United States v. Potts, 69-CR-45.

• Decision Date: 18 January 1971
• Docket Number: No. 69-CR-45.,69-CR-45.
• Citation: 321 F. Supp. 717
• Parties: UNITED STATES of America, Plaintiff, v. Lawrence POTTS, Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

321 F. Supp. 717

UNITED STATES of America, Plaintiff, v. Lawrence POTTS, Defendant.

No. 69-CR-45.

United States District Court, E. D. Wisconsin.

January 18, 1971.

David J. Cannon, U. S. Atty., Milwaukee, Wis., for plaintiff.

Carl W. Kuehne (Kaftan, Kaftan, Kaftan & Kuehne), Green Bay, Wis., for defendant.

DECISION

MYRON L. GORDON, District Judge.

Counts I, II, and III of the indictment charge the defendant with tax evasion for the years of 1962, 1963, and 1964, in violation of 26 U.S.C. § 7201. Count IV charges that the defendant filed a false tax return for the year 1964, in violation of 26 U.S.C. § 7206(1). Following a trial to the court, both sides submitted briefs setting forth their respective positions.

COUNTS I, II, and III

The government bases its prosecution upon the net worth theory of proof, and both parties agree that Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 250 (1954), is controlling on the use of this technique. The method used in a net worth prosecution is set forth in Holland as follows (page 125, 75 S. Ct. page 130, 99 L.Ed. 150):

"In a typical net worth prosecution, the Government, having concluded that the taxpayer's records are inadequate as a basis for determining income tax liability, attempts to establish an `opening net worth' or total net value of the taxpayer's assets at the beginning of a given year. It then proves increases in the taxpayer's net worth for each succeeding year during the period under examination and calculates the difference between the adjusted net values of the taxpayer's assets at the beginning and end of each of the years involved. The taxpayer's nondeductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the Government claims the excess represents unreported taxable income. In addition, it asks the jury to infer willfulness from this understatement, when taken in connection with direct evidence of `conduct, the likely effect of which would be to mislead or to conceal.' Spies v. United States, 317 U.S. 492, 499, 63 S.Ct. 364, 87 L.Ed. 418."

The defendant in the present action operated a cheese factory in eastern Wisconsin during the years in question. The government contends that the defendant's net worth as of December 31, 1961, was $371,908.29. Among the assets included by the government in this opening net worth figure is a cheese inventory valued at $68,978.86 that was stored in Manitowoc and De Pere warehouses at the end of 1961. The defendant does not contest the inclusion of the value of this cheese inventory as a part of the opening net worth figure.

However, the defendant argues that the government's opening net worth figure fails to include $40,197.36 worth of cheese that he claims was stored in other coolers owned by him and located in, and near, his factory. Indeed, the value of the defendant's total cheese inventory as of December 31, 1961, is the only disputed figure in the government's net worth calculations. This court must decide whether the government has clearly proved that the opening inventory was of a value of $68,978.86 rather than the $109,176.22 urged by the defendant. The defendant does not oppose the government's contention that any cheese inventory at the end of 1961 was disposed of during the course of 1962.

The government maintains that the defendant's net worth increased over the period in question to $451,954.33 as of December 31, 1964, and that his corrected taxable income for each of these years was:

                          1962  —  $23,918.45
                          1963  —   37,832.55
                          1964  —   42,131.93
                

The amount of taxable income which Mr. Potts actually reported was:

                         1962   —  $21,626.13
                         1963   —   24,537.03
                         1964   —   29,132.05
                

Thus, the government argues that the additional taxable income for each of the years in question is:

                        1962   —  $ 2,292.32
                        1963   —   13,295.52
                        1964   —   12,999.48
                

The government originally contended that the defendant's cheese inventory at the end of 1961 was in an amount valued at $57,265.67. On the basis of testimony and evidence presented at the trial, however, the government now argues, as already stated, that the inventory was in an amount valued at $68,978.86, for a difference of $11,713.19 from the original figure.

