Memorandum in Opposition — Fowler v. United States

3a he Spee out of he Wael aes

Reerecny ey me

No. 793

Joun 8. Fow.er anp Jammie Lea own,

PETITIONERS |

/

v. :

_ Untrep States or AMERICA

ON PETITION FOR A WRIT OF OBRTIORARI 70 THR, UNremp.

STATES at 2 red poy TH bear FOR THE EIGHTH Mean

MEMORANDUM FOR THE UNITED STATES 1 OPPOSITION .

‘Petitioners, husband and wife, were found guiléy

by ajury of having wilfully attempted to:evade'and

defgat their ineome taxes. The husband was ‘sen-

, tenced to ninety days’ imprisonment, plaeéd on pro-

bation for two years thereafter, and fined $2,000; the

wife was placed on a for two years nes ~_

$2,000 (Pet. App. 17a). 57

»

The! government’s case was: hese upon the: net y

worth worth method of proof.’ It was considered : necessary

| -MThere is ‘no legal ‘basis for petitioners’ suggestion: (Peti'?)

that the net-wérth method of proof must'be corroborated: the

bank deposits’ or-any other method'of ‘proof; : ‘Moreover, ' peti-

Moners neither, claimed nov: showed any ‘prejedie-tréun'the fate

(1)

208-179—_66

to use this method because petitioners’ bank deposits

far exceeded their reported. gross receipts (IV R.

475), and their books reflected neither their operation 7

of a restanrant during portions of 1958 and

(IV R. 483) nor ineome from the sale of real te

and stock or interest (IV R. 484). Moreover, peti-

tioners had many large currency transactions which

did not appear on their books (V R. 511-514), and

they regularly used cash register money for unre-

corded personal expenditures (VR. 523). In each

of the prosecution years, petitioners’ income tax

returns were prepared by a ©.P.A. on the basis of

petitioners’ incomplete books (IIT R. 123-125).

‘Iv determining a starting point for the net worth

eémputation, the government began with a balance

sheet submitted by petitioners to the Small Business

Administration in support’ of an application for a

$40,000 loan in 1955. As a result of his exhaustive

independent: examination of petitioners’ net worth

at that time, however, the examining agent inereased

their met assets for the starting point by more than

$20,000 (IV R. 470-474). He also searched all leads

for non-taxable receipts and, consequently, gave peti- -

tioners. credit for an unreported condemnation award,

insurance claim proceeds, and the cash surrender

| value.of two insurance policies (IV R.. 461-463).

Petitioners: chad not claimed any large cash hoard

hati dlen guvecnmant had ot one tiss staieti it would woe-the bank.

depesits. method. in addition to net, worth; such evidence was

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4

is

and had stated. that their cash on hand would never

exceed $2,000, which they allegedly needed to aeccom-

modate customers who wished to have checks cashed

(IV RB. 477-478; V BR. 587-568). Investigation dis- .

closed nothing. inconsistent with, and tended to cor-

_roborate, this statement (IV R. 479).

Petitioners’ net expenditures during the indict-

ment years were far in excess of reported income;

indeed, their personal expenditures alone exceeded

the reported taxable income for each year and in- ,

cluded amounts spent for two Cadillae automobiles

(IiI R. 222-224; IV R. 420-423; V R. 511), a fur

coat (IV R. 423-425), extensive life insurance pre-

miums (IV R. 320-322, 410-417), vacations (V R.

523-525), and gambling losses (V R. 520-521).

From all of the evidence addneed by the govern-

ment, the jury could have found (V R. 639-662) ‘that

the understatement of income was $9,253.84 for 1957,

$17,238.75 for 1958, and $44,832.67 for 1959. - The tax

defieiencies for these years would have amounted to

approximately $2,000. in 1957,;- $4,000 in 1088, and

$24.000 in 1959 (V R. 662-666).*" Beye

In this Court, petitioners .are essentially urging

that the evidence be reweighed. Specifically, they

place their reliance (Pet. 9-10) upon alleged errors

in the government’s. net worth computation, prin-

Qn their returns, . petitioners reported taxable income of

$820.90 in 1957, $147.18 in 1958, and $3,973.18 in 1959 (1 R.

1-2). “Of course the government did not have to prove the

exact amounts of unreported income — United States v,

Johnson, 319 U.S. 503,517, ast ie:

weet omen

4

cipally ‘what they ‘call the “check float”: ‘The vi-

dence showed that certain clivcks which were dated

féar the end of one year did not clear the bank until

the beginning of, the following year, and the claim

is made that accounting for these checks as if paid

in the earlier year would have materially reduced the

net worth bulge.’ We disagree. In

United States v.:Vardine, 305 F. 24 60 (C.A. 2), upon

which petitioners rely (Pet. 9-10), the court below

properly pointed out (Pet. App. 29a) -that no_evi-

dence had been adduced in the present case to show

that these checks were delivered to the payees in the

year dated or whether they were used to reduce lia-

bilities shown as existing at year’s end ee

ment’s net worth statement.‘

- Nor is there any merit to the contention (Pet.

