Opinion ID: 395207
Heading Depth: 1
Heading Rank: 1

Heading: The Government's Case Against Scott

Text: 3 Count One of the indictment charged Scott with violating 26 U.S.C. § 7206(1) 2 by wilfully and knowingly preparing and filing a false United States Individual Income Tax Return (Form 1040) for the calendar year 1972 and then verifying this return as true under penalties of perjury. The indictment charged that although Scott stated in his return that his adjusted gross income was $31,643.00, he knew and believed that his adjusted gross income for 1972 was substantially in excess of that sum. 4 To sustain a conviction under 26 U.S.C. § 7206(1), the proof must show: (1) that Scott knowingly prepared and filed a Form 1040 for the year 1972 which he verified as true; (2) that the return was false in some material way in this case, that Scott falsely reported his adjusted gross income for the year 1972; and (3) that Scott's actions in falsifying his return were wilful. 5 In this case, the government relied on two types of proof that Scott falsely reported his adjusted gross income for 1972: the net worth and expenditures method of proof, as approved by the Supreme Court in Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954), and the specific items approach. 6 Under the net worth method of proof, the government was first required to establish Scott's opening net worth or total net assets at the beginning of the prosecution year, here, January 1, 1972. The government was then obliged to prove that Scott's net worth increased between January 1 and December 31, 1972, the end of the prosecution period for purposes of this appeal. This it did by calculating the difference between net worth at the beginning and end of the year. To that figure, the government added Scott's expenditures for the year, yielding putative income. The government was then required to show that the likely source of the difference between Scott's reported adjusted gross income and his putative income was taxable income, or that no nontaxable source for the difference existed. United States v. Massei, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517 (1958). Finally, because the net worth method of proof rests solely on circumstantial and indirect evidence, the government was required to negate all reasonable explanations offered by Scott which were inconsistent with his guilt. See Holland v. United States, supra; United States v. Hamilton, 620 F.2d 712, 714 (9th Cir. 1980); Taglianetti v. United States, 398 F.2d 558, 562 (1st Cir. 1968), aff'd, 394 U.S. 316, 89 S.Ct. 1099, 22 L.Ed.2d 302 (1969); Davis v. Commissioner, 239 F.2d 187, 189 (7th Cir. 1956), cert. denied, 353 U.S. 984, 77 S.Ct. 1284, 1 L.Ed.2d 1143 (1957). 7 Pursuant to the specific items approach, the government attempted to show that Scott excluded several material items of his 1972 income from his 1972 Form 1040. Proof that Scott wilfully omitted any one of these items would be sufficient to sustain a conviction under 26 U.S.C. § 7206(1). 8 The government's net worth proof combined with one of the specific items of income, the Wirtz-Cooper payments, indicated that Scott understated his 1972 adjusted gross income by more than $22,153, for an adjusted gross income of at least $53,796.
9 There can be little doubt that Scott had personal knowledge of the contents of his 1972 tax returns. His accountants prepared his return from worksheets he personally completed. Scott signed the return after verifying it in a private meeting with his accountant. According to Scott's 1972 Form 1040, he earned $30,887 in wages, salaries, tips and other employee compensation, and $756 in interest income, for a total adjusted gross income of $31,643.00. His itemized deductions totaled $13,237, including $12,000 in alimony payments, $150 in medical and dental expenses, $996 in deductible taxes (general sales, state and local income taxes), $140 in charitable contributions, $100 in casualty or theft losses, $175 for the preparation of his tax returns, and $62 for the maintenance of his safe deposit boxes. According to Scott's calculations, $5,448 had been withheld for federal income taxes, but he was required to pay only $4,296. He thus claimed that he was entitled to a $1,198 refund. 10
11 The government's net worth proof indicated that Scott's net worth increased from approximately $30,253 at the close of 1971 to approximately $51,420 at the end of 1972. 3 The government claimed that the likely source of this increase was campaign contributions which Scott converted to his personal use in 1972. Accordingly, it argued that these contributions became taxable income in 1972 which Scott should have reported on his Form 1040. 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); O'Dwyer v. Commissioner, 266 F.2d 575, 586 (4th Cir.), cert. denied, 361 U.S. 862, 80 S.Ct. 119, 4 L.Ed.2d 102 (1959); Paschen v. United States, 70 F.2d 491, 500 (7th Cir. 1934). Scott, on the other hand, introduced evidence from which the jury could have inferred that the source of the cash expenditures relied on by the government in establishing his net worth increase was nontaxable cash gifts he received prior to and during 1972. See William G. Stratton, 54 T.C. 255, 280-81 (1970). The government attempted, largely by cross-examination, to bring out that most of the so-called gifts were motivated by concern for Scott's needs because of his political career, and, in some instances, as a reward for official action beneficial to the donor. 4
