Petition — Watkins v. United States

Bupreme Court, U. @P

FiLew

AUG 16 1979

vo. 29-264

IN THE SUPREME COURT OF THE UNITED

RODAK, JR., CLERK

October Term, 1979

WALLACE W. WATKINS, Petitioner,

Vv.

UNITED STATES OF AMERICA, Respondent

PETISION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

NORMAN SEPENUK

1330 Bank of California Tower

707 S.W. Washington Street

Portland, Oregon 97205

August 14, 1979

i

INDEX

OPINION BELOW ..cccccccccccccccccccccccee L

JURISDICTION ..cccccccccccccccccccsccccee 2

QUESTIONS PRESENTED .ccccccccccccccccccce 2

STATEMENT OF THE CASE ..ccccccccsccccccese 2

REASONS FOR GRANTING THE WRIT .......2+-- 4

CONCLUSION ..ccccccccccccccccccccccccccce 8

APPENDIX A .ccccccccccccccccccccccscccces Am]

Bee ee be caw eee ee eb ebb eeescaccccee B-1l

ii

TABLE OF AUTHORITIES

CASES Page

Ayash v. United States

35 F.2d 1009 (10th Cir. 1968) ....

United States v. Brashier

Sen Bem. Sone tectnS--L5t0) cevcses

United States v. Farris

517 F.24 226 (7th Cir.),

cert. denied, 423 U.S.

EE a CUES Sid's 406 eas a ee

United States v. Magnus

365 F.2d 1007 (2d Cir.),

cert. denied, 386 U.S.

(1906) wcccccccccccccccccccces

United States v. Ming

466 F.2d 1000 (7th Cir.),

cert. denied, 409 U.S.

TAS RAPES b caeseecdsewcevinedsee

United States v. Snow

529 F.2d 224 (9th Cir.),

cert. denied, 429 U.S.

821 (1976) eeeeeeeveeeeeeeeeveeee 3,

FEDERAL RULES

Fed. R. Evid. 404 (b) eeeeeeveeeeeeee eee 6,

STATUTES

26 U.S.C. § 6012 .ccccccccccccccceccccceccs

26 U.S.C. § F201 wcccccccccscvcvcccvccece

26 U.S.Cw § 7203 cccccccccccccccccccecces

28 U.S.C. § 1254 wcccccccccccccccccvesece

6

6

no fF NO VI

No.

IN THE SUPREME COURT OF THE UNITED STATES

October Term, 1979

WALLACE W. WATKINS, Petitioner,

Vv.

UNITED STATES OF AMERICA, Respondent

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Petitioner, Wallace W. Watkins,

prays that a writ of certiorari issue to

review the opinion and judgment of the

United States Court of Appeals for the

Ninth Circuit entered on June 13, 1979,

which affirmed the order of the United

States District Court for the District of

Oregon.

OPINION BELOW

The opinion of the Court of Appeals

is not yet officially reported. It is at-

tached as Appendix A, infra. The petition

ae

for rehearing and suggestion for rehearing

in banc was denied July 27, 1979 (see Ap-

pendix B, infra).

JURISDICTION

The jurisdiction of this Court is

invoked under 28 U.S.C. § 1254.

QUESTION PRESENTED

Whether, in a trial for income tax

evasion, the government should be permitted

to introduce evidence of failure to file

tax returns in pre-prosecution years where

no evidence of a duty to file is produced?

STATEMENT OF THE CASE

Petitioner was convicted on three

counts of willfully attempting to evade his

income taxes for the period 1971 through

1973. 26 U.S.C. § 7201. He urged three

grounds for reversal of his conviction,

each of which was rejected by the Ninth

Circuit in its opinion affirming the con-

viction. A single ground for certiorari

is presented here with the following facts

being pertinent.

At the trial, the government was

initially permitted to show, over repeated

defense objection, that the defendant

failed to file federal income tax returns

during the years 1958 through 1970, a thir-

teen year period preceding the indictment

years. Before submitting the case to the

jury, the trial judge struck evidence re-

lating to defendant's failure to file fed-

eral returns prior to 1968, and admitted

evidence of prior failures to file for

1968-1970 on the element of intent. On ap-

peal, the defendant argued that admission

of the prior failures to file was permissi-

ble only if the government proved that the

defendant had a duty to file returns for

those years. This argument was rejected by

the Ninth Circuit on the grounds that its

previous decision in United States v. Snow,

529 F.2d 224 (C.A.9, 1976) permits proof of

prior failures to file on the element of

-4-

intent whether or not a duty to file has

been shown.

