Case Name: BRYAN v. UNITED STATES
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1949-05-13
Citations: 175 F.2d 223
Docket Number: No. 12456
Parties: BRYAN v. UNITED STATES.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 175
Pages: 223–229

Head Matter:
BRYAN v. UNITED STATES.
No. 12456.
United States Court of Appeals Fifth Circuit.
May 13, 1949.
Motion to Amend Judgment Denied June 10, 1949.
McCORD, Circuit Judge, dissenting.
Alston Cockrell, John W. Muskoff, Jacksonville, Fla., C. J. Batter, Washington, D. C., for appellant.
Damon G. Yerkes, Asst. U. S. Atty., Jacksonville, Fla., for appellee.
Before SIBLEY, McCORD, and WALLER, Circuit Judges.

Opinion:
WALLER, Circuit Judge.
Count 1 of the indictment alleged that in 1941 Appellant willfully and knowingly attempted to defeat and evade a part of his income tax by filing with the Collector of Internal Revenue at Jacksonville, Florida, a false and fraudulent income tax return. Counts 2, 3, and 4 charged him with having committed the same offense in each of the years 1942, 1943, and 1944, respectively. The jury acquitted on Counts 1 and 2 but convicted on Counts 3 and 4. Two bills of particulars filed by the United States Attorney limit the alleged evasions to understatements of the gross receipts derived from the business operated by Appellant in each of the years. No claim is made that the deductions from the income tax returns of the Appellant were unallowable, fictitious, or false. Measured, as the proof must be, by these bills of particulars, the conviction must stand or fall upon the proof, or lack of proof, of false statements knowingly made for the purpose of evading income taxes in the returns of gross business receipts for the years in question. No witness gave any direct testimony as to any specific instances of failing or refusing to account for gross business income. Such records as were kept by Defendant make no such revelations. No evidence was produced from any books or records of the Defendant showing gross income in excess of that reported. No proof has been produced of duplicity in keeping more than one set of books. The Government attempted to show, and did show, by the testimony of approximately fifty witnesses and by documentary proof, expenditures in each of the years of sums greatly in excess of the gross income reported for each year. For instance, in the year 1943, Appellant reported as gross income the sum of $271,980.27, whereas his gross expenditures for the year were $293,251.45. The Government insists that the Defendant's net worth during that year was increased by expenditures made in excess of reported gross income to the point that his net income was $23,615.95 rather than the $1,-814.67 reported. In the year 1944 the gross income of the Defendant was reported at $154,911.40. The Government proved that his total expenditures during the year in question was $229,021.40, and after making certain allowances and deductions, it insists that his net income was understated for that year in the sum of $81,919.84.
The evidence is clear that Defendant spent considerably more money during these years than his reported gross incomes. It also was demonstrated that his capital assets were increased each year in proportion to expenditures in excess of gross receipts, but Defendant contends that the evidence wholly fails to show that the expenditures in excess of reported gross income came out of current receipts and not out of available assets acquired in prior years.
The difficulty in the case lies in determining whether or not the net assets of the Defendant, owned at the beginning of the period in question and still held at the dates of the alleged violations, were accurately ascertained and definitely established by the auditor for the Bureau of Internal Revenue.
There were available to the auditor no financial statements, no books of Defendant showing assets and liabilities, and no admissions by the Defendant that could be used as an admitted, or definite, point of beginning by which to determine income by the "net worth and expenditure basis " * as was attempted in this case. In the absence of an admitted or definite statement that hound or tended to bind the Defendant as to his net worth on January 1, 1941, the auditor for the Bureau undertook to compute such net worth from the record of conveyances, bills of sale, mortgages, bank deposits, income tax returns, and such other information as he could find and which he considered reliable. After resorting to all known and available sources of information, the auditor computed the Defendant's net worth as of January 1, 1941, at $107,108. This figure was based chiefly on the cost of real estate, furniture, and fixtures in the night clubs and gambling places of the Defendant, and included only $40.70 cash in the bank. The auditor was unable to find where the Defendant had kept any bank account prior to 1940. Defendant, who was engaged in operating night clubs, gambling spots, and bars, during the years involved, had been a purveyor of illicit liquor in the prohibition era, according to the testimony of his wife had amassed, and secreted, in a safe in a closet in his home, considerable wealth.
