213 F. Supp. 306 | E.D. Pa. | 1963
This is a criminal prosecution for income tax evasion. The Government charges that the defendant willfully attempted to evade payment of his income tax by reporting sums as capital gains which the Government contends were ordinary income. These sums arose out of a series of transactions which will be discussed at length later in this opinion.
The jurisdiction of this Court was invoked under Title 26 U.S.C.A. § 7201, which provides in part as follows:
“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title * * * shall * * * be guilty of a felony * *
The defendant was tried and convicted by a jury on Counts II and III of the Indictment, but failed to agree on Count I.
The defendant has filed motions for acquittal and a new trial which we will consider separately.
MOTION FOR ACQUITTAL
The Indictment charges Milton H. L. Schwartz, hereinafter called Schwartz, with willfully and knowingly attempting
The series of transactions which brought about these charges occurred •during the years 1952 through 1956. The defendant suffered a large carry forward capital loss of $174,000.00 during the year 1953. Because of this loss, he was allowed, as is any taxpayer, to take credit against it for five years of any capital gains which he received during the succeeding five years. The defendant in his returns for these years 1954, 1955, and 1956 reported as capital gain transactions various sums which the Government charges were income from services.
Schwartz is an attorney and a member -of the Bar of Philadelphia. His own words best describe his practice as being • devoted to financial matters, “and to help resurrect companies, individuals, mat-ters that are complicated in some instances * * * ” (NT 452). Schwartz was conversant in tax law and he represented clients with tax problems occasionally. His practice was international in scope, taking him to various foreign countries.
In considering these motions for acquittal and new trial, this Court is required to take the view of the evidence which is most favorable to the Government and to give the Government the benefit of all inferences which reasonably may be drawn in its favor. United States v. Frank, D.C., 151 F.Supp. 866, affd. 245 F.2d 284 (3 Cir. 1957), cert. denied 355 U.S. 819, 78 S.Ct. 25, 2 L.Ed. 2d 35 (1957). The defendant advances the proposition that the Government is bound by the testimony of its own witnesses. This is not the law of this Circuit in criminal cases. United States v. Frank, supra; United States v. Woll, 157 F.Supp. 704 (E.D.Pa.1957); United States v. Cindrich, D.C., 140 F.Supp. 356, aff’d. 241 F.2d 54 (3 Cir. 1957). This Circuit follows the rule as stated in United States v. Gordon, 242 F.2d 122, 126 (3 Cir. 1957), cert. denied 354 U.S. 921, 77 S.Ct. 1378, 1 L.Ed.2d 1436 (1957).
« * * * jn prosecutions of federal criminal cases, the government is not bound by the testimony of its witnesses, and the jury may believe part of what a witness says and disbelieve the remainder. * * * ”
It seems that some of the witnesses called by the Government testified, as interpreted by the defendant, that these transactions involving Schwartz were partnership and ownership ventures rather than income from Schwartz’s law practice. This Court is not of the same opinion, and there was enough testimony elicited from the Government’s witnesses, singled out by the defendant, to find that these transactions were ordinary income matters. There were a number of disputed transactions which involved the defendant, and the first one concerned General Public Warehouse. In 1953, the defendant reported the sale of a capital asset
The Government argued that the defendant never had a capital interest in General Public Warehouse and consequently never sold any such interest. The Government further contends that the payments made to the defendant by General Public Warehouse were payments made for legal services which the defendant performed, hence such were reportable as ordinary income.
It seems there were two agreements, one dated April of 1952, in which the defendant was to be a party to a joint venture. The agreement required contribution of a specific sum by each signer. The defendant never contributed. Subsequently, a new agreement was entered into, dated October 7,1952. (NT 55-60). This new agreement provided that the April agreement is “null and void ab initio”. (NT 57 at par. 1). Paragraph 3 of this agreement further stated that Schwartz rendered services (NT 58). Paragraph 4 of this agreement, and subsequent paragraphs, describe how the defendant was to be paid. Schwartz signed this agreement. The witness, Laup-heimer, who is president of General Public Warehouse, stated that he employed the defendant as a lawyer. This was supported by a Power of Attorney, running in favor of the defendant. (Ex. G10).