12 As its starting point in proving Scott's net worth, see United States v. Hamilton, 620 F.2d 712, 714 (9th Cir. 1980); Kramer v. Commissioner, 389 F.2d 236, 238 (7th Cir. 1968), the government offered a letter dated April 16, 1968, that Scott wrote to his first wife, now Dorothy Humphrey, from whom he was then separated. In this letter, an apparent effort to arrange a property settlement, Scott described his assets and liabilities in detail. The letter indicated that the Scotts, together, had total assets of approximately $122,000. Their assets included their home, personal furnishings, savings and checking accounts, and stock in Holiday Travel House, Inc., a travel agency they owned jointly. Their only liability was a $28,000 mortgage on their home. Scott proposed that he transfer $93,000 of these assets to Dorothy, including the house, automobiles and bank accounts totaling $10,000, and keep $29,000 in assets for himself, consisting of $18,000 in bank deposits and cash, and the $11,000 worth of stock in Holiday Travel House, Inc. Scott offered to retain the $28,000 mortgage on their house as a liability, which left him with a total net worth in 1968 of $1,000. Scott stated in his letter that he would place this remaining $1,000 in their children's savings accounts. 5 13 The government then traced Scott's net worth from April 16, 1968 to December 31, 1971, the eve of the prosecution period. The government's evidence indicated that at the end of 1971, Scott had a net worth of approximately $30,253.
14 Between December 31, 1971 and December 31, 1972, the relevant year for purposes of this appeal, Scott's net worth increased by approximately $21,000, giving him a total net worth at the end of 1972 of approximately $51,420. The evidence showed that most of this increase was reflected in increased savings: in 1972 Scott deposited $21,877 in savings accounts and certificates of deposit. The primary source for these deposits was Scott's paychecks. Indeed, the evidence showed that Scott did not cash a single paycheck in 1972. Instead, he deposited each paycheck in one of his checking accounts or invested them in certificates of deposit, savings accounts or interest bearing securities. Another source for Scott's investments was his reimbursement warrants for state travel, which totaled $2,657 in 1972. When he received them, he generally deposited or invested them: that year, he cashed warrants for only $265.82. 15 Having introduced proof that Scott's net worth increased between the close of 1971 and 1972, the government then traced Scott's expenditures during 1972. These expenditures would be added to the net worth increase to complete the government's proof of Scott's putative adjusted gross income. This proved to be a difficult task, however, as Scott left few records of his expenses. He wrote no checks to cash during 1972; he used his checking accounts only for expenses mandated by his divorce decree or for his savings and certificates of deposit. Neither did Scott write any 1972 checks for his ordinary living expenses, such as rent, food, clothing, entertainment and gifts for friends and family. Nor did Scott pay for his living expenses by credit card; in 1972 he used only a Holiday Travel House personal credit card for occasional travel expenses. 16 From this information alone, it can be inferred that Scott paid for almost all of his day to day expenses in cash, cash which he was not reporting as income. This inference is supported by Scott's state travel vouchers which showed that he usually spent cash when he traveled on behalf of the state. As previously indicated, however, he almost always deposited his travel reimbursements in his bank accounts rather than cashing them for future expenses. 17 Because Scott used cash for most of his expenditures in 1972, the government was forced to calculate the total amount of those expenditures. Taglianetti v. United States, 398 F.2d 558, 562 (1st Cir. 1968), aff'd, 394 U.S. 316, 89 S.Ct. 1099, 22 L.Ed.2d 302 (1969). The government's evidence showed that Scott spent at least $13,000 in cash during 1972. According to the government's analysis, however, only $3,400 of that total amount was from legitimate sources such as the reimbursement warrants for state travel that he cashed, other cash reimbursements and nontaxable gifts. 6 Almost $10,000 therefore came from undocumented sources. 