Opinion ID: 298598
Heading Depth: 1
Heading Rank: 1

Heading: The Failure to Record the Grand Jury Testimony

Text: 8 Agent Sager was apparently the only witness who testified before the grand jury which returned the indictment against the Cramers. According to the Government's memorandum in the district court, [a]s of the date of the indictment herein, to wit, March 27, 1969, minutes of grand jury proceedings were not taken in [the Northern] District, except in major criminal cases. Since the instant prosecution presumably was not deemed to be a major criminal case, no stenographer was present to record Agent Sager's grand jury testimony, and consequently this was not available for possible use as impeachment. Appellants claim that this failure constituted a denial of due process. 9 The Cramers rely principally on our decisions in United States v. Youngblood, 379 F.2d 365 (2 Cir. 1967), and United States v. White, 417 F.2d 89 (2 Cir. 1969), cert. denied, 397 U.S. 912, 90 S.Ct. 910, 25 L.Ed.2d 92 (1970), for the proposition that we have established a rule in this circuit requiring that all grand jury testimony be recorded. In Youngblood, we directed that at trials commencing after June 21, 1967, the date of our judgment in that case: 10 the district courts of this circuit at the request of the defendant should order that the defendant be allowed to examine the grand jury testimony of those witnesses who testify at his trial without requiring him to show any particularized need for this material. 11 379 F.2d at 370. We also noted, id. at n. 4, that 12 [i]t is our understanding that stenographic minutes of grand jury proceedings in our circuit are now regularly taken and filed away. However, this may not have always been the practice, and where it has not been we do not imply that a defendant is entitled as of right to minutes that do not exist. 13 Two years later in White, a case arising in the Northern District and involving the nonrecordation of the grand jury testimony of one of the key prosecution witnesses, we held the trial testimony of the witness admissible, but noted that [h]ad this failure [to record the grand jury testimony] occurred subsequently to our decision in Youngblood, . . . very possibly a different question would have been presented. 417 F.2d at 92. 14 In United States v. Ayers, 426 F.2d 524 (2 Cir.), cert. denied, 400 U.S. 842, 91 S.Ct. 85, 27 L.Ed.2d 78 (1970), we were presented with a district judge's refusal to order the transcription of post- Youngblood grand jury testimony which had been recorded. We there held that such an order is a matter of discretion for the trial judge, depending upon the circumstances of the particular case. 426 F.2d at 529. In support of this conclusion we noted that [a]lthough recordation as a matter of course certainly is the better procedure, . . . this combination of rule and footnote in Youngblood (quoted above) does not require in terms that all grand jury testimony be recorded and that [f]ailure to record testimony given before a Grand Jury seems still a matter about which a defendant has no right to complain. 426 F.2d at 529 and n. 1. Hence, while Youngblood made it clear that a defendant is entitled as a matter of right to examine the transcribed grand jury testimony of witnesses who testify at trial, insofar as this relates to their trial testimony, Ayers makes it equally plain that a defendant is not entitled to a reversal of his conviction simply because testimony before the grand jury which returned an indictment against him has not been recorded. This is the position taken by every court which has considered the problem, see, e. g., Nipp v. United States, 422 F.2d 509 (10 Cir. 1969), cert. denied sub nom. Bishop v. United States, 397 U.S. 1008, 90 S.Ct. 1235, 25 L.Ed.2d 420 (1970); Loux v. United States, 389 F.2d 911 (9 Cir.), cert. denied, 393 U.S. 867, 89 S.Ct. 151, 21 L.Ed.2d 135 (1968); United States v. Turner, 274 F.Supp. 412 (D.Tenn. 1967); see also United States v. Caruso, 358 F.2d 184 (2 Cir.), cert. denied, 385 U.S. 862, 87 S.Ct. 116, 17 L.Ed.2d 88 (1966) (pre- Youngblood ), and is in accord with the permissive language of F.R.Cr.P. 6(d) which states that a stenographer or operator of a recording device may be present while the grand jury is in session (emphasis supplied). 