REASONS FOR GRANTING THE WRIT

Defendant's request for certiorari

is based on the fundamental proposition

that prior failures to file tax returns (a

misdemeanor under 26 U.S.C. § 7203 if will-

ful) simply is not relevant in a felony

: unless the

prosecution for tax evasion

government first shows that the defendant

had a duty to file returns in those earlier

years, i.e. that the prior failure to file

was illegal or wrongful.

The Internal Revenue Code, and ap-

propriate regulations, make it clear that

only individuals having the requisite

amount of gross income are required to file

1. The government's theory at trial was

that, in addition to failing to file his

tax returns for the prosecution years (a

misdemeanor), defendant had also attempted

to evade tax (a felony) by concealing his

financial affairs from the Internal Revenue

Service.

=§—

income tax returns. 26 U.S.C. § 6012,

Treasury Regulations § 1.6012-1. For the

years in question in this case (1968

through 1970, the pre-prosecution period) —

the government was required to show that

the defendant received $600 or more of

gross income before being required to file

a return for any year. The government pro-

duced no such proof in this case.

We have found no case discussing the

issue of whether the government must prove

a duty to file tax returns before permit-

ting proof of earlier failures to file on

the element of intent during the prosecu-

tion period. The decisions holding that a

prior or subsequent failure to file is ad-

missible on the element of willfulness in

either a tax evasion or failure to file

case contain no discussion of this

2

issue. Nor have we been able to find

2. See, e.g., Ayash v. United States, 35

F.2d 1009 (10th Cir., 1968); United (Cont.)

-6-

any case in which the point was expressly

raised as here. To our knowledge, then,

the Ninth Circuit's specific holding that

a duty to file is not required before such

proof is allowed is unprecedented.

The court's holcing wrongly inter-

prets Rule 404(b) Federal Rules of Evi-

dence, which admits proof of prior similar

acts only if the such acts are criminal or

wrongful. See, for example, United States

v. Brashier, 548:F.2d 1315, 1325, (C.A.9

1976). Surely a failure to file a tax re-

turn without proving an accompanying duty

to file is obviously not a "crime" or

"wrong" admissible for any purpose within

the meaning of Rule 404(b). Moreover, the

Court's holding also results in shifting

2. (Cont.) States v. Magnus, 365 F.2d

1007 (2d Cir.), cert. denied, 386 U.S. 909

(1966); United States v. Ming, 466 F.2d

1000 (7th Cir.), cert. denied, 409 U.S. 915

(1972); United States v. Farris, 517 F.2d

226 (7th Cir.), cert. denied, 423 U.S. 892

(1975); United States v. Snow, 529 F.2d

224, 226 (9th Cir.), cert. denied, 429 U.S.

821 (1976).

-7-

the burden of proof to the defendant to es-

tablish a legal reason for him not to file

a return in the year involved, i.e. that he

did not make sufficient gross income to re-

quire a filing, that he was hospitalized or

otherwise incapacitated at the time of the

required filing, or the like. We believe

that the Solicitor General will acknowledge

that the course of conduct that was fol-

lowed in this case by the prosecution, viz:

proving a mere failure to file without an

accompanying duty to do so -- is not in ac-

cordance with Department of Justice policy

or instructions. The government's practice

of utilizing prior or subsequent failures

to file in a tax evasion or failure to file

the case is widespread. See, e.g., cases

cited in f.n. 2. Now that such a rule has

been sanctioned by the court below it may

be expected that government prosecutors

will forego the more stringent (and we sub-

mit legally correct) requirement of proving

=~

a duty to file. This Court should grant

certiorari to resolve the important issue

presented.

CONCLUSION

For the reasons stated, this writ

should be granted and the judgment of the

Court of Appeals for the Ninth Circuit

should be reversed.

Respectfully submitted,

NORMAN SEPENUK

ee Oe

Norman Sepenuk

Attorney for Petitioner

.

Oe OT en og en er

ern

APPENDIX A

A-1

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA, )

Plaintiff-Appellee, ; No. 78-2733

Vv. | OPINION

WALLACE W. WATKINS,

bntpniniies Naincitans:5

Appeal from the United States

District Court of Oregon

Before: KILKENNY and SNEED, Circuit

Judges, and WATERS,* District

Judge.

Watkins appeals from his conviction

after jury trial on three counts of tax

evasion, 26 U.S.C. § 7201. He attacks the

district court's admission of three types

of evidence. Our jurisdiction is based on

28 U.S.C. § 1291. We affirm.

I.

