United States v. Schipani

• Decision Date: 08 November 1968
• Docket Number: No. 63-CR-237.,63-CR-237.
• Citation: 293 F. Supp. 156
• Parties: UNITED STATES of America, Plaintiff, v. Joseph F. SCHIPANI, Defendant.
• Court: U.S. District Court — Eastern District of New York

293 F. Supp. 156

UNITED STATES of America, Plaintiff, v. Joseph F. SCHIPANI, Defendant.

No. 63-CR-237.

United States District Court E. D. New York.

November 8, 1968.

Joseph P. Hoey, U. S. Atty., for the Eastern District of New York, Brooklyn, N. Y., for plaintiff; Eldon F. Hawley, Cono R. Namorato, Trial Attys., Dept. of Justice, Tax Division, Washington, D. C., of counsel.

Jacob P. Lefkowitz, New York City, for defendant.

OPINION

WEINSTEIN, District Judge.

I. DIFFERENCES BETWEEN FIRST AND SECOND TRIAL

This net worth tax fraud case covering the years 1956 through 1960 was tried before the Court essentially on the record of the first trial. The factual background is set out in the affirming opinion of the Court of Appeals. United States v. Schipani, 362 F.2d 825 (2d Cir. 1966). See also United States v. Schipani, 289 F.Supp. 43 (E.D.N.Y. 1968), 44 F.R.D. 461 (E.D.N.Y.1968).

There are two major differences between this and the first trial. The government must now succeed by negating all non-taxable sources of income rather than by establishing particular sources. Evidence introduced at the earlier trial relating to possible sources of income has been suppressed. See United States v. Schipani, 289 F.Supp. 43 (E.D. N.Y.1968).

The second difference is the inapplicability of the "presumption", relied upon by the government at the first trial, that the defendant, since he filed on tax return during the pre-indictment years, earned less than the minimum sum required for a tax return—five or six hundred dollars a year. Since he spent considerably more than these amounts, the government argued that he could not have accumulated any net worth during this period. Such an inference is inconsistent with the factual pattern described below. It would beat the defendant's shield of the presumption of innocence into a sword for the government. The Court of Appeals frowned on this approach; the government may not use it. United States v. Schipani, 362 F.2d 825, 829-830 (2d Cir. 1966).

II. AVAILABILITY OF CASH HOARD

The critical factual question in the case is whether the defendant had acquired a cash hoard prior to the indictment period on which he might have lived during the indictment years. The Court concludes beyond a reasonable doubt that there was no such cash hoard.

In arriving at this conclusion, the following factors have been considered:

1. The government's thorough investigation which failed to uncover any traces of a prior accumulation.

2. The proven expenditures made by the defendant during the period 1943 through 1955 together with the inference that the defendant must have made additional expenditures for living expenses for himself and his family.

3. A series of events which corroborate the fact that the defendant had not accumulated any cash reserve:

(a) The defendant stated in 1943 in connection with an inquiry of prison authorities that he had assets of only $1,350.

(b) The defendant negotiated two loans during 1944 in the amount of $205.00. Such small loans are inconsistent with the existence of a cash accumulation. Undoubtedly, the defendant's $1,350 hoard had been depleted by his family's needs, requiring him to borrow small amounts to meet living expenses.

(c) In 1940, the defendant borrowed $51.59 from a life insurance company to pay a premium. The defendant made two small payments on the loan in 1942 and 1943, but did not repay the loan in full until 1947, when he made a final payment of $55.10. This event suggests that the defendant was in a precarious financial position from 1940 to at least 1947. The premium involved was relatively small yet the defendant could only make partial payments in 1942 and 1943, and did not complete the payment until approximately seven years after the premium was originally due.

(d) The defendant was delinquent in the payment of numerous premiums on his insurance policies. On many occasions it was necessary for the defendant to apply for reinstatement of a policy which was "out of benefit" because the defendant was more than thirty days late in the payment of a premium. In connection with three of his policies, the defendant was more than thirty days late in the payment of eighteen annual premiums, and he had to make repeated applications for reinstatement.

