Case Name: C. D. MORRISON and Frank R. Morrison, Appellants, v. UNITED STATES of America, Appellee
Court: United States Court of Appeals for the Fourth Circuit
Jurisdiction: United States
Decision Date: 1959-08-13
Citations: 270 F.2d 1
Docket Number: No. 7734
Parties: C. D. MORRISON and Frank R. Morrison, Appellants, v. UNITED STATES of America, Appellee.
Judges: Before HAYNSWORTH, Circuit Judge, and PAUL and BOREMAN, District Judges.
Reporter: Federal Reporter 2d Series
Volume: 270
Pages: 1–12

Head Matter:
C. D. MORRISON and Frank R. Morrison, Appellants, v. UNITED STATES of America, Appellee.
No. 7734.
United States Court of Appeals Fourth Circuit.
Argued Jan. 13, 1959.
Decided Aug. 13, 1959.
Certiorari Denied Nov. 16, 1959.
See 80 S.Ct. 196.
Boreman, District Judge, dissented.
William Rosenberger, Jr., Lynchburg, Va., for appellants.
L. S. Parsons, Jr., U. S. Atty., Norfolk, Va., for appellee.
Before HAYNSWORTH, Circuit Judge, and PAUL and BOREMAN, District Judges.

Opinion:
PAUL, District Judge.
This is an appeal by C. D. Morrison from a conviction for evasion of income taxes for the years 1950 and 1951 and by Frank R. Morrison, who was convicted of aiding and abetting in the preparation of the tax returns of C. D. Morrison. Both men were tried before a jury and their conviction resulted in the imposition of a fine upon each of them. C. D. Morrison was in the building construction business and Frank R. Morrison, his brother, during the years in question, kept the books pertaining to the operation of the business.
"The brief for appellants enumerates a large number of assignments of error ranging from a denial of appellants' motion for a directed verdict of acquittal to exception to the court's instructions and including, in between, alleged errors in the admission of evidence and alleged prejudicial statements by the United States Attorney in the course of the trial. It is sufficient to say that as to the great majority of the assignments of error we find that they not only relate to trivial matters which could not possibly have affected the outcome of the case, but alse that they are so lacking in merit as not to require discussion. Apparently counsel came to the same conclusion for most of the assignments were ignored in argument and only a few were argued seriously and at length.
In spite of the fact that the record in this case is voluminous, including lengthy examination of witnesses and the presentation of many exhibits, analysis of the questions involved shows that they are not complicated. The taxpayer had reported a net income for the year 1950 of $1,797.03; and for 1951 a net income of $1,196.60. The indictment, based on the calculations of agents of the Internal Revenue Service, charged that the true net income for 1950 was $31,997.57 and for 1951 $43,730.74. In arriving at these results the revenue agents used what they termed "the bank deposits and expenditures method of computing income."
Basically, so it is testified, this involves the estimation of the gross receipts of a business by ascertaining the bank deposits made during the tax year, together with any other income shown to have been received but not placed in bank. To the total thus shown it is necessary to make numerous deductions and adjustments, such as, for example, eliminating amounts deposited as the proceeds of bank loans, amounts transferred from one bank account to another, any amounts received as gifts, and other adjustments of a similar sort, thereby determining the gross business receipts. From the amount thus found there is deducted all proper business expenses in order to arrive at the adjusted gross income. This, in turn, is subject to deduction for such items as contributions, interest paid, taxes, medical expenses, etc. The result, after allowance for the exemptions for the taxpayer and his dependents, represents the taxable income.
The method outlined was applied by the accountants of the revenue service in the instant case and a large part of the testimony in the case was that of the agents in a detailed explanation and demonstration of how they arrived at the amount of the gross receipts of taxpayer's business and of the items of deduction and adjustment whereby they determined the taxable income. In reviewing this testimony we are of opinion that the taxpayer was treated fairly and that he was given the benefit of all allowances that could reasonably and properly be made in his favor. In the course of the investigation of the taxpayer's records, and before the making of the report on which the indictment was founded, the agents had several conferences with the defendants and their counsel, at which the defendants were given opportunity to explain any questionable matters and offer any information that might be favorable to them.
A significant feature of the case is that, except for a long and largely immaterial cross-examination, the defendants made no serious attempt to deny the accuracy of the figures presented by the government witnesses, including those representing the unreported income. They made no effort, through testimony from an accountant or any other witnesses, to show that the figures testified to by the government agents were in error or misleading. In fact the record is replete with statements made in the course of the trial that it was admitted that there had been an understatement of income, and we do not find it contended that the understatement was less than the agents found it to be.
