Petition for Writ of Certiorari — Esser v. United States

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1975.

No. €5-1310

CHARLES A. ESSER,

Petitioner,

vs.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SEVENTH CIRCUIT.

JOEL MURRAY,

ROBERT J. BUTLER,

69 West Washington Street,

Chicago, Illinois 60602,

312/332-0838,

Attorneys for Petitioner.

Gunthorp-Warren Printing Company, Chicago e Financial 6-6565

INDEX.

PAGE

Citation to the Opinion Below. ... 2.0.20... 2. cece. l

PS ire Al cone bo bab cae nmeeeen ee ews 2

PN, WO sg ks ed ee an chen sae eee ae eens 2-3

Constitutional Provision Involved................--.. 3

Ne eds ca oka pas maa lok Mae are een 4+

ge MOTT ELUT ETC T CET TELE eT 4.2

Reasons for Ciranting the Writ... . 2... 5c cee ceee 12-24

UN hase hres Ao SO% Pa ee cone wee a5 25

Appendix “A” (Opinion of the Court of Appeals)

Appendix “B” (Order of the Court of Appeals Denying Re-

hearing and Suggestion for Rehearing in Banc)

Appendix “C” (Indictment Involved )

TABLE OF AUTHORITIES.

Cases.

Beard v. United States, 222 F. 2d 84 (4th Cir. 1955)...15, 22

Gleckman v. United States, 80 F. 2d 394 (8th Cir. 1935).. 20

Holland v. United States, 348 U. S. 121, 99 L. Ed. 150, 75

Se Bee COs 6 504s oe ees eke 12, 20, 21, 23, 25

Kirsch v. United States, 174 F. 2d 595 (8th Cir. 1949). .20, 21

Leland v. State of Oregon, 343 U. S. 790, 72 S. Ct. 1002

fas Seu ree mee were ar ener ys, ree en 20

Lilienthal’s Tobacco v. United States, 97 U. S. 237, 24

ie Mk ky dc crhanna ewok ae ek 4 aa tee 20

United States v. Doyle, 234 F. 2d 788 (7th Cir. 1956).... 22

United States v. Charles A. Esser, 520 F. 2d 213 (1975)

OEE A ee Terr ee re et: Appendix “A”

CM aA Ree

=

United States v. Fenwick, 177 F. 2d 488, 492 (7th Cir.

Ne bs WU atin d ya ou eke eon 8 i 20

United States v. Indian Trailer Corporation, 226 F. 2d 595

Eo nev wad ce Signs Saco ms she we naie 20

United States v. Lacob, 416 F. 2d 756 (7th Cir. 1969). . .18, 22

United States v. Morse, 491 F. 2d 149 (ist Cir. 1974)

LE a fat TAR ON, SRG oad eS Ogg a Sn 13, 18, 24

United States v. Slutsky, 487 F. 2d 832 (2nd Cir. 1973)

RE Ae dChG eas Sa iw ae 13, 14, 15, 18, 22, 24

Universal Camera Corp. v. N. L. R. B., 340 U. S. 475, 95

i , Pe Ok Me, ED. ww ek ee 23

Constitutional Provisions.

Amendment V, Constitution of the United States........

w

Statutes.

Title 28, United States Code, Section 1254(1).......... 2

Title 26, United States Code, Section 7201.............

Other Authority.

Handbook for Special Agents, Intelligence Division, Internal

Revenue Manual, Chapter 9900............... 15, 16, 17

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IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1975.

No.

CHARLES A. ESSER,

Petitioner,

VS.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SEVENTH CIRCUIT.

Petitioner prays that a writ of certiorari issue to review the

judgment of the United States Court of Appeals for the Seventh

Circuit entered in United States vy. Charles A. Esser, Case No.

74-1997, on August 12, 1975. A Petition for Rehearing and

Suggestion for Rehearing In Banc were denied by that Court

on February 12, 1976.

CITATION TO THE OPINION BELOW.

