Petition — Costanzo v. United States

Supreme Court, U. ail

FILED

SEP 8 1978

\

a a. BLE CLERK

In The

Supreme Court of the United States

October Term, 1978

No. 78-3 94

ANGELO COSTANZO,

Petitwner,

US.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT

JOHN W. CONDON, JR., ESQ.

Attorney for Petitioner

300 Statler Office Building

Buffalo, New York 14202

(716) 856-2183

Condon & Sedita, P.C.

of Counsel

Daily Record Corporation Spaulding Law Printing

Rochester. New York (41 17) Syracuse, New York

TABLE OF CONTENTS

Page

Ee wv

EE EE EE w

Bg TGS rr 1

EE EE l

Constitutional Provision Involved.................. 2

SE il 3

EES EES 3

ENS OS 4

Reasons for Granting the Writ................000. 7

I. Can the Second Circuit fashion a new rule which

allows the Government to prosecute and convict a

taxpayer for evading corporate and personal income

tax without the burden or responsibility of showing

that the corporation had income and that such cor-

porate income became the taxpayer’s persona! income? 7

Il. Can the Government discharge its duty to see that

justice is done where it failed to investigate the in-

ferences it asks the jury to draw from circumstantial

ee ca wo cece eS sceceee. 10

EE 15

Appendix

A. Opinion of the United States Court of Appeals for

EE A-l

n

PRELIMINARY STATEMENT

Petitioner is a 65 year old baker who, during the indictment

years, was president and majority shareholder of Costanzo’s

Bread, Inc. His wife, Josephine Costanzo, was treasurer and a

minority shareholder in that corporation during those same

years. Roth were indicted on four counts of evading personal

income tax in an amount of $106,679.93 and four counts of

evading corporate income tax in an amount of $114,621.11. They

were jointly tried before a jury under a net Worth theory of

prosecution. On September 1, 1977, Angelo Costanzo was con-

victed of the eight counts alleged against him. His wife was

acquitted of the eight counts alleged against her.

On July 11, 1978, the U.S. Court of Appeals for the Second

Circuit affirmed the conviction of Mr. Costanzo.

Under the facts of the case, the income attributed by the

Government’s theory to both Mr. Costanzo and to Costanzo’s

Bread, Inc. was comprised of essentially the same money. The

Government claimed Costanzo’s Bread, Inc. was the likely source

of this money. The trial court limited cross-examination into the

thoroughness of the Government’s net worth reconstruction of

the income ascribed to Costanzo’s Bread, Inc. and to Mr.

Costanzo by holding that the “efficiency” of the bakery business

was not in question.

The Court of Appeals held that, since the Government negated

all possible sources of non-taxable income, proof that Costanzo’s

Bread, Inc. was the “likely source” was unnecessary.

It is petitioner’s primary contention that when the same

money is ascribed to a corporation and then to an individual as

income, the Government is obligated to show that the cor-

poration itself received that income and was the source of that

income to the individual. Suggesting that such proof is un-

necessary implies that the Government may obtain a conviction

without proving beyond a reasonable doubt that the corporation

wi

received the income upon which both corporate and personal

income tax were allegedly evaded.

Petitioner contends as well that when the Government elected

to prosecute petitioner for tax evasion, particularly under a net

worth theory, it had a duty to investigate the validity of the

inferences which it would ask the jury to draw from the cir-

cumstantial evidence it would present to them. It is typical of

income tax evasion cases in general and net worth prosecutions

in particular that they depend heavily upon circumstantial

evidence. Sophisticated i1.vestigative techniques are aimed at

securing such circumstantial evidence, often through interaction

with the taxpayer. Yet, it is the perilous nature of cir-

cumstantial evidence that it proves by inference rather than

directly. Because of this, the Supreme Court has imposed upon

the Government in its use of such evidence a duty to seek justice

rather than a conviction. Accordingly, petitioner contends that

when the Government offers circumstantial evidence from which

the jury is to infer a taxpayer’s guilt it has the duty to

reasonably attempt investigation of whether that inference is

valid.

Ww

TABLE OF CASES

Brady v. Maryland, 373 U.S. 83 (1963)... 2... 2... ee. 10

Holland v. U.S., 348 U.S. 121 (1954)... ee eee.

7, 9, 10, 12, 13, 14

In re Winship, 397 US. 358 (1970)... . 2... ee eee 8

Kohl v. U.S., 266 F2d 381 (CA Wisc. 1955) .....7...... 14

Lakside v. U.S., 98 S.Ct. 1091 (1978)... 2... ee eee 12

Merrit v. U.S., 327 F. ed 820 (5th Cir. 1964) ........... 9

Richardson v. U.S., 294 F.2d 593 (CA Mich. 1961)... .... 14

Simmons v. U.S., 308 F. 2d 160 (CA Md. 1962) ......... 14

U.S. v. Goldberg, 330 F.2d 30 (8rd Cir. 1964). .......... )

U.S. v. Massei, 355 US 595 (1958)... .. ee eee eee seat

US. v. Moody, 339 F.2d 161 (6th Cir. 1964)... 2.2.2... 8,11

United States Constitution

Ant. i, Gotten 0 See 0 5s i ne eae 2,14

RERENUEY ~ k. oon kk n Sw uae eee 2

ps restr ras

pre ee ee 3

Statutes

SP UBA. GUOE. nw. oc cc uncs Mids ce eee 3

In The

Supreme Court of the Wnited States

October Term, 1978

No.

ANGELO COSTANZO, ; ’

Petitioner,

vs.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE S®COND CIRCUIT

Petitioner, ANGELO COSTANZO, prays that a Writ of

Certiorari issue to review the judgment of the United States

Court of Appeals for the Second Circuit entered on July 11, 1978.

Opinion Below

The opinion of the Court of Appeals dated July 11, 1978, has

not yet been reported. It is reprinted in its slip form in Appendix

A, infra, at p. A-1 et seq.

