Petition — Rosato v. United States

r Supreme 0

I FILED

" DEC 12 1978

he

In THB MICWAEL peDak, JR., CLERK

Supreme Court of the United States

eee 78-938

OCTOBER TERM 1978

ALEXANDER ROSATO,

Petitioner,

~against-

UNITED STATES OF AMERICA,

Respondent.

—_—_-

a

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

MURRAY APPLEMAN

Attorney for Petitioner

A Member of the Bar of the

United States Supreme Court

225 Broadway

New York, N.Y. 10007

(212) 349-6966

DICK BAILEY PRINTERS, 290 RICHMOND AVE., S.1., N.Y. 10302

TELEPHONE: (212) 447-5358

TABLE OF CONTENTS

Page

The Opinion of the Court Below.................... 2

in in SSE ERT Fp AO ao 2

os ine eihis's wie bone bb's OS a bbe We 6 2

The Principal Constitution and Statutory

Provisions Involved .... 2... 2... cece eee PATS Re 3

NE ne ids news bubacdaneevaws 4

Reasons for Granting the Writ:

A. Motion for Directed Verdict of Acquittal

Pursuant to Rule 29 Should Have Been Granted ....... 6

B. Courts Ruling Barring Examination of Present

Internal Revenue Service Positions Effect on the

Year 1972 Deprived Defendant of a Fair Trial

ee a ew ee wee ne 13

C. Prosecutor’s Summation Deprived The

SRNR C00 DE BENE i p-n0'v bcc cetinccpecenees 17

D. Agent’s Pervasive Testimony Rendered It Useless

And Court Should Have Ordered Testimony Stricken

So As To Avoid Confusion And Prejudice........... 19

"NES ig tea 8s 6 DE DORE Se eee 19

Appendix A—Order and Judgment of United States

Court of Appeals for the Second Circuit ............ 2a

Appendix B—Orders Denying Petition for Rehearing

and Petition for Rehearing In Banc................. 3a

i

CASES CITED

Page

SIO, Sa Rn Mk b's OCR ae WEA ie cade be 8

C.B. Brown v. Commissioner, 37 T.C. 461 aff’d on

Se SUN Pe Wi PU es oka bis cade Snide cecdcccss 7

ORT Ve Sica, Se Eh Sin. vcs ink 0.8 oecw a eR caeeen 16

Central Illinois Public Service C. v. U.S., (Feb. 28,

Fy Se Rea > UE Ske Fes Chee Cekdndoaenesa 11

Chertkoff v. Commissioner, 66 T.C. No. 50......... 15

Citizens National Bank of Waco vy. U.S., (1977) 551

FOE Sk d bao nnkck Sea wOOC CAE Re Re odes 9

J.S. Collinan v. Commissioner, (1930) 19 B.T.A.

SEE Pe aad tis CAD Sas Lo AP oe eR cen 8

Darby Investment Corp. v. Commissioner, 315 F2d

SPR UE BE, Blane Mg cA aed hei eet s eee eh aces ee 10

Deputy v. DuPont, (1940) 308 U.S. 488 .............. 7

Elliott Paint & Varnish Co. v. Commissioner, (1941)

GR Eee brs balls adcn beac o eth thon keke h whiene 9

Ford v. U.S., (Sth Cir. 1954) 210 F2d 313, 317, 318

cert. Gem. SA2 UB. SSO CII oss occ win tedaacate 18

Gregory v. Helvering, 308 U.S. 355 (1939) ............ 8

James v. U.S., (1961) 366 U.S. 213 .......... cee eee 10

Kahr v. Commissioner, (2d Cir. 1969) 414 F2d 621 .... 11

Lifton v. Commissioner, (1961) 36 T.C. 909 aff'd

BET Pe Me ras Ob Ga e OGS pes Sask wees bes ccs pes 9

National Equipment Rental, Ltd. v. Hendrix, (CA-2,

ERs DEER ob oswis crdpeedothuardacessee 8

Phillip v. Frank (CA-9 1961) 295 F2d 629 rev’d 185 F.