The Opinion of the United States Court of Appeals for the

Seventh Circuit has been reported in 520 F. 2d 213 (1975) and

is reproduced in Appendix “A” hereof. The Order of the United

States Court of Appeals for the Seventh Circuit denying a re-

hearing and suggestion for rehearing in banc is unpublished and

is reproduced in Appendix “B” hereof.

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JURISDICTION.

The judgment of the United States Court of Appeals for the

Seventh Circuit having been entered on August 12, 1975, and

the Petition for Rehearing and Suggestion for Rehearing In

Banc having been denied on February 12, 1976, the jurisdiction

of this Honorable Court is hereby invoked under Title 28, United

States Code, Section 1254(1). The instant Petition shall be filed

within thirty days after February 12, 1976, in accordance with

Rule 22 of the Rules of the Supreme Court of the United States.

QUESTIONS PRESENTED.

1. In a federal criminal tax evasion case prosecuted ex-

clusively under the bank deposits theory, must the government

prove, as an element of its burden of establishing the guilt of

the accused, that it has conducted an adequate and full investiga-

tion, examination and analysis of defendant’s bank deposits in

order:

a. to distinguish between income and non-income deposits

and to thus guarantee essential accuracy in the cir-

cumstantial proof;

b. to make every reasonable effort to obtain such docu-

mentary evidence of defendant’s bank deposits, including

the deposit slips and underlying items of deposit, as

is necessary to distinguish between income and non-

income deposits; and

c. to afford defendant the opportunity to explain deposits

which the government cannot identify as income or

non-income?

2. When the government does not conduct an adequate and

full investigation and analysis of defendant’s bank deposits, but

instead claims that it was virtually impossible to do so, is it

consistent with due process under the bank deposits theory of

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3

analysis to allow a jury which has never received any instruction

from the District Court on these matters:

a. to determine whether defendant’s deposits, including

deposit slips and underlying items of deposit, were

capable of retrieval, examination and analysis by the

government; and

b. to rely upon defendant’s unanalyzed monthly bank

statements and savings passbooks as proof of deposits

of income?

3. When the government does not conduct an adequate and

full investigation and analysis of defendant’s bank deposits, but

instead relies solely upon defendant’s monthly bank statements

and savings passbooks as proof of defendant’s bank deposits, is

it consistent with due process under the bank deposits theory

of analysis to shift the burden of proof to defendant by requiring

him to explain any discrepancy between the total deposits shown

on his bank statements and the income reported on his tax return

or suffer the legal inference that such discrepancy is unreported

income?

CONSTITUTIONAL PROVISION INVOLVED.

The Due Process Clause of the Fifth Amendment to the

Constitution of the United States is involved herein. Amendment

V to the Constitution provides:

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

wise infamous crime, unless on a presentment or indictment

of a Grant Jury, except in cases arising in the land or naval

forces, or in the Militia, when in actual service in time of

War or public danger, nor shall any person be subject for

the same offense to be twice put in jeopardy of life or limb;

nor shall be compelled in any criminal case to be a witness

against himself nor be deprived of life, liberty, or property,

without due process of law; nor shall private property be

taken for public use, without just compensation.

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STATUTE INVOLVED.

The statute under which petitioner was charged and convicted

is Title 26, United States Code, Section 7201. Said statute

provides:

Any person who willfully attempts in any manner to

evade or defeat any tax imposed by this title or the pay-

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 5 years, or both, together with the costs of

prosecution. (Aug. 16, 1954, c. 736, 68A Stat. 851.)

STATEMENT OF THE CASE.

The case was commenced on November 30, 1973, with the

filing of a three-count indictment in the United States District

Court for the Northern District of Illinois, Eastern Division,

charging the petitioner with willfully and knowingly attempt-

ing to evade income taxes due for the years 1967, 1968 and

1969, by filing false income tax returns, in violation of Title

26, United States Code, Section 7201. The indictment involved

is reproduced in Appendix “C” hereof. Petitioner was tried by

a jury and convicted on all counts. His conviction was affirmed

by the United States Court of Appeals for the Seventh Circuit.