The net worth-expenditures method of establishing net income, sought to be applied in this case, is effective only if the computations of net worth at the beginning and at the end of the questioned periods can reasonably be accepted as accurate.
Since the bill of particulars in this case admits that no claim of evasion is based upon the deductions from gross income reported by the Defendant, and since there is no evidence that the gross expenditures by the Defendant in any year were made entirely from gross income of the business operations in such year, it was essential for the Government to present evidence that excluded, or tended to exclude, all other available sources from which the additional funds expended could have been derived. If the Defendant correctly reported his gross income, then a very substantial part of the expenditures was obliged to have been made from funds other than such current income and from sources not covered by the returns or the records of the Defendant or included by the Government's computation of net worth. During the years 1943 and 1944 — covered by Counts 3 and 4 on which Defendant was convicted — the Defendant's expenditures exceeded the gross income of his business by approximately $100,000.00. Obviously, therefore, Defendant either falsely stated his gross receipts or had available to his use assets not revealed by the auditor's computation of his net worth at the beginning of the period involved.
The Defendant did not take the stand, but his wife did, and testified that when she married the Defendant in 1926 he was a bootlegger possessed of approximately $180,000, the residue of which was kept in a safe in a closet in their home until November 4, 1940, when she rented a lock box at the Florida National Bank in Jacksonville wherein she put between $150,000 and $160,000 in cash. She further testified that she paid one of the large expenditures of $40,000 involved here by taking that much cash from the lock box, depositing it in the bank, and giving a check thereon — all on the same day. The records of the bank show that the lock box was opened by her on the date of the $40,000 check and tend to corroborate her to that extent. She also testified that she withdrew money as needed from the lock box. Thus Defendant undertook to account for the difference between the amount of his expenditures in excess of the amount of his current gross income during the period, as well as their source. Obviously — and seemingly with good right — the jury did not believe the wife's testimony.
But we cannot escape the fact that Mr. Marquis, the auditor, frankly admitted that he did not know whether his computation contained all the assets of the Defendant or not. The substance of his statement was that it contained all the assets which he, an auditor of much experience, could find.
The auditor gave the following testimony:
"By the Court:
"Q. If you overlooked any assets that this defendant had, in your calculations, then your calculations would be in error, or subject to revision? A. Yes, sir." [R. 289.]
"Q. And you don't mean to say that he had no money whatsoever other than what is shown on that bank account, shown on January 1, 1941? A. I didn't say that.
"Q. Doesn't your audit assume that? A. That is all the money we could account for." [R. 296.]
"Q. And you took Tnto consideration only recorded purchases that you could find? A. That was all I could.
"Q. That was all you could? A. Yes.
"Q. During the course of examining Mr. Bryan, did you inquire into the cash sales that he made prior to that time? A. No.
"Q. Did the Department, or someone in your presence in one of the Government Departments, make inquiry into that? A. I would not know." [R. 300.]
"Q. Yet up until that time you had never found a bank account, up until 1940, that Mr. Bryan had? A. No.
"Q. And yet you assume that the only monies he had were in the bank on the first day of January, 1941 ? A. That is all we took into account.
"Q. You don't know whether he had a lot of other money, or not? A. No, sir." [R. 302-303.]
These - admissions are serious in this case because the Government must rely almost entirely upon circumstantial evidence, that is to say, upon the circum stance of the expenditure of considerably more money in the years in question than the Defendant took in from the operation of his night clubs and gambling enterprises. The evidence, being circumstantial, must exclude every reasonable hypothesis other than the guilt of the Defendant. The jury no doubt disbelieved, and had the right to disbelieve, Mrs. Bryan's testimony, but in view of the auditor's admissions that he was not able to say that his computation included all of the assets of the Defendant at the beginning of the period, together with the absence of any admissions, records, financial statements, bookkeeping entries, or other findings, or evidence, tending to bind the Defendant as to the lack of additional assets at the beginning of the tax period, the evidence, in the light of the bill of particulars, was insufficient to make out a prima facie case against the Defendant on the net worth-expenditure basis, and the case should not have been submitted to the jury since it did not exclude the hypothesis that the funds used in making some of the expenditures might have been from sources other than current business income.
