Opposition Brief — Jacobs v. Tennessee

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| CITATIONS

_ Cases;,

Beard v. United States, 222 F. 2d 84, certiorari :

_ denied, 350 U.S. 846. ___- Rd REED, AEE 10

Grubb v. Commissioner, 315 F. 2d a 10 |

- Holland v. United States, 348 U.S. 121-_._ 10,11,12 ©

’ United States v. Bender, 218 F. 2d 869, cer-

tiorari denied, 349 U. S. RDN at Nice 12 -

United States v. Costello, 221 F. 2d 668,

affirmed, 350 U.S. 359....-.2..-:....-... 7’

United States v. Holovachka, 314 F. 2d 345, —

certiorari denied, 374 U.S. 809__...____._- 10

United States v. Hornstein, 176 F.2d 217_--. =» 11

' United States v. Johnson, 319 U.S. 50@e< ____- 11

. . United States v. Link, 202 F. 2d 592_.--____- 11

. Warszower v. United States, $12 US. 348.:.:

Statute: .

Internal Revenue Code of 1954, Bee: |) rr

(26 U.S.C. (1958 ed.) 7201)_...__- Posehn ae

) |

’ 780-228—65..

aw the Supreme our ofthe tad States

OctopER TERM, 1965

. | | No. 216

Frep T. MACKEY, PETITIONER’

Vv. tt

. Unrrep States or America:

ON PRTITION FOR A WRIT OF CEFRTIORARI TO THH UNITED .—

STATES COURT OF APPEALS FOR THE SEVENTH O1RCUIT

BRIEF sedans containers

ae OPINION BELOW :

The opinion of the court of appeals (Pet AL-A16) |

is not yet ee :

©

JUBISDICTION :

The jeden of the court of een was entered

on April 1, 1965 (Pet. A16-A17) and a petition for

rehearing was denied on May 13, 1965 (Pet. A17~18)..

_ The petition for.a writ of certiorari was filed on June .

4, 1965. The jurisdiction of thin Court is invoked

- under 28 U.S.C. , 1254(1). :

- QUESTIONS. PRESENTED

1. Whether, in a prosecution for income tax eva-:

sion proved by the net worth method, there was aufli-

aD | |

2 fee as Ee

cient : evidence to eatablieh ‘with reasonable certainty |

petitioner’ s.net worth at hoa eee of the prose- .

cution years. _ |

2. Whether the prosecution had a. duty, during the

closing two weeks of a seven-weeks trial, to analyze

_ and summarize a mass of basic insurance company

_ records (policy applications) in order to foreclose | |

the - possibility that some of the unreported income

charged to petitioner:may in faet have arisen from

unrecorded .and unreported income of the insurance ©

companies, where the defense produced the applica-

. tions belatedly and in a state of disarray and where

the books of the insurance companies—upon. which

the government relied—were in agreement with their

- federal income tax returns and their annual reports

- to the Indiana State Department of, Insurance.”

_ STATUTE INVOLVED

tating Revenue Code of 1954: |

Seo. 7201. Arrempr To: Evape OR DEFEAT Tax.

Any person who willfully attempts in any oy

manner to evade or defeat any tax imposed by

this title or the payment thereof shall, in addi-

tion. to other penalties provided by -law,. be

guilty of a felony and, upon conviction thereof,

‘shall’ be fined not more than $10,000; or im-

: prisoned not more than 5 years, or both, to-

_--gether with the costs of prosecution.

(26 U.S.C. (1958 ed. ) 7201.)

3

Petitioner was indicted: in March 1963 on five

‘counts charging tax evasion. fér the years 1956

through 1960 by causing false and fraudulent tax

returns to ‘be prepared, in violation of Section 7201

of the Internal Revenue Code of 1954. The total tax

deficiencies alleged for the five-year period: were $999;- j

341.72, (A.A. 13-20.)* After ‘a jury trial lasting

seven weeks, appellant was convicted on all .counts,

‘fined $10,000 and costs, and sentenced to -— years in

prison. (A.A. 69-70.) . ag

The government’s case was proved by the net worth

-method. The evidence showed that the visible net

worth of petitioner and his wife ‘at the starting

point, December 31, 1955—including assets held in

the names of the Gibraltar insurance companies and

other nominees for the: “benefit of . petitioner— .