Jurisdiction

Following a jury trial, petitioner was found guilty in the

United States District Court for the Western District of New

York for evading personal income tax in the amount of

$106,679.93 during the years 1968-1971 (inclusive) and corporate

income taxes in the amount of $114,621.11 for those same years,

all in violation of Title 26, United States Code, Section 7201. On

January 11, 1978, the petitioner was sentenced to four con-

current one year and one day terms in prison for evading per-

sonal income tax during each of the indictment years, and four

$10,000.00 fines for evading corporate income tax during those

same years.

Petitioner appealed his convictions to the United States Court

of Appeals for the Second Circuit. On July 11, 1978, that court

affirmed appellant’s conviction.

On August 3, 1978, within thirty (30) days of the entry of that

decision, Mr. Justice Thurgood Marshall signed an order

granting petitioner an extension of time through September 8,

1978, to file his petition for writ of certiorari. This petition is

filed within that time limit. The jurisdiction of this Court is

invoked under 28 USC 1254(1). :

Constitutional Provisions Involved

Constitution: Art. 1, Sect. 9, Clause 4.

Capitation and other direct taxes

No Capitation or other direct tax shall be laid, unless in

proportion to the Census or Enumeration herein before directed

to be taken.

AMENDMENT V

No person shall be held to answer for a capital, or otherwise

infamous crime, unless on a presentment or indictment of a

Grand Jury, except in cases arising in the land or naval forces, or

in the Militia, when in actual service in time of War or public

danger; not shall any person be subject for the same offence to be

twice put in jeopardy of life or limb; nor shail be compelled in

any criminal case to be a witness against himself, nor be

deprived of life, liberty or property, without due process of law;

nor shall private property be taken for public use, without just

compensation.

AMENDMENT VI

In all criminal prosecutions, the accused shall enjoy the right

to a speedy and public trial, by an impartial jury of the State and

district wherein the crime shal! have been committed, which

district shall have been previously ascertained by law, and to be

informed of the nature and cause, of the accusation; to be con-

fronted with the witnesses against him; to have compulsory

process for obtaining witnesses in his favor, and to have the

Assistance of Counsel for his defense.

AMENDMENT XIV

Because of its length, it is reprinted in Appendix B, infra, at p.

B-1 et seq.

Statute Involved

26 U.S.C. §7201 Attempt to evade or defeat tax

Any person who willfully attempts in any manner to evade or

defeat any tax imposed by this title or the payment thereof,

shall, in addition to other penalties provided by law, be guilty of

a felony and, upon conviction thereof, shall be fined not more

than $10,000.00 or imprisoned not more than 5 years, or both,

together with the costs of prosecution.

Questions Presented

1. Can the Second Circuit fashion a new rule which allows the

Government to prosecute and convict a taxpayer for evading

corporate and personal income tax without the burden or

responsibility of showing that the corporation had income and

that such corporate income became the taxpayer’s personal

income?

2. Can the Government discharge its duty to see that justice is

done where it could have but failed to investigate the inferences

it asked the jury to draw from circumstantial evidence?

Siatement of Facts

Angelo Costanzo was the eldest of a family of eleven children

raised during the 1920’s in the Italian immigrant section of

Buffalo, New York. He began working part-time when he was

eight years old. With the onset of the Depression’ in 1929, he had

to quit school to increase his contribution to the family’s sup-

port. But there were no jobs available. Therefore, at the age of

16, with very little money and less choice, he attempted to take

over a failing neighborhood bakery business. He ran it

singlehandedly from oven to peddling bread house-to-house, 13-

16 hours a day, 7 days a week, without respite. His industry and

reliability prevailed and gradually his business grew. By the

1940's he had four bakery shops. :

In 1962, he founded and became president of Costanzo’s Bread,

Inc. He owned 90% of the shares of the corporation, his wife

owned 5%, and the remainder were unissued.

On November 12, 1975, he and his wife were charged by the

Federal Grand Jury in the Western District of New York, under

Indictment No. 75-253, with eight counts of income tax evasion

during the years 1968 through 1971. Counts I through IV

charged an understatement of personal income by $206,721.22

and the evasion of $106,679.93 in additional taxes. Counts V

through VIII charged an understatement of corporate revenues

by $242,070.92 and the evasion of $114,621.11 in additional

corporate taxes. The government’s basic premise was that during

the indictment years, the Costanzos took money from the

business without declaring it as corporate income or personal

income.

After a jury trial, Mrs. Costanzo was acquitted of all eight

counts and Mr. Costanzo was found guilty on all eight counts.

The Government’s case was founded upon a net worth theory

of prosecution. The Government produced witnesses and exhibits

for the purpose of showing that Petitioner’s assets increased

during the indictment years and that the increase was at-

tributable to taxable income earned but not reported during that

time.

The primary avenue of proof led through a maze of stock

acquisitions which, according to the Government’s theory, were

purchased with unreported income. The total stock involved was

not only the stock registered in the name of Petitioner and his

wife, but also all the stock registered to their two sons, Angelo,

Jr. and Richard. Internal Revenue Agents sought to establish

that the stocks were actually purchased by the petitioner, and

they included the purchase price of all the stocks in their

computation of Mr. Costanzo’s net worth.

As part of its burden of proof, the Government was required to

demonstrate that the amounts expended during the indictment

years were actually attributable to income received during those

years. Petitioner asserted that since the Depression he had

gradually built up a large cash reserve in safe deposit boxes and

that this reserve was the source of the money for the stock

acquisitions.

The Government gave limited credence to the Petitioner's

assertions about the existence of a cash reserve and it credited

the Petitioner with the amount of $49,000.00 in cash as of

January 1, 1960. That amount purportedly represented the

contents of the one safe deposit box in Petitioner’s own name on

that date. This amount was based upon a Government ex-

periment which showed that a maximum of $49,000.00 in $20.00

bills could be “stuffed” into the box. Mrs. Costanzo had two

other safe deposit boxes as of January 1, 1960; however,

no credit was allowed by the Government with respect to those

boxes. The Government ignored Mrs. Costanzo’s safe deposit

boxes as a non-taxable source of funds because she had told IRS

agents that prior to 1960 all she received from Mr. Costanzo was

household money.

