United States v. Cleveland

• Citation: 477 F.2d 310
• Decision Date: 16 April 1973
• Docket Number: No. 72-1471.,72-1471.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Robert E. CLEVELAND, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

477 F.2d 310 (1973)

UNITED STATES of America, Plaintiff-Appellee, v. Robert E. CLEVELAND, Defendant-Appellant.

No. 72-1471.

United States Court of Appeals, Seventh Circuit.

Argued January 8, 1973.

Decided April 16, 1973.

Rehearing Denied May 7, 1973.

Joseph A. Lamendella, Samuel J. Betar, Chicago, Ill., for defendant-appellant.

James R. Thompson, U. S. Atty., William T. Huyck and Ann P. Sheldon, Asst. U. S. Attys., Chicago, Ill., for plaintiff-appellee.

Before FAIRCHILD, CUMMINGS and STEVENS, Circuit Judges.

STEVENS, Circuit Judge.

Defendant was indicted and convicted on three counts of tax evasion in violation of 26 U.S.C. § 7201. On appeal, he raises numerous issues relating to the sufficiency of the evidence, several evidentiary rulings, the voir dire, the instruction of the jury, and the application of the Jencks Act, 18 U.S.C. § 3500. Only the final point has merit.

The prosecution was based on the "net worth" theory of proof. This theory assumes that a taxpayer's increase (or decrease) in net worth plus his nondeductible expenses (less nontaxable receipts, if any) during the tax year should equal his taxable income. If there is a substantial unexplained discrepancy between this figure and the amount actually reported, the inference that taxable income was not reported is sufficient to support a conviction. See Capone v. United States, 51 F.2d 609 (7th Cir. 1931); Guzik v. United States, 54 F.2d 618 (7th Cir. 1931). Although the theory puts the burden of explaining the discrepancy on the defendant, and has other deficiencies, the Supreme Court has approved its use. United States v. Johnson, 319 U.S. 503, 63 S.Ct. 1233, 87 L.Ed. 1546; Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L. Ed. 150.

"While we cannot say that these pitfalls inherent in the net worth method foreclose its use, they do require the exercise of great care and restraint. The complexity of the problem is such that it cannot be met merely by the application of general rules. Cf. Universal Camera Corp. v. Labor Board, 340 U.S. 474, 489 71 S.Ct. 456, 95 L. Ed. 456. Trial courts should approach these cases in the full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute . . . Appellate courts should review the cases, bearing constantly in mind the difficulties that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation." 348 U.S. at 129, 75 S.Ct. at 132.

With this admonition in mind, we turn to the case at hand.

I. Sufficiency of the Evidence.

The government's calculations indicate that defendant failed to report $6,064.76 in 1964; $6,744.92 in 1965; and $5,864.35 in 1966, the three indictment years. By way of contrast, he reported no income in 1964; $102.10 in 1965; and $1,591.04 in 1966. Cleveland argues that close examination of the government's case reveals that the proven discrepancies were only $909.00 in 1964; no taxable income in 1965 (although he reported $102.10); and $2,839.00 in 1966. The proven discrepancies in 1964 and 1966, he argues, are not substantial enough to support a conviction.

1964

Cleveland claims the government made four errors in its schedules for 1964. First, the government included as an increase in net worth $5,000 received in settlement of a lawsuit, but did not enter the same amount as a liability to his client. There was evidence at trial, however, which showed that Cleveland felt no obligation to pass the money on to his client and in fact had used it for his own purposes. Nor had any attempt to collect it ever been made. Tr. 150. This evidence was sufficient to establish that the $5,000 was income. Rutkin v. United States, 343 U.S. 130, 136-137, 72 S.Ct. 571, 96 L.Ed. 833 (1954); United States v. Wyss, 239 F.2d 658 (7th Cir. 1957).

Second, defendant contends he should have been credited $800 on the purchase price of a building (the Foster Avenue building). The closing statement shows a credit of $800 for "6 stoves and 2 refrigerators." Gov.Ex. 41C, App. 78-79. Defendant's expert witness testified that this represented "a reduction in purchase price."¹ Even though we must view the evidence most favorably to the government, for purposes of decision we accept this testimony. Nevertheless, the $800 is immaterial in light of the other evidence of guilt.