DUP a viv chloe ers eee aay cin d'nd Ka440 Rhian soe 9

Porter v. Commissioner, (1933) 288 U.S. 436, 442... 9,10

Sims v. Rives, (1936) 84 F2d 871 cert. den. 298

RP SE RCA eR ae eel eee eck Secosek > OUeecbiepeess 3

Taylor v. Commissioner, 27 T.C. 361 ........... ewhbe 7

Tharp v. Commissioner, T.C.M. 72-10 ..........006: 8

TOO V. O.5., BFS Woe GOO CITE) oc ccc cnc ccercscccees 6

U.S. v. Calles, (CA-5, 1973) 482 F2d 1155............ 6

U.S. v. Celentano, (S.D.N.Y. 1975) 391 F. Supp. 1252 19

U.S. v. Critzer, (CA-4, 1974) 498 F2d 1160........... 6

U.S. v. Drescher, 179 F2d 863 cert. den. 340 U.S. 321 . 16

U.S. v. Martell, 199 F2d 670 cert. den. 345 U.S.917.... 6

U.S. v. Meriam, (1923) 263 U.S. 179, 188 ............ 9

U.S. v. Schipani, 289 F. Supp. 43, 57 (E.D.N.Y. 1968)

aff'd 414 F2d 1262 (2nd Cir. 1969) ................. 13

iv

U.S. v. U.S. Gypsum Co., Sup. CT No. 76-1560

(June 2D, ISTO 06s <adduti sbiiancveteaeeeee 12

A.C. Willingham v, U.S., (CA-5, 1961) 289 F2d 283 .. 16

Willhoit v. U.S. Gypsum Co., Sup. CT No. 76-1560

(Jume 29, IFTS si isin cai ve ckes bdecuweeaeeee 12

Yagoda v. Commissioner, 331 F2d +82 (CA-2, 1964)... 15

OTHER AUTHORITIES

Revenue Ruling 68-35 CB 68-1, 190 ............... 7,9

Revenue Ruling 72-458 CB 72-2, 514.............. 7,9

File 26 U.S. Gee eck oe lidtestienn eee 3

Title 26 U.S.C. SIMON. os ccs3 cceoevisepmanneeee 3

OCTOBER TERM 1978

ALEXANDER ROSATO,

Petitioner,

~against-

UNITED STATES OF AMERICA,

Respondent.

PETITIYON FOR A WRIT OF CERTIORARI TO THE

SECOND CIRCUIT:

<2.

1970 and 1971 Federal income tax returns Rosato know-

ingly made a false statement with respect to a material

matter by understating his income by a substantial amount

(Title 26 U.S.C. 7206(1)).

Rosato was found guilty on counts three and four

pertaining to the year 1971 and acquitted on counts one

and two. As a consequence, petitioner was sentenced to

two years probation, plus a $5,000 fine. The United States

Court of Appeals for the Second Circuit refused a petition

for rehearing or rehearing en banc by a decision rendered |

November 13, 1978. (Appendix B infra).

THE OPINION OF THE COURT BELOW:

The opinion of the Court below namely the United

States Court of Appeals for the Second Circuit, affirming

the judgment of conviction is set forth in Appendix A, in-

Sra, as aforesaid.

JURISDICTION

The order of the judgment of the United States Court

of Appeals for the Second Circuit, the Court below, is

dated August 17, 1978 and its refusal of a petition for

rehearing or rehearing en banc is dated November 13,

1978. The jurisdiction of this Court is invoked, made and

conferred under 28 U.S.C. 1254(1).

QUESTIONS INVOLVED

A. Motion for directed verdict of acquittal pursuant

to Rule 29, should have been granted.

B. Courts ruling barring examination of present’ In-

ternal Revenue Service positions effect on the year 1972

3

ived defendant of a fair trial (546-548).

ia Prosecutor’s summation deprived the defendant of

a fair trial. pe

D. Agcat’s pervasive testimony rendered it ess

and Court should have ordered testimony stricken so as to

avoid confusion and prejudice.

THE PRINCIPAL CONSTITUTION AND

STATUTORY PROVISIONS INVOLVED:

Fifth Amendment to the Federal Constitution, in

part:

‘No person held to answer for a capital, or other-

1 ee unless on a presentment or indict-

ment of a Grand Jury... i 3% =e

j without due process Bivvic 3

Psp Rives, 1936, 84 F2d 871 cert. den. 298 U.S. 682:

‘Constitutional guaranty that no person shall be

deprived of life, lioerty or property, without due process of

law implies equal protection of laws.’’ ;

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

tax:

‘ person who willfully attempts in any manner fo

raitn a tudes tae ten imesh to Yai tn or tek BAY

ment 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, or imprisoned not

more than § years, or both, together with the costs of pro-

secution.’’

Title 26 U.S.C. §7206. Fraud and false statements:

bscribes

(1) Any person who willfully makes and su

any ed, statement, or other document, which contains

or is verified by a written declaration that it is made under

the penalties of perjury, and which he does not believe to

be true and correct as to every material matter shall be

-4-

fined not more than $5,000, or imprisoned not more

than 3 years, or both, together with the costs of pro-

secution.”’

