United States v. Krilich, 71-1678.

• Decision Date: 28 November 1972
• Docket Number: No. 71-1678.,71-1678.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Robert R. KRILICH, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

470 F.2d 341 (1972)

UNITED STATES of America, Plaintiff-Appellee, v. Robert R. KRILICH, Defendant-Appellant.

No. 71-1678.

United States Court of Appeals, Seventh Circuit.

Argued September 22, 1972.

Decided November 28, 1972.

Rehearing Denied December 27, 1972.

Anna R. Lavin, Edward J. Calihan, Jr., and Joseph A. Lamendella, Chicago, Ill., for defendant-appellant.

James R. Thompson, U. S. Atty., Robert A. Filpi, Asst. U. S. Atty., Chicago, Ill., for plaintiff-appellee.

Before SWYGERT, Chief Judge, and CUMMINGS and SPRECHER, Circuit Judges.

CUMMINGS, Circuit Judge.

In June 1970, a two-count indictment was returned against defendant charging him with income tax offenses. The first count alleged that on his 1963 income tax return he willfully and knowingly made and subscribed statements, verified by a written declaration that they were made under the penalties of perjury, which he did not believe to be true and correct as to every material matter, in that he claimed a net long-term capital gain in the amount of $451,128.88, knowing that the gain was substantially in excess thereof. This was charged to violate 26 U.S.C. § 7206(1).¹

The second count alleged that he willfully and knowingly attempted to evade income taxes by filing a false and fraudulent 1963 income tax return disclosing taxable income of $97,718.93, with tax due in the amount of $51,978.89, whereas, as he well knew, his taxable income was $246,942.78, with tax due in the amount of $118,858.54. This was said to violate 26 U.S.C. § 7201.²

The indictment was based upon defendant's increase of the cost basis of two parcels of real estate sold in 1963 by including in the basis shown in his 1963 income tax return (a) $95,048.84 owed to Berry Electric Contracting Company ("Berry") for work it had done in the construction of the Lawrencewood Shopping Center in Niles, Illinois, and (b) $200,000 for a supposedly fictitious obligation to install sewers on the property. This would mean that defendant had underreported his long-term capital gains by $122,523.76, had understated his taxable income by $58,136.88 and had underpaid his 1963 income taxes by $45,085.59 (Govt. Ex. 17).³ After a bench trial, defendant was found guilty on both counts, given eighteen-month concurrent sentences and fined $5,000. We affirm.

I. Sufficiency of the Evidence

In 1962, defendant purchased 23.6 acres of useable land in Schiller Park, Illinois, from Sam Papanek (and apparently from his brother, John Papanek) for $310,878.03. For purposes of this appeal the Government accepts defendant's figure of $39,231.22 for expenses, resulting in a correct basis for the property of $350,109.25. Defendant now admits that an additional $95,048.84 owed to Berry on a separate transaction "was mistakenly applied" by defendant in computing the cost of this property. This sum was owed to Berry for work done at defendant's Lawrencewood Shopping Center — a different piece of property and a completely unrelated transaction. The cost basis of the Schiller Park property was incorrectly increased in this amount as follows: Defendant's purchase of this property from Papanek was pursuant to an escrow agreement established at the Chicago Title & Trust Company on September 10, 1962.⁴ Defendant was to receive the deed for the property upon deposits of $51,000 and $259,878.03, or a total of $310,878.03.⁵ Defendant's first payment in the amount of $51,000 was by his check of September 13, 1962. The escrow agreement provided that the second payment of $259,878.03 could be "proceeds of a loan to be deposited under a separate moneylender's escrow." Defendant and Berry entered into such an escrow agreement on March 11, 1963, and defendant's title was recorded on March 27, 1963. The escrow agreement stated that defendant was about to acquire title to this property and provided that Berry would deposit $259,878.03 in escrow at the Chicago Title & Trust Company to be used to consummate the purchase. In turn, defendant was to issue his promissory note to Berry in the sum of $354,926.87. This amount consisted of the $259,878.03 payment due on the purchase of the land, plus an unrelated $95,048.84 owed Berry by defendant for the work Berry had done at the Lawrencewood Shopping Center.