18 Scott spent a large portion of the undocumented income on personal travel. Although he was running for reelection as Illinois Attorney General in 1972, he traveled to Ft. Lauderdale in January, Miami in February, the Bahamas in April, England and Scotland in May, Copenhagen, Nice and Nevada in June, California and Texas in July, Ft. Lauderdale, Miami and Orlando in August, New Orleans, Miami, Ft. Lauderdale, San Diego and Beverly Hills in November, and San Diego, Beverly Hills and Ft. Lauderdale in December. On only six of these trips did Scott pay for any expenses by check. Nor are there credit card records for any of the travel expenses he most likely incurred. Few of Scott's travel expenses on these trips were charged to or reimbursed by the state, 7 his campaign committee, Holiday Travel House, Inc., or the William J. Scott Host Fund. 8 Only the cash travel expenses that the government was actually able to document were added to the government's calculations of Scott's total cash expenditures and hence to the net worth schedules. Therefore, any undocumented expenditures Scott made during his 1972 travels increased his unreported income for that year over and above the government's proof. 19 In addition to documenting certain of Scott's travel expenses, the government offered evidence of other large cash expenditures. Scott paid cash for $3,000 worth of traveler's checks in 1972. 9 Additionally, on May 3, 1972, Scott purchased a stamp collection from Malden Jones, a retired news reporter living in Springfield, Illinois. He paid for this collection with a check for $650 and $1,950 in cash. At trial, Scott argued that the cash came from the paycheck he received on May 3, 1972. The evidence showed, however, that he deposited to his bank accounts, or directly invested, every paycheck he received in 1972. He deposited his paycheck of April 26, 1972, on May 3 or 4, 1972, to his account at Illinois National Bank in Springfield, Illinois. Gov't Ex. US-106A. The evidence also showed that in December, 1972, Scott paid for a $950 diamond ring in cash. Gov't Ex. US-156; E-16. 20 Many of Scott's ordinary living expenses, such as rent and clothing, were not included in the government's net worth analysis because they could not be documented. For example, although 1972 was an election year, there were no records of Scott's expenditures for clothing. Nor could any rent payments be traced, although the evidence suggested that Scott was living in the Outer Drive East apartment belonging to Leonard Golan. No expenditures for gifts for friends or family could be traced, nor could the government find any records indicating that Scott spent any money on his two children in addition to his monthly child support payments. 10 Finally, the government could trace no expenditures for household goods or services, personal entertainment, or personal care items. The jury could properly have concluded that Scott incurred some expenses for these items which would have added to Scott's net worth increase and expenditures, beyond what the government proved. 21 The only daily living expense the government included in its net worth calculations was food. Although the government was unable to document any of Scott's food expenditures, his state travel vouchers provided a basis for projecting such expenses. These state travel vouchers indicated that in 1972, Scott spent an average of $8.47 per day on food and drink for each of the 83 days he submitted vouchers. The government then applied this average meal cost to the 283 non-vouchered days for a total projected non-reimbursed food cost of $2,397.01. This amount was then added to the government's net worth schedule. Of course, anything Scott spent on food over that amount would have further increased his net worth and thus the amount of unreported income.
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).
36 After introducing proof that Scott's net worth increased during 1972 due to campaign contributions diverted to his personal use, the government demonstrated that it had investigated all reasonable leads provided by Scott as to nontaxable sources of income which, if true, would establish his innocence. Holland v. United States, 348 U.S. 121, 135, 75 S.Ct. 127, 135, 99 L.Ed. 150 (1954). Scott presented various leads to the Tax Division of the Department of Justice in a conference held on March 27, 1979 with the Division lawyers. 21 A letter submitted shortly after the conference, on March 30, 1979, detailed these leads. The government spent considerable time at trial proving that these leads had been investigated and accounted for in the net worth analysis. Some leads were shown to be false exculpatory statements made by Scott or through his counsel. 37 In this letter of March 30, 1979, Scott claimed that he had used the safe deposit box monies discovered by Mrs. Humphrey to repay himself for unreimbursed political expenses. He alleged that he was owed $14,000 from his 1964 gubernatorial campaign and $35,000 from his 1968 campaign. The government introduced considerable evidence to rebut this claim. 