In the trial, the defense contested the Government’s con-

clusions as te the claimed taxable increases in net worth on

several significant levels.

It contended that the increases in net worth were not at-

tributable to income earned during the indictment period; that

the Petitioner had not bought all of the stocks in the hands of his

sons which the Government had attributed to him; and that the

business was incapable of generating sufficient amounts of

money to be the “likely source” for the alleged increases in net

worth.

Although the Government tried to prove and claimed to have

presented sufficient trial evidence that Costanzo’s Bread, Inc.

was the likely source of taxable income, the Second Circuit Court

of Appeals held that:

“given the Government’s proof of unreported income and

its negation of all possible sources of non-taxable income,

proof of a likely source of taxable income was not

necessary.”

Mr. Costanzo’s conviction for evasion of both corporate income

tax and personal income tax was thereupon affirmed.

REASONS FOR GRANTING THE WRIT

I.

Can the Second Circuit fashion a new rule which allows the

Government to prosecute and convict a taxpayer for evading

corporate and personal income tax without the burden or

responsibility of showing that the corporatien had income

and that such corporate income became the taxpayer’s

personal income?

The basic premises of net worth prosecution were set forth by

this Court in Holland:

Increases in a taxpayer’s assets derive from taxable

sources. Holland v. U.S., 348 U.S. 121, 131 (1954).

and Massei:

Increases in a taxpayer’s assets do not derive from

nontaxable sources. U.S. V Massei, 355 U.S. 595, 595

(1958).

In United States v. Costanzo, the skeletal theory of the Govern-

ment’s case was straightforward:

1. Mr. Costanzo had substantiai taxable income during the

indictment years which he did not declare on his personal tax

returns (basic evidence: assets in names of Mr. & Mrs. Costanzo

and their two sons).

2. Mr. Costanzo got the money to purchase those assets from

corporate income which was not declared on t*e corporation's

income tax returns.

Fitting this theory into the format of Massei does not work.

Negativing nontaxable sources of the money which purportedly

was used to purchase the assets does not prove that the money

was income to the corporation.

Yet the Holland method of proof is not wholly satisfactory

either. Holland might be adequate if it were only a matter of

showing that the corporation was the likely source of the money

which was used to purchase the assets. But the Government set

out to prove as well that corporate income taxes were also

evaded on that money. The fundamental operating premise of

both Holland and Massei is that the receipt of taxable income is

reflected by an increase in assets. However, it was an increase in

Mr. Costanzo’s assets, not the corporation’s, which the Govern-

ment’s case sets forth. Attributing an increase in Mr. Costanzo’s

personal assets to corporate income tax evasion in such a factual

setting can only be accomplished by proving beyond a reasonable

doubt that the corporation was the specific source of the money

which was used to purchase those personal assets.

In other words, for Mr. Costanzo to have evaded corporate

income tax, the corporation had to have realized the income

alleged. For that corporate income to have been the same money

which purchased the personal assets representing Mr. Costanzo’s

increase in net worth, the corporation had to be the specific

source of that money/income to Mr. Costanzo as well. This is the

only logical manner in which the separate convictions for

evasion of corporate income tax and personal income tax can be

reconciled under the requirements of due process.

It is a basic due process requirement that “proof of a criminal

charge beyond a reasonable doubt is constitutionally required.”

In re Winship, 397 U.S. 358 (1970). As set forth above, the United

States Court of Appeals for the Second Circuit held, inter alia,

that:

“given the Government’s proof of unreported income and

its negation of all possible sources of non-taxable income,

proof of a likely source of taxable income was not

necessary” U.S. v. Costanzo, CA2, July 11, 1978, __. F2d

___; Appendix P. A-12.

The Second Circuit affirmed the petitioner's conviction under

a net worth theory of prosecution on four counts of evading

personal income tax and four separate counts of evading cor-

porate income tax on the same money. Yet if proof that the

corporation was a likely source is not necessary, how can it be

said at all that the corporation received the income alleged?

“It is necessary for the Government to prove in a case

such as this [wilfull tax evasion] that a tax is due. U.S. v.

Moody, 339 F 2d 161, 162 (6th Cir. 1964)”

For example, in U.S. v. Goldberg, 330 F 2d 30 (3rd Cir. 1964)

cert. den. 377 U.S. 953, Goldberg was convicted under 26 U.S.C.

7201 of evading both personal and corporate income tax on the

same money. On appeal, Goldberg contended the money was

either income to him or to the corporation, but not both. The

Court of Appeals held that individual liability was not

repugnant to corporate liability because the government

demonstrated that income was received by the corporation

before it was received by Goldberg. That demonstration effec-

tively destroyed Goldberg’s contention. Although Goldberg was

not a net worth prosecution, the distinctions relied on by the

Court to rebut the appellant Goldberg’s contentions illustrate

the parameters of proof required to convict for evasion of both

corporate and personal taxes.

As precedent, the Second Circuit’s decision herein sub-

stantially affects tax evasion prosecutions in general. The clear

implication of the decision below is that a taxpayer can be

convicted of evading corporate and personal income taxes on the

same money without showing that the corporation ever had that

money as income and without showing that the taxpayer ever

received it from the corporation. In reaching its decision, the

Second Circuit sidestepped the fact that net worth does not refer

to an increase in assets alone (Holland, supra 348 U.S. at 136) but

rather is a technique for reconstructing income (Merrit v U.S.,

327 F2d 820, 821 [5th Cir. 1964]. It also overlooked the par-

ticularly significant interlocking nature of the corporate and

personal incomes alleged herein which necessitated that the

Government reconstruct corporate income to show that the

corporation was not just a “likely” source but was the specific

source of reconstructed personal income.

10

It is against such a backdrop that this court is asked to review

the Second Circuit’s decision upholding the net worth

prosecution and subsequent convictions of petitioner herein.

IL.

Can the Government discharge its duty to see that justice is

done where it could have but failed to investigate the in-

ferences it asks the jury to craw from circumstantial

evidence?

