United States v. Mathews, Crim. No. 70-291.

• Citation: 335 F. Supp. 157
• Decision Date: 17 December 1971
• Docket Number: Crim. No. 70-291.
• Parties: UNITED STATES of America v. Vernon W. MATHEWS.
• Court: U.S. District Court — Eastern District of Pennsylvania

335 F. Supp. 157

UNITED STATES of America v. Vernon W. MATHEWS.

Crim. No. 70-291.

United States District Court, W. D. Pennsylvania.

December 17, 1971.

Richard L. Thornburgh, U. S. Atty., Thomas A. Daley, Asst. U. S. Atty., for plaintiff.

Andrew J. Conner, Ritchie T. Marsh, Erie, Pa., for defendant.

OPINION AND ORDER DENYING MOTION FOR NEW TRIAL OR JUDGMENT OF ACQUITTAL

KNOX, District Judge.

Defendant was found guilty by verdict of a jury of the crime of wilfully attempting to evade or defeat income taxes imposed upon his personal income for the years 1964, 1965, 1966 and 1967 under the provisions of 26 U.S.C. 7201.¹ He has filed Motions for a New Trial or Judgment of Acquittal claiming that the evidence was insufficient to convict him or was not sufficient to establish his guilt beyond a reasonable doubt and, in any event, he should be entitled to a new trial. Numerous trial errors are also claimed in the Motion for New Trial.

The evidence showed that defendant for some period of years had operated an IGA (Independent Grocers Association) supermarket in Edinboro, Erie County, Pennsylvania, which the evidence indicated became quite profitable. His income tax returns as filed for the years in question showed tax liability as follows:

                           GROSS            NET        INCOME
                         RECEIPTS         INCOME        TAX
                1964     $634,323.56    $ 2,549.18    $    0.00
                1965     $662,140.61    $ 4,077.33    $   61.07
                1966     $717,758.90    $ 4,502.77    $  482.64
                1967     $810,007.30    $24,382.41    $5,762.04
                

The government's evidence to establish defendant's guilt used the net worth method and was corroborated by a bank deposits analysis. The evidence by the net worth method indicated that as of December 31, 1963, an examination of defendant's assets showed he had a net worth of $217,447.72 and as of December 31, 1967, he had a net worth of $382,258.92. Obviously, the net income as reported by the defendant on his returns did not account for this. Such a great increase in wealth in such a short period of time obviously could only be attributed to a large amount of income or gifts or inheritances. He further admitted to the agents that the only property he had ever inherited consisted of a few shares of stock in the First National Bank of Edinboro. Defendant took the stand himself and did not attempt to explain the tremendous increase in net worth by inheritance or by gifts. Due allowance was made by the government for increases in market values of securities during the years in question and this also failed to explain the reason for the increase.

Defendant's explanation was that some time in the year 1965 or 1966, he became aware of the fact that there was a great amount of unaccounted for cash and of a great increase in his assets and finally came to the conclusion that the cash registers in his store were only picking up a total of certain types of transactions and not giving a daily grand total of all the sales in the store. These sales, as required by Pennsylvania Sales Tax Regulations, were broken down into taxable items and non-taxable items such as food. Notwithstanding this, the defendant made no complaint to the cash register distributor who sold him the machines that he was not getting the daily grand total of all transactions. The dealer who sold him the cash register testified in behalf of the defendant but did not claim that there was any mistake in the totals provided by the machines and gave no evidence as to complaints having been made or requests to rectify the situation.

It further appeared that defendant would take his cash register tapes home at the end of each day and enter the totals on a large sheet which was used at the end of the year to provide item I "gross receipts" on Schedule C (business income) attached to his income tax return. These sheets at the end of the year were turned over to his accountant. The latter testified that from these sheets he prepared the income tax returns in question. Immediately upon transcribing the totals from each days sales onto the larger sheets, defendant admitted he destroyed the tapes so that there was no tangible evidence to support the daily totals entered upon the larger sheets. The evidence also showed that the total gross receipts as entered on the federal income tax returns did not correspond with the gross receipts as shown upon the reports required for Pennsylvania Sales Tax purposes. It also appeared that defendant paid out large amounts of cash for the purchases of securities, for the purchase of life insurance and other assets during the years in question. The jury was, therefore, entitled to infer that defendant had destroyed his cash register tapes so that no evidence existed to support the figures shown on the larger sheets which were used for preparing the income tax returns, and that defendant did this deliberately as a part of his scheme to evade taxes. Support for the necessary finding of a wilful attempt to evade taxes was to be found in the following ample evidence.