STATEMENT OF THE CASE

The Government’s case against Rosato for these years

rested primarily on the testimony of Edmond Graifer, an

admitted ‘‘con-man,’”’ loan shark and perjurer who

defrauded New Jersey banks of over a million dollars (29,

85, 100). He testified that on or about February 2, 1970 he

borrowed $30,000 from the defendant to expand his per-

sonal loan shark business (35). For this he paid the defen-

dant 1% interest, i.e., $300.00 a week until May 5, 1971

when he reduced the amount owed to the defendant by

paying him $5,000 (39). Subsequently, he paid the defen-

dant $250.00 a week (52). Thus in 1970 Rosato received

$14,000 and $18,800 (includes the $5,000) in 1971 from

Graifer. Graifer further testified that an additional

$50,000 in 1971 was loaned to him by Rosato without in-

terest (114, 115), of which $40,000 was estimated to be un-

paid (155). He also stated that no payments to Rosato had

been made since June 1972 (38) and that he never claimed

interest deductions for these amounts paid to Rosato

(117).

There was further testimony from one Anthony

French that he received a $10,000 loan from the defendant

sometime between September and November 1971, for

which he paid the defendant 2% interest, i.e., $200.00 a

week. French testified that he did nct care whether Rosato

applied these payments to interest or principal (231-233).

Further, that apparently he fell behind in his payments in

the fall of 1972 and after 1973 no payments were made to

Rosato. 2

s.

There was further testimony that Rosato allegedly

received a $2,500 finders fee in 1971 (50-51).

The Government in its tax computations for 1971

charged the defendant, who is on a cash basis for re-

porting income, with interest income from Graifer of

$13,800, French $2,000, added the finders fee of $2,500 to

come to a total of $18,300 which the defendant allegedly

should have reported as miscellaneous income rather than

the $11,600 reflected on the return. If it is appropriate to

deem that payments could be properly applied to principal

rather than interest, no additional income results from

these transactions in 1971.

William Davidson, an Internal Revenue Agent and

the Government’s expert witness, testified that the tax-

payer was in the business of making loans (495); that with

regard to repayments of a debt that the debtor has the first

option to treat payments as interest rather than principal

and if no election is made by the debtor the creditor has

the next option, but if no election is made, it is the

Government’s position that payments are applied to in-

terest first (499); that under the facts in this case the debtor

had no election to make since he could not claim ‘he in-

terest expense deduction on his return (536) and that

usurious interest loans or contracts are speculative (551).

Joseph Gallo, defendant’s expert witness, a CPA and

former Agent employed by the Internal Revenue Service

for 10 years, corroborated Davidson’s evaluation of these

loans as being speculative and that income derived from

these loans would result in no additional recognizable tax-

able income in the year 1971 due to the proper election by

the taxpayer in applying payments first to principal rather

than interest (596).

-6-

REASONS FOR GRANTING THE WRIT:

A. MOTION FOR DIRECTED VERDICT OF AC-

QUITTAL PURSUANT TO RULE 29 SHOULD

HAVE BEEN GRANTED.

To sustain a conviction of willfully attempting to

evade income tax liability, the Government must prove ex-

istence of a tax deficiency, willfullness and an affirmative

act constituting evasion or an attempted evasion of the

tax. U.S. v. V. Cales (CA-5, 1973) 482 F2d 1155. Thus to

convict one of attempted income tax evasion, it must be

shown that he committed some overt act or acts as part of

his attempt to evade or defeat tax. It is well settled that the

Government has the burden of proving each essential ele-

ment of the crime. Tot v. U.S., 319 U.S. 463 (1943). The

determination of criminal liability not civil liability is at

stake in the extant situation.

The Government has the burden of proving guilt

beyond a reasonable doubt with respect to every element

of the crime. Thus, with regard to the existence of a tax

deficiency in a criminal case, if the law relied on by the

Government to include an alleged omitted amount as in-

come is not absolute, the requisite intent to evade and

defeat tax must be deemed to be missing. Willfulness

means ‘‘a state of mind of taxpayer, wherein he is fully

aware of the existence of a tax obligation to the Govern-

ment which he seeks to conceal.’’ U.S. v. Martell, 199 F2d

670 cert. den. 345 U.S. 917. In U.S. v. Critzer (CA-4,

1974), 498 F2d 1160, taxpayer’s conviction was reversed

due to the fact that the law was so'vague and uncertain

with regard as to whether rental income from tax exempt

land is taxable, the requisite intent to evade and defeat

taxes was compelled to be deemed missing.

-7.