Petitioner was prosecuted exclusively under the bank deposits

theory of analysis. Throughout the trial and appeal petitioner

argued tiat the government was required but had failed to

prove, as an element of its burden of es*sblishing his guilt, that

it had conducted an adequate and full investigation, examination

and analysis of petitioner’s bank deposits. Petitioner contended

that the government had failed to make any reasonable effort

‘o examine, analyze and introduce into evidence petitioner's

deposit slips and underlying items of deposit. Petitioner argued

that the government had thus failed to properly attempt to dis-

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5

tinguish income from non-income deposits and had thus failed

to accord petitioner any opportunity to explain his unidentified

non-income deposits. Petitioner concluded that these cumulative

failures on the part of the government denied him a fair trial.

The government claimed at trial and on appeal, notwith-

standing substantial evidence to the contrary, that it was virtually

impossible to examine, analyze, reproduce and introduce into

evidence petitioner’s bank deposits. The government, therefore,

merely obtained from petitioner, and introduced into evidence,

his monthly bank statements and savings passbooks, without

making any attempt to ascertain whether the deposits were in-

come or non-income. The government’s actual analysis of the

deposits to petitioner’s bank accounts consisted of simply adding

up the credits on his monthly bank statements and savings pass-

books. (Appendix, page A6, footnote 2.)

The government also contended on appeal that its investiga-

tion of petitioner’s deposits was legally sufficient because peu-

tioner had stated to the Internal Revenue Service that he de-

posited his business receipts into his bank accounts and because

the monthly bank statements from his business checking account

showed regular deposits having the appearance of business re-

ceipts. Contrary to this contention, however, the record is clear

that petitioner never told the Internal Revenue Service that he

only deposited business receipts into his bank accounts. It is

clear from the record that during the years in question peti-

tioner, a self-employed veterinarian, maintained only one active

checking account which was titled, Prospect Animal Hos-

pital, and that he used that account for non-business as well as

business purposes.

Petitioner argued that the “appearance of income” rationale

urged by the government was inapposite and could not legally

suffice as a substitute for the fundamental requirement that in a

bank deposits case an adequate and full investigation of the de-

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6

posits must be conducted in order to distinguish between income

and non-income deposits, in order to afford the accused an op-

portunity to explain deposits which the government cannot iden-

tify as income or non-income, and in order to guarantee essential

accuracy in the circumstantial proof.

The Court of Appeals decided that the government’s claim

that it was virtually impossible to retrieve, examine and analyze

petitioner’s deposits was a question of fact for the jury. Although

the Court recognized that “deposit slips and underlying items of

deposit are customarily introduced to demonstrate the nature of

the deposits” (Appendix, page AS), it concluded, based upon

petitioner’s statement that he deposited business receipts into

his bank accounts, that the “bank statements introduced into

evidence . . . showed regular deposits having the appearance of

business receipts.” (Appendix, page A7). The Court held that

the authorities do not require the government to identify and

analyze a defendant’s bank deposits in order to prosecute under

the bank deposits theory. The government must only prove that

a defendant “was engaged in an income producing business and

that regular deposits of funds having the appearance of income

were in fact made to bank accounts during the course of busi-

ness.” (Appendix, page A5.) Once the government proves de-

posits having the appearance of income, “defendant has the

burden to explain as far as possible the deposits. With this done

the jury is entitled to infer that the difference between the balance

of deposited items and reported income constitutes unreported

income.” (Appendix, page A6.)

The Court of Appeals concluded that a “full investigation of

various transactions underlying defendant’s deposits was con-

ducted and that all reasonable steps were taken to identify

and deduct non-income items such as inter-bank transfers and

repayment of loans.” (Appendix, pages A6-A7.) The Court also

stated that the record was “replete with testimony regarding

the determination and crediting of non-income items to the

total deposits.” (Appendix, page A7.) The trial record belies

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7

these conclusions. The few non-income items which the govern:

ment identified and deducted were not discovered by a full

investigation and analysis of the transactions underlying peti-

tioner’s deposits, but were readily determined in the following

cursory manner.