This Court, in its review of the net worth method in Holland,

took elaborate precautions to recite the grave dangers inherent

in circumstantial evidence as used in net worth prosecutions.

The Court pointed out speci ‘cally that the Government’s duty is

not to seek a conviction but rather to see that justice is done.

Holland v. U.S., supra, 348 U.S. at 135. This duty on the part of

the Government to act in good faith to seek justice rather than

conviction is a central characteristic of the American Legal

system (for example, Brady v. Maryland, 373 US 83 (1963)).

As illustrative of the obligations which fall within this duty,

the Holland court charged the Government with the respon-

sibility of pursuing all relevant and reasonable leads put forth

by the taxpayer in explanation of the increase in assets alleged

to represent unreported taxable income. Holland, supra, 348 U.S.

at 135. Petitioner contends that the Government's duty to seek

justice requires as well that the Government act in good faith to

check the validity of the inferences which it asks the jury to

draw from the circumstantial evidence which it presents to

them.

In the instant matter, the Court of Appeals held that “{t}he

circumstantial nature of the proof relief upon in a net worth tax

evasion case led the Supreme Court to indicate that the suf-

ficiency of the evidence to support a conviction should be

measured in light of the thoroughness of the Government's

investigation of all relevant circumstances.” (Part III of af-

firming decision, P. A-10). Yet in Part IV (p. A-12) of that

=———S

ll

decision, the Court held that defense cross-examination of the

Government’s witnesses with respect to the gross profit per-

centage of Costanzo’s Bread, Inc. went beyond the scope of direct

examination and was within the trial court’s discretion to ex-

clude. The trial court, in foreclosing that cross-examination,

stated:

“We are not here to test the efficiency of the operation”

(Record on Appeal, 91).

The lower Courts ignored the fact so aptly expressed in U.S. v.

Moody, 339 F2d 161, 162 (6th Cir: 1964) that matters of this sort

are not “net worth cases,” but rather are tax evasion cases.

Because of the extremely perilous nature of the type of proof, the

Government has an affirmative obligation to reconstruct income

with thoroughness. The Handbook for Special Agents (Internal

Revenue Manual, Chapter 9900, as of January 29, 1975)

recognizes that: “The [gross profit] percentage method is very

useful for test checking; for corroborating the results obtained by

some other means of proof such as . . . net worth.” (§327.11). The

Handbook continues: “. . . the percentage method may be a useful

method of determining or verifying income, especially when the

books and records are inadequate. . . .” (§327.13(1)).

Such substantiation to corroborate the inferences generated by

the net worth method is not too much to ask of the Government

when the perils are so great to the innocent, the information to

do so is reasonably available to the Government and the

Government will ask the jury to draw those inferences to reach a

guilty verdict.

In the instant matter, the Government presented to the jury

corporate and personal figures in the hundreds of thousands of

dollars without test-checking the implication — without test-

checking the very conclusion the jury was asked to reach — that

during the indictment years the corporation could have had the

excess unreported income to fund the acquisitions alleged. This

falls short of the Government’s obligation to use net worth

methodology with extreme caution and great thoroughness.

12

A common feeling for human psychology suggests that merely

presenting evidence of the corporation’s financial size will have a

“smoking pistol” effect upon the jury. What else could the jury

think but that the corporation was the source of the money?

“There is great danger that the jury may assume that

once the Government has established the figures in net

worth computations, the crime of tax evasion

automatically follows.” Holland, supra, 348 U.S. at 131.

This danger that figures alone will carry the day looms like the

white bear of Lakside; “bare figures have a way of acquiring an

existence of their own” which, to borrow a phrase, may dominate

a jury “like telling them not to think of a white bear.” Holland,

supra, 348 U.S. at 128, and Lakside v. U.S., 98 S. Ct. 1091, 1098

(1978: dissent), respectively.

Under such conditions, to lead the jury towards reaching a

conclusion without attempting to verify the conclusion to which

it is being led cannot constitute a good faith discharge of the

duty to seek justice rather than a conviction.

As well, then, defense counsel’s inquiry as to the

“thoroughness” with which the Government ostensibly

discharged its duty to reconstruct income should not be narrowly

construed as solely an effort to test the efficiency of Costanzo’s

Bread, Inc. Neither should counsel have been precluded from

inquiry into the corroborative effect which the percentage

calculations could have been expected to show (or not show) had

the Government fulfilled its duty to reconstruct all the in-

formation relevant to income.

In passing, the paradox should be noted that when the

Petitioner claimed the existence of a safety deposit box of cash,

the Government “test checked” that box by stuffing it full of

federal reserve notes. Yet, they did not “test check” the web of

circumstantial figures which they attributed to corporate earn-

ings.

13

Petitioner contends that to have been denied the right to

pursue this meaningful cross-examination was highly prejudicial

and deprived him of due process fairness and significant Six

Amendment cross examination rights, especially under cir-

cumstances when he stood accused of evading both corporate and

personal income taxes.

Another example of the deadly impact of uninvestigated

inference occurred at trial when the Government introduced

evidence that at 9:00 a.m. of the day when IRS agents had

scheduled a 10:15 a.m. appointment with petitioner to inventory

the contents of his safe deposit box, Mr. Costanzo entered that

box. (trial transcript, pp. 1595-1600). Although the [RS in-

vestigation actively continued for more than a year thereafter

and although IRS agents knew Mr. Costanzo used that box most

frequently (some 327 times from 1967-1971), no attempt was ever

made to ask Mr. Costanzo why he had gone to that safe deposit

box at that particular time. The Government had every op-

portunity to ask him and did indeed interview him after that

date, yet it was never mentioned to him. But the circumstance

that he did go was presented to the jury in support of the Govern-

ment’s case without ever having given Mr. Costanzo a chance to

explain what may have been a totally innocuous regular-course-

of-business incident. For him to have explained at trial would

have necessitated sacrifice of his fifth amendment rights and

open exposure to crossexamination in general. Yet without

explanation, the inference is crippling. Petitioner maintains

that the same duty (to seek justice rather than a conviction)

which imposes the obligation to investigate taxpayer leads also

imposes an obligation on the Government not to lead the jury to

inferences which are founded upon incomplete or haphazard

investigation.