Viewing the evidence in the best light for the Govern-

ment, Rosato loaned money to Graifer, who admittedly

told the former that he was going to place the money in the

street as a loan shark and $10,000 to Anthony French, in-

volved in construction enterprises, whose business enter-

prises had gone bankrupt just prior thereto (222). French

could not acquire loans in the normal course of business.

Being conservative, the prospects of repayments were

tenuous to say the least. Neither party specifically inform-

ed the defendant that the payments were to be applied to

interest and in point of fact, French specifically stated that

he did not care how the defendant applied his payments.

Thus there was apparently no characterization by the deb-

tors as to how these payments were to be applied.

Interest is the price paid per unit of time for the use of

money or for creditor’s forbearance in demanding pay-

ment. Rev. Rul. 72-458, CB 72-2, 514; Deputy v. DuPont,

(1940), 308 U.S. 488. There must be a bona fide debt on

which the interest is paid. Taylor v. Commissioner; 27

T.C. 361.

Editorially, Commerce Clearing House, a tax

publication used by Internal Revenue Service personnel

(478) states:

‘The matter of applying payments received on a loan

toward reduction of the principal or toward interest

generally concerns only the parties involved. On the ac-

crual basis, interest accrues ratably, regardless of how pay-

ment is made. On the cash basis, however, the parties may

agree how payments are to be applied. In the absence of an

agreement, the debtor has the right to specify how the

payments are to be applied. If the debtor makes no alloca-

tion, the creditor may do so.”’

In C.B. Brown v. Commissioner, 37 T.C. 461 aff'd

on another issue 380 U.S. 563, it was stated:

-8-

‘*Taxpayer could treat the payments as applying

to principal rather than interest in the absence of any

directions by the payor as to the application of the

payments.”’

Board of Appeals defines ‘‘debt’’ as a specific sum of

money which is due and owing from one person to

another, and denotes not only the obligation of the debtor

to pay but the right of the creditor to receive and enforce

payment. J.S. Collinan v. Commissioner, 19 BTA 930,

932 (1930).

G.O.L. Section 5-511 of the State of New York pro-

vides that all usurious contracts are void. G.O.L. Section

5-513 provides for the recovery of payments made in ex-

cess of the legal rate of interest.

From the foregoing authorities it is clear that the

loans in question are void and unenforceable at all times

and that a debt was never created. See Tharp v. Commis-

sioner, TCM 72-10, National Equipment Renial, Ltd. v.

Hendrix (CA-2, Decided Nov. 11, 1977). As was stated in

Gregory v. Helvering, 308 U.S. 355 (1939), ‘‘The legal

right of a taxpayer to decrease the amount of what other-

wise would be his taxes, or altogether avoid them, by

means which the law permits cannot be doubted.’’

The Court rulings allowing taxpayers to apply

payments to principal rather than interest are irrefutable.

Moreover, if a creditor’s method of recording collections

is to apply the money collected to principal until the entire

principal was paid and then to apply further collections to

interest, no part of collections is interest until principal is

received. Blackwell, 15 TCM 962.

Thus the taxpayer entered into a transaction for pro-

fit, income from which is not recognized until costs are

recovered.

-9-

It should be noted that the fact that a party treats a

payment as interest may be relevant but is not decisive.

Elliott Paint & Varnish Co. v. Commissioner, 44 BTA 241

(1941). The Treasury says that taxpayer’s books may be

kept on a different basis than the returns. Rev. Rul. 68-35

CB 68-1, 190.

Assuming arguendo that this Court in spite of the

precedent set above, decides that repayments received by

the defendant are to be considered to be interest, then the

rationale as expressed by the Courts in Phillip v. Frank,

295 F2d 629 rev’g 185 F Supp. 349 (CA-9, 1961) and Lif-

ton v. Commissioner, 36 T.C. 909 (1961) aff?d 317 F2d

234 should be noted wherein it was related that if a

speculative venture is entered and there is no reasonable

certainty of the contributed funds being collected in full,

no payments will be considered as income until the entire

cost is recovered tax free.

Speculation for these items is an apparent understate-

ment. The defendant due to the laws of the State of New

York could not collect on either of these two void loans.

There was no marketability in existence or enforceable

personal liability.

While it appears that there is no doubt as to the mean-

ing of the above as applied to the facts of this case, should

there be any doubt it must be resolved in favor of the tax-

payer. See Porter v. Commissioner, 288 U.S. 436, 442

(1933). U.S. v. Meriam, 263 U.S. 179, 188 (1923) and

Citizens National Bank of Waco v. U.S., 551 F2d 832

(1977).

