United States v. Cramer

• Decision Date: 23 July 1971
• Docket Number: No. 719 and 720,Dockets 35267 and 35268.,719 and 720
• Citation: 447 F.2d 210
• Parties: UNITED STATES of America, Appellee, v. Louis CRAMER and Minnie K. Cramer, Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

447 F.2d 210 (1971)

UNITED STATES of America, Appellee, v. Louis CRAMER and Minnie K. Cramer, Defendants-Appellants.

Nos. 719 and 720, Dockets 35267 and 35268.

United States Court of Appeals, Second Circuit.

Argued June 7, 1971.

Decided July 23, 1971.

Louis Bender, New York City (Boris Kostelanetz, New York City, and Richard B. Thaler, Ithaca, N. Y., of counsel), for appellants.

James M. Sullivan, Jr., U. S. Atty., N. D. N. Y., Syracuse, N. Y., for appellee.

Before FRIENDLY, Chief Judge, HAYS and OAKES, Circuit Judges.

FRIENDLY, Chief Judge:

Louis Cramer and his wife Minnie, partners in an auto parts business in Ithaca, New York, appeal from their conviction after a jury trial in the District Court for the Northern District of New York, of willful tax evasion, 26 U.S. C. § 7201, and willful assistance in the preparation of false tax returns, 26 U.S. C. § 7206(2). The four-count indictment charged in substance that the Cramers had understated by $74,839.61 their taxable income on their joint income tax return for 1962 (Count 1) and by $55,466.70 for 1963 (Count 2), and that, with respect to the same tax years, they had willfully assisted in the preparation of their materially false partnership returns by (1) overstating purchases, (2) failing to report purchase discounts, (3) overstating sales returns and allowances, and (4) overstating New York Disability and Group Hospital Expenses (Counts 3 and 4). The jury returned a verdict of guilty on all four counts against each defendant, although the basis of its decision on Counts 3 and 4 was limited to "reported purchases of merchandise."¹ The defendants received the sentences stated in Part VI below.

For many years, Louis and Minnie Cramer were partners in Cramer's Auto Parts Co., a wholesale jobber of auto parts whose sales were principally to garages and gas stations. Louis waited on the trade behind the counter and purchased the parts sold in the store; Minnie helped in the office and assisted in the bookkeeping. During the years in question, Judge Louis Thaler, senior partner in the law firm of Thaler and Thaler, prepared the Cramers' tax returns on the basis of information they supplied to him.

The stimulus for the investigation that led to the prosecution of this case was a similar investigation undertaken by the New York State tax authorities. As a result of the latter, a settlement was reached whereby the Cramers paid a 5% negligence penalty in addition to the tax (and interest) due the State. Apparently pursuant to an agreement between state and federal tax authorities, the Internal Revenue Service was notified of the state examination and settlement, and the Service then commenced its own investigation.

The federal investigation was undertaken by Agents Hurban and Sager. Agent Hurban examined the books and records of Cramer's Auto Parts Co. — consisting of the cash disbursements journal, the cash receipts journal, the cancelled checks, bank statements, and sales invoices. A comparison of the results of this examination with the figures reported on the Cramers' partnership returns revealed, with respect to the items specified in Counts 3 and 4, unreported income in the amounts specified in Counts 1 and 2. In addition, a number of conferences were held between the agents and the Cramers, Judge Thaler, his son and associate Richard, and James Barrett, an accountant hired by Thaler and Thaler in connection with the New York State investigation. In the course of these meetings, the agents obtained information concerning appellants' financial picture during the years in question as well as the manner in which the returns were prepared. On the basis of information so obtained, and much documentary evidence, proof was adduced at trial to corroborate the specific deficiencies in reported income by showing an increase in appellants' net worth and expenditures above that reported as taxable income (and unexplained by increases from nontaxable sources) of about $74,000 for 1962 and $38,000 for 1963.²

Appellants did not take issue with the factual accuracy of the asserted deficiencies in reported income resulting from the failure to report purchase discounts, the overstatement of sales returns and allowances, and the overstatement of New York Disability and Group Hospital Expenses. They claimed that these were a function of errors by others on whom they relied to prepare their returns (or the underlying figures therefor), a claim the jury apparently believed. See fn. 1 supra. With respect to the overstatement of purchases which constituted the bulk of the deficiency, however, the appellants contended that they properly reduced the gross profit margin reflected on their own books and records (by an upward adjustment in the figures for purchases) to one in accord with the national average for auto parts wholesalers, because the former was "way out of line" with the latter. Alternatively, they contended that even if the method was not proper, they relied on the advice of their attorney, Judge Thaler, who informed them that it was — a contention, which, if believed, would tend to negate the element of "willful" tax evasion which the Government was required to prove.