Procedural History.

Appellant Watkins was indicted June

*Hon. Laughlin E. Waters, United States

District Court Judge for the Central Dis-

trict of California, sitting by designa-

tion.

A-2

29, 1977 on five counts. Three counts al-

leged that he willfully attempted to evade

taxes for the years 1971 through 1973; two

counts charged Watkins and others with

stealing, and conspiring to steal, timber

owned by the United States. The trial

court ordered separate trials for the tim-

ber theft counts and the tax evasion

counts. The theft charges were tried first

and a mistrial declared after the jury was

unable to reach a verdict. Thereafter the

tax evasion counts were tried, and the jury

convicted Watkins on each of three counts

of attempted tax evasion. The trial judge

sentenced Watkins to two and one-half

years' imprisonment and imposed a $5,000

fine.

II.

Alleged Errors of Trial Court.

Appellant in this appeal urges that

his convictions should be reversed because

the trial court erred in three respects.

A-3

Concisely put, these alleged errors are as

follows:

I. The trial judge erred in ad-

mitting evidence of theft in

the trial for tax evasion,

¢ # The trial judge erred in ad-

mitting into evidence declar-

ations of alleged co-conspir-

ators,

III. The trial court erred in ad-

mitting into evidence Watkins'

failure to file federal income

tax returns for the three suc-

cessive years immediately pre-

ceding the first year for

which tax evasion was charged.

We hold that no error was committed

by the trial court. Each alleged error

will be discussed separately.

III.

Evidence of Theft.

The government must carry the burden

A-4

of proving an affirmative act of tax eva-

sion to satisfy § 7201. Spies v. United

States, 317 U.S. 492 (1943). See United

States v. McNulty, 528 F.2d 1223 (9th

Cir.), cert. denied, 425 U.S. 972 (1976).

The government asserted at trial and argues

here that certain evidence of theft was

relevant to one of the affirmative acts

charged. Appellant requested exclusion of

the evidence on the ground that he had con-

ceded the only fact to which the evidence

was relevant and that the prejudicial im-

pact of the evidence outweighed its proba-

tive value.

To understand the evidence to which

appellant objects it is necessary to des-

cribe a provision of the federal income tax

law. Section 63l(a) of the Internal Reven-

ue Code accords income from timber opera~

tions special treatment. It is a special

elective provision that allows a taxpayer

who meets the section's criteria to treat

J

A-5

the cutting of timber as the sale and ex-

change of a capital asset under section

1231.!

The necessary criteria are: (1)

the taxpayer must have owned or had a con-

tract right to cut timber and sell it for

his own account; (2) the taxpayer must have

cut timber for sale on his own account; and

(3) the taxpayer must have owned or held a

contract right to the timber for more than

six months before the beginning of the

year. A taxpayer who cuts stolen timber

fails to meet these criteria and cannot

claim section 631(a) treatment, because he

neither owns the timber nor has a contract

right to cut or sell it in his own name.

It is undisputed that appellant har-

vested timber both in his own name and on

behalf of other logging firms on a con-

tractual basis. Through his accountant

appellant presented the government with

records of his timber business for 1973.

Analysis thereof revealed that in 1973 ap-

A-6

pellant sold 1.4 million board feet of tim-

ber in excess of the amount he acquired

through his logging operations. Again

through his accountant appellant represent-

ed that the excess derived from cutting on

a tract of land known as Sesech Gulch,

which appellant had logged in his own be-

half. The government theorized that in-

stead the excess had been stolen by the ap-

pellant from the Ash Flat tract, which ap-

pellant had logged on behalf of another

company. By falsely representing the

source of the lumber, the government

contended, Watkins sought to establish sec-

tion 631 eligibility. Such conduct, the

government concludes, constituted an affir-

Mative act of tax evasion for purposes of

§ 7201.

At trial appellant's counsel repeat-

edly objected to the theft evidence. He

stated that appellant did not dispute the

volume figures presented by the government

A-7

as the amount of timber for which appellant

was entitled to claim section 63l(a) treat-

ment. These figures excluded the 1.4 mill-

ion board feet which the government claims

had been stolen. Defense counsel therefore

argued the evidences' only purpose -- to

counter anticipated claims that the excess

timber was harvested legally -- no longer

existed. But this evidence also was rele-

vant to the inference to be drawn from ap-

pellant's statement that the excess timber

volume must have come from Sesech Gulch.