The Fourth and Ninth Circuits Courts of Appeal have

defined speculative as ‘‘if there is doubt whether the con-

tract will be completely carried out no payments are in-

come until the entire cost is first recovered tax free.’’

Commissioner v. Lifton, supra, Phillips v. Frank, supra,

Willhoit, T.C.M. 1958-207 rev’d and rem’d 308 F2d 259

-10-

which conflicts with the Sixth Circuit Court of Appeals

definition of speculative, i.e., ‘‘only if the investor can’t

reasonably expect to get back his cost is his investment

speculative enough to warrant possible deferment of in-

come.’’ See Darby Investment Corp. v. Commissioner,

315 F2d 551 aff’g 37 T.C. 839.

It is evident that due to the aforementioned uncertain-

ties of if or how the amounts received by Rosato should be

reported, that as a matter of law, the defendant cannot be

guilty of willfully evading and defeating income tax. As a

matter of law the requisite intent to evade and defeat in-

come tax is missing. The obligation to report these

payments as income is so problematical that defendant’s

actual intent is irrelevant. Even if it could be shown that he

had consulted the law and sought to guide himself accord-

ingly, he could have had no certainty as to what the law re-

quired. See Amy T. Critzer, supra.

It should- be further noted that neither of the

witnesses with regard to the alleged interest income

testified to the fact that they specifically told the defen-

dant to apply the payments to interest, nor did they claim

any deduction for the amounts repaid to Rosato.

There is sufficient doubt as to the meaning of the pro-

visions of the Internal Revenue Code involved here as ap-

plied to the facts of this case and all doubt must be resolv-

ed in favcr of the taxpayer. Porter v. Commissioner, 288

U.S. 436, 442, 53 Ct. 451, 77 L.Ed.880 (1933). It is settled

that when the law is vague or highly debatable, a defen-

dant, actually or imputedly, lacks the requisite intent to

violate it. In James v. U.S., 336 U.S. 213, 81 S.Ct. 1052, 6

L.Ed.2d 246 (1961) when the Supreme Court decided that

embezzled funds were taxable income, it nonetheless

reversed James conviction under Code Section 7201.

Former Chief Justice Warren in a three justice plurality

opinion stated:

mae

**We believe that the element of willfulness could not

be proven in a criminal prosecution for failing to include

embezzled funds in gross income in the year of misap-

propriation so long as the statute, contained the gloss plac-

oe ane Ba tone the Sime the ages cxlene wae com-

t ”

Justice Black and Douglas agreed with the decision further

stating:

**.... @ Criminal statute that is so ambiguous in

scope that an interpretation of it brings totally unexpected

results, thereby subjecting people to penalties and

punishments for conduct which they could not know was

criminal under existing law raises serious questions of un-

constitutional vagueness 366 U.S. at 224.’’

In civil fraud and criminal cases, the Courts ruled that

the uncertainty created by Wilcox as a matter of law

precluded a demonstration of willfulness, without regard

to the defendant’s actual state of mind with respect to his

knowledge or reliance on Wilcox. See Kahr v. Commis-

sioner, 414 F2d 621 (2 Cir. 1969).

Supreme Court in its recent decision with regard

to withholding tax on employee meal reimbursements,

Central Illinois Public Service Co. v. U.S. (February 28,

1978), 46 U.S.L.W. 4163, stated that prior to an employer

being liable for the civil liability for withholding tax the

obligation to withhold must be ‘‘precise and not

speculative.”

In the extant situation where the Government’s

burden of proof is much greater, the United States argues

that the payments were interest, since the weekly payments

in no way diminished the amount originally owed, a con-

clusion which must be rejected by this Court.

-12-

As was stated in U.S. v. U.S. Gypsum Co., Sup. Ct.

76-1560 (June 29, 1978) with regard to the Sherman Anti-

Trust Act, which would be equally applicable here ‘‘that

criminal process should be used only where the law is clear

and the facts reveal a flagrant offense and plain intent

.... Further ‘‘ * * * that the criminal provisions of the

act should be reserved for those circumstances where the

law was relatively clear and the conduct egregious.’’ It is

obvious that the defendant was not consciously behaving

in a way the Internal Revenue Code prohibits and his con-

duct herein is not a fitting object of criminal punishment

for violation of the Internal Revenue Code.