38 As to the 1964 debt, the accountant for Scott's 1964 campaign testified that he had examined all of the 1964 campaign records and found nothing indicating that anyone, including Scott, had incurred unreimbursed expenses during that campaign. Moreover, in January, 1965, supporters held a testimonial dinner for Scott for the purpose of repaying any remaining campaign expenses and raising money for future campaigns. After all of the dinner expenses and all the known 1964 campaign debts had been paid, $51,466.84 remained, all of which was deposited in the William J. Scott Continuing Fund and the William J. Scott Dinner Committee Fund, both of which were campaign accounts. Scott sought no reimbursement from the proceeds of this dinner, and the dinner chairperson testified that he could not recall Scott mentioning any unpaid campaign expenses. Finally, the government introduced evidence that, based on his 1964 tax returns and work papers, Scott had insufficient funds available in 1964 to make the $14,000 in expenditures claimed. 22 39 The government also introduced records from Scott's 1968 campaign. These records showed no unreimbursed expenses. Indeed, on October 18, 1967, Scott wrote a letter to Elliott Frank, trustee of Scott's newly formed Citizens for William J. Scott for Public Office (the Committee), see note 15, supra, regarding the manner in which he was to be reimbursed for political expenditures he personally incurred. In this letter, Scott stated that he would forward the invoices of any new expenditures so that the Committee could make the payments directly. He then wrote, I will also turn over a monthly list of my personal political expenses for reimbursement. During 1967, all of 1968, and on through the indictment years, Scott kept meticulous records of his political expenses, which the Committee then reimbursed. For example, his reimbursement requests for 1968 included $606 for political secretarial services, Gov't Ex. C-5, as well as $4 baby-sitting expenses and baggage tips, Gov't Ex. C-6. In early January, 1969, he submitted a final tally of 1968 Political Expenses of William J. Scott Not Previously Recovered, Gov't Ex. C-11. This tally totaled $546.69 and again, covered everything from dinner and transportation expenses to $1.50 baggage tips. The jury could infer from this evidence that Scott had not spent $35,000 in personal funds in 1968 for political purposes without seeking reimbursement. Moreover, the government introduced testimony that Scott had insufficient personal funds available to make such expenditures in the first place. 40 In the March 30, 1979 letter, Scott also stated that until February, 1975, he was a major shareholder in, chief executive officer of, and primary salesman for the Holiday Travel House, Inc. He was therefore able to travel on Holiday House business and at its expense during the prosecution years. He further alleged that he received free airline travel and lodging on special occasions, and was able to purchase travel tickets at a 75% discount. 41 The government rebutted this lead by demonstrating that its net worth calculations credited Scott with any reduced rate or free travel he had obtained: the schedules were based solely on Scott's documented expenditures and assumed no full price travel on his part. Nor did the government treat as income any reimbursements Holiday Travel House may have given Scott. 23 Thus, Scott's claims regarding his travel costs had no impact on the government's net worth calculations. 42 The March 30, 1979 letter also contained eight subparagraphs purportedly describing sources of cash available to Scott. The first subparagraph referred to attached documents, which were photocopies of purchaser's copies of two bank drafts. Each draft was for $2,500, and payable to Mrs. Mary Abelson and William J. Scott, respectively. The letter stated that Scott did not have the original checks, but that the one to Mrs. Abelson was reendorsed to William J. Scott, and that he cashed both drafts in 1971. At trial, the government showed that Mrs. Mary Abelson and not Scott had in fact endorsed and negotiated the check made out to her, contrary to Scott's assertion. As to the check made payable to William J. Scott, the government proved that Scott had not cashed the check, but rather had used it to purchase Treasury Notes. 43 The second purported source of cash listed by Scott in the letter was a cashier's check on the LaSalle National Bank dated May 10, 1968, in the amount of $5,000. The government introduced evidence showing that this money was deposited into the savings account that Scott and his first wife maintained at Harris Trust & Savings Bank. 44 The third subparagraph listed a National Boulevard Bank document dated February 23, 1971, indicating that Scott received $5,000 in Treasury Notes due on November 15, 1971. The sixth subparagraph referred to a letter from the National Boulevard Bank dated December 16, 1970, stating that Scott possessed $7,000 in U.S. Treasury Notes due on November 15, 1971. The government's evidence indicated that both of these paragraphs referred to the same transaction, which began with a check payable to Citizens for Scott for Public Office and ended with the $7,000 being turned into certificates of deposit, rendering it unavailable as cash. 45 The fourth subparagraph referred to a National Boulevard Bank document stating that Scott received a $5,000 U.S. Treasury Bill due on January 31, 1971. The government's evidence indicated that the proceeds of this Treasury Bill were used to purchase the two bank drafts referred to in the first subparagraph, the checks payable to Mrs. Mary Abelson and William J. Scott, thereby providing no evidence of cash available to Scott. 