Third, Cleveland contends that he overstated on his 1964 tax return the interest expense on the Foster Avenue property, thereby creating the impression of additional resources available to defendant during the tax year. The government, however, did not rely on the tax return in its computations. It relied instead on the Liberty Savings and Loan Mortgage payment ledger cards. Gov. Ex. 41. Defendant stipulated to the interest figures contained therein. Gov. Ex. ZZZ.

Fourth, the government did not credit defendant for $636 in insurance commissions received by him on his own life insurance policy. Defendant's own expert witness recognized that the amount was income. Tr. 341-342. Cleveland was not entitled to credit for the sum since it was income.

The findings with respect to defendant's 1964 income are supported by the record.

1965

The primary objection to the government's computations for 1965 concerns the inclusion of $8,116.99 in a Glencoe Bank checking account in the name of defendant's wife. Cleveland contends that those funds cannot be traced to him. The Clevelands were married in 1962; they separated in 1965. The account was opened, maintained, and closed in 1965. The evidence showed that Bernice Cleveland had no income during her marriage. Defendant alleges that Mrs. Cleveland brought $30,000 into the marriage. We find no evidence supporting this allegation. The only evidence introduced on the point indicates that she brought roughly $2,000 into the marriage. Tr. 88, 90. The evidence was sufficient to support the inference that the $8,116.99 was income to Cleveland.

Appellant also argues that he is entitled to a theft loss on the $8,116.99 because his wife took the money on dissolution of the marriage. There was no theft, however, since defendant gave the money to his spouse for deposit in her separate account. A gift does not entitle one to a theft loss.

The evidence on the $8,116.99 and all other elements of the government computation are supported by the evidence.

1966

Defendant contends that the 1966 figures are incorrect because they treat loans from three friends as income. The testimony of the three was quite dubious, and the jury evidently did not believe that the payments totalling $3,925 were loans. In any event, appellant admits a proved unaccounted for difference of $2,839 in a year when he reported only $1,591.04. In view of the fact that this is an amount which was computed without making any realistic allowance for normal living expenses, we cannot accept his contention that the amount is insubstantial.

The evidence was sufficient to support the government's calculations for each of the three indictment years. The consistent pattern of income understatement proven in this case is sufficient to support the inference of willfulness. Holland v. United States, 348 U.S. 121, 139, 75 S.Ct. 127, 99 L.Ed. 150.

II. The Admissibility of Evidence.

Defendant argues that his objections to certain government evidence were improperly overruled. The objections were grounded on the marital privilege, the Fifth Amendment, and the rule against evidence of unrelated criminal activity.

In preparing its case, the government conducted many interviews with defendant's former wife, Bernice. Although she never testified at trial, defendant sought to suppress all information and leads obtained from her, contending that the interviews violated the marital communications privilege. The trial court refused to hold a hearing on the matter.

Although testimony by a government agent as to what a spouse said would be inadmissible in the Fifth Circuit,² the rule is otherwise in the Second Circuit.³ As we stated in United States v. Doughty, we prefer the view of the Second Circuit. See 460 F.2d 1360, 1364 n. 3 (7th Cir. 1972). In any event, no such testimony was given at this trial, and we find no authority for the broad exclusionary rule advocated by defendant. See the Advisory Committee Notes to Rule 504, Proposed Federal Rules of Evidence.

At defendant's trial, the government read to the jury portions of the transcript of divorce proceedings involving Cleveland and his spouse, Bernice. That transcript contains numerous admissions by defendant as to his financial condition. Since the government did not read to the jury all relevant portions of the transcript, defendant contends it was permitted to "pick and choose from the taxpayer's statement" in violation of Holland v. United States, 348 U.S. 121, 128-129, 75 S.Ct. 127, 132, 99 L.Ed. 150. Appellant's reliance on that portion of the Holland opinion is completely misplaced. That discussion was concerned with the need for corroboration of admissions made to Internal Revenue agents; it had nothing to do with the use of portions of a transcript, the complete text of which is available to both parties.

Appellant also raises the Fifth Amendment as a bar to selective introduction of the transcript. He concedes that the entire transcript could have been read to the jury without offense to his Fifth Amendment rights. Since the government chose to read only part of it, he contends that he could not have read additional excerpts to the jury without, in effect, commenting on his failure to testify. We find no merit in this argument.

His next point relates to testimony on the $5,000 received by Cleveland in settlement of a lawsuit. The government deemed it income to Cleveland because he had appropriated it to his own use. The evidence supported this conclusion. Defendant properly points out that evidence of past crimes is not...