United States v. Stein

Citation437 F.2d 775
Decision Date02 March 1971
Docket NumberNo. 18296.,18296.
PartiesUNITED STATES of America, Plaintiff-Appellee, v. Nathan STEIN, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Philip R. Melangton, Jr., Indianapolis, Ind., for defendant-appellant.

Johnnie M. Walters, Asst. Atty. Gen., Tax Division, Richard B. Buhrman, Joseph M. Howard, Attys., Dept. of Justice, Washington, D. C., Stanley Miller, U. S. Atty., Indianapolis, Ind., for plaintiff-appellee.

Before DUFFY, Senior Circuit Judge, and FAIRCHILD and PELL, Circuit Judges.

PELL, Circuit Judge.

Defendant Nathan Stein was indicted in two counts for wilfully attempting to evade and defeat federal income taxes due and owing for the calendar years 1962 and 1963, in violation of Section 7201 of the Internal Revenue Code of 1954, 26 U.S.C. § 7201. Following a trial by jury, Stein was found and adjudged innocent as to the 1962 count but guilty as to the 1963 count. The court imposed a fine of $2500 plus costs and a prison sentence of one year. From this judgment and sentence defendant has appealed.

Defendant had been engaged in the business of buying and selling meat at wholesale in Indianapolis, Indiana since 1956. He employed an accountant to keep his books and prepare his tax returns, both on a cash basis. The accountant worked with sales figures supplied by Stein which the accountant did not independently verify. Stein was a calendar year taxpayer.

Revenue agents first examined defendant's books in March 1964, and a special agent was assigned to the case in May 1964. The agents reconstructed defendant's income for 1963 on the bank deposits method. From his total deposits plus cash expenditures equalling $394,668.11, they subtracted $18,428.12 in non-income deposits. After subtracting defendant's cost of goods sold, a gross profit from business of $78,747.08 remained. From this was subtracted his operating expenses, as well as various exclusions, exemptions and deductions, leaving a taxable income figure of $40,545.13. Defendant's return for 1963 reported his taxable income as $1,833.90, an alleged understatement of nearly $39,000.

The bank deposit method of proving the understatement was followed exclusively by the government at trial. Any possibility of direct proof of defendant's income was eliminated when his sales invoices were allegedly destroyed by a fire of undetermined origins in his office during April 1965, nearly a year after the beginning of the investigation. Defendant testified that before the fire he had offered these invoices to the revenue agents but that they had not yet sought to examine them at the time of their destruction.

The government offered direct evidence of wilfulness in the testimony of Stein's former employee, Gerald Waterman. Over defendant's objection based on remoteness, Waterman testified that in 1962 he had a conversation with Stein in a restaurant during which Stein told Waterman that he, Stein, would have no hesitancy, with the assistance of his accountant and attorneys, about "cheating the Government as well as I would cheat anybody else, which includes my help, my customers."

On cross examination, Waterman admitted that he had not referred to this conversation in a signed statement given to revenue agents and that the only conversation mentioned in that statement was one in the presence of two other employees. Both of these employees denied knowledge of any such conversation. Defendant denied the conversation with Waterman. It was shown that Waterman had previously brought a suit against defendant which was dismissed and that he had applied for the 10% reward from the Internal Revenue Service.

The government rested on the basis of the bank deposit computation and Waterman's testimony.

Stein testified that in 1962 he had included $9,000 in year-end accounts receivable in his ending inventory, thus reducing cost of goods sold and increasing gross profits. He did not report the collection of these receivables in 1963 on the basis that he had already paid tax on them in 1962. There would not seem to be double taxation here since the 1962 ending inventory was carried forward as the 1963 opening inventory.

At the end of 1963, defendant's accounts payable would have exceeded his receivables and produced a negative inventory figure under his method of accounting. Defendant, assertedly feeling that some year end inventory had to be shown, solved the problem by not reporting collections of nearly $15,000 in receivables made during the last week of 1963, thus leaving this amount as ending inventory to be carried forward. Stein also instructed his accountant to post every expenditure after December 24, 1963 into 1964.