In view of the foregoing conclusions it is unnecessary for us to pass upon the other specifications of error.
The judgment of the lower Court is reversed and the cause remanded for a new trial.
Reversed and remanded.
The following are excerpts from the bills of particulars:
"Answering Paragraph a of the motion for bill of particulars, as required in said order, the United States says that 'No deductions are claimed to be false, however, the depreciation claimed for the year 1941 was reduced due to technical adjustments.'
"Answering Paragraph b of the motion for bill of particulars, as required in said order, the United States says that 'None claimed to be false.' [Paragraph b of the motion related to deductions.]
"Answering Paragraph c of the motion for bill of particulars, as required in said order, the United States says 'The gross income for each of the years covered by the indictment is understated.'
"Answering Paragraph d of the motion for bill of particulars, as required in said order, the United States says 'The gross income from business and gambling is understated.'
"Answering Paragraph e of the motion for bill of particulars, as required in said order, the United States says 'No income is claimed to have been received from any sources other than those shown on the returns filed.'
• "And finally, answering Paragraph f of the motion for bill of particulars, as required in said order, the United States says 'None alleged to have been received from sources other than those shown in the returns filed.' " [R. 10-11.]
*
"The business gross receipts are alleged to be understated in the amount of not less than $9,036.81 for the year 1941;
"The business gross receipts are alleged to be understated in the amount of not less than $11,038.39 for the year 1942;
"The business gross receipts are alleged to be understated in the amount of not less than $21,468.95 for the year 1943; and
"The business gross receipts are alleged to be understated in the amount of not less than $81,507.41 for the year 1944.'' [R. 14.]
The auditor stated:
"A net worth basis is simply an increase in net. worth from one year to the next year. By net worth from all capital items and expenditures that we recorded here we show where the increase in net worth came from. That is where that net worth and expenditure basis comes into the picture. Establishing a not worth at the opening of the period and establishing a net worth at the close of the period, and the increase in net worth is the figure we have in the audit after each year under investigation. Those increases in net worth are substantiated by the expenditure basis of either cash or checks that we have involved." [R. 271.]
In United States v. Chapman, 7 Cir., 168 E.2d 997, 1001, we find the following statement:
"Appellant contends that, 'In a "net worth ease," the starting point must be based upon a solid foundation and a Revenue Agent's statement of the defendant's oral admission or confession when uncorroborated is not sufficient to convict.' We fully agree with this statement of the law. However we find no deviation from it in this case. The actual starting point here was the net worth as established by appellant's books and records. From these Lloyd drew up a statement of appellant's assets and liabilities as of January 1, and December 31, 1942."
In the case of United States v. Skid-more, 7 Cir., 123 F.2d 604, the net worth-expenditure basis was used in the prosecution of the defendant for income tax evasion, but in addition to the calculation of the Revenue Agents as to his assets it was shown that the defendant had made certain admissions to the Government Agents as to his net worth and it is apparent in that case that the conviction would not have been sustained if the computation made by agents was unsubstantiated by any admissions or records of the defendant and if the agent had admitted that he did not know whether the defendant had other assets or not.
In James Q. Whittemore, Tax Court Docket No. 13421, dated November 16, 1948, Judge Arundell, speaking for The Tax Court, said:
"But there is another reason of equal importance that throws discredit o.n respondent's method and that is his failure to determine with any degree of accuracy petitioner's net worth at the starting date of December 31, 1941. It would be absolutely necessary to know the amount of petitioner's net worth at the beginning of the taxable period before one could determine under a net worth basis a taxpayer's income for succeeding years."