The tax returns in the years involved were prepared on a cash basis and among the errors assigned by defendants is one to the effect that the court refused to charge the jury that the returns should have been prepared on an accrual basis.
This complaint arose out of the fact that in the investigation of the taxpayer's records the government agents had made computations of the tax deficiency based on the cash method of reporting income which was the method used by the taxpayer; and had also, as was known to counsel for appellants, computed the income on an accrual basis. Following the testimony of the government witness that, in investigating the case for criminal action, he had based his computations on a cash basis, which was the method used by the taxpayer, counsel for appellants sought to show that the returns should have been computed on an accrual basis. The agent readily admitted that the taxpayer's business was such as that computation of his income on an accrual basis would have been proper and would have more truly reflected his correct income. He admitted also that the computations of the taxpayer's income on an accrual basis had been made for the purpose of arriving at the deficiency for civil liability. From this the appellants argue that the prosecution used a hybrid method of computation in arriving at the understatement of income. However, the witnesses made it definitely clear that the computation on which the criminal action was based was made upon the accounting method actually used by the taxpayer. Witnesses for the prosecution did not contend that this computation was a correct measure of the true tax obligations for assessment purposes, and the taxpayer now contends, therefore, that this computation should not have been admitted in evidence.
It is quite true that such a computation would not be admissible if inquiry here was directed simply to the tax obligations of the taxpayer. In this criminal proceeding it was necessary to establish not only that the tax liabilities here were understated, but that the understatement was attributable, at least in part, to the fact that the taxpayer's returns were not honestly prepared. Proof of the latter fact could only be accomplished by adopting and consistently applying the taxpayer's own method of accounting, despite the fact that we are all agreed that the method, itself, is im proper, or less reliable than some other method. This computation, using the taxpayer's own method of accounting, establishes the fact that there were excluded items of taxable income, the omission of which resulted in an understatement of his tax liabilities, using the taxpayer's own accounting methods and without regard to adjustments, which inevitably result from changes in the accounting method. When the taxpayer has employed a hybrid or unauthorized accounting method, he is hardly in a position to complain when the computation employing that method is introduced to prove specific items of omitted income. Leeby v. United States, 8 Cir., 192 F.2d 331; O'Connor v. United States, 9 Cir., 175 F.2d 477; United States v. Frank, 3 Cir., 245 F.2d 284. See also Dupree v. United States, 5 Cir., 218 F.2d 781.
/ The case against the defendants was based on the contention that in both of the years in question substantial amounts had been received in the business which were not deposited in bank and not included in the reported income. Various items of this sort were traced and shown. It being admitted that there was an understatement of income for both 1950 and 1951, there remains the question of whether this was the result of a knowing and willful attempt to evade payment of income taxes justly due. The intention to evade payment of the tax is, of course, an essential element of the offense charged. It is in connection with this proof of intent that appellants urge earnestly that error was committed.
' In undertaking to show that the taxpayer's omission from his reported in-' come of various amounts paid to him was purposeful and intended and to negative any contention of mere mistake or inadvertence the government offered evidence that in years previous to those in. question he had made a practice of filing returns in which similar omissions occurred. Specifically the government offered testimony to the effect that examination of the taxpayer's records and tax returns for the years 1947, 1948 and 1949 disclosed the same pattern of procedure, namely, the failure to deposit in bank or to include in his report of income various amounts which were part of his business receipts. This evidence was admitted over the objection of the defendants.
We find no error in the receipt of this evidence. It was admitted under the principle, long recognized and settled, that in the proof of a criminal intent it is permissible, in order to negative an assumption of accident or inadvertence, to show that the defendant has committed similar acts previously or that the act under investigation is one of a repeated pattern of conduct. As stated by Mr. Wigmore in his erudite work on the law of evidence (2d. Ed. Sect. 302):
"The argument here is purely from the point of view of the doctrine of chances — the instinctive recognition of that logical process which eliminates the element of innocent intent by multiplying instances of the same result until it is perceived that this element cannot explain them all.
*
"In short, similar results do not usually occur through abnormal causes; and the recurrence of a similar result (here in the shape of an unlawful act) tends (increasingly with each instance) to negative accident or inadvertence or self-defense or good faith or other innocent mental state, and tends to establish (provisionally, at least, though not certainly) the presence of the normal, i. e. criminal, intent accompanying such an act;
In support of the principle stated in the text Mr. Wigmore cites and quotes from various authorities including among others those from which the following ^excerpts are taken.