Also, clearly showing that the defendant performed services and was being paid for services is the affidavit which Schwartz himself executed for submission to the Department of the Navy. (NT 39). This document indicates and details those services.
In direct response as to whether the defendant invested in General Public Warehouse, Laupheimer answered in the negative. (NT 93).
The next transaction was The Fretz Building. The Fretz Building, located at 10th and Diamond Streets in Philadelphia, was sold in December 1955. The buyer was a company controlled by Shorenstein. The seller was a company controlled by Garfinkle. The sale was executed by the defendant and a Mr. Wolf. For their commission, they jointly received $15,000.00. The defendant’s share was one-half of this amount. This was established by the testimony of Gar-finkle, the seller (NT 239); and the testimony of the buyer, Shorenstein (NT 252); and the testimony of the real estate agent, Mr. Wolf, with whom Schwartz split the fee. Wolf specifically identified this $15,000.00 as being paid for commissions (NT 313, 314). Wolf also testified that he and Schwartz were to contribute this payment toward the purchase price of the building pursuant to their own private agreement (NT 315). This testimony clearly shows that Schwartz was paid a commission for his part in this sale. What he did with it does not militate against this fact that it was paid as a commission, hence ordinary income.
The third transaction was called Steiner. It was charged that Schwartz received payments as ordinary income from the Paul Steiner Company. The Government introduced into evidence the testimony of Paul Steiner to establish the character of the money received by Schwartz. Steiner stated that Schwartz was his lawyer. (NT 111). For a portion of legal services the defendant asked for and was paid $10,000.00 (NT 115; also Ex. G19, G20 & G21). There was testimony that after the check was paid to Schwartz, it was cashed two or three days later. The money was taken to New York and used as an investment in a high rise apartment in Venezuela in which Steiner and Schwartz were to be partners.
What Schwartz did with this money is of no consequence, since it was paid to him for his services as a lawyer. This was ordinary income and was never reported as a capital transaction by the defendant.
The last major item was called Masterpiece. It concerned residual rights to the reissue showing of some old movies.
In order to sustain this conviction, the elements of willfulness and an attempt to evade and defeat the tax owing by the affirmative conduct of the defendant must be proved beyond a reasonable doubt. Spies v. United States, 317 U.S. 492, 63 S.Ct. 364, 87 L.Ed. 418 (1943). The method of evasion used in this case was a substantial understatement of income, along with the mislabeling of ordinary income as capital gains. The defendant argues that no reported case exists wherein a defendant was found guilty of evasion because he reported an item as a capital gain which the Government ruled to be ordinary income. Schwartz further argues that this is merely a dispute over how to interpret the tax laws, and if it takes an expert to determine the capital gain nature of an item, no criminal intent is shown.
The intent and essential function of the tax laws, to insure payment of every taxpayer’s fair share of the fiscal burden, will not be frustrated by the ingenuity of the defendant. This defendant is a skilled attorney who has studied taxation. He is not a misinformed layman. The record shows that he engaged in financial deals of a highly sophisticated nature. The statute
“Any person who willfully attempts in any manner to evade or defeat any tax * * 26 U.S.C.A. § 7201 (Emphasissupplied).
This most general language pervades the statute and encompasses any. form of evasion, however innovating or original it may be.
“Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished and perhaps did not define lest its effort to do so result in some unexpected limitation.” Spies v. United States, supra, at p. 499, 63 S.Ct. at 368.
The Indictment in this case alleged the filing of false returns to have been the manner of the attempt as is the usual case. Cave v. United States, 159 F.2d 464 (8 Cir. 1947). Furthermore, the willfulness of the defendant could be inferred from the consistent pattern of understating income. Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954). This alone would be sufficient, but the defendant resorted to evasive tactics during the investigation. In discussions with the agent, he repeatedly promised to show his books and records, but never did. Cindrich v. United States, 241 F.2d 54 (3 Cir. 1957).