The government sought by the evidence not

merely to show a substantial tax due and

owing, but also to show that Watkins pro-

vided, through his accountant, false infor-

mation in an effort to avoid tax.

The admissibility of this evidence

turns upon the interrelationship of four

Federal Rules of Evidence. Fed. R. Evid.

401 defense "relevant evidence” as "evi-

dence having any tendency to make the ex-

A-8

istence of any fact that is of consequence

to the determination of the action more

probable or less probable than it would be

without the evidence." This standard is

clearly met; the evidence tends to estab-

lish the required "affirmative act." See

Edwards v. United States, 375 F.2d 862,

866 (9th Cir. 1967), overruled on other

grounds, United States v. Bishop, 412 U.S.

346 (1973). Fed. R. Evid. 402, the second

applicable Rule, provides that relevant

evidence is admissible unless otherwise

excludable. Fed. R. Evid. 404(b) permits

evidence of other crimes, wrongs, or acts

for a proper purpose, but prohibits the

use of such evidence to prove a criminal

disposition. See United States v. McDon- ;

ald, 576 F.2d 1350 (9th Cir.), cert.

denied, U.S. & , 99 S.Ct. 105 &

312 (1978). A proper purpose includes

proof of a "plan" by which taxes were

evaded. The evidence in question here

A-9

served that purpose thereby overcoming any

bar of Rule 404(b). However, despite the

relevance of the evidence, and the inap-

Plicability of a specific exception to ad-

missibility, Rule 403 gives a trial judge

discretion to exclude the evidence. Rule

403 reads:

Although relevant, evidence may be

excluded if its probative value is

substantially outweighed by the dan-

ger of unfair prejudice, confusion

of the issues, or misleading the

jury, or by considerations of undue

delay, waste of time, or needless

presentation of cumulative evidence.

The striking of the balance between

the probative value of particular evidence

and the danger of prejudice is unmistakably

committed to the trial judge's discretion.

United States v. Riggins, 539 F.2d 682, 683

(9th Cir. 1976), cert. denied, 429 U.S.

1045 (1977). See United States v. Curtis,

568 F.2d 643, 645-46 (9th Cir. 1978); Uni-

ted States v. Butcher, 557 F.2d 666, 670

(9th Cir. 1977). We defer to the trial

A-10

judge's assessment in the absence of a

clear abuse of this discretion. We cannot

say that admission of the theft evidence

was a clear abuse of discretion. The judge

carefully instructed the jury as to the

limited purpose for which the evidence was

admitted. Prejudice may have been gener-

ated, but the balance struck was within the

bounds of the trial judge's discretion.

IV.

Co-Conspirator Testimony.

Appellant's argument that the trial

judge erred in admitting testimony of al-

leged co-conspirators also fails. Appell-

ant contends the government presented in-

sufficient independent evidence connecting

him to the alleged conspiracy. Such evi-

dence is necessary under Fed. R. Evid. 801

(d) (2) (E) to exclude statements of co-con-

spirators from the definition of inadmis-

sible hearsay. To establish the exclusion

there must exist "independent proot of the

A-11

existence of the conspiracy and of the con-

nection of the declarant and the defendant

to it." United States v. Eubank, 591 F.2d

513, 519 (9th Cir. 1979); United States v.

Weiner, 578 F.2d 757, 768 (9th Cir.), cert.

denied, U.S. , 99 S.Ct. 568 (1978);

United States v. Snow, 521] F.2d 730, 733

(9th Cir. 1975), cert. denied, 423 U.S.

1090 (1976). The trial judge makes the

initial determination whether a sufficient

foundation has been established to make the

declarations admissible. United States v.

Eubank, supra, 591 F.2d at 519; United

States v. King, 552 F.2d 833 (9th Cir.

1976), cert. denied, 430 U.S. 966 (1977).

However, the trial judge may admit the

challenged statements conditionally, sub-

ject to a later motion to strike if the

prosecution fails to establish the required

foundation. United States v. Eubank,

supra, 591 F.2d at 519 n.6; United States

v. Weiner, supra, 578 F.2d at 768. It is

A-12

not controlling, therefore, whether suffi-

- cient independent evidence connecting ap-

pellant with the conspiracy existed at the

time the trial judge made his first ruling

under Rule 801(d)(2)(E). The trial judge

considered the sufficiency of the independ-

ent evidence before giving the case to the

jury. Our review of the record convinces

us that the government presented sufficient

independent evidence of the "declarant's":

and appellant's connection with a conspir-

acy to steal timber. We find no error in

the admission of co-conspirator testimony.