-_- amounted to $361,461.52, a figure substantially greater

. than all of the income reported by appellant and his

_ Wife: since 1929; that, by the end of the prosecution

years, this visible net worth had increased to niore

than one and a half million dollars, although during

that five-year period. petitioner and his wife had re- .

ported only $143,339.24 of taxable income; and that

- petitioner had .a likely source of taxable hasan in

. the policy. wheel (numbers banker) operation which

he admittedly carried ‘on throughout the years in

1The designations CALA. » and “G.A.” refer to the Appellant’s

Appendix and the Government’s Appendix in the court below. |

- The March 1968 indictment was superseded as to its last —

four counts by an indictment filed on ‘October 2, 1963, making

only minor changes in the original allegations. (A.A. 17-20. )

adie (Govt. Exs. 9 thidugh .13—Sehedule C,

96, 97, 730, 759,. 760, 765, 800; ALA, 1340, 1344-1848,

2102 éf seq.; GA. 27-28.) -

The amounts of taxable income and income tax

liabilities reported on petitioner’s returns compared

_ with the correct amounts, as proved at the trial, are @

as follows (Govt. Exs. 9 vee 13, 800 vei: 802 ;

ALA. at

Yer | Correct Reported Unreported

1986. $209, 108. 95 $17, 315. 54 $191, 793. 41

1957 350, 681. 63 13, 452. 72 337, 228. 91

1968......., 378, 408. 95 33, 884. 68 344, 524. 27

1959 138, 157.27 39, 503. 38 98, 563. 89

1960. 72, 078. 06 39, 092. 92 $2, 985. 14

Total. 1,148, 434.86 | 143,330.24} 1, 005, 008. 62

Income tax

: Yeu Correct Reported | . Unreported .

amount amount 5 tax ee

1956. * $134, 608. 61 $3,200.08} " -$131, 299.53

1987....... 258, 277. 42 2, O15. 45 258, 261. 97

1958. 279, 213. 45 Q 353. 31 269, 860. 14

a "77, 456. 38 12, 007.89 65, 358. 49

1960. * 31, 508. 62 11, 946. 68 19, 556. 94

Total sil 777,000.48 | 38,622.41 739, 337. 67

In addition to his policy wheel- business; petitioner —

i operated the Gibraltar Industrial Life Insurance Co.

and the Gibraltar Mutual Life Insurance ‘€d. and,

beginning in 1957, the M.W.E. & S.. Investment Co.,

. Ime: The prineipal issue at trial was whether the

government was justified in including in petitioner’ 8

ae

2 5 :

net worth certain assets dequired im the names of the ©

Gibraltar companies.’ (Cf. Pet. 15.) _ ;

.. Gilbraltar Industrial, which was chartered by the

State of Indiana, maintained offices in Indianapolis

‘and Gary. (Govt. Exe. 125-129; A.A. 1128-1129,

1564-1565. y° Although the corporation had no stock-

holders, petitioner acquired an interest in it in 1947 ©

- and was chairman of the board during the years —

- named in the indictment. (Govt. Ex. 113; A‘A. 499,

1298, 1572-1573; G.A. 34.) All of the officers of the

* company weré related to petitioner by blood. (Govt.

Exs, 125-129; A.A. 497, 546, 576, 583, 743, 753, 1291-

1293). The company’s office was run by Mrs. Fannye

Benford, petitioner’s sister (A.A. 497). As treas-

urer, she was responsible’ for all:of the company’s

financial transactions (A.A. 499, 772-773, 869, 916,

4293). .At the trial, Mrs. Benford first testified that —

the books and records were complete with respect to.

the company’s income and financial ctions (A.A.

' 175-777, 978-979), but later testifi that the com- ©

pany received substantial premium income which was .

not recorded (A.A. 1227-1229). These books, how-

ever, were the basis for the annual reports submitted

by the company to the Indiana State Department of

2 Because petitioner rea the members of his immediate family

. owned the M.W.E..&-S, Investment €o., Inc., and because ‘the

ate income reported by that enterprise masy account for some of the

net worth increases, the above tabulations of unreported income ,-

and tax take into account (ie., give petitioner credit. for) the.

jniconie reported. by M.W.E. & S.—totalling $89,971.35—from

the time of its incorporation in 1989 — xs. susieabiin

™ 2358). | |

|

ae

ee. Insurance and for the federal income tax returns.

| (A.A, 305-307, 771-779, ‘192-793, 1250-1251.) The

‘annual reports to the State of Indiana disclosed that

" during the five prosecution years the. company oper-

ated at a loss, realizing gross income | of $283,620.58.

and disbursing $310,927.17. (Govt. Exs. 125-129.)