15 Moreover, this would be the worst possible case in which to announce, on a retroactive basis, a per se rule of exclusion of the testimony of a witness whose grand jury testimony was not recorded. Shortly after each conference between the agents and appellants, their attorneys, and their accountant, Agent Sager prepared detailed memoranda recording what transpired. These made reference to such matters as Louis Cramer's admission that he made the adjustment to purchases without informing Judge Thaler — an item in Sager's trial testimony on which appellants particularly rely in asserting that the unavailability of his grand jury testimony prejudiced them. But inasmuch as these reports, prepared prior to Sager's grand jury testimony and turned over to the defense pursuant to 18 U.S.C. § 3500, were fully consistent with his trial testimony, it would be perverse indeed to predicate a reversal of the conviction on the remote possibility that Sager might have presented the grand jury with a version of the facts different from that reported contemporaneously in his memoranda and later at trial. While appellants raise the spectre of arbitrary and discriminatory prosecutorial conduct in selecting those cases in which grand jury testimony will be recorded, it will be time enough to deal with such a problem when, as, and if a defendant comes forth with any evidence suggesting bad faith on the part of the Government — something appellants have utterly failed to do here. 16 We do not mean to imply by the above discussion that we approve of the practice which has been and, so far as we have been informed, still is followed in the Northern District. We reiterate that recordation as a matter of course certainly is the better procedure. We hold only that the failure to record grand jury testimony of a prosecution trial witness — at least absent any evidence of prosecutorial misconduct — does not constitute a sufficient ground for reversal. Formulation of a general principle that all grand jury testimony must be recorded is a matter which may more appropriately be disposed of in the current revision of the Federal Rules of Criminal Procedure or by the Circuit Councils in the exercise of their supervisory power. 17 II. Adjustment of Purchases on the Partnership Return to Reflect the National Gross Percentage of Profit for the Industry 18 Appellants assert that both by his disparaging and disruptive remarks and by his charge, the trial judge interfered with an effective presentation of the defense contentions. The only claim of even colorable merit under this rubric involves the propriety of appellants' upward adjustment of purchases on their partnership return in order to bring their gross percentage of profit into line with the industry average. 19 During the years in question, Louis Cramer provided Judge Thaler with the data, derived from the books of Cramer's Auto Parts Co., so that the latter could prepare the Cramers' tax returns. After preparing rough drafts of the returns for 1962 and for 1963, Judge Thaler informed Louis Cramer that the books revealed a gross profit figure of approximately 40%. Cramer responded that it was impossible with the discounts I give, and what we sell the material for, and what the national average was. It runs 30 percent. The best I could do was 31. Agent Sager testified that Cramer told him that, without informing Judge Thaler, he made the adjustments — increasing the purchase figures and thereby reducing his gross profit margin to approximately 30%, in line with the industry average. Judge Thaler, whose testimony contradicted Sager's with respect to who made the actual changes in the purchase figures, explained that he made the adjustments based on information which was submitted to me, and which was, as I believed, the national average, and was informed was the national average. When questioned as to the propriety of making such an adjustment, Judge Thaler responded that I felt it was my duty to make a return the way it was indicated it should be made. If it was his [Louis Cramer's] belief, and I had no reason to disbelieve him, if it was his belief that his was the same as the national average, I felt it was my duty to do it that way. When questioned further as to whether the percentage-of-profit figure was reached on the basis of actual purchases, Judge Thaler replied: No, it was figured on the basis of the national average as I understand the Commissioner does. Later in the course of the trial, after hearing additional testimony concerning appellants' method of calculating their partnership income, the court instructed the jury that income tax returns are not based on averages, they are based on figures, except where the Internal Revenue Code permits certain fixed averages, such as in relation to local taxes and things of that nature. Appellants argue that this instruction was erroneous and that it removed one of their principal contentions from the jury's consideration. 20 It is not disputed that an upward adjustment in the purchase figures, as reflected in appellants' books and records, was made on their partnership returns in order to arrive at a gross percentage of profit for Cramer's Auto Parts which was more in line with the industry average than the percentage actually disclosed. Appellants nevertheless urge the somewhat novel contention that despite the existence of detailed books and records, a taxpayer may properly disregard these figures when the profit margin they disclose is substantially higher than the industry average. 