The entries made in defendant's books failed to reflect that the aforesaid $354,926.87 consisted of a $259,878.03 loan and the old debt of $95,048.84. Thus there is an August 31, 1963, entry in defendant's books debiting the Lawrencewood Shopping Center account in the amount of $354,926.87 and crediting the note to Berry in the same amount per the March 1963 agreement.⁶

Thereafter, Herbert A. Maier, an accountant who took care of defendant's and the Lawrencewood Shopping Center's books, discovered that the $354,926.87 was not properly debited to the Shopping Center. Pursuant to defendant's instructions,⁷ Maier made an adjusting entry removing the $354,926.87 from the Shopping Center account and entering it in defendant's land account. This adjustment likewise did not distinguish between the $259,878.03 second payment on the Schiller Park property and the unrelated $95,084.84. The total of these two sums was entered in the land ledger account, incorrectly increasing the cost basis of the property by $95,048.84.

In our view, the district court could properly find the $95,048.84 misapplication to the basis of the property to be willful. Unlike us, the district judge as the trier of facts had the benefit of personally judging the credibility of the witnesses tendered by both parties. The amount in question was buried as part of the Schiller Park cost basis, and its true origin was difficult to trace. Defendant was a sophisticated taxpayer, not a "babe in the woods."⁸ According to accountant Maier, the entry erroneously including this amount in the cost of the Schiller Park property was made at defendant's direction and therefore marked "Per RRK." The agreement defendant entered into with Berry on March 11, 1963, clearly distinguished between the $259,878.03 which Berry was to deposit for the purchase of the Schiller Park property and other debts owed Berry by defendant. The repayment provisions of this agreement explicitly maintained the same difference, as did the treatment of the funds received from the sale of six acres to Testa (see note 6 supra). The addition of the $95,048.84 to the cost of the Schiller Park property gave defendant a present financial benefit in the taxable year 1963. Therefore, it is immaterial that he may have lost the opportunity of including it in the Lawrencewood books for depreciation over a period of years. As the trial judge stated in denying the first motion for acquittal, "I think the allocation as it was actually done gave the taxpayer a significant tax advantage over whether it had been properly allocated in the first place." Furthermore, from Maier's testimony, it would appear that the $95,048.84 had not actually been deleted from the cost of the Lawrencewood Shopping Center and was included in its depreciation for tax purposes. Finding willfulness in a tax case necessarily often involves a subtle determination. Our conclusion is that the finding here as to the $95,048.84 item was sufficiently supported to warrant countenance.

In April 1963, defendant contracted to sell approximately six acres of the Schiller Park property south of Lawrence Avenue (except the east 250 feet thereof) to Joseph D. Testa for $283,500. Title was conveyed by defendant's land trustee in June 1963. The documents effectuating this transaction do not refer to any obligation of defendant to install sewers of any kind on this tract, although defendant did tell Testa that he had engineering plans relating to the installation of storm sewers along Lawrence Avenue. Subsequently Testa installed his own sewers and water mains and rerouted a diagonal ditch on his property. However, he never agreed that defendant should install sewers on the property, nor did defendant reimburse Testa for his sewer construction. In reporting his gain on the sale of the land to Testa, defendant did not include any amount for storm sewers in computing his basis.

On August 23, 1963, defendant's land trustee of the remainder of the Schiller Park tract contracted to sell approximately eight acres of the property north of Lawrence Avenue (except the east 445 feet thereof) to John Parrish Enterprises, Inc. ("Parrish") for $542,000. The contract made no reference to any obligation of defendant or the trustee to install sewers. A second contract between Parrish and Krilich Builders, Inc. (whose president was defendant) provided that Parrish pay $58,000 for the installation of small sewers and water connections on the property Parrish purchased.⁹ These improvements were not those for which defendant claimed he was obligated in the amount of $200,000. Defendant wanted the total purchase price of $600,000 divided into two portions ($542,000 for the sale of land and $58,000 for the installation of sewer and water lines), so that he could obtain capital gains treatment instead of being treated as a developer for tax purposes.¹⁰ Parrish and its sole stockholder, John E. Perisich, had no other contract with defendant or Krilich Builders regarding the Schiller Park property purchased by Parrish.

Defendant's brother-in-law, Allen Sorenson, the Secretary of Krilich Builders, testified that early in 1962 he and defendant had discussed the possibility of enclosing the ditch along the south side of Lawrence Avenue and cutting diagonally across the property eventually sold to Testa. Accordingly, an engineer was hired to prepare drawings concerning the enclosing of the ditch with large pipe at a cost of $165,000 to $200,000. The plans also covered the installation of a storm sewer crossing under Lawrence Avenue. All these plans related to the south side of Lawrence Avenue and involved only storm sewers.

In early June 1964, defendant delivered his books and...