The defendant argues that if the $40,197.36 worth of additional cheese inventory which he alleges was on hand in his on-the-premises coolers is added to the government's corrected opening net worth figure, the result is a net worth of $412,105.65 as of December 31, 1961. If this adjusted net worth figure is subtracted from the government's December 31, 1964, net worth figure, the difference represents an increase in net worth of only $39,848.68 over the three-year period. This means, the defendant says, that he over-reported his income over the three years by $11,609.64. Furthermore, he maintains, if the $11,609.64 is subtracted from the government's "error" of $11,713.19, he under-reported his income by only $103.55. Either result, he argues, hardly provides evidence of "consistent understatement of income" that would support the element of willfulness inherent in a charge of violating § 7201.

Holland v. United States, 348 U. S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954), clearly shows that the government must establish the taxpayer's opening net worth with reasonable certainty. Furthermore, Holland states that "also requisite to the use of the net worth method is evidence supporting the inference that the defendant's net worth increases are attributable to currently taxable income." 348 U.S. at 137, 75 S.Ct. at 136, 99 L.Ed. 150. Finally, the burden of proof remains on the government to prove each and every element of the offense charged, beyond a reasonable doubt. In my opinion, all of these requirements have been met in the case at bar.

The defendant argues that a principal flaw in the government's reliance on the net worth theory of proof results from the government's failure to check the "lead" allegedly furnished by the defendant as to the presence of large amounts of cheese in the defendant's coolers at the end of 1961. On the government's duty to check relevant leads, the court in Holland had this to say (page 135, 75 S.Ct. page 135):

"When the Government rests its case solely on the approximations and circumstantial inferences of a net worth computation, the cogency of its proof depends upon its effective negation of reasonable explanations by the taxpayer inconsistent with guilt. Such refutation might fail when the Government does not track down relevant leads furnished by the taxpayer— leads reasonably susceptible of being checked, which, if true, would establish the taxpayer's innocence."

The defendant contends that the lead furnished to the government was "reasonably susceptible of being checked."

The defendant introduced numerous witnesses who testified to the presence of large amounts of cheese in storage in the defendant's own coolers in the fall and winter of 1961. In addition, several of these witnesses testified that, although over eight years had passed, they remembered that the defendant was storing cheese because other cheese-makers were doing the same thing, since cheese prices were low during that period.

The credibility to be accorded the witnesses in the present action is particularly within the province of the court. It is my conclusion that any leads furnished the government in this case were "remote, vague, and indefinite." See Blackwell v. United States, 244 F.2d 423, 429 (8th Cir. 1957), cert. denied, 355 U.S. 838, 78 S.Ct. 49, 2 L.Ed.2d 51 (1957).

I am aware that, as stated in Holland, use of the net worth theory of proof "requires the exercise of great care and restraint." (348 U.S. page 129, 75 S.Ct. page 132, 99 L.Ed. 150). In my opinion, however, the government has proved the defendant's net worth with a reasonable certainty. While choosing not "to remain quiet at his peril", Holland, page 139, 75 S.Ct. page 137, 99 L. Ed. 150, the defendant has not introduced sufficient evidence to refute the government's opening net worth figure.

The defendant introduced no business records to corroborate his contention that he had an additional $40,000 worth of cheese in storage in his own facilities at the end of 1961. While the defendant introduced several witnesses who testified to the storage of cheese by the defendant, I find their testimony in this regard unpersuasive.

As already stated, it is necessary for the government to provide evidence "supporting the inference that the defendant's net worth increases are attributable to currently taxable income." Holland, page 137, 75 S.Ct. page 136, 99 L.Ed. 150. In United States v. Massei, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517 (1958), the court stated:

"In Holland we held that proof of a likely source was `sufficient' to convict in a net worth case where the Government did not negative all the possible nontaxable sources of the alleged net worth increase. This was not intended to imply that proof of a likely source was necessary in every case. On the contrary, should all possible sources of nontaxable income be negatived, there would be no necessity for proof of a likely source."

The government contends that a likely source of the increase in the defendant's net worth was the evasion of his tax payments for the years for which he has been indicted. This, the government argues, was largely accomplished through the overstatement of expenditures for supplies during this period. This also provides the basis for the tax fraud allegation of count IV of the indictment. Without...