Defendant further sought to show the existence of over $9,000 in non-income deposits to his bank accounts during 1963 which had not been previously reported to the investigating agents.

The government conceded an additional $4,600 of unreported income was due to good faith accounting errors.

Thus, defendant sought to show that approximately $37,500 of the $39,000 understatement was due to non-income deposits and to good-faith errors and misconceptions of proper accounting techniques.

Defendant also introduced a computation of his income based on the net worth method. By this computation, his taxable income for 1963 was approximately $4,000 rather than the $40,545 alleged by the Government.

Finally, defendant presented evidence intended to show good faith and lack of wilfulness. His 1963 return was apparently filed after he was aware of the pending investigation. He gave his full cooperation to the investigating agents. There was no evidence of a double set of books. No hidden bank accounts were discovered. No unreported sources of income were shown. Of the four years subject to investigation, only two led to prosecution and only one to conviction.

Defendant's primary contention on this appeal is that the evidence was insufficient to prove his guilt beyond a reasonable doubt. We cannot agree. Of course, we do not weigh the evidence nor determine the credibility of witnesses. Given the verdict of guilty, we must consider the evidence in the light most favorable to the government's position. Glassner v. United States, 314 U.S. 60, 80, 62 S.Ct. 457, 86 L.Ed. 680 (1942).

In tax evasion cases, a not uncommon attribute seems to be a lack of precise and clear recordation and documentation. The case before us is no exception. Whether the scarcity, murkiness or ambiguity of supporting data in any particular case is purposeful or merely inadvertent is no doubt often a matter to which the trier of fact gives some determinative consideration. In the trial forum there is the opportunity to observe and evaluate credibility. We, faced only with a cold record, must ordinarily give our credibility to resolutions of fact which follow the opportunity of direct observation available to, and presumably availed of by, the trier of fact.

Defendant first argues that the government's use of the bank deposit method was insufficient to show substantial unreported income in 1963. While unexplained deposits in excess of reported income is not alone proof of unreported income, it is "a rather convincing circumstance in support of the charge." Malone v. United States, 94 F.2d 281, 287 (7th Cir. 1938), cert. den. 304 U.S. 562, 58 S.Ct. 944, 82 L.Ed. 1529. "Of course, proof under the bank deposit theory is circumstantial in nature, but we know of no reason why such deposits may not be considered in determining income, when there is no evidence that they represent anything other than income." United States v. Doyle, 234 F.2d 788, 793 (7th Cir. 1956), cert. den. 352 U.S. 893, 77 S.Ct. 132, 1 L.Ed.2d 87.

However, Stein asserts that in the instant case there was no proof that all non-income items had been eliminated from the government's computation. Of course, the same could be said of any bank deposit case. But the record is clear that the agents made a thorough study of all leads provided by defendant and in every case gave defendant the benefit of the doubt in eliminating possible non-income items. No more is required. Holland v. United States, 348 U.S. 121, 135-136, 75 S.Ct. 127, 99 L.Ed. 150 (1954).

Defendant also complains that all the non-income eliminations were based on a brief interview in which he attempted to recall non-income items merely by looking at a column of figures representing his deposits. However, nothing prevented defendant from giving the matter additional careful thought and contacting the agents as he thought of other items.

Further, this privilege of adducing proof of additional items of non-income character continued into the trial. Even at this late stage when Stein certainly must have been aware of the seriousness of that with which he was confronted, and conceding the credibility of his trial proofs, he was able to account for only another $9,000 in non-income items to reduce the $39,000 understatement of income. There is no requirement that the government establish the exact amount of unreported income, as proof of a substantial sum will suffice. United States v. Johnson, 319 U.S. 503, 517, 63 S.Ct. 1233, 87 L.Ed. 1546 (1943); United States v. Chapman, 168 F.2d 997, 1001 (7th Cir. 1948), cert. den. 335 U.S. 853, 69 S.Ct. 82, 93 L.Ed. 401.

Defendant further complains that the government's bank deposit proof was not corroborated by a...

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