46 The fifth subparagraph listed three possible sources of cash. The first was a National Boulevard Bank record reflecting 1966 ownership of World Airways Stock. Government evidence showed that Scott had originally purchased 700 such shares. He sold 600 of them in 1966. The remaining 100 shares he sold for $2,225 in 1967, the proceeds of which he deposited in his Harris Bank account. The second alleged source of cash listed in this paragraph referred to the same transaction previously listed in subparagraphs four and one, thus providing no cash for Scott. Finally, the third source listed in subparagraph five was the same transaction listed in paragraphs three and six. 47 There were no documents attached in support of the seventh subparagraph, which implied that Scott, at some point in time, owned 80 units of securities in Loew's Theatres, Inc. Scott referred to no such interest in any of his income tax returns filed between the late 1960s and 1975, nor did he include it in any Statements of Economic Interest filed with the Illinois Secretary of State. Neither was it referred to in the property settlement between Scott and his first wife. A government witness contacted Loew's for evidence of any investment held by Scott but testified that Loew's had no records of any such investment. In short, the government could uncover no evidence indicating that Scott had any cash available from that source. 48 The eighth subparagraph purported to list six withdrawals from Scott's checking accounts during 1967, for a total of $16,000. Government evidence showed that three of these listings were the same transaction. None of them resulted in any cash being available to Scott. Rather, these checks for cash were simply deposited into savings accounts or other accounts maintained by the Scotts. 49 Finally, between March 27, 1979 and April 2, 1979, Scott provided the Tax Division of the Department of Justice and the U.S. Attorney with the names of 100 persons who allegedly made cash gifts to Scott. Prior to the indictment, various Internal Revenue Service agents attempted to contact these people on these lists for information about their purported gifts. The government introduced memoranda reporting these contacts as evidence of its efforts to investigate leads. The memoranda stated that of the persons contacted, seventy-five reported that they gave only nominal amounts to pass-the-hat funds for Scott's birthday or Christmas presents. 24 Two of the people Scott listed did not exist, and sixteen could not be reached prior to the return of the indictment. The remaining individuals reported several different things. One stated that he had loaned $1,500 to Scott in 1970 which had never been repaid. This sum was already reflected in the government's net worth figures. One remembered making one payment of $500, which the government showed was deposited into Scott's campaign account. Another could recall giving Scott no money after the late 1960s, and yet another reported making no contributions of any nature. Two persons refused to talk to the government agents. Only one person said that he gave gifts between the early 1960's through 1976 which perhaps totaled $1,000. He was called as a government witness. 50
Specific Items Of Omitted Income 51 The government introduced several specific items of income that Scott failed to report on his 1972 Form 1040. The largest of these were: the $5,000 Edward Barrett and William J. Kiley gave Scott in the summer of 1972; the payments Arthur Wirtz, a Chicago businessman, made to Ellen Cooper, whom Scott married in 1974; and the $500 check for campaign use which William Shaffer gave Scott in April, 1972, and which Scott converted to his own use in May, 1972. Proof that Scott willfully failed to include any one of these specific items in his adjusted gross income as reported on his 1972 Form 1040 would be sufficient to sustain Scott's conviction, regardless of the government's net worth proof. 52 The government used the $5,000 Barrett payment in its net worth proof as a likely source for some of Scott's cash expenditures. Standing alone, however, there was sufficient proof from which the jury could infer (1) that this payment was a campaign contribution Scott converted to his own use in 1972, thereby rendering it taxable income he was required to report; or (2) that it was a payment made for the improper purpose of influencing official conduct. United States v. Isaacs, 493 F.2d 1124, 1144-45 (7th Cir.), cert. denied, 417 U.S. 976, 94 S.Ct. 3183, 41 L.Ed.2d 1146 (1974). If the jury concluded that it was a payment made for the purpose of influencing official conduct, Scott was required to report it as income in the year he received it 1972. Id. at 1161. It was clear from Scott's 1972 Form 1040 that he did not report it under any label. 