It appears to be particularly inappropriate for the

Government, absent exact authority that the obligation to

report these amounts received by the defendant in 1971

were precise and not conjectural, to proceed against a tax-

payer in a criminal case. The judicial decisions indicate

that it is acceptable and appropriate not to report the

amounts received as income until principal is recovered. In

order for the defendant to have notice, which is legally

meaningful, that these amounts must be reported as in-

come, explicitness, lacking here, to inform a reasonably

prudent person of the legal consequences of failure to

comply with this Internal Revenue Service interpretation

of the law must be precise. In view of the complexities of

Federal taxation, fundamental fairness should prompt the

Government to refrain from attempting to criminally pro-

secute with regard to an item that is speculative or lacks a

clear congressional mandate that it must be reported as in-

come.

The standard of ‘‘proof beyond a reasonable doubt’’

is constitutionally mandated for elements of a criminal of-

fense. Due process commands that no man shall lose his

liberty unless the Government has borne the burden of

£93:

convincing the fact finder of his guilt. It is critical that the

moral force of the common law not be diluted by a stan-

dard of proof that leaves people in doubt whether inno-

cent men are being condemned. If quantified, the beyond

a reasonable doubt might be in the range of more than 95%

probable. U.S. v. Schipani, 289 F.Supp. 43, 57 (E.D.N.Y.

1968) aff’d 414 F2d 1262 (2nd Cir. 1969).

Based on the taxpayers method of reporting payments

received, no information pertaining thereto was necessary

or required to be disclosed on the return. It is conceded

that omitted items may be material where reporting is

necessary in order that the taxpayer estimate and compute

his tax correctly. That is not the situation herein and thus

the return and evidence failed to substantiate any indicia

of falsity with regard to the information on this return.

Thus the motion for a directed verdict of acquittal pur-

suant to Rule 29 should have been granted (568).

B. COURTS RULING BARRING EXAMINATION

OF PRESENT INTERNAL REVENUE SERVICE

POSITIONS EFFECT ON THE YEAR 1972 DE-

PRIVED DEFENDANT OF A FAIR TRIAL (546-

548)

The income tax effect of Rosato’s proper method of

reporting these payments is as follows:

Return of Principal Income Loss

1970 §=61971_ ~— 1972 1971 1972

Graifer $14,400 15,600 3,200 0

French 2,000 8,000

The Government’s theory, solely due to its reforma-

tion of how it deems the aforementioned payments should

-14-

be allocated, results in the following tax effect:

Interest Principal Loss

1970 1971 1972 1971 1972

Graifer $14,400 13,800 5,000 30,000

French Ms 2,000 8,000 10,000

Moreover, the $50,000 personal loan to Graifer,

$40,000 of which was admittedly not repaid, would also

probably be qualified as an ordinary loss in 1972. See IRC

Section 165 and Herbert & Virginia Tharp v. Commission-

er, supra.

Thus, the relevancy and materiality of the tax conse-

quences in 1972 of the correlative adjustments required by

the Government’s reallocation of payments to interest and

principal in 1970 and 1971, was proper, required, material

and consequential to the determination of the action as to

tax liability. Anytime one transfers income or loss from

one year to another, the tax effect on the other year in-

volved affects the ultimate amount of tax liability.

It should be noted that the Internal Revenue Code,

i.e., Section 482, dealing with reallocation of income be-

tween related parties, requires that if a position is taken by

the Government reallocating income and expenses, that

the correlative adjustments must be made. Although this

Code section is not directly applicable here, its principle

would seem to indicate that where appropriate, as

reallocating income between years or related parties, a cor-

relative adjustment should be considered or made.

Congress, in its wisdom, fully aware that situations of

this type could deprive a taxpayer of correlative ad-

justments due to the Statute of Limitations, legislated

Code Section 1311-1316, which permits this bar to be

lifted in favor of either the taxpayer or the Treasury in a

-15-

number of special cases where an inconsistent position is

maintained. An inconsistent position is a position which is

consistent with a prior erroneous inclusion, exclusion,

omission, allowance, disallowance, recognition or

nonrecognition. Code Section 1311(b)(1). Unequivocally

the Internal Revenue Service’s present position affects

defendant’s basis for these loans and would qualify for

Code Section 1311-16 if required.

A review of the Senate Finance Committee reports

reveals that Congress was concerned about providing an

equitable solution to cases in which ‘‘an unfair benefit

would have been obtained by assuming an inconsistent

position and then taking shelter behind the protective bar-

rier of the Statute of Limitations.’’ S.Rep.No. 1567, 75th

Congress 3rd Session 49 (1938) reprinted in 39-1 (part 2)

CB 79 at 815. This legislation was based upon the principle

that disputes as to the year in which income or deductions

belong or as to the person who should have the tax burden

of income or the tax benefit of deductions, should never

result in a double tax or double reduction of tax or an ine-

quitable avoidance of tax.

