United States v. Clark

• Decision Date: 04 August 1954
• Docket Number: Crim. A. No. 23,067.
• Citation: 123 F. Supp. 608
• Parties: UNITED STATES v. CLARK.
• Court: U.S. District Court — Southern District of California

123 F. Supp. 608

UNITED STATES v. CLARK.

Crim. A. No. 23,067.

United States District Court S. D. California, Central Division.

August 4, 1954.

Laughlin E. Waters, U. S. Atty., Los Angeles, Cal., by Norman W. Neukom, and Richard A. Lavine, Asst. U. S. Attys., Los Angeles, Cal., and George Willi, Sp. Asst. to the Atty. Gen., Tax Division, for plaintiff.

Charles H. Carr. William K. Rasmussen, Los Angeles, Cal., J. A. Donnelley, San Diego, Cal., for defendant.

YANKWICH, Chief Judge.

Whenever the Government and the defendant in a criminal case waive a jury, they are entitled to not just a verdict one way or the other, but to the reasons behind it. This conforms to the Canons of Judicial Ethics of the American Bar Association (Canon 19) and to a practice which I have followed consistently.¹ So in what follows I shall set forth the problem involved in this case and the solution arrived at.

I The Offense Charged

The defendant is charged with violation of Section 145(b) of the Internal Revenue Code,² i. e. with having willfully attempted to evade and defeat his individual income taxes and those of his wife Lena G. Clark for each of the years 1946 and 1947 by filing and causing to be filed on behalf of himself and his wife false and fraudulent income tax returns wherein he knowingly and unlawfully understated and caused to be understated his and his wife's net income and income tax liability. Each of the income tax returns involved was filed with the Collector of Internal Revenue for the Sixth Internal Revenue Collection District of California, at Los Angeles, California. It is, therefore, within the jurisdiction of this court.³

The taxable income reported on both the 1946 and 1947 individual income tax returns of Lena G. Clark consists entirely of her community property one-half, as established under Nevada law, of the taxable income reported on the 1946 and 1947 individual income tax returns of her husband, Wilbur I. Clark. Accordingly, if there was a willful understatement of taxable income on the returns of Wilbur I. Clark for the years 1946 and 1947, it would necessarily result in a willful understatement of taxable income, in corresponding amounts, on the separate returns of Lena G. Clark for the same years.

The underpayment charged under count one was $21,559.10; on count two, $21,620.84; on count three, $3,261.13; and on count four, $3,465.38.

Through Bills of Particulars furnished prior to the trial it became known that the Government would use what is known as "the net worth" method in presenting its case. This formula has been defined in this manner:

"Increase in net worth, plus nondeductible disbursements, minus nontaxable receipts, equals taxable net income. It is basic to this proposition that a man's expenditures and acquisition in any year (which can be demonstrated) must derive from what he had at the beginning plus what he receives during the year; after the nontaxable income has been eliminated or negatived, the balance of the receipts must constitute taxable net income."⁴

There is no direct statutory provision sanctioning the use of this method. However, Section 41 of the Internal Revenue Code requires that the net income should be computed

"in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income."⁵

II The Elements of the Offense

The section under which the prosecution is had requires proof beyond a reasonable doubt of two elements: (a) that there was attempt to evade the taxes due, and (b) that the attempt was willful. If these be present, it matters not whether the source of the income is legal or illegal.⁶

Indeed, the Government insists on participating in the fruits of the most illegal transactions. It draws the line only at theft of property as to which it makes no claim in the thief's hands upon the ground that a thief acquires no title.⁷

The Supreme Court, in a leading case has pointed to the fact, which is very significant in every prosecution under this section, that more is required than a mere omission to make a return and pay a tax:

"We think that in employing the terminology of attempt to embrace the gravest of offenses against the revenues Congress intended some willful commission in addition to the willful omissions that make up the list of misdemeanors. Willful but passive neglect of the statutory duty may constitute the lesser offense, but to combine with it a willful and positive attempt to evade tax in any manner or to defeat it by any means lifts the offense to the degree of felony.

"Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished and perhaps did not define lest its effort to do so result in some unexpected limitation. Nor would we by definition constrict the scope of the Congressional provision that it may be accomplished `in any manner'. By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal. If the tax-evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime."⁸ (Emhpasis added.)

The courts have generally held that to satisfy these requirements the return must be a fraudulent one.⁹ But it is to be noticed as the writer of the article referred to in the American Bar Association Journal states, that what arose out of a special situation in cases where no adequate books have been kept is now so commonly used that there is danger that a prosecution for a serious felony may be based entirely upon disagreement as to bookkeeping methods. And the burden of proof may be shifted entirely on the taxpayer to explain not some items concealed by failure to keep books, but items which books kept in the regular course of business and of the type sanctioned by reputable accountants for a particular business may not reflect. Some courts have warned against such contingencies.¹⁰

A study of the cases will reveal the fact that the original use of this method was sanctioned because it related to illegal activities by persons, who, because of the nature of their business, could not and would not keep books adequately reflecting their income. Illustrative perhaps is the leading case decided by the Supreme Court which sanctioned such method.¹¹ There, large-scale gambling was carried on in a state in which gambling was not allowed. Mr. Justice Frankfurter characterized the defendant as a "gambler on a magnificent scale". Johnson concealed his ownership of gambling establishments in Chicago, a city in which no legal gambling is allowed. Records kept were meager and even such as were kept were destroyed. In the circumstances, the Court used the following language:

"It is not to be expected that the actual financial transactions of such a vast illicit business would appear by direct proof. Compare United States v. Wexler, 2 Cir., 79 F.2d 526. The long duration of this gambling business, the substantial evidence of the operation of the law of probability in favor of the houses, such records as there were pertaining to the private banking facilities and currency exchanges which were at the service of these houses, made it not a matter of tenuous speculation but of solid proof that there were winnings of a substantial amount which Johnson did not report. * * *

"Of course the government did not have to prove the exact amounts of unreported income by Johnson. To require more or more meticulous proof than this record discloses that there were unreported profits from an elaborately concealed illegal business, would be tantamount to holding that skilful concealment is an invincible barrier to proof."¹² (Emphasis added.)

III The Legality of Nevada Gambling

In the case before us we are confronted with a gambler who operates in a state in which gambling is legalized. The Government, in its brief, makes this statement:

"During the years involved in this indictment, and for some period prior thereto, Wilbur I. Clark described his occupation on his federal income tax returns as that of `professional gambler'. It is not anticipated that it will be disputed that from the time when Wilbur I. Clark migrated from California to Las Vegas, Nevada, about June, 1944, until the present, he has at all times been engaged in the operation of resort-gambling casinos (admittedly lawful enterprises under the laws of the State of Nevada) in a proprietary capacity."

The use of the phrase "professional gambler" does not imply approbrium since gambling is legal in Nevada. At any rate, a Government which insists on collecting income from illicit enterprises¹³ is not in a position to play the moralist. By an Act of the Legislature of Nevada approved March 19, 1931, gambling games and gambling devices may be licensed.¹⁴ When so licensed the conduct of gambling games is lawful. The statute is now codified. The Supreme Court of Nevada has sustained the right of the legislature to enact this law,¹⁵ and the United States District Court of Nevada has held that a gambling enterprise operated under Nevada law was a monied and business corporation within the meaning of the Bankruptcy Act.^* The language of the late Judge Norcross is very appropriate:

"As the Bankruptcy Act was passed for the benefit of creditors of a bankrupt as well

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