The petitioner would also ask the Court to consider the ad-

monition in Holland, supra, 348 U.S. at 136; that:

14

“Increases in net worth standing alone, cannot be

assumed to be attributable to currently taxable income.”

This admonition suggests that, in addition to the dangers

inherent in the net worth method’s use of circumstantial

evidence, there is an equally grave danger that if the cir-

cumstantial evidence presented is less than wholly complete, the

referent for the tax evaded may not be income but rather an

increase in net worth per se. That is, the tax referent may be an

increase in assets. Such an asset tax is expressly forbidden by the

proscription against direct taxes in the Constitution, Article I,

Section 9, Clause 4 (see also Simmons v. U.S., 308 F.2d 160 (CA

MD. 1962); Kohl v. U.S, 266 F.2d 381 (CA. Wise. 1955);

Richardson v. U.S., 294 F.2d 593 (CA Mich. 1961) cert. den. 82 S.

Ct., 640, 369 U.S. 802, 7 L ed. 2 549.

The presence of this danger becomes all the more real when

one recognizes that the principal assumption of the net worth

method is that which equates “increases in net worth with

unreported taxable income” (Holland v. U.S., supra, 348 U.S. at

131.)

The very real constitutional danger is that the taxpayer may

be convicted of tax evasion solely on the strength of an

assumption which equates assets and income, an assumption

which, standing alone, this Court has held to be inadequate

(Holland, supra, 348 U.S. at 136.)

The peril to the innocent inherent in a net worth method of

circumstantial proof and the danger of direct constitutiona.

conflict if that method of proof is even slightly faulty, combine to

require that the Government be held to the highest standards in

review of net worth cases.

15

CONCLUSION

For all these reasons, the Court should grant this petition for

certiorari.

Sept., 1978

Respectfully submitted,

JOHN W. CONDON, JR., ESQ.

Attorney for Petitioner

300 Statler Office Building

Buffalo, New York 14202

(716) 856-2183

Condon & Sedita, P.C.

of Counsel

A-1

APPENDIX A

OPINION OF THE UNITED STATES

COURT OF APPEALS FOR THE

SECOND CIRCUIT

UNITED STATES COURT OF APPEALS

For the Second Circuit

No. 838—September Term, 1977.

(Argued May 5, 1978 Decided July 11, 1978.)

Docket No. 78-1043

United States of America,

Appellee,

—against—

Angelo Costanzo,

Defendant-Appellant.

Before:

Moore, Oakes and Gurfein,

Circuit Judges.

Appeal from a judgment of conviction for income tax evasion

entered after a jury trial in the United States District Court for

the Western District of New York, Hon. J. T. Curtin, J. The

Court of Appeals held that the taxpayer’s opening net worth was

established with sufficient certainty, that proof of a likely source

of unreported taxable income was unnecessary because the

Government negated all possible sources of nontaxable income,

and that the taxpayer’s admissions relevant to the existence of a

A-2

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

cash hoard and purchases of stock for his sons were corroborated

by the Government's other evidence.

Affirmed.

JOHN W. CONDON, JR., Buffalo, N.Y. (Condon

& Sedita, P.C., Buffalo, N.Y., of counsel,

Louis A. Haremski, Buffalo, N.Y., on the

brief), for Defendant-A ppellant.

WILLIAM M. SKRETNY, First Assistant United

States Attorney, Western District of New

York (Richard J. Arcara, United States

Attorney, Western District of New York,

of counsel), for Appellee.

GURFEIN, Cirewit Judge:

This is an appeal by Angelo Costanzo from a conviction for

income tax evasion. Appellant and his wife were named as

defendants in an eight-count indictment covering the years 1968

through 1971. Counts I through IV charged them with evasion of

their joint personal income taxes in the amount of $106,679.93,

and Counts V through VIII charged them with the evasion of the

corporate income taxes, in the amount of $114,621.11, of

Costanzo’s Bread, Inc., a corporation owned by the taxpayers.

Appellant was engaged in a bakery business in corporate form,

employing forty persons. It sold at wholesale and at retail and

included a baked goods counter and a snack bar. The jury

acquitted Mrs. Costanzo and returned a verdict of guilty on all

counts against appellant.’ We are asked to reverse the judgment

1The district court sentenced the taxpayer to imprisonment for one year and

one day on each of Counts I though IV, the sentences to run concurrently; the

district court imposed a fine of $10,000 on each of Counts V through VIII, for

a total fine of $40,000.

~~ oe ee.

ee

A-3

Appendix A — Opinion of the United States

Court of Appeals for the Second Cirewit

of conviction and to dismiss the indictment for insufficiency of

evidence or to remand for a new trial because of alleged

evidentiary errors. We affirm.

We view the evidence in a light most favorable to the

Government. United States v. Brawer, 482 F.2d 117, 125 (2d Cir.

1973), cert. denied, 419 U.S. 1051 (1974). The Government, em-

ploying the “net worth” method of proof, proved the taxpayer's

unreported taxable income by showing that the increase in his

net worth in the period from 1968 to 1971, plus his nondeductible

expenses for those years, exceeded his reported taxable income

and his nontaxable receipts. This familiar method of proving tax

evasion has been approved by the Supreme Court. Holland v.

United States, 348 U.S. 121 (1954). But in approving the use of

the net worth method, the Court also recognized its potential for

mistake and abuse. Holland, supra, 348 US. at 124-129. Ap

pellate courts have been specifically instructed to “review the

cases, bearing constantly in mind the difficulties that arise when

circumstantial evidence as to guilt is the chief weapon of a

method that is itself only an approximation.” Holland, supra,

348 U.S. at 129. We have accordingly reviewed the record. The

taxpayer's principal points on this appeal raise questions about

the Government’s compliance with the requirements of the net

worth method of proof. Though the charge to the jury in such

cases is complex, no attack is made upon Judge Curtin’s charge.

a

I

Proof of the Taxpayer's Opening Net Worth

The taxpayer argues that the Government failed adequately to

establish his net worth as of December 31, 1967, the opening date

of the period. The Supreme Court emphasized the importance of

proof of opening net worth in Holland, supra, 348 U.S. at 132.