Coleridge, C. J., in the English case of R. v. Francis (1874) :
"It seems clear upon principle that when the fact of the prisoner having done the thing charged is proved, and the only remaining question is whether at the time he did it he had a guilty knowledge of the quality of his act or acted under a mistake, evidence of the class received must be admissible. It tends to show that he was pursuing a course of similar acts, and thereby raises a presumption that he was not acting under a mistake."
Grove, J., in another English case, Blake v. Assurance Co. (1878):
"When the question is whether an act was or was not fraudulent, acts of a similar kind are given in evidence to show intention."
Judge Taft in the case of Penn Mut. Life Ins. Co. v. Mechanics' Savings Bank & Tr. Co., 6 Cir., 72 F. 413, 422, says:
"It is a well established rule of evidence that, when the issue is the fraud or innocence of one in doing an act having the effect to mislead another, it is relevant to show other similar acts of the same person having the same effect to mislead, at or about the same time, or connected with the same general subject-matter. The legal relevancy of such evidence is based on logical principles. It certainly diminishes the possibility that an innocent mistake was made in an untrue and misleading statement, to show similar but different misleading statements by the same person about the same matter, because it is less probable that one would make innocent mistakes of a false and misleading character in repeated instances than in one instance."
For other cases applying this rule of evidence see Schultz v. United States, 8 Cir., 200 F. 234, 238; Seimer v. James Dickinson F. M. Co., D.C.Ill., 299 F. 651, 657; Holt v. United States, 6 Cir., 42 F.2d 103, 105-106; Weiss v. United States, 5 Cir., 122 F.2d 675, 684. That the rule is one of long standing, see Bottomley v. United States, 3 Fed.Cas. pp. 968, 971, No. 1,688; Wood v. United States, 16 Pet. 342, 10 L.Ed. 987; Butler v. Watkins, 13 Wall. 456; 464-465, 20 L.Ed. 629; Castle v. Bullard, 23 How. 172, 186, 16 L.Ed. 424.
This evidence of a repeated course of conduct was permissible only for its bearing on the question of intent and, in presenting it, the District Attorney made it clear that he was offering it for that purpose alone. The court admitted it for that purpose and there is no reason to assume that the jury was under any misunderstanding as to its limited purpose. Of course the evidence of prior conduct was not conclusive as to defendant's intent in the years in question, nor was it claimed to be. It was merely one circumstance to be considered along with other evidence in determining whether there was an intention to defraud.
It appears that in making up the tax returns the defendants, while omitting from their stated business receipts various amounts which should have been included, also included some items which were not properly a part of the taxable income. The agents who investigated the case, in making their calculations, gave the defendants credit for these items improperly reported as income and the deficiencies heretofore mentioned were arrived at after giving this credit. The fact that the reported income, while omitting amounts which should have been included, also included amounts which should have been omitted, is urged by counsel as evidence that there was no intent to defraud and that the errors in the returns were due to a lack of knowledge as to what constituted taxable income. When coupled with the admitted fact that both defendants were men of little formal education and without training as bookkeepers the argument is pertinent and has force. But it was an argument to be directed to the jury, as no doubt it was. Against these aspects of the evidence favorable to defendants there were countervailing matters; as for example, that the defendants offered no evidence to deny the amount of the understated income; that the amounts improperly omitted from the income reported were much greater than the items improperly included, and that these omis sions appeared to be pursuant to an established practice. And finally when it was shown that the taxpayer's net income for one of the years in question was over $30,000 and for the other more than $40,000, a jury might well have doubted his good faith in reporting less than $2,-000 for each year.
All of these facts whether favorable or unfavorable to the defendants, along with all others appearing in the evidence were for the jury to consider in arriving at its conclusions. We have read with care the instructions given the jury by the court and we find in them nothing to criticize. They are sound statements of the law applicable to the case, they are clear and complete and as favorable to the defendants as they could, in reason, desire. This court does not sit to hear cases de novo. Its function is to correct any errors that may have been committed in the trial court and an appellant assumes the task of pointing out any such errors. The record indicates that the defendants had a fair trial on issues submitted to the jury under proper instructions. They have not convinced us that any error was committed against them or that we would be justified in disturbing the verdict rendered by the jury. The judgment is therefore affirmed.
Affirmed.