The verdict of the jury was supported by substantial evidence and the crime of tax evasion was established beyond a reasonable doubt as to Counts II and III.
MOTION FOR NEW TRIAL
The defendant raises the following matters which he contends warrant the granting of a new trial:
1. It was error to allow the Government expert Borenstein to give his testimony.
2. The Court erred in sustaining an objection to the interrogation of the witness Leonard Ettinger, Esq.
3. The Court erred in deleting major facts from Silberstein’s deposition.
(a) Concerning the immorality • of Silberstein, and
(b) Comment on the defendant’s failure to show his books.
5. The Court erred in refusing to charge that a cash investment is not necessary in order to have a capital gain.
6. Newly discovered evidence of one Massey who was involved in these transactions with Schwartz.
While the Court considers some of these points as being of no merit we will consider them all.
One of the Government’s witnesses was a Mr. Borenstein, who computed the defendant’s tax liability based on the evidence adduced at the trial. This is the usual and correct procedure in tax evasion cases. Cave v. United States, 159 F.2d 464, 468 (8 Cir. 1947). The defendant contends that this was an expression of opinion on the issue which the jury ultimately had to decide. The evidence which Borenstein summarized was only that which was introduced at the trial. It is difficult to see how he invaded the province of the jury. Friedberg v. United States, 348 U.S. 142, 75 S. Ct. 138, 99 L.Ed. 188 (1954). In fact, Borenstein was prevented by the Court from expressing an opinion as to whether he thought certain items were ordinary income (NT 382, 384). The admission of the testimony of an expert witness consisting of computations based on substantially the entire evidence in the record is not an invasion of the province of the jury. United States v. Johnson, 319 U.S. 503, 63 S.Ct. 1233, 87 L.Ed. 1546 (1942). The defendant, himself, on cross-examination of the Government’s agent Catrambone specifically asked him for and received his opinion that these items were ordinary income (NT 348).
The Court refused to allow Leonard Ettinger to testify that he had advised the defendant these items were capital gain transactions. Leonard Et-tinger is an attorney in Philadelphia. He was an associate of the defendant. At no time during this trial was it ever shown that an attorney-client relationship existed between Schwartz and Ettinger. Yet, Sohwartz sought to cloak himself with the defense of reliance upon the advice of counsel. This was not the fact, and the Court refused to allow this fiction to be foisted upon the jury. In spite of the Court’s ruling, Schwartz, himself, testified that he asked Ettinger for his advice. (NT 512). Also Ettinger, himself, testified that he thought some of these items were capital gains and he advised Schwartz to speak to the Internal Revenue agent regarding same. (NT 392). Schwartz further testified that he asked the Internal Revenue agent’s advice as to whether the Masterpiece item was a capital gain (NT 511). Even with the Court’s rejection of Ettinger’s direct statements concerning any advice to Schwartz, sufficient testimony was obtained regarding this fact. That testimony, however, cannot rise above the premises upon which it is based. Williams Company v. Serpas, 5 Cir., 261 F.2d 857 (1959).
The third contention of the defendant, is that the Court erred in deleting what he calls major portions of agent Silber-stein’s deposition before it was read to the jury. It is important to point out that the defendant made no objection to the Court’s action when this deposition was read to the jury by counsel. This deposition of Silberstein can best be described as a haranguing colloquy which generated more heat than light. It is replete with arguments, and frequently it deteriorated to the level of a personality clash among the parties present.