A-4

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

“[AJn essential condition in cases of this type is the

establishment, with reasonable certainty, of an opening

net worth, to serve as a starting point from which to

calculate further increases in the taxpayer’s assets. The

importance of accuracy in this figure is immediately

apparent, as the correctness of the result depends entirely

upon the inclusion in this sum of all assets on hand at the

outset.” '

The details of the Government's thorough and careful net worth

investigation were related to the jury by the Government's

witnesses. The Government established an opening net worth of

$450,321.13 as of December 31, 1967. There is no merit in the

taxpayer’s argument that this opening net worth figure was

fatally flawed by a failure to take into account a cache of cash in

his or in his wife’s safety deposit boxes. While such a defense to a

net worth tax evasion case can sometimes destroy the Govern-

ment’s case, see, e.g., United States v. Bethea, 537 F.2d 1187,

1189-91 (4th Cir. 1976), the evidence in this case was more than

sufficient to negate the existence of such a cash hoard.

The Government examined appellant’s income tax returns for

the years 1940-1959; the returns showed minimai assets and

income insufficient to allow accumulation of a significant cash

hoard. See Holland, supra, 348 U.S. at 133-34. In addition, the

relevant tax returns beginning with 1960, including the tax

returns of Costanzo’s Bread, Inc., beginning in 1962, were

examined. The Government agents computed the appellant’s net

worth increase for each year from 1960-1971, including a cash

assets assumption highly favorable to the taxpayer.’ In the

period from 1960 to 197i, appellant expended or accumulated

2The taxpayer claimed, during the investigation, that as of 1960 he had kept

cash in his safety deposit box, in denominations of bills no higher than $20.

The investigators determined that a box the size of the one rented by the

taxpayer would hold 2,450 bills when filled to capacity with new bills, and

credited the taxpayer with $19,000 in cash as of 1960, the beginning date of

the net worth calculation.

a

A-5

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

$665,047.13 more than his reported income. Other evidence

inconsistent with the cash hoard claim showed that Mrs.

Costanzo earned only $3100 as secretary of the corporation

beginning in 1962; that the taxpayer and his wife received no

large inheritances or gifts; and that the taxpayer made eight

borrowings from 1960, and also borrowed on his insurance policy

and had a chattel mortgage on the trade fixtures placed in his

business in 1960. In addition, the evidence showed that an in-

ventory of Mrs. Costanzo’s safety deposit box during the in-

vestigation revealed contents of $37; no records exist of the

contents of the box, or of the taxpayer’s deposit box, at earlier

times. Although Mrs. Costanzo testified that shortly after 1940

she saw a sizeable cash hoard in a tool box belonging to the

taxpayer, the evidence showed that the taxpayer and his wife

had had eleven savings accounts and two checking accounts.

The foregoing circumstantial evidence inconsistent with the

existence of a cash hoard corroborated the taxpayer's admissions

proved by the prosecution. Appellant had stated to investigators

that he was “out of cash” as of December 31, 1967, and that he

gave his wife only housekeeping money, an admission which

negated the possibility that she could have accumulated any

substantial amount of money. In view of these admissions, and

the Government’s corroborating evidence, we think that the

evidence was adequate to establish the taxpayer's opening net

worth with sufficient certainty.

Appellant contends, at least inferentially, that some of the

expenditures made during the taxable period could have derived

from the earnings of the bakery business in years preceding

1967. The agents proved the amounts of income reported in the

1960-67 period and properly credited the taxpayer with such

amounts. It is true that some of the cash expended after 1967

could have been derived from earlier tax evasion rather than

from current income. But it is obvious that this is simply a

variation of the “favorite” defense of a cash hoard in existence at

A-6

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

the beginning of the period covered by the indictment. Holland,

supra, 348 U.S. at 127. Proof of such cash hoard would have to be

tendered by the defendant, or at least given to the Government

as a lead for investigation, for it would otherwise be beyond the

reach of the Government, Rossi v. United States, 289 U.S. 89

(1933). See United States v. Kiamie, 258 F.2d 924 (2d Cir.), cert.

denied, 358 U.S. 908 (1958). Once the Government had presented

its evidence negating the existence of a cash hoard, supra, “the

defendant remain|ed] quiet at his peril.” Holland, supra, 348 US.

at 139. Ifan earlier tax evasion is the defense, it is the defendant

who must prove it; otherwise the court and the jury may

presume that the defendant acted in accordance with the law in

his earlier dealings with the Government.

In fact, the appellant tried to introduce the reports of the

revenue agents who audited Costanzo’s Bread, Inc. in 1963 and

1969, with findings that only small changes from the income tax

returns were required. if the reports, tendered by the defendant

as a true reflection of his affairs, had been allowed into evidence,

the 1963 report would have tended to show that the expenditures

in the taxable period proved by the Government did not have as

their source unreported income during the period preceding the

taxable period.

Appellant argues, nevertheless, that it was error to exclude the

agent's reports. Such reports generally have an internal verity

which keeps them from necessarily being objectionable hearsay.

Fed. R. Evid. 803(8) (C).° Though the reports were not hearsay,

3Fed. R. Evid. 803(8) (C) provides:

“The following are not excluded by the hearsay rule, even though the

declarant is available as a witness:

“(8) Public records and reports. Records, reports, statements, or data

compilations in any form, of public offices or agencies, setting forth

...(C) in civil actions and proceedings and against the Government in

criminal cases, factual findings resulting from an investigation made

pursuant to authority granted by law, unless the sources of in-

formation or other circumstances indicate lack of trustworthiness.”

a

2 ct a

ee mitesesenetene

A-7

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

| however, they were not relevant to the issues in this tax evasion

prosecution. The reports show only a correspondence between

the corporation’s records and the returns that it filed, while the

Government's case turned on convincing the jury that the

corporation’s records did not reflect the true receipts of the

business. There was no error in this exclusion of irrelevant

evidence. In any event, the substance of the reports was elicited

upon cross-examination of the agents, and the reports them-

selves were cumulative evidence which the trial judge could

exclude in his discretion.