The government observed from the face of the savings pass-

books which petitioner demonstrated to the IRS agents,

that in 1967 at one savings and loan association petitioner

effectuated four intra-bank transactions: a transfer of $1046.18

from one account to another, a transfer of $15,000 from a regu-

lar savings account to a savings certificate account, a renewal

of said $15,000 savings certificate account, and a transfer

of $5186.40 from a savings account which petitioner closed to

another savings account. (Tr. 269-272.) The government

deducted these intra-bank transfers as non-incojiie.

The government was told by petitioner that he held two

mortgages and that he received monthly payments which he

deposited to his bank accounts. Petitioner also supplied the

government with the names of the mortgagors and the govern-

nent contacted them to confirm the existence of the mortgages.

Without analyzing petitioner's deposits, the government deducted

these mortgage loan repayments as non-income. (Tr. 571-573.)

The government determined from the face of petitioner’s

income tax returns that petitioner received non-business income,

including proceeds from the sale of stock and commodities, rents,

royalties, dividends and interest. Without analyzing petitioner’s

deposits, the government deducted these items as non-income.

The record is replete with testimony regarding the govern-

ment’s total failure to investigate and analyze petitioner's bank

deposits. It is impossible to determine how many other non-

income items could have been eliminated had the government

actually analyzed the bank deposits.

The following facts, supported by transcript citations, bear

importantly on the questions presented herein. Although the

key government witnesses, the special agent who conducted the

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8

criminal investigation and the revenue agent who testified as

the government’s summary witness, both knew that the bank

deposits theory requires an analysis of the deposits (Tr. 232,

498), neither ever attempted to analyze the deposits made to

petitioner's bank accounts. (Tr. 230-232, 499.) The special

agent admitted that he did not even attempt to reproduce bank

microfilm records of petitioner’s deposits. (Tr. 213.) He ad-

mitted that the microfilm records of the bank where petitioner

maintained his only active checking account were available

(Tr. 230), but the deposit tickets “could not be produced with-

out going into a time-consuming operation” (Tr. 22>) and he

was told that it would be virtually impossible. (Tr. 229.) Al-

though he admitted that the deposits themselves, including the

deposit slips and the underlying items of deposit, are the pri-

mary method of proof in a deposits case (Tr. 232), he testi-

fied that during his more than two-year investigation of peti-

tioner the only things he investigated were the records furnished

him by petitioner. (Tr. 231.)

The assistant cashier of the bank where petitioner main-

tained his only active checking account testified that the bank

maintains a microfilm record of deposits and that the record

is available. (Tr. 253.) He testified that his bank was not

asked, and did not attempt, to locate any individual deposits

to petitioner's account for any of the three years in question.

(Tr. 256.) He admitted that, though it might be a tedious job,

the vast majority of the deposits could be reconstructed from the

microfilm. (Tr. 256-257.)

The president of a savings and loan association, where peti-

tioner maintained a savings account, testified that the original

source of ihe funds deposited to petitioner's account could have

been ascertained by locating the deposit items on the microfilm

records of his association; however, the government did not

ask him to do that. (Tr. 283-284.)

After the trial commenced, the attorney for the government

instructed three IRS special agents to examine microfilm records

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9

at the bank where petitioner maintained his checking account

(Tr. 395, 432, 449) and to obtain five designated deposit tickets

and the corresponding checks deposited to petitioner's checking

account. The first special agent testified that he attempted to

locate the deposit tickets and checks on two dates in 1967 (Tr.