The Second Circuit in Yagoda v. Commissioner, 331

F2d 482 (CA-2, 1964), affirming a Tax Court decision,

stated that the mitigation sections are remedial, not

punitive, in that they allow for the correction of errors. In

Chertkoff v. Commissioner, 66 TC No. 50 wherein the

service deemed that a long term capital gain item included

as income in 1966 should be a dividend in 1965, the Service

refunded the tax attributable to the reported 1966 capital

gain and issued a deficiency notice for 1965.

In Yagoda, supra, the Service, refusing to recognize

trusts for wife and daughter being entitled to partnership

income, contending that all of the partnership income was

taxable to the husband, in deficiency assessments issued to

-16-

the husband, allowed credits with regard to the resulting

over-assessments of the trusts for consistency.

In the extant situation solely due to the fact that the

Service deemed payments to be interest rather than repay-

ment of principal (taxpayer’s contention), a deduction

resulted for 1972 which apparently more than wipes out

the alleged tax deficiency for 1971. Based on this rationale

as expressed in Yagoda and Chertkoff, supra, evidence as

to the correlative adjustment was appropriate, material

and unquestionably would have affected the outcome of

the trial.

The Court relied on the case of A.C. Willingham vy.

U.S.A (CA-5, 1961), 289 F2d 283 aff’g an unreported

District Court decision, which is distinguishable from the

facts herein, barred the introduction of the proper cor-

relative adjustments created by the Internal Revenue Ser-

vice position. It should be noted that in Willingham the

Court stated that ‘‘a fortuitous loss in 1955 does not

change the intent with which the fraudulent return was

filed two years earlier.’’ Nothing occurred here in a subse-

quent year which was not solely due to the inconsistent

position caused by the Internal Revenue Service position.

The Supreme Court in Bull v. U.S., 295 U.S. 247,

adopted the theory of recoupment to permit a barred over-

payment of estate tax to be offset against income tax

liability resulting from the same item. The Second Circuit

has held that a refund of income tax upon erroneously in-

cluded income must be offset by a deficiency in a later year

resulting from the correct inclusion of that item. U.S. v.

Drescher, 179 F2d 863, cert. den. 340 U.S. 321. The

reverse position in the extant situation, i.e., deficiency in

earlier year offset by overpayment in a subsequent year,

was not allowed to be revealed to the jury (547), in spite of

the requirements of Code Sections 1311-1316 inclusive.

-}7.

Thus as can be seen by the intent of Congress in deter-

mining tax liability, the totality of circumstances and the

effect of adjustments, if applicable to different years,

should be considered. Moreover, in the present situation a

probable refund would result.

C. PROSECUTOR’S SUMMATION DEPRIVED

DEFENDANT OF A FAIR TRIAL.

The prosecutor stated in her summation to the jury:

‘*It would have been very nice if I could bring before

you a priest or rabbi who observed the defendant making

illicit loans, illegal loans, but unfortunately criminals go

about their business only in the presence of other

criminals, not in the presence of priests or priests or rabbis, 9

(628).”’

Defendant did not take the stand and his character is

not an issue. The Government alleges that its effect was

more than neutralized by the following Court’s instruction

to the jury: }

‘*Ladies and Gentlemen:

As linstructed you earlier, the evidence in the case is

from the witnesses and from the exhibits. What counsels

say to you, what counsels say to you in argument is not

evidence.

The remarks by counsel in summation with regard to a

general proposition that criminals associate with criminals

is certainly not evidence. That is not even common sense.

Accordingly, I instruct you to disregard it and I also

remind youthat this defendant stands before you with a

presumption of innocence and that that presumption stays

with that defendant throughbout this argument,

throughout the entire trial and continues during your

-18-

deliberations.

It is for you to consider all the evidence and in your

judgment determine whether beyond a reasonable doubt

this defendant has committed a criminal offense, it is for

you to make that determination and that determination is

not to be made by anyone else and it is not to be considered

by you.’’ (629-630)

When an assistant U. S. attorney appears in Court

and, especially for a trial before a jury, she represents and

personifies the Government, she must prosecute cases

diligently and vigqgously, but she must also perform her

task with dignity Whd self discipline. Prosecutor’s com-

ments in this case did not rise to the level of oratory elo-

quence. She engaged quite simply in name calling.

It may be that corrective instructions are no more

than an empty wom without any effect on the jurors. Fur-

ther, verdicts in Closely contested criminal cases often find

their real spring in the atmosphere generated in and by the

trial where things felt but unseen, sometimes real,

sometimes illusory, arising out of, but more than, the rele-

vant and admissible evidence, in the end more influence

the verdict than does the relevant testimony. See Ford v.