Il

Proof of a Likely Source of Unreported Taxable Income.

In Holland, supra, the Supreme Court indicated that in ad-

dition to proving an increase in the taxpayer’s net worth, the

Government was required in that case to prove a likely source of

unreported taxable income. 348 U.S. at 137-38. But the Govern-

ment is not required to prove a likely source of unreported

taxable income in every net worth case; rather, it may either

prove a likely source of taxable income or negate any possible

source of nontaxable income.

“In Holland we held that proof of a likely source was

‘sufficient’ to convict in a net worth case where the

Government did not negative all the possible nontaxable

sources of the alleged net worth increase. This was not

intended to imply that proof of a likely source was

necessary in every case. On the contrary, should all

possible sources of nontaxable income be negatived, there

would be no necessity for proof of a likely source.”

United States v. Massei, 355 U.S. 595, 595 (1958) (per cwriam).

The taxpayer in the present case claimed that the increase in

his net worth was only appdrent, and in fact resulted from the

investment of a pre-existing cash hoard. But the evidence offered

AS

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

by the Government was sufficient to negate the existence of such

a hoard, as we have already noted, supra. The Government also

introduced evidence to negate the receipt of gifts or inheritances

by the taxpayer or his wife during the period covered by the

indictment. The Government’s proof thus went beyond the single

source of nontaxable income (the cash hoard) suggested by the

taxpayer, and was more than sufficient to negate the receipt of

nontaxable income by the taxpayer. See United States v. Bianco,

534 F.2d 501, 506 (2d Cir.), cert. denied, 429 U.S. 822 (1976);

Gatling v. Commissioner, 286 F.2d 139, 144 (4th Cir. 1961).

Having negated all possible sources of nontaxable income, the

Government was not required to prove a likely source of taxable

income. Massei, supra; United States v. Schipani, 414 F.2d 1262,

1264-65, 1267 (2d Cir. 1969), cert. denied, 397 U.S. 922 (1970). See

also United States v. Ford, 237 F.2d 57, 63 (2d Cir. 1956); United

States v. Mitchell, 413 F.2d 181 (7th Cir. 1969). As the Ninth

Circuit noted in Whitfield v. United States, 383 F.2d 142, 144

(1967):

“If ... the prosecution was compelled to relate all the

unreported income precisely to the motel operation, then

employment of the ‘net worth’ method of proof would

have been unnecessary.”

The Government, in any event, offered extensive proof that the

taxpayer's business was a likely source of unreported taxable

income. The evidence showed that Costanzo’s Bread, Inc., was a

successful business with many sizeable accounts, and was large

enough to generate substantial amounts of unreported cash

receipts. The corporation reported nearly half a million dollars

in gross sales in each of the four years in question. The evidence

also showed that large amounts of cash were received, that cash

receipts were recorded by the taxpayer or his wife, and that the

receipts and cash register tapes from which the records were

prepared were subsequently destroyed. The taxpayer himself

got een tne,

A-9

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

made all of the deposits to the corporate bank account. We see no

merit in the taxpayer’s argument that the Government failed to

prove that the business was a likely source because it did not

prove either the physical production capacity of the bakery or

the gross profit percentage of similar businesses in upstate New

York.‘ The mistaken assumption underlying this argument is

that the Government must show that the bakery was capable of

generating the entire amount of the unreported income alleged

in the indictment. As we have noted, such proof is unnecessary

in this net worth case. The Government’s evidence showed, in

any event, that the bakery was a likely source of at least a

substantial portion of the unreported income charged in the

indictment.’

4Gross profit percentage is the ratio of gross profits to gross receipts. Given

the cost of materials purchased by Costanzo’s Bread and the gross profit

percentage for bakeries of like size and activity in the region, one con-

ceivably could calculate the gross profit that could be generated by the use of

the materials purchased by Costanzo’s Bread, although the cost of materials

in a bakery business might have very little relationship to the profit ratio.

The defense offered no proof of either the prevailing gross profit percentage

in the bakery business in the region or the physical production capacity of

the bakery. There was also affirmative evidence of the receipt of cash as well

as the payment of expenses in cash.

5It would have been necessary to underreport the gross receipts of Costanzo’'s

Bread by only 8 to 18 percent for the four years in question to generate the

entire amount of unreported income charged in the indictment.

A-10

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

Ill

The Government’s Investigation.

The circumstantial nature of the proof relied upon in a net

worth tax evasion case led the Supreme Court to indicate that

the sufficiency of the evidence to support a conviction should be

measured in light of the thoroughness of the Government's

investigation of all relevant circumstances.’ The thoroughness of

the Government's investigation of the cash hoard claim has

already been reviewed in connection with the opening net worth

calculation, supra. The Government’s investigation covered

every circumstance that might have shed light on the creation or

existence of a cash hoard, and the evidence of this investigation

was sufficient to negate the claim of a cash hoard on hand as of

December 31, 1967, sufficient in amount to accoynt for the

expenditures.

The Government's investigation of the purchases of stock in

the names of the taxpayer’s sons was also sufficient to meet the

standards laid down in Holland. Some of the stock purchases

6 “It is, of course, not for us to prescribe investigative procedures, but

it is within the province of the courts to pass upon the sufficiency of

the evidence to convict. When the Government rests its case solely on

the approximations and circumstantial inferences of a net worth

computation, the cogency of its proof depends upon its effective

negation of reasonable explanations by the taxpayer inconsistent

with guilt. Such refutation might fail when the Government does not

track down relevant leads furnished by the taxpayer — leads

reasonably susceptible of being checked, which, if true, would

establish the taxpayer’s innocence. When the Government fails to

show an investigation into the validity of such leads, the trial judge

may consider them as true and the Government's case insufficient to

go to the jury.”