V.

Prior Failure to File Returns.

The prosecuting attorney, in his

opening etatebent, told the jury that ap-

pellant had not filed income tax returns

"since 1958," and that "the evidence will

show that Mr. Watkins not only did not

file federal income tax returns, he did not

file Oregon income tax returns either."

A-13

Subsequently the government did introduce

evidence regarding the failure to file fed-

eral returns, but not state returns. The

judge then struck testimony relating to ap-

pellant's failure to file federal returns

prior to 1968. He instructed the jury to

disregard the statements and evidence of

the failure to file Oregon returns or fed-

eral returns other than after 1968 through

1971. In addition, the judge instructed

the jury that the failure to file could be

considered only as it bore upon appellant's

intent.

Again, the relevant standard of re-

view is "whether the district court abused

its discretion when it decided that the

tendency of the evidence in question to

prove the essential elements of knowledge

and intent outweighed its potential pre-

judice." United States v. Rocha, 553 F.2d

615, 616 (9th Cir. 1977). This court, in

United States v. Snow, supra, 529 F.2d 224,

A-14

upheld the admission of evidence of failure

to file income tax returns in Similar cir-

cumstances. 7 Appellant attempts to dis-

tinguish Snow, arguing that in Snow the

prosecution presumably was able to show

that the defendant had a duty to file re-

turns in those years for which evidence of

a failure to file was admitted. But no

such requirement is evident in Snow.

We hold, therefore, that the trial

judge did not abuse his discretion in al-

lowing the jury to consider the evidence of

nonfiling for three years prior to the

first year of the indictment. His estimate

of the probability of undue prejudice is

entitled to great weight. United States v.

A-15

to file federal returns prior to 1968 elim-

inated any prejudice that may have stemmed

from the prosecutor's opening statement.

See United States v. Pavon, supra, 561 F.2d

Pavon, 561 F.2d 799, 803 (9th Cir. 1977).

In addition, his instruction to the jury

that they should disregard any evidence

concerning the defendant's alleged failure

to file state income tax returns and any

evidence concerning the defendant's failure

at 803.

AFFIRMED.

A-16

FOOTNOTES

l. Section 631 requires that a taxpayer

make a binding election to employ its pro-

visions on the return for the taxable year

timber is cut. Such an election cannot be

made on an amended return. Though it is

arguable that Watkins may be precluded from

the benefits of section 63l(a) for civil

purposes, the government conceded at trial

that, for the purposes of a criminal case,

Watkins would be allowed the benefits of

that section as if he had made the requi-

Site election in each year.

2. The defendant in Snow had been

charged with filing false individual re-

turns for 1968 through 1970 and failing to

file an individual return for 1971. The

trial judge admitted evidence that the de-

fendant had failed to file a federal indi-

vidual return for the six years preceding

1968. In addition, he admitted (Cont.)

A-17

2. (Cont.) evidence that the defendant

had received notice of state tax liability

in 1968. This court held that evidence of

the defendant's failure to file federal and

state income tax returns in pre-prosecution

years was properly admissible as relevant

to the issue of willfulness.

APPENDIX B

B-1

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA, )

Plaintiff-Appellee, No. 78-2733

Vv. ORDER

WALLACE W. WATKINS,

sd taidaie Slee tank.

Before: KILKENNY and SNEED, Circuit

Judges, and Waters*, District

Judge

The panel as constituted in the

above case has voted to deny the petition

for rehearing and to reject the suggestion

for rehearing en banc.

The full court has been advised of

the suggestion for en banc rehearing, and

no judge of the court has requested a vote

on the suggestion for rehearing en banc.

*Honorable Laughlin E. Waters, District

Judge for the Central District of Califor-

nia, sitting by designation.

B-2 CERTIFICATE OF SERVICE

Fed. R. App. P. 35(b). I hereby certify that I served the

foregoing Petition for a Writ of Certiorari

The petition for rehearing is denied on the counsel for respondent by enclosing

a copy thereof in an envelope, postage pre-

and the suggestion for a rehearing en banc paid, addressed to:

is rejected. The Hon. Wade H. McCree

Solicitor General of the

United States

Department of Justice

Washington, D.C. 20530

Mr. Ronald H. Hoevet

Asst. U.S. Attorney

P.O. Box 71

Portland, Oregon 97207

Dated: August 14, 1979.

Yo— 2,8

Norman Sepenuk

Attorney for Petitioner