U.S. (Sth Cir, (1954), 210 F2d 313; 317, 318, cert. den. 352

U.S. 833 (1956) ). The deep tendency of human nature to

punish, not because the defendant is guilty this time, but

because he is a bad man and may as well be condemned

now that he is caught, is a tendency which cannot fail to

operate with any jury in or out of Court.

Under the circumstances herein, in view of the jury’s

illogical inconsistegt verdict, the extreme prejudice caused

by this remark prébably was the marginal difference be-

tween the defendant’s conviction and his acquittal on

Counts three and four.

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D. AGENT‘S PERVASIVE TESTIMONY REN-

DERED IT USELESS AND COURT SHOULD

HAVE ORDERED TESTIMONY STRICKEN SO

AS TO AVOID CONFUSION AND PREJUDICE.

The Agent testified that the defendant had no option

other than to report this as interest (495-496) whereas

subsequently (499) he states that there is an option. He er-

roneously cited Regs. 1.166-1(e) for the proposition that

the loan to Doonan could’ not under any circumstance in

this case be deducted (512-513). In one instance he claims

the payments under a void agreement to be not deductible

to the payor, but then asserts that French (who evidently

entered into a usurious contract, void in New York) could

claim the deduction (535-538). Moreover, he admitted

(551) that the payments from these two persons in issue

were made on contracts that could be interpreted as specu-

lative but always maintained the position that these

amounts received from Graifer and French must be

reported as interest income.

Thus, the confusion and prejudice caused by this

testimony rendered it useless. See U.S. v. Celentano, 391

F.Supp. 1252 (S.D.N.Y. 1975). Moreover, based on the

testimony relative to speculative ventures, a directed ver-

dict of acquittal was mandatory.

CONCLUSION

: It is respectfully submitted that this petition for cer-

tiorari be granted.

Respectfully submitted,

MURRAY APPLEMAN

Attorney for Petitioner

A Member of the Bar of the

United States Supreme Court

,

APPENDIX

2a

APPENDIX A

Order and Judgment of United States Court of Appeals

for the Second Circuit

At a stated Term of the United States Court of Appeals for

the Second Circuit, held at the United States Courthouse in the

City of New York, on the seventeenth day of August one thou-

sand nine hundred and seventy-eight

Present: HON. ELLSWORTH A. VAN GRAAFEILAND, Circuit

Judge; HON. JOHN F. DOOLING, HON. ALBERT W. COFFRIN,

District Judges.

78-1154

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v

ALEXANDER ROSATO,

Defendant-Appellant.

Appeal from the United States District Court for the

Eastern Ditrict of New York

This cause came on to be heard on the transcript of record

from the United States District Court for the Eastern District of

New York, and was argued by counsel.

ON CONSIDERATION WHEREOF, it is now hereby

ordered, adjudged, and decreed that the judgment of said

District Court be and it hereby is affirmed in accordance with

the Court’s oral opinion in open court.

3a

APPENDIX B

Orders Denying Petition for Rehearing and Petition for Rehear-

ing In Banc

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

At a Stated Term of the United States Court of Appeals, in

and for the Second Circuit, held at the United States Court

House, in the City of New York, on the thirteenth day of

November, one thousand nine hundred and seventy-eight.

PRESENT: HON. ELLSWORTH A. VAN GRAAFEILAND, Cir-

cuit Judge; HON. JOHN F. DOOLING, HON. ALBERT W. COF-

FRIN, District Judges.

United States of America,

Plaintiff-Appellee,

Vv.

Alexander Rosato,

Defendant-Appellant.

78-1154

A petition for a rehearing having been filed herein by

counsel for the defendant-appellant, Alexander Rosato,

Upon consideration thereof, it is

Ordered that said petition be and hereby is denied.

4a

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

At a stated term of the United States Court of Appeals, in

and for the Second Circuit, held at the United States Court

House, in the City of New York, on the thirteenth day of

November, one thousand nine hundred and seventy-eight.

United States of America,

; Plaintiff-Appellee,

Vv.

Alexander Rosato,

Defendant-Appellant.

78-1154

A petition for rehearing containing a suggestion that the

action be reheard in banc having been filed herein by counsel

for the defendant-appellant, Alexander Rosato, and no active

judge or judge who was a member of the panel having requested

that a vote be taken on said suggestion,

Upon consideration thereof, it is

Ordered that said petition be and it hereby is DENIED.

s/IRVING R. KAUFMAN

Chief Judge