 7201, and also to have willfully subscribed a materially false small business corporation income tax return in violation of 26 U.S.C. Sec. 7206(1). Following a thirty-day jury trial in the United States District Court for the District of Massachusetts, Sorrentino was convicted on all eight counts. On appeal, he challenges three jury instructions, sundry evidentiary rulings, the trial courtroom seating arrangement, and a Jencks Act ruling.

The elements of attempted tax evasion under Sec. 7201 are (1) an additional tax due and owing, (2) an attempt to evade or defeat that tax, and (3) willfulness. Sansone v. United States, 380 U.S. 343, 351, 85 S.Ct. 1004, 1010, 13 L.Ed.2d 882 (1965). The Government makes out a prima facie case under the net worth method of proof if it establishes the defendant's opening net worth (computed as assets at cost basis less liabilities) with reasonable certainty and then shows increases in his net worth for each year in question which, added to his nondeductible expenditures and excluding his known nontaxable receipts for the year, exceed his reported taxable income by a substantial amount. See Holland v. United States, 348 U.S. 121, 125, 75 S.Ct. 127, 130, 99 L.Ed. 150 (1954); McGarry v. United States, 388 F.2d 862, 864 (1st Cir.1967), cert. denied, 394 U.S. 921, 89 S.Ct. 1178, 22 L.Ed.2d 455 (1969). The jury may infer that the defendant's excess net worth increases represent unreported taxable income if the Government either shows a likely taxable source, Holland, 348 U.S. at 137-38, 75 S.Ct. at 136, or negates all possible nontaxable sources, United States v. Massei, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517 (1958); the jury may further infer willfulness from the fact of underreporting coupled with evidence of conduct by the defendant tending to mislead or conceal. Holland, 348 U.S. at 125, 75 S.Ct. at 130.

In the present case, the Government conducted an extensive pretrial investigation of Sorrentino's financial affairs for the years in question. Government agents interviewed the defendant, his two sisters, his business associates and contacts, and numerous bank and commercial employees who dealt with Sorrentino. The agents analyzed the defendant's banking and investment accounts in detail to ascertain the nature and extent of his assets and liabilities. They also checked local real estate and probate records, as well as the IRS's own records. The investigation showed that Sorrentino held or acquired the following major assets, among others, during the indictment years: telephone bonds and Treasury notes; three parcels of improved real estate, including a new home constructed by Sorrentino in 1975-79 at a cost of over $330,000; and undistributed income from the Crown & Anchor, a motel with several bars of which Sorrentino was manager and half owner. There was also documentation of substantial personal, nondeductible expenditures for automobiles, antiques, and travel. Aside from a $5,000 trust fund and some jewelry valued at $8,000 left him in his mother's will twenty years previously, there were no records of gifts or inheritances.

The results of the Government's investigation were summarized in a net worth and expenditures schedule based on evidence admitted at trial and revised in the course of the trial to reflect the testimony actually given before the jury. The net worth schedule shows an opening net worth for Sorrentino of $17,074.86 on December 31, 1974, with increases in the following amounts in the indictment years: $46,752.56 in 1975; $13,198.44 in 1976; $74,767.19 in 1977; and $70,602.19 in 1978. This translates, according to the Government's calculations, when nondeductible expenditures are added and nontaxable receipts subtracted, to the following figures for taxable income: $110,194.17 in 1975; $31,223.11 in 1976; $90,352.92 in 1977; and $66,240.84 in 1978. ¹ The corresponding figures reported as income by Sorrentino were: $10,979.60 in 1975; none in 1976; $5,378.00 in 1977; and none in 1979.

On the issue of the source of the unreported income, the Government offered the testimony of Robert Hedrick, the former general manager of the Crown & Anchor during the period in question. Hedrick testified that he observed the regular collection of substantial amounts of cash door receipts, which were not reported as income on the Crown & Anchor's corporate tax returns but instead were distributed under the table to Sorrentino and his co-owner. Hedrick also testified to the existence of a similar "skimming operation" with respect to the cash receipts from the Crown & Anchor bars, which were allegedly used to fund a cash payroll with the purpose of evading federal withholding taxes. Hedrick's testimony was corroborated in material respects by John Henry, another Crown & Anchor employee.

On the issue of willfulness, the Government showed not only a regular failure on Sorrentino's part to report taxable income from his securities and a complete failure to report income in previous years, but also a predilection for undocumented cash transactions and a pattern of registering his own assets in the name of his intimate friend, Chester Warner.

At trial, the principal defense was that the net worth increases and expenditures shown by the Government actually came not from the Crown & Anchor skimming operations, but from nontaxable sources which the Government failed to take into account, namely gifts and inheritances. Specifically, defendant claimed that he had received substantial cash gifts from his father, and that, after the father's death in January, 1976, he had received an inheritance of valuable antiques with a basis stepped up to fair market value. Although defendant produced some evidence of antique sales, he could not document their nontaxable nature, for all transactions had purportedly been made in cash, and both his father and the purchaser of his antiques were no longer alive.

We reject at the outset the notion that the Government's evidence was insufficient to go to the jury because of any failure to track down "leads" to nontaxable sources. ² Defendant points to a newspaper article which mentioned in passing a statement made by Sorrentino to the effect that he had inherited his father's antique collection, and claims that this should have been treated by the Government as a lead. In his single pretrial interview with an IRS special agent, however, Sorrentino expressly denied receiving any gifts or inheritances except from his mother, and refused to offer any leads whatsoever concerning nontaxable sources of income. We hesitate in these circumstances to apply the leads doctrine at all. Even assuming, though, that the newspaper article provided a lead, we hold that the Government's exhaustive investigation of county probate registers, federal social security records, federal estate and gift tax returns and antique dealers' records was clearly adequate to support the Government's prima facie case. The investigation revealed no trace of a probated will or taxable estate for Sorrentino's father, much less a bequest of valuable antiques; rather, it indicated that Sorrentino's father lived in straitened circumstances and was dependent on social security payments. This supported the inference, apparently made by the jury, that Sorrentino's unreported receipts did not come from a nontaxable source such as gifts or inheritances. See United States v. Goldstein, 685 F.2d 179, 182 (7th Cir.1982); United States v. Giacalone, 574 F.2d 328, 332 (6th Cir.), cert. denied, 439 U.S. 834, 99 S.Ct. 114, 58 L.Ed.2d 129 (1978); United States v. Penosi, 452 F.2d 217, 219-20 (5th Cir.1971), cert. denied, 405 U.S. 1065, 92 S.Ct. 1495, 31 L.Ed.2d 795 (1972).

We now turn to the four areas in which the defendant assigns substantial error.

I. JURY INSTRUCTIONS

In his charge to the jury, Judge Caffrey set forth the elements of attempted tax evasion under Sec. 7201, and explained the Government's burden of proof under the net worth method. On the issue of taxable source, he stated: "The burden of proof is on the government to establish beyond a reasonable doubt that the funds reflected by his increased net worth or by his nondeductible expenditures came from taxable rather than nontaxable sources." He further explained that taxable income would include compensation for personal services, gain from business or commercial dealings, and interest or dividends, while nontaxable receipts would include gifts, inheritances, life insurance proceeds, loans, and reimbursement for purchases made on behalf of other people. Judge Caffrey properly instructed the jury that in deciding whether the Government had met its burden it should consider evidence of a likely source of taxable income and evidence tending to negate any nontaxable source, as well as any failure on the Government's part to track down any...