395-396) and he was able to obtain one deposit ticket and

between 220 and 240 checks comprising the majority of the

deposit made on that date. (Tr. 399-400.) He could not find

the second deposit but admitted that it was not posted on peti-

tioner’s monthly bank statement on the same line as the date

of the deposit he had attempted to locate. (Tr. 411-412.) The

second agent testified that he had attempted to locate the deposit

tickets and checks on two dates in 1968 (Tr. 432-433) and he

was able to obtain one deposit ticket and 79 checks comprising a

majority of the deposits made on that date. He could not find

the second deposit but admitted that it was not posted on peti-

tioner’s monthly bank statement on the same line as the date

of the deposit he had attempted to locate. (Tr. 441.) The third

agent testified that he attempted to locate a deposit ticket and

checks on one date in 1969 and he was unable to find a deposit

ticket for that date but he did locate 48 checks deposited to

petitioner’s account on that date. (Tr. 449-452.)

Evidence adduced at trial from both government and defense

witnesses established that during the years in question peti-

tioner had a substantial cash accumulation from which he made

substantial cash gifts and loans to relatives (Tr. 368-376, 760-

763), friends (Tr. 310-317, 826-831) and business acquaint-

ances. (Tr. 815-821.) These gifts, loans and the repayment of

same are summarized as follows:

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Concerning the foregoing gifts, loans and repayments, the

government's summary witness testified that he credited peti-

tioner with a non-income loan repayment of $5,000 from Patricia

Blosser in January, 1967, because he assumed that “those funds

may have been redeposited to the accounts. . . .” (Tr. 572.)

He testified, however, that he treated Blosser’s testimony about

other cash loans she received from, and repaid to, petitioner in

1967 differently. (Tr. 573.) He stated that he had no way of

knowing the source of these loans (Tr. 573), but “the money

- - . could have come from Dr. Esser’s cash accumulation. .. .”

(Tr. 573.) He admitted that all funds accumulated by petitioner

prior to 1967 and deposited in his bank accounts in 1967, 1968

or 1969 would not be taxable income during the years in ques-

tion (Tr. 642-643), but the government's summary would have

treated such amounts as taxable income. (Tr. 643.)

The government's summary of the evidence presented during

its case-in-chief admittedly did not credit petitioner with addi-

tional non-income loan repayments totalling $14,000 from

Blosser in 1967 (Tr. 655), $7,000 in non-income gift repay-

ments from Emily Jacobson in 1968 (Tr. 656-658), and $5,000

in non-income repayments from her in 1969. (Tr. 659-660. )

The government did not re-summarize the evidence at the close

of the defense case and, accordingly, did not credit petitioner with

additional non-income loan repayments totalling $17,000 from

Wendell Sampson in 1967 (Tr. 818), $4,500 from Sampson

in 1968 (Tr. 819), $21,000 from Freda Kucera in 1968 (Tr.

828-830), $1,400 from Yvonne Koester in 1968 (Tr. 763),

$6,000 from Kucera in 1969 (Tr. 830-831), and $1,680 from

Koester in 1969. (Tr. 763.)

Petitioner’s business manager testified that most of peti-

tioner’s clients paid by check as opposed to cash. (Tr. 754.)

She testified that several times a day petitioner cashed checks for

his clients from funds he had in his wallet. (Tr. 755.) Peti-

tioner cashed employees’ payroll checks (Tr. 757) and travelers’

checks (Tr. 759-760) in the same manner. (Tr. 757.) All such

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12

checks were then put in the cash box (Tr. 756) and became

part of petitioner’s bank deposits. (Tr. 757.) Several times a

week petitioner also gave her an additional hundred or two hun-

dred dollars from his wallet and told her to put it in with

the deposit. (Tr. 757-758.) She never saw petitioner cash a

check from the cash business receipts in the cash box. (Tr.

756.) The government’s summary witness had previously testi-

fied that all client checks, employee payroll checks and travelers’

checks cashed by petitioner and subsequently deposited to his

bank accounts would have appeared in the government's sum-

mary as taxable income to petitioner. (Tr. 622-637.)

Notwithstanding all of the foregoing, the Court of Appeals

determined that “the evidence was more than sufficient to sup-

port the verdict below.” (Appendix, page A7.)

REASONS FOR GRANTING THE WRIT.

The requirement that in a bank deposits case the government

