Opinion ID: 395207
Heading Depth: 3
Heading Rank: 3

Heading: The Likely Taxable Source

Text: 22 Having documented the increase in net worth and the cash expenditures, and thus an excess of putative income over reported income, the government was then obliged to show either a likely taxable source for this increase or that no nontaxable source for the expenditures existed. United States v. Massei, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517 (1958); Holland v. United States, 348 U.S. 121, 137, 75 S.Ct. 127, 136, 99 L.Ed. 150 (1954). The government introduced evidence from which the jury could infer that Scott consistently acquired political contributions and then converted them to his own personal use, making these converted contributions taxable income. E. g., United States v. Miriani, 422 F.2d 150, 152 (6th Cir.), cert. denied, 399 U.S. 910, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970). In this sense, the campaign funds are analogous to trust funds, they are not income when received but become income if and when converted to personal use. 23 The government's proof indicated that Scott kept the campaign funds he spent for his personal use in several safe deposit boxes. Mrs. Humphrey, Scott's former wife, testified that during November, 1967 she entered two safe deposit boxes she maintained with Scott at the Harris Trust and Savings Bank in Chicago and at the Evanston Bank. She found cash in these boxes totaling $48,900. She put this money into a new box at the Northern Trust. A few days later, after Scott had discovered that the money was missing, she told him what she had done. Scott demanded that she return the money. He told her, she testified, that the money was for his political campaigns and not for his personal use. She then agreed that Scott could become a joint signatory to the Northern Trust box, thereby giving them both access to the box. 24 The money from the safe deposit boxes was not treated as an asset in Scott's 1970 divorce proceedings because Scott insisted that it was campaign money to be used only for political purposes. Therefore, the divorce decree entered in 1970 provided that the safe deposit box money would go to Scott. The day the decree was entered, Scott and his former wife together surrendered the Northern Trust box. Scott refused to inventory the contents of the box in her presence. That same day, Scott visited Box 5457D at the Harris Trust. He had opened this box in 1970, the day before the start of the meeting of the National Association of Attorneys General held in St. Charles, Illinois. 11 See note 8, supra. 25 The $48,900 Mrs. Humphrey testified about was not included in the government's net worth calculations because Scott testified in his 1970 divorce proceedings and again in his 1977 child support hearings that the $48,900 was for political use only. 12 The jury could have inferred, however, that some of Scott's documented cash expenditures came from these funds. Scott entered Box 5457D at the Harris Trust 11 times between January 1, 1972 and June 30, 1972. On May 30, 1972, for example, Scott entered the box, and the next day, May 31, he left on a trip to London, Stockholm, Nice and Copenhagen. If Scott spent any of this $48,900 for his personal use in 1972, then he was required to report that amount as income for that year. 26 The evidence indicated, however, that the $48,900 Mrs. Humphrey testified about was not the only cash available to Scott. First of all, bank records for 1972, an election year, show a significant increase in Scott's safe deposit box activity. According to Harris Bank records, Scott surrendered Box 5457D on July 18, 1972, for a bigger box. During the remainder of the election year, Scott opened two more safe deposit boxes, giving him a total of five open safe deposit boxes, including one in Springfield, Illinois. 13 Scott entered his safe deposit boxes 34 times in 1972, often within days before he left the state or his whereabouts were unknown. 14 Due to the remarkable correlation between Scott's entries to these safe deposit boxes and his out of state trips, it can easily be inferred that he kept cash in these boxes which he used for personal expenditures. Even Scott's own expert witness conceded that Scott kept cash in his safe deposit boxes and was spending it. 27 Second, Scott himself stated, in a 1977 interview with Chicago Sun Times reporter Edward Pound, that he often received cash contributions from supporters: 28 Scott explained: There are people who like to make campaign contributions in cash. It was not an unusual thing for people to do in those days before the state campaign reporting law (which took effect in October 1974) .... A guy would say to me, I know you got expenses; here, $1,000. There were people who gave me $500, $1,000 in cash. They considered them gifts. Fundamentally, I treated them as campaign contributions. 29 Chicago-Sun Times, Oct. 8, 1977, at p. 1, col. 1, introduced into evidence as Gov't Ex. M-8. 15 Both Scott and the government treated Pound's article, without objection, for the truth of the matter asserted. 30 That Scott converted many of these campaign contributions to his own use can be inferred from the specific instances in which he failed to give his fund raising committee the campaign contributions he had received. Edward Barrett, a government witness, testified that he and his law partner, William J. Kiley, now deceased, gave Scott $5,000 in cash in the summer of 1972. Barrett, whom Scott had appointed Special Assistant Attorney General to handle state condemnation matters, testified that he called Scott and told him that he had a $5,000 campaign contribution. Scott came to Barrett's office to accept the contribution. When he arrived, Barrett and Kiley told him how grateful they were for the business he had given them, 16 and that they wanted to contribute to his campaign. Each of them then handed Scott an envelope containing $2,500 in cash. 17 Scott then said It's nice to know who your friends are, and pocketed the money. Kiley responded, Okay, Bill, don't forget where that came from. 31 Barrett and Kiley were not given receipts from Scott's campaign committee, and their contributions do not appear on any campaign records. Neither did Jack Wallenda, who handled Scott's campaign contributions, receive this money. Moreover, Scott did not report it pursuant to the Disclosure of Economic Interests Law, Ill.Rev.Stat. ch. 127 § 604A et seq. (1973), which requires state officers to disclose any gifts of over $500. 32 Scott diverted checks meant for his campaign to his personal use as well. On or about April 19, 1972, William Shaffer, an investigator employed by the Attorney General's Office, gave Scott a personal check for $500. A memo at the bottom of the check stated Campaign Use. Scott endorsed the check and on May 17, 1972, he deposited it in his personal account at First Federal Savings and Loan in Chicago. He did not report this money on his 1972 tax return. 18 33 The government also introduced evidence showing that Scott had previously converted campaign contributions to his personal use. Mr. Harry Ash, of Inheritance Abstractors, Inc., testified that on November 6, 1968, his company purchased a $4,000 cashier's check made payable to Scott Campaign Committee. The government showed that Scott personally endorsed this check and negotiated it at the American National Bank for cash on October 3, 1969. In April, 1970, Inheritance Abstractors again purchased a cashier's check, this time in the amount of $2,500 and payable to Scott's Campaign Committee. The evidence showed that Scott gained possession of this check and endorsed it Citizens for W. J. Scott for Public Office. He negotiated it with the Investment Department of National Boulevard Bank, where he had formerly been a vice-president, on May 15, 1970, as part payment for a $7,000 U. S. Treasury Note he purchased for himself on that date. 34 Ash testified that he and Inheritance Abstractors, Inc., intended these checks to be used solely by Scott's Campaign Committee, and that he never imparted any contrary intention to Scott. Nevertheless, the evidence showed that Scott converted these funds to his own use. He did not report the proceeds of these checks on his tax returns. 19 35 The government also argued that no nontaxable source for Scott's cash expenditures existed. See United States v. Massei, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517 (1958). The government showed that during the net worth period, Scott had received no inheritance, other than stamps and coins from his father which he had not sold, and no insurance benefits. He did receive the proceeds of a single loan in 1970, totaling only $1,500 and reflected in the government's net worth figures. For this argument to succeed, however, the jury would have to reject Scott's interpretation of the testimony of the thirty-three witnesses as establishing nontaxable cash gifts to Scott, during or before 1972. 20 See William G. Stratton, 54 T.C. 255, 280-81 (1970).