53 The second item of specific income Scott omitted from his 1972 Form 1040 was the $11,057.10 in payments Arthur Wirtz made to Ellen Cooper during 1972. The government contended that Wirtz made these payments as a favor to Scott because as Attorney General, Scott possessed regulatory and enforcement powers over many of Wirtz' businesses. See United States v. Kuta, 518 F.2d 947, 950 (7th Cir.), cert. denied, 423 U.S. 1014, 96 S.Ct. 446, 46 L.Ed.2d 385 (1975). 25 Therefore, Scott should have reported these payments, as the first principle of income taxation (is that) income must be taxed to him who earns it, United States v. Basye, 410 U.S. 441, 449, 93 S.Ct. 1080, 1085, 35 L.Ed.2d 412 (1973); Commissioner v. Culbertson, 337 U.S. 733, 739-40 (1949), and not some other person who receives or spends it. 54 In order for the jury to understand the government's theory regarding the Wirtz payments, the government introduced evidence of the history of financial dealing between Scott and Arthur Wirtz, a prominent Chicago businessman. 26 Wirtz testified 27 that he or his family owned a variety of companies operating in Illinois, including businesses in real estate, banking, liquor distribution, horse breeding, sports teams and exhibitions, furniture, restaurants, hotels, insurance, engineering and mortgage banking. 55 Wirtz served on the sponsoring committee for Scott's January 1965 testimonial dinner. At that time, Scott was Treasurer for the State of Illinois. As treasurer, Scott deposited $525,000 into a no interest account at the First Security Trust & Savings Bank of Elmwood Park, a bank owned by the Wirtz family and run by Wirtz' son, William. Almost.$4.5 million dollars was in that account in 1966. 56 Scott left the office of state treasurer in January, 1967. Shortly thereafter, he contacted Wirtz about the possibility of starting a private law practice. Wirtz testified that Scott told him that he was finished with politics and needed a retainer. 28 Wirtz agreed to help out. In February, 1967, three Wirtz-owned corporations paid Scott a retainer of $27,000. Wirtz testified, however, that he could not recall having any legal or professional contact with Scott in 1967 or 1968. In response to a subpoena duces tecum, Wirtz searched his personal and corporate records for evidence of any legal work performed by Scott in either 1967 or 1968 but could find nothing. Nor could Wirtz recall Scott actually performing any legal work. 57 Scott campaigned actively for the Office of the Attorney General throughout 1968. After his election, Scott called Wirtz and said that he would like to clean up his account. Wirtz told Scott to take it up with his son, William. Wirtz testified that he told William to settle the matter with Scott, saying you don't get any place by making enemies. Scott was then paid $20,000 by checks drawn on various Wirtz corporations. 58 As Attorney General, Scott executed state leases in a Chicago building owned by a Wirtz company. Rentals over the years totaled $215,000. Scott's 1972 campaign occupied office space in the same building at a nominal charge, often consisting only of utilities, which in some months were as little as $3 or $4. 59 Wirtz testified that in either late 1971 or early 1972, Scott approached Wirtz and told him that he had a friend named Ellen Cooper for whom he would like to find a job with one of the Wirtz companies. Wirtz told Scott that he would be glad to find a spot for her and that she should call his executive secretary, Gertrude Knowles. Cooper was placed on the Chicago Stadium Corporation payroll, which Wirtz described as a confidential account. Wirtz personally signed her payroll checks, which in 1972 totaled $11,057.10. 29 Wirtz testified that he saw Scott again in late 1973. At that time Scott told him that he was going to marry Ellen Cooper. Although Wirtz couldn't recall the details of the meeting, they agreed that she ought to terminate our services. She was then removed from the Wirtz payroll. 30 60 The evidence indicated that Cooper did nothing to earn these payments. Wirtz did not meet Cooper until some time after he put her on his payroll. None of the other Wirtz employees could remember meeting her until 1979. Neither could Wirtz find any attendance records, work product, employment application, or any other personal or corporate records related to Cooper. Moreover, throughout 1972, while Cooper was purportedly employed by Wirtz, she received a salary for serving as secretary to Scott's re-election campaign. She often traveled with Scott during this period, and numerous campaign documents prepared during 1972 contain references to her campaign role. 61 On cross-examination, Wirtz flatly denied making the payments to Cooper out of fear of Scott. Wirtz admitted, however, that he knew that Scott, as Attorney General, had enforcement powers over many of the Wirtz businesses. 62 Based on the evidence surrounding the Wirtz payments to Cooper, the government's tax expert concluded that this money should be attributed to Scott. Scott made all the arrangements enabling Cooper to receive the money and it could be inferred that he had earned it. There is no evidence that Cooper did anything to earn the money. 