21 In support of this proposition, appellants refer us to two cases in which a taxpayer, on his own initiative, has adopted a gross percentage of profit method in calculating his income. Gordon D. Seigle, 33 T.C. 255 (1959), rev'd on other grounds, 281 F.2d 372 (4 Cir. 1960), and United States v. Kiamie, 258 F.2d 924 (2 Cir.), cert. denied, 358 U.S. 909, 79 S.Ct. 236, 3 L.Ed.2d 230 (1958). It is true that in Seigle, the Commissioner did not contend that the use of a percentage of sales method for determining cost of goods sold was erroneous, although he did prevail on his contention that the figure used by the taxpayer was not a proper one. But the crucial fact in that case was that the taxpayer kept no records which would have allowed the use of a permissible method, 26 U.S.C. § 446(c), of accounting: 22 No inventories were ever taken . . . no attempt was ever made to allocate cost to the various portions of the original bulk purchase. 23 . . . There were insufficient records and data to enable the Commissioner to reconstruct any opening or closing inventory. Under these circumstances [the Commissioner] had to adopt some method that would allow [the taxpayer] to recover costs and clearly reflect the income. 24 33 T.C. at 260. Here, by contrast, inventories — of which more hereafter — were taken, and although the record indicates that appellants' method of accounting left room for improvement in some respects, James Barrett testified that the books were of high quality, as far as they went. As a matter of fact, the cash receipts and disbursements records, I think, were superior. They were better than the 99 percent of the kind of records we find in a business of this size. 25 Kiamie likewise does not support the proposition that a taxpayer possessing detailed books and records may unilaterally ignore these in favor of an industry-wide average. No claim was made that the use of a gross percentage of profit method, there employed in order to eliminate alleged distortions in income resulting from intercorporate transactions, was proper as a matter of law. Rather it was offered, and properly so, as a defense to criminal charges — since the jury was entitled to believe, regardless of the propriety of the procedure, either that the gross profit figure accurately reflected income or that the defendants acted in good faith in using it. 3 The trial court's charge adequately apprised the jury of these very defenses: 26 [T]he Defendant Louis Cramer contends that the partnership from which substantially all of the joint income was derived, could not have had the gross profit tentatively computed by Louis Thaler because it exceeded the margin of profit on which he and the industry generally operated. He explained to us just what he meant by margin of profit, the percentage of his profit against the selling price. You must determine first whether or not the Defendants received any or all part of the additional income attributed to them by the Government . . . if you find that they didn't . . . of course, you would find them not guilty. . . . 27 If you find . . . that the Defendants relied on good faith on Louis Thaler's preparation of the returns and believed that each of the returns correctly showed the income and amount of tax due, then you must find as to such defendant a not guilty verdict, even though you find that the returns were incorrect and the Defendants owed a substantial — owed a tax substantially in excess of that shown to be due on the returns. 28 Finally, appellants seek to derive, from the Commissioner's statutory authority to compute taxable income under such method as, in his opinion, does clearly reflect income [i]f no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, 26 U.S.C. § 446(b), an implied prerogative of a taxpayer to adopt, sua sponte, a method of computation which he believes does clearly reflect income when, in the taxpayer's opinion, his own books and records are out of line with the industry average. Section 446(e), however, makes it perfectly clear that as a general rule 29 a taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable income under the new method, secure the consent of the Secretary or his delegate. 30 In light of the existence of appellants' detailed books and records, there was therefore no justification as a matter of law for the Cramers to adopt, without the consent of the Commissioner, a gross percentage of profit method, and the trial court's instruction to that effect was proper. Moreover, as noted above, this very issue was presented to the jury as a matter of defense with respect to criminal intent — regardless of the propriety of the method or, indeed, its accuracy — so that the appellants were hardly deprived of having the jury consider their arguments on this score.