~The company’s federal income tax returns for 1958

and 1959 (those for other years having been excluded

from ‘evidence) were in substantial agreement with

these annnual reports. (Govt. Exs, 22, 23; A.A.

305-307.) The accountant who ‘prepared the reports

“it was making loans, or that there was a bank ac-

- eount in its name into which large deposits were

+ made, or that-it had any assets outside of the United

States. (Govty Exs. 481-483; A.A. oat-3%, 1286-

1287.) . !

. Gibraltar Mutual, like Gibraltar Industrial, was

- 4 and returns was never informed that Gibraltar Indus-

trial was: acquiring real estate and securities, or that

, pan by the State of Indiana, maintained offices -

in’ Indianapolis and Gary, and had no stockholders.

(A.A. 297, 1567, 1578.) Petitioner began with a

$35,000. investment. in the company in. 1954, added

-’ $5,000 in 1959 and another $13,000 in 1960... (G.A. 1.)

. “The officers of the company during the prosécution

~ years included no one except the ‘same five relatives

of petitioner (who was chairman of the board) listed

as officers of Gibraltar Industrial (Govt. Exs. 140-144;

G.A. _35-40),. Mrs. Benford, the: treasurer, testified

x that.so far’as she knew all receipts: were recorded on

zie the company’s books. (A.A. 12-788, 821-826, 99-

——e

a

‘ ‘oe .

. 980). The annual reports submitted to the S te of In-

diana disclgséd that during the five prosecution years

Gibraltar. Mutual received gross income totalling

$153,235.22 and made disbursements (ineluding addi-

tions ;to reserves) totalling $154,109.91 (Govt. Exs.

140-144). The federal income tax returns, like those

of Gibraltar Industrial, were prepared from the annual

reports filed with the State of Indians. : 821- .

826, 1284-1285.) + Gorn

‘The Gibraltar companies + were wenksi-3 in the cag | |

office as the M.W.E. & S. Investment Co., Inc. and -

the same employets, who collected. money for the in-

surance companies collected it fon M.W.E. & S. (A.A.

- 368, 615-616, 862-863, 1057.) Incoming receipts were

handled either by Mrs. Benford or by petitioner’s

secretaiy, who would record on the companies’ books

money received from . policyholders who came into

the office to pay their premiums, (A.A. 615-616, 675, -

979.) There was evidence that transactions and

funds of the insurance ‘companies were sometimes

commingled with those of petitioner and his M.W.E. —

& S. corporation... (Govt. Ex.-135, p. 6; A.A. 346,

452-453, 795-796; G.A. 27.) The Gibraltar Building

itself, though its title was held in the name of Gibral-

tar Industrial, was reported each year as an asset

of M.W.E: & S. on ” federal income tax. returns.

(Govt. Exs. 14-16.)

Although the deductible expenses of the Gibraltar gee

| companies: were, with rare exception, paid by regular :

bank check, the investments in securities, loans and

real estate unrecorded on the books'and unreported

.f

.

i . “ os J ; :

‘ e “e .

+

on the tax réturis age Stato Ingurance Department

"reports were paid for in cirtency or by cashier's .

check. (A:A. 1268-1271.) “Large sams were used to

bay cashier’s cheeks for the acquisition-of real estate —

(A.A. 354,- 1271-1272) and secnrities (A.A. 482,.550-

551, 572), but the more common ‘practice was to tse

currency, often in bills of $10 and $20 denominations

(A.A, 414, 423). Securities, real estate and other'as-_

- gets acquired in the name of the Gibraltar eompanies—

, usually Gibraltar Industrial—were customarily pur- .

-“Chaised by petitioner with currency from one of the.of-

fice’ safes. (¢A.A. 898-899, 919-920, 925, 933, 935, 937,

941-942, 947, 945-950, 952, 954-955, 964-966, * 969,

972-973, 1018-1020, 1032-1033, 1037-1089, 1044~1045,

. 1067-1068, 1133-1134, 1136, 1197.) The largest single

transactions pebaiaaito petitioner’s acquisition of stock.