As to the net worth proof, appellants' principal contention relates to the use of the inventory figures on which the Government relied in part in establishing valuations of appellants' assets at the beginning and end of the years in question. Although the Government employed the inventory figures reported on appellants' tax returns, it is now contended that these inventories were obsolescent and use of them in a net worth analysis would necessarily overestimate appellants' net worth.

While this is but a crude outline of the detailed factual presentation at trial, the relevant details may be more appropriately developed in the context of appellants' legal contentions.

I. The Failure to Record the Grand Jury Testimony

Agent Sager was apparently the only witness who testified before the grand jury which returned the indictment against the Cramers. According to the Government's memorandum in the district court, "as of the date of the indictment herein, to wit, March 27, 1969, minutes of grand jury proceedings were not taken in the Northern District, except in major criminal cases." Since the instant prosecution presumably was not deemed to be a "major criminal case," no stenographer was present to record Agent Sager's grand jury testimony, and consequently this was not available for possible use as impeachment. Appellants claim that this failure constituted a denial of due process.

The Cramers rely principally on our decisions in United States v. Youngblood, 379 F.2d 365 (2 Cir. 1967), and United States v. White, 417 F.2d 89 (2 Cir. 1969), cert. denied, 397 U.S. 912, 90 S.Ct. 910, 25 L.Ed.2d 92 (1970), for the proposition that we have established a rule in this circuit requiring that all grand jury testimony be recorded. In Youngblood, we directed that at trials commencing after June 21, 1967, the date of our judgment in that case:

the district courts of this circuit at the request of the defendant should order that the defendant be allowed to examine the grand jury testimony of those witnesses who testify at his trial without requiring him to show any particularized need for this material.

379 F.2d at 370. We also noted, id. at n. 4, that

it is our understanding that stenographic minutes of grand jury proceedings in our circuit are now regularly taken and filed away. However, this may not have always been the practice, and where it has not been we do not imply that a defendant is entitled as of right to minutes that do not exist.

Two years later in White, a case arising in the Northern District and involving the nonrecordation of the grand jury testimony of one of the key prosecution witnesses, we held the trial testimony of the witness admissible, but noted that "had this failure to record the grand jury testimony occurred subsequently to our decision in Youngblood, . . . very possibly a different question would have been presented." 417 F.2d at 92.

In United States v. Ayers, 426 F.2d 524 (2 Cir.), cert. denied, 400 U.S. 842, 91 S.Ct. 85, 27 L.Ed.2d 78 (1970), we were presented with a district judge's refusal to order the transcription of post-Youngblood grand jury testimony which had been recorded. We there held that "such an order is a matter of discretion for the trial judge, depending upon the circumstances of the particular case." 426 F.2d at 529. In support of this conclusion we noted that "although recordation as a matter of course certainly is the better procedure, . . . this combination of rule and footnote in Youngblood (quoted above) does not require in terms that all grand jury testimony be recorded" and that "failure to record testimony given before a Grand Jury seems still a matter about which a defendant has no right to complain." 426 F.2d at 529 and n. 1. Hence, while Youngblood made it clear that a defendant is entitled as a matter of right to examine the transcribed grand jury testimony of witnesses who testify at trial, insofar as this relates to their trial testimony, Ayers makes it equally plain that a defendant is not entitled to a reversal of his conviction simply because testimony before the grand jury which returned an indictment against him has not been recorded. This is the position taken by every court which has considered the problem, see, e. g., Nipp v. United States, 422 F.2d 509 (10 Cir. 1969), cert. denied sub nom. Bishop v. United States, 397 U.S. 1008, 90 S.Ct. 1235, 25 L.Ed.2d 420 (1970); Loux v. United States, 389 F.2d 911 (9 Cir.), cert. denied, 393 U.S. 867, 89 S.Ct. 151, 21 L.Ed.2d 135 (1968); United States v. Turner, 274 F.Supp. 412 (D.Tenn. 1967); see also United States v. Caruso, 358 F.2d 184 (2 Cir.), cert. denied, 385 U.S. 862, 87 S.Ct. 116, 17 L.Ed.2d 88 (1966) (pre-Youngblood), and is in accord with the permissive language of F.R.Cr.P. 6(d)...