1. His business background and training at Edinboro State College and Erie Commercial College.

2. His never having bothered to reconcile cash in the register with the tape totals, although he knew how, and his continued daily destruction of the tapes even after "sensing something wrong". The routine audit in 1961 mentioned by taxpayer furnished no justification for this and certainly no estoppel would run against the government on this, particularly in the absence of complete knowledge of the facts.

3. His never having contacted the seller of the cash registers, the National Cash Register Company, regarding "the sales he felt he was missing."

4. The financial statements he presented his bank which disclosed his awareness of yearly increases in his net worth far exceeding the taxable income reported on his returns.

5. His extensive use of cash, although possessing both business and personal checking accounts, to make considerable expenditures; cash payments by him for just one insurance premium, that to the Lutheran Brotherhood, substantially exceeded the taxable income he reported in 1964, 1965, and 1966 (Government Exhibit 70).

6. The false Pennsylvania Sales Tax Returns he filed from September 1965 through July of 1967 and again in December of 1967.

Defendant testified that he was too busy to reconcile cash. Reconciliation of cash with sales as shown on the cash registers would certainly be a normal method for any prudent business man to follow to determine if mistakes were being made by employees or if there was dishonesty or whether the machines themselves were accurate.

He did not attempt to file amended returns or report this matter to the internal revenue agents who later began to question him about his returns.

From this brief recital of the evidence, it is the opinion of the court that the jury was rightly justified in determining that defendant had wilfully attempted to evade or defeat his income taxes. He was thus properly convicted on all four counts of the indictment. As the net worth method does have possible objections, it should be used with great caution. See Smith v. United States, 348 U.S. 147, 75 S.Ct. 194, 99 L.Ed. 192; United States v. Calderon, 348 U.S. 160, 75 S.Ct. 186, 99 L.Ed. 202. The jury was so instructed.² Nevertheless, the evidence in the instant case was so overwhelming, it is difficult to see how the jury could come to any other conclusion.

Use by the agents of the so-called bank deposit and expenses method also pointed inevitably to the same conclusion with only a small difference in unreported income for each year. Even if the net worth method was not substantiated, the other method likewise justified conviction.

For these reasons, the Motion for Judgment of Acquittal will be denied.

We will now turn to the specific grounds urged for grant of new trial.

Ground 1. Lack of Proof of Wilfulness.

The defendant asserts that the government failed to establish a Section 7201 violation for each indictment year as its proof did not show that the defendant wilfully and with specific intent, attempted to evade the taxable income due and owing the government in each of the years in question. The defendant further asserts that the government failed to offer corroborative evidence as to the defendant's opening cash as of December 31, 1963, knowing that defendant in the conduct of his business required and held substantial amounts of cash.

In examining the evidence together with all inferences reasonably and logically deducible therefrom, it must be viewed in the light most favorable to the government since the jury returned a verdict of guilty as to all four counts. United States v. Minker, 312 F.2d 632 (3d Cir. 1962), cert. denied, 372 U.S. 953, 83 S.Ct. 952, 9 L.Ed.2d 978.

What we have previously said in denying the Motion for Judgment of Acquittal applies equally to this ground for new trial. Further, taxpayer's understatement to the Pennsylvania Department of Revenue disclosed his "attitude toward the reporting and payment of taxes generally". United States v. Taylor, 305 F.2d 183 at page 185-186 (4 Cir. 1962), cert. denied, 371 U.S. 894, 83 S.Ct. 193, 9 L.Ed.2d 126. In addition, the defendant's repetition of the same pattern of substantial understatements for four consecutive years justifies the inference that his conduct was intentional rather than inadvertent. United States v. Frank, 245 F.2d 284 (3d Cir. 1957). Such consistent understatement of income is some evidence of wilfulness. United States v. Alker, 260 F.2d 135 (3d Cir. 1958). As stated in Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 137, 99 L.Ed. 150 (1954):

"The petitioners contend that willfulness `involves a specific intent which must be proven by independent evidence and which cannot be inferred from the mere understatement of income'. This is a fair statement of the rule. Here, however, there was evidence of consistent patterns of

...