Holland, supra, 348 U.S. at 135-36 (footnote omitted).

ee

en

A-11

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

relied upon by the Government to show the increase in the

taxpayer’s net worth were made in the names of the taxpayer's

sons. The taxpayer admitted to the agents that he had paid for

the stock purchases in his sons’ accounts. The Government’s

investigation corroborated this admission by producing evidence

from the taxpayer’s broker that the taxpayer placed buy orders

for his sons’ accounts as well as statements by the taxpayers’

sons that he had indeed paid for the stock purchased in their

names. The Government’s proof also showed that Angelo

Costanzo, Jr., had an average reported gross annual income of

$11,670 in 1965-1971, and that Richard Costanzo, the other son,

had an average reported gross annual income of $8,045 in 1965-

1971. The purchases in their names amounted to $313,070 for

those years. Finally, the Government was able in many instances

to show that purchases for the sons’ accounts had been paid for

by checks from the taxpayer. The evidence produced by this

thorough investigation was sufficient to corroborate the ap-

pellant’s admission that he had bought all of the stock in his

sons’ names.’

7The defendant claimed that $250 that he received during the relevant period

was the repayment of a loan that he had made earlier to Jerome Walters,

and that the Government's investigation of the loan transaction was

inadequate. The Government failed to locate Walters, or to ask the defen-

dant’s aid in finding him. But the Government's failu:e to locate Walters or

to seek the defendant's help in doing so was brought out fully on cross-

examination. Further, the availability to the taxpayer of $250 from a

nontaxable source is inconsequential in view of the size of the unexplained

increase in net worth proved by the Government. In this criminal

prosecution, the Government was required to show only that the taxpayer

had willfully evaded payment of taxes and not the exact amount of the

income that went unreported or the taxes that went unpaid. See United

States v. Parr, 509 F.2d 1381, 1385-86 (5th Cir. 1975).

A-12

Appendix A — Opinion of the United States

Court of Appeals for the Second Circuit

IV.

Evidentiary Rulings atTrial.

The taxpayer argues that the trial court committed prejudicial

error in its rulings on certain evidentiary questions. He urges,

first, that it was error to allow a Government witness to testify

about the statements by the taxpayer's sons that their stock had

been purchased by the taxpayer. These statements were made in

the taxpayer's presence, and he concurred in them at the time.

Since the statements were offered against the taxpayer, they

were admissible under Fed. R. Evid. 801(dX2XB). Further, since

the taxpayer’s own unequivocal admission that he had purchased

the stock in his sons’ names was properly received into evidence,

and sufficiently corroborated, the admission of the sons’s

statements cannot have been prejudicial.

In crossexamining the Government’s witnesses defense

counsel was allowed to establish that the Government had not

used the gross profit percentage calculation during its in-

vestigation, and that it had not determined the physical

production capacity of the bakery. Additional cross-examination

on these two points was not allowed by the trial court, but this

line of inquiry went beyond the subjects of the direct

examination and was within the court’s discretion to exclude.

Fed. R. Evid. 611(b). Further, neither cross-examination nor

direct evidence on these two points could have aided the tax-

payer. Given the Government's proof of unreported income and

its negation of all possible sources of nontaxable income, proof of

a likely source of taxable income was not necessary, as we have

seen. Appellant made no offer to prove through his own wit-

nesses the lack of capacity of the bakery to generate income

beyond that reported.

Affirmed.

Oe eS ae ey ere en

_— 5) a.

Bl

APPENDIX B

FOURTEENTH AMENDMENT

AMENDMENT XIV. — CITIZENSHIP; PRIVILEGES AND

IMMUNITIES; DUE PROCESS; EQUAL PROTECTION;

APPORTIONMENT OF REPRESENTATION;

DISQUALIFICATION OF OFFICERS; PUBLIC DEBT;

ENFORCEMENT.

Section 1. All persons born or naturalized in the United

States, and subject to the jurisdiction thereof, are citizens of the

United States and of the State wherein they reside. No State

shall make or enforce any law which shall abridge the privileges

or immunities of citizens of the United States; nor shall any

State deprive any person of life, liberty, or property, without due

process of law; nor deny to any person within its jurisdiction the

equal protection of the laws.

Section 2. Representatives shall be apportioned among the

several States according to their respective numbers, counting

the whole number of persons in each State, excluding Indians not

taxed. But when the right to vote at any election for the choice of

electors for President and Vice President of the United States,

Representatives in Congress, the Executive and Judicial officers

of a State, or the members of the Legislature thereof, is denied to

any of the male inhabitants of such State, being twenty-one

years of age, and citizens of the United States, or in any way

abridged, except for participation in rebellion, or other crime,

the basis of representation therein shall be reduced in the

proportion which the number of such male citizens shall bear to

the whole number of male citizens twenty-one years of age in

such State.

Section 3. Ne person shall be a Senator or Representative in

Congress, or elector of President and Vice President, or hold any

office, civil or military, under the United States, or under any

B-2

Appendix B — Fourteenth Amendment

State, who, having previously taken an oath, as a member of

Congress, or as an officer of the United States, or as a member of

any State legislature, or as an executive or judicial officer of any

State, to support the Constitution of the United States, shall

have engaged in insurrection or rebellion against the same, or

given aid or comfort to the enemies thereof. But Congress may by

a vote of two-thirds of each House, remove such disability.

Section 4. The validity of the public debt of fhe United States,

authorized by law, including debts incurred for payments of

pensions and bounties for services in suppressing insurrection or

rebellion, shall not be questioned. But neither the United States

nor any State shall assume or pay any debt or obligation in-

curred in aid of insurrection or rebellion against the United

States, or any claim for the loss or emancipation of any slave;

but all such debts, obligations and claims shall be held illegal and

void.

Section 5. The Congress shall have power to enforce, by ap-

propriate legislation, the provisions of this article.