In addition to life insurance policies, the defendant also contracted for insurance on his boat and even arranged for fire insurance on the household effects of his son. He was obviously a firm believer in the benefits of all types of insurance coverage. An individual as intelligent as the defendant would not repeatedly fail to make premium payments within the thirty day grace period if he had an available cash accumulation. The amounts due were minimal, yet the premiums were repeatedly late, necessitating applications for reinstatement. Each application for reinstatement commenced the running of a new two year "period of contestability." It is unlikely that anyone with a cash accumulation would voluntarily allow the grace period to lapse, thereby giving the insurance company an additional period within which it could contest a policy.

(e) In 1955, the defendant financed the purchase of a new car. He was often delinquent in the payment of monthly installments in 1955 and 1956, and, on at least two occasions, a late penalty was collected from him.

(f) In 1955, a default judgment in the amount of $64.05 was entered in an action brought by a health club against the defendant's wife to recover the sum of $46.00. The defendant subsequently paid $55.00 to an attorney in settlement of this judgment.

(g) The defendant made arrangements early in 1956 to mortgage his house in Long Beach, New York. The transaction was concluded in May, 1956, when the defendant received $10,000.00, less mortgage expenses. Defendant made arrangements to have the check which he received cashed immediately. He was delinquent in making several mortgage payments, and in 1957 he paid some $20.00 in late charges.

(h) In November, 1956, the defendant partially financed the purchase of a 1957 car. On one occasion, there was a delinquency in repaying this loan.

(i) In 1958, the defendant financed the purchase of jalousies and a boat.

A review of these events (3(a)-(i)) shows that the defendant repeatedly found difficulty in meeting his financial obligations. The conclusion is inescapable that the defendant had not accumulated a cash reserve during the pre-indictment period.

Many of defendant's transactions required installment payments. Since he had no checking account, each installment required the delivery of cash or an appearance at a bank to purchase a money order. If the defendant had had a cash accumulation it is unlikely that he would have chosen such inconvenient installment plans.

The exhaustive investigation conducted by the Treasury agents disclosed no visible assets other than those for which the defendant was given credit. If he had had other resources it seems unlikely that he would have hoarded them in the form of cash. Such an unproductive use of his funds seems inconsistent with his life style, his intelligence, the needs of his family and his abilities as revealed by the evidence. It is highly probable that had he had a sizeable cash hoard he would have invested it to get a return in the form of interest, dividends, rentals, or other profits. No such investments were found despite an extensive search. If they existed, the income from them would have been sufficient to support the indictment.

Defendant's spending habits do not appear to be those of a retired person living on a prior accumulation. Rather, they appear to be the expenditures of a capable and aggressive person, confident that he could earn a living at his chosen field—whatever it was. His surreptitious method of using many small money orders rather than a checking account or substantial cash payments is inconsistent with the action of a citizen with a substantial nest egg of cash. It is reasonable to infer that this defendant met such current expenses as those for rent, insurance, taxes, utilities, cleaning, tuition, and doctors from current income.

III. EXISTENCE OF NON-TAXABLE INCOME

When the net worth method of proof is used, the government must show either a "likely source of income" or must negate all possible non-taxable sources of the net worth increases. The Supreme Court, in the case of United States v. Massei, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517 (1958), stated the rule in a brief per curiam decision:

"In Holland (348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150) 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."

See also United States v. Schipani, 362 F.2d 825, 830 (2d Cir. 1966); United States v. Ford, 237 F.2d 57, 65 (2d Cir. 1956), rev'd on other grounds, 355 U.S. 38, 78 S.Ct. 114, 2 L.Ed.2d 71 (1957) (per curiam). Sources of non-taxable income do not need to be negatived to a certainty. Proof of lack of such sources beyond a reasonable doubt is sufficient.

Defendant's defense that his income during the indictment period may have been non-taxable proceeds from crime is untenable. C. I. R. v. Tellier, 383 U.S. 687, 691, 86 S.Ct. 1118, 16 L.Ed. 2d 185 (1966); James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961). The tax law "does not concern itself with the lawfulness of the income that it taxes. Income from a criminal enterprise is taxed at a rate no higher and no lower than income from more conventional sources." C. I. R. v. Tellier, 383 U.S. 687, 691, 86 S.Ct. 1118, 1120 (1966).

The government has satisfactorily negated non-taxable sources....