63 Another specific item of income Scott omitted from his 1972 Form 1040 was the $500 check Scott received from William Shaffer in April, 1972 marked campaign use. Scott deposited this check into his personal account in May, 1972. The government used the payment in its net worth proof as evidence that Scott converted campaign contributions to private use. Because Scott converted this campaign contribution to his own use by placing it in his personal checking account, it became income to him which he should have included on his 1972 Form 1040. He failed to do so. 64 Other specific items of income Scott should have included in his 1972 adjusted gross income were the savings Scott incurred by fraudulently obtaining discounts on his Air Jamaica flights to the Bahamas and Jamaica during 1972. In late 1971 or early 1972, the Air Traffic Conference of America ruled that Scott was ineligible for reduced rate eligibility due to his being a full-time employee with the State of Illinois, which disqualified him for discounts as either an owner or as an outside salesman. Gov't Ex. HT-64-1. On both January 19, 1972 and again on March 15, 1972, however, Scott wrote to Air Jamaica requesting reduced air fare from Chicago to Nassau, Bahamas, round trip and from Chicago to Nassau to Montego Bay, round trip, respectively. In both letters, he certified that he had been in the service of Holiday Travel House continuously for the past twelve months and was devoting all or substantially all of his time on behalf of the House to the promotion and sale of travel, as required by the I.A.T.A. regulations regarding reduced rates. He further certified that the requests were made in good faith. Gov't Ex. A-4 and A-5. See note 23, supra. 65 Finally, to the extent that the jury could find that Leonard Golan provided Scott with a rent-free apartment in the Outer Drive East building during 1972 for the purpose of influencing Scott's official conduct, United States v. Isaacs, 493 F.2d 1124, 1144-45, cert. denied, 417 U.S. 976, 94 S.Ct. 3183, 41 L.Ed.2d 1146 (1974), rendering Golan's action non-cash income, the value of the rent on that apartment for 1972 becomes a specific item of income that Scott omitted from his Form 1040. There was evidence from which the jury could draw such a conclusion. Scott often appointed Leonard Golan and his law firm as Special Assistant Attorneys General. Between 1969 and 1979, Golan and his firm earned $1,159,594 from such appointments. Golan, who had two other residences, ordered an extra key to his Outer Drive East apartment twelve days after Scott's divorce. Jack Wallenda, who served as Scott's chauffeur, testified that he occasionally dropped Scott off at this building or picked him up there. Wallenda also stated that Scott kept his clothes at this apartment. 66 If Golan lent Scott his apartment in 1972 in order to influence Scott's conduct, then Scott was required to report the rental value of this apartment as income on his Form 1040. He did not.
67 The final element necessary to the government's case against Scott is evidence of Scott's wilfulness in underreporting his adjusted gross income for 1972. 68 (Willfulness) may be inferred from conduct such as ... making false entries or alterations, or false invoices or documents, ... concealment of assets or covering up sources of income, handling one's affairs to avoid making the records used in transactions of the kind, and any conduct, the likely effect of which would be to mislead or conceal. 69 Spies v. United States, 317 U.S. 492, 499, 63 S.Ct. 364, 368, 87 L.Ed. 418 (1943). 70 In this case, the government argued that wilfulness could be inferred from the manner in which Scott handled his financial affairs. Scott, a lawyer and an experienced banker who was once Treasurer of Illinois, invested almost all of his money derived from ordinary and legitimate sources, such as his paychecks or his state travel reimbursements, in high yield interest bearing securities or certificates of deposit. All of these funds were perfectly traceable, and from the evidence, it is obvious that Scott seldom let such funds remain idle, without earning any interest. 71 The very fact that Scott kept any money, regardless of its source, in safe deposit boxes seems out of character for a man who so carefully invested and earned interest on his other funds. The secreting of large amounts of cash in safe deposit boxes can itself be evidence that the cash did not come from legitimate sources simply because of the evident motivation to avoid records. This fact, coupled with his lack of records for living and travel expenses, as well as the unreported but taxable sources the jury could properly find, provides a sufficient basis from which the jury could infer that Scott was wilfully concealing his income. Scott's original defenses to the charges against him, as evidenced by the leads he submitted to the Tax Division of the Department of Justice on March 30, 1979, see Part I-B-4, supra, are further evidence of wilfulness, as the jury could have believed these to be false exculpatory statements, evidencing an intent to mislead or conceal. Id.