: in a fire insurance company. An official of that com-

i pany received $50,000 in currency from petitioner

~ with imstrnuetions to issue the, stock in the name of

Gibraltar Mutual. (A.A. 355-356.) Later, in 1958, ©

petitioner gave the same official ati additional $93,000

im eurrency for the- purchase of more shares in the

name of M.W.E. & 8. (A.A. 360-361.) In 1960 pe-

titioner bought am additional block of stock from an-

other individual, paying | him 815, 600° in currency.

(A.A. 654.) pene ae :

- In addition to the snstts joqitisidl in the names of f

ne the Gibraltar ¢onpanies and M.W.E. & S., petitioner

_ sotnetimes acquired property in the names of rela-

tives, business: asseciates, and onee ixi fietitaous °

name of “Theodore Pillow’. (A.A. 252-258, 268-270,

we .

rg ae TAN SaaS ie

eis 9 at gh Bear,

914, 378-379, 502, 544-548, 558, 572-577, 583,.590, 598,

745-747.) The evidence also established the creation

by petitioner of a fictitious $200,000" mortgage liability

on the Gibraltar Building. During the investigation .

petitioner. told the Treasury agents that, the building

was encymbered by a mortgage in that amount, and

such a: mortgage was in fact listed on the federal: in-

xome tax returns of M.W.E. & S., which were pre

pared by an attorney on the ‘basis of information

furnished him’ by petitioner. (Govt. Exs. 14-16; A.A. -

883-886, 1341.) ‘Mrs. Benford was unaware of any

mortgage (A.A. 794) and. the representative of the

“mortgagee’’ testified that no consideration had

changed’ hands, that there was no mortgage, and that ©

"his company had allowed: ‘petitioner to use its name as

a favor to ——_- ae wae ee

care “heine is no hshaeke to’ a argument (et

10-15) that petitioner was improperly convi be-

_eause the government’s net worth summary gave him

5%

oly

a

no credit for undeposited. cash on hand _at: the starting: |

point. The solidity of the starting point was estab-—

' lished by (a)* the exhaustive investigation by the -. ie

Treasury agents, which disclosed no other assets; (b). .

the study of petitioner’s lifetime income tax ‘history,

which showed that his. total reported income—tess

income taxes paid—was less than his visible net worth .

at the starting point; (e) petitioner’s failure to claim,

either duting the investigation or at the trial, any

uridéposited cash ‘on hand at the starting point; ahd

(d) evidence tending to discredit all of petitioner’s

oe eee Ete 3 10

: : arguments with vaigsat a possible undisclosed winnie "

cs | on hand~at-that time. (Pet. A9-Al2; supra, p. 3;

A.A. 1340, 2108 et seq.) -This, together with*the abun-

“9 , dant proof that petitioner is a man. who believes in.

'. ‘putting his money to work for him, fully supports the’, *

' jury’s iftference that at the end of 1955 petitioner did a

not have enough undeposited cash to impair the gov-

ernment’s: reconstruction of his unreported income.

Cf. Holland v. United States, 348 U.S. 121, 138-139. *

Whether he ‘had cash) on hand at the various pertinent -

times is, of course, a matter peculiarly within the —

' knowledge of petitioner, who Tefused: to make any . -

statement on the subject:. (A.A. 1340.). Tg these,

| cireumstances the government was not required to ~

_ credit him: with cash on hand, having made a clear- -

cut prima facie case to support the starting point net

worth. Beard -v.-United States, 222 F. 2d 84, 89 —

(CA. 4th), certiorari denied, 350 U.S. 846; United

States v. Holovachka, 314 ¥. 2d 345, ag dn (CA.

To), certiorari denied, 374 U.S. 809.

“The civil eases cited by pétitioner (Pet. 13-14)

—_—_.——— are indpposite not only because they are distinguish- .

able on their facts,’ but because (1) in civil suits.

2In Grubb v. Commissioner, 315 F. 2d 758 (C.A. 6th), the

. court held that.the burden of proof as to cash on hand was 3

_ on the Commissioner, arid that the Tax Court's estimates of -— -

cash on hand were arbitrary and “based on 4 guess”. (/d., pp.

758-759.) , Since the Commissioner’s determination was found,

even by the Tax. Court, to be wrong, and since the Tax Court’s————__—

_——~‘determination, was also wrong, the case was remanded for fur- :

ther :inquiry into the amount of cash on hand. In the other —

_ a ee es eae de eee (Pet. 18-14) there was )

a

i Geer oe ed

| Reece. Foe wsas eae

‘Both sides Sin eir, eards on the table, either before

trial or at trial, and the cash on hand i is thus at least .

theoretically ascertainable; and ‘(2) in civil cases it is

necessary ‘to determine, as accurately as possible, the’

exact amounts of. the tax ‘deficiencies. In criminal

. eases such. precision is unattainable and unnecessary.

United States v. Johnson, 319 U.S. 503, 517-5185,

Holland v. United States, 348 U. Ss. 121, 138.

*. 2. Also und ‘is the contention (Pet. 15-17), that

the: “government failed to “track down relevant leads

furnished by the’ taxpayer—leads reasonably guscepti-

- ble of being checked, which, if true, would establish —

the taxpayer’s innocence.’’ Holland v. Umted ‘States,

stipra, pp. 135-136. The short of it\is that petitioner

_” refused to furnish leads. (A:A. 1340-1341.) The -

argument that the government, in the closing two.

weeks. of the trial, should have analyzed and sum-

marized the policy applications of the Gibraltar com- —

panies, weighing some 830 Ibs., is frivolous. The gov-'

ernment relied. upon the companies’ books, tax ,re-

turns, and reports to the State. of Indiana;:as it was

—-- entitled to, do, in ascertaining their assets, income and

: disbursenients, United States v.. Hornstein, 176 FE. 2d oe

217, 220 (C.A. 7th); United ‘States v: Link, 202: F. 2d. :

substantial evidence of cash on hand which was fenced by the

Commissioner and the:trial courts. ;

In United States v. Costello, 221 F. 24 68, 678 (C.A. 2d),

affirmed on other grounds, 350-U:S. 359, a criminal case, there ...

—-——-wasbefore the court a great deal of. evidence: of the defend-

ant’s financial history for years. prior to the prosecution pe-

; —— which disclosed that “* * * in the past he had abwege kept

.

apeh [cash] reserves in large amonuts.”

sy

\

‘ te

- §92, 693-594 (0.A. 3d); United States vi Bender, 218

FB. 2d 869, 871-872 (0.A, 7th), certidrari denied, 349

-' U.S. 920; ef. Warszower v. United States, 312 US.

- 342, 347. +The petitioner’s belated production of the

_ policy’ applications * came much too late, for even if

these records showed ‘which policies had lapsed. and

- when, and. the amounts of the weekly premiums (and

there is no indication that they did), it obviously

would have. been a physical impossibility ‘to° sym-

| marize them and compare them with the companies:

Br er dnomrmverirnrgenetoeate The admoni- .

' tion in the Holland case as to the government’s duty .@

to track down leads refers to leads furnished’ to the

Treasury agents during ‘their investigation, not to-pos- cas “|

sibilities aerate to the a the clone of

——— 4

*Tf these policy applications were vulernitt at.all, they became

Rip rope epi ieed

, trial, retracting-her testimony that the Gibraltar’

compenies’

books were true and complete and now stating that substantial

- ~premi seipts were unrecorded. ‘At that point, it became -—

it that the companies were in possession of these policy

applications and hed failed to prodyce thein in’ compliance with

the trial subpoena, which called for the production of all books

and records of the companies. The court then ordered their

_ preduction. AAA, 1264-1265.)

5 The applications were in such a state of disarray that one.

witness estimated ‘it ‘would * two pr three icsths to put

| yen back cot rn” (AA. 1814.) .

°o

aed CONCLUSION . ee “ge

_ ’ For the reasons stated; the petition for a writ of «

certiorari should he denied. San

Respectfully sabmnttted. eee Been

- ARCHIBALD ‘Cox,

Solicitor General.

| ig oHN B. Jonzs;Jr.,

| so? Assist stant. Attorney General,

3 nse _--Mrver RoTHWACKs, © |

AN shia Oe aa a ~ Ricwarp B. BURMAN, ©

Mi a i ae tape ea Attorneys.

?

Ut GeveRnmen PxINTING OPPicE:te6s

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