11-13) that the evidence in the instant case did not

meet the standards for net worth proof set forth by

spiro th tua thn epi td Ss

by $177 (VR 005-006)

was “too significant to overlook,” would have reduced the tax-

payer's alleged understatement by one-half (see Pet. App. 57a~

58a). No such disparity is shown here.

‘Tt should be noted that, under the net worth method, .no

ee

8 ~

: nee 3

this: Court in Holland v. United States; 348.0 .S. 121.

It is clear that both the trial court (Pet.“App.'3a) |

and the court of appeals (Pet. App. 31a, 34a)' were -

satisfied that the government had. shown the need for —

using the net worth method, had established a starting

point, had shown a substantial increase in nét worth

for each year, had_shown a likely taxable source of

income, had thoroughly imvestigated all reasonable

leads, and had shown wilfullness. ‘This, we submit, is

all that is required by the Holland decision.

The government’s evidence of wilfullness did not

depend, as petitioners assert (Pet. 12-13), upon their

uncorroborated admissions. In addition to a con-

sistent pattern of under-reporting and failure to show

all their income on their books, petitioners dealt exten-

sively in cash, failed to reveal all their income to the

C.P.A. who prepared their returns and maintained

a much higher standard of living than their reported

taxable income (see n. 2, supra) could conceivably

support. Certainly the Holland case would permit a

‘jury to find wilfullness from such a —, and the

jury here properly did so.* 3

_ 5 Petitioners imply (Pet. 12-18) that they were too poorly

educated to have been able to form the requisite intent or to

have made legs'ty cognizable admissions. “This contention was

properly rejected by the court of appeals (Pet. App. 35a-37a):.

It is clear that petitioners were astute enough to run several »

very successful businesses. It is also clear (V R. 529-531; Pet.

App. 36a-37a) ‘that the investigating agent took great pains to

explain petitioners’ constitutional rights to them. Agent Brown

testified that Mr. Fowler understood the example he gave him

in explaining their constitutional rights (VY R. 521).

¢

For the foregoing reasons, we respectfully submit

that the decision below was correct a

— for certiorari should be denied.

THURGOOD MARSHALL,

Solicitor General.

RicHarD M. Roperts, —

Acting Assistant Attorney General.

JosepH M. Howann,

Burton BERKLEY,

Attorneys.

JANUARY 1966. |

U.9. GOVERNMENT PRINTING OFFICE: 1966

Office-Suprame Court, U.S.

FILED

FEB is 1966

= : o

et tse

IN THE

Supreme Cot of the United States

OctToBER TERM, 1965

No. 793 -

JOHN S. FowLer AND JIMMIE LEA FowLeEr, Petitioners,

against

Unitep Srates, Respondent.

REPLY TO MEMORANDUM IN OPPOSITION

Wiu1AmM H. Bowen

Counsel for Petitioner P

11th Floor, Boyle Building

Little Rock, Arkansas 172201

Of Counsel:

. SmitH, WILLIAMS, Frmpay & Bowen

Little Rock, Arkansas

eran

Press or Brzon S. Apams, WAsuHiNeorON, D. C.

eS,

IN THE >

Supreme Court of the United States

OoctosER TERM, 1965

No. 793

JoHN 8S. FowLer AND JIMMIE LEA Fow eR, Petitioners,

against

Untrep States, Respondent.

REPLY TO MEMORANDUM IN OPPOSITION

The Solicitor Genegal\defends the errors in the Gov-

ernment’s net worth computation here involved by

admitting two of them (the check float and the omitted

liabilities) while ignoring the others. He would ex-

cuse the check float error, as did the Appellate Court,

g an absence of proof that the checks were de-

” Tvered within the year and adding the surmise that

the checks in float may have reduced a liability reflected

in the net worth computation. ~

An examination of these checks, the dates they were

drawn, their negotiation early in thé succeeding year,

2

the fact that they were issued in payment of routine

accounts and their numbers combined to make clear

that they were drawn and delivered in the ordinary

course of business within the year reflected on the

checks. Checks so drawn and delivered justify de-

duction in the year delivered. state of Modie J.

Spiegel, 12 TC 524, acquiescence, 1949-2 C.B. 2, 3,

Rev. Rule. 54-465, 1954-2 C.B. 98; and constitute in-

come to the payee even though recewed after banking

hours December 31st. Charles F. Kahler, 18 TC 31:

These outstanding checks were called to the atten-

tion of the Government during cross examination of

its Special Agent and before the Summary Agent

fashioned the net worth statement here involved.

Nevertheless, this statement was not corrected to re-

flect this float.

This ‘‘lead’’, in the language of Holland, (348 U.S.