The defendant objects to the Court’s refusal to allow portions of the-deposition to be read concerning Silberstein’s illness and impending operation. It appears that the defendant wanted to-impart to this deposition the character-applicable to a dying declaration. This-we could not and would not countenance-
The defendant complains that the prejudicial remarks of the United States Attorney concerning the firing of Silberstein from the Internal Revenue Service for immorality warrants a new trial. The United States brought out this firing of Silberstein to show his bias as affecting his credibility since he was discharged after seventeen years’ service. The United States Attorney in the heat of trial commented on this fact while eliciting testimony. However, he never overstepped the grounds of propriety as to constitute prejudicial error. Especially is this true, in view of the Court’s charge to the jury that they could consider Silberstein to be as honest as any other man even though he was thus fired. The trial Court has wide discretion as to how and when bias may be proved and what collateral evidence is material. Mims v. United States, 254 F.2d 654 (9 Cir. 1958).
The comment on the defendant’s failure to show his books was relevant to show the defendant’s willfulness and evasive tactics during the investigation. Spies v. United States, supra; Cindrich v. United States, supra.
“Under the statutes the government has authority to examine books, papers and records (see Int. Rev.Code of 1954, § 7602, 26 U.S. C.A. § 7602; Int.Rev.Code of 1939, § 3614, 26 U.S.C.A. § 3614).” United States v. Frank, 245 F.2d 284, 286 (3 Cir. 1957).
This Court frequently protected the defendant in this regard throughout the
“As to evidence — and I want to cover this point at this time — there was considerable mention throughout the trial and on argument relating to the production of the books by this defendant. Now let me tell you preliminarily — and my mind hasn’t changed on this and no one has pointed out to me any reason why I should change it — basically no person has to submit his books, because under our Constitution you don’t have to do things which may tend to incriminate you. Therefore, there was no legal obligation on this- man to produce his books if he didn’t want to. However, the fact that he did not produce his books may be used by you to consider whether or not he was attempting to conceal something, whether or not he cooperated, whether or not it was an act on his part, along with other things I will mention later, which may lead you to believe that what he did was wilful and intentional.” (NT 600)
The defendant never took an exception to the Court’s charge. In fact, he characterized it as follows:
“Thank you Your Honor for an extremely fair charge. We don’t have a single exception to take.” (NT 616, 617)
Now, the defendant argues that error resulted in our not charging the jury that a cash investment is not necessary in order to have a capital gain.
The so-called newly discovered evidence contained in the Massey affidavit that he was kept from the trial by the United States Attorney is the weakest objection raised by the defendant. Massey was amenable to process by the defendant and he did not call him. Also, the Government can select its own witnesses and is not compelled to call every witness who has a connection with this case. There is nothing in Massey’s affidavit which shows that he was actively prevented from appearing at the trial by the United States Attorney. Massey’s statement in this affidavit that Schwartz was a partner in General Warehouse is contradicted by his earlier letter to this Court, filed on September 25, 1962. In paragraph one of this letter Massey states in part as follows:
“ -* * * Jn my deposition to the Internal Revenue Service Agent Cat-rambone, I had stated that Milton H. L. Schwartz was intended to be a partner along with Alfred J. Laup-heimer and myself in General Public Warehouse and had become unacceptable as a partner to Mr. Laup-heimer because of lack of further capital investment.” (Emphasis supplied)
There is sufficient evidence in this record to justify the jury’s verdict. The defendant’s objections have been considered at length and we find no error requiring a new trial.
ORDER
AND NOW, this 14th day of January, 1963, IT IS ORDERED that the motion of the defendant, Milton H. L. Schwartz, for judgment of acquittal, or in the alternative for a new trial, is denied.
. Subsequent recomputation at the trial altered Schwartz’s tax liability as follows:
Tax Defendant’s
Tear Liability Return Deficiency
1954 $3,194.36 $737.38 $2,456.98
1955 $4,110.59 $381.15 $3,729.44
1956 $2,992.29 $597.97 $2,394.32
. 26 U.S.C.A. § 7201.
. The defendant addresses the Court to Zampetti v. Cavanaugh, 406 Pa. 259, 176 A.2d 906 (1961), as authority for this proposition. This case is distinguishable on its facts. Zampetti was a director and secretary of the corporation. He also contributed equipment and Ms inventive services as Ms investment in the corporation. This was done pursuant to the agreement among the parties.