121, 135-136), was ignored by the Government and

‘‘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 in-

sufficient to go to the jury.”’ Id. 136:

Significantly, the Court of Appeals Second Circuit.

agrees with the import of this quoted language from

Hollamd and disagrees with the Solicitor General on

exactly this same set of facts. In Vardine, although ~

the Appellate Court was persuaded that the taxpayer

was guilty (305 F. 2d 60, 62), a finding that the tax-

payer ‘“‘had checks outstanding at the end of the years

1951, 1952; 1953 and 1954” (id. 65) in much smaller

amounts than are here involved, was said to be re-

versible error.

TE

3

A possible explanation of the Solicitor General’s

and perhaps the Eighth Cireuit’s tolerant attitude of

error appears in the second paragraph of the fourth

footnote of the Memorandum Brief in Opposition.

There the Solicitor General erroneously states that no

harm is done by ignoring the check float because there

will be an equivalent offsetting accounting e (a)

in reduction of liabilities or (b) by way of n to

non-deductible expenditures. To apply his theory let

us use the total check float outstanding as of December

31, 1957 of $4,255.70, involving twenty checks, and let

us assume that $2,000.00 of these checks were for year-

end bonuses to employees and $2,255.70 were for

ultility and related operating expenses.. It is clear

in these circumstances that the liabilities and personal

expenditure columns of the net worth statement would

be untouched. Only if it is assumed that, in this

illustration, $2,000.00 were paid in reduction of a debt

or debts and the $2,255.70 constituted non-deductible

personal expenditures could the Solicitor General be

correct.

The disputed checks on their face do not bear out the

Solicitor General’s conclusion ; his assumption is wrong

and it is clear that the ‘‘lead’} given to the Govern-

ment at trial relative to the check float was ignored

contrary to the teaching of Vardine, Holland and com-

mon sense.

Next, the Solicitor General in a footnote attempts

to brush aside the Flemister rule, (260 F. 2d 513) as

inconsequential because the omission of liabilities here

involved was not disparate. These taxpayers complain

not about a single omission ‘of a finding by the

Appellate Court that no prejudicial error occurred

4 *

‘even assuming that Appellants are correct in all mat-

ters relating to the trust fund, the loan, the automobiles

and the check float.’? See Appendix to Petition, p.

29a. If a single omission is error in the Fifth Cireuit

we submit that a series of errors is reversible in the

Eighth Circuit. If one omission poses a question to

be fairly weighed by the Court of Appeals with re-

spect to a taxpayer who lives in Texarkana, Texas,

within the Fifth Circuit, a series of errors, we sub-

mit, poses a question to be fairly weighed by a super-

‘visory court for the neighbor who lives a foot: across

the state line in. Texarkana, Arkansas, within =

Kighth Circuit.

The Solicitor General would dodge the clear Te-

quirement of corroboration of opening ‘cash of

$2,000.00, which figure is based upon the taxpayers’

admission at their first encounter with the Special

Agent, Smith v. U. S., 348 U.S. 147, by declaring that

taxpayers dealt in cash and maintained a much higher

standard of living than was indicated by reported tax-

able income. See Memorandum in Opposition, p. 5.

These taxpayers cashed checks for their patrons, in

round figures, totaling $13,800.00 in 1957, $28,000.00

in 1958 and $9,800.00 in 1959. (R. 583) The Special

Agent thought so little of these cash transactions that

he sampled some_10% of the checks and quit. .(R.

585) If the taxpayers had intended to deceive or to

hide or conceal their cash transactions we ask why

would they have deposited all of their cash in one busi-

ness bank account? (R. 474; 191-200; 220-224)

As to the charge that willfulness may be implied

because the taxpayers spent more money than they

reported as taxable income, the Solicitor General must

5

be mindful that, even on the most conservative depreci-

‘ation basis, the taxpayers experienced depreciation

during the years in issue as reflected on their tax re-

turns in the following amounts (R. 166-169; 173-174;

Gov. Exs. 4, 5 and 6):

1957 $11,834.01

1958 15,318.10

1959 19,120.20

Thus, in each of these years there was this much cash

free of tax which would have been available for use

by these taxpayers with impunity to be spent for those

few personal items shown, with ominous overtones, at

page 3 of the Solicitor General’s Memorandum.

> We are aware of no cases or rule of law which re-

quire or even permit an inference of willfulness and

evil purpose in these circumstances. To the contrary,

we submit that taxpayers’ education, their whole-

- hearted cooperation, the open manner in which they

handled their affairs and their banking, their employ-

ment of a bookkeeper and a certified public accountant

to handle their affairs combined with a business that

‘was so many sided as to be confusing and distracting

_to them support a conclusion of innocent mistake or at

the most negligence in the manner in which they

handled their business affairs and reported their tax-

able income.

_~ In elosing it is noted that no response was made by

“the Solicitor General to the claim in the Petition of

the crucial importance of this case in the administra-

_tion of civil and criminal tax law. Since this Peti-

~ tion was filed the Court of Appeals for the Fourth

Circuit by decision entered December 7, 1965 has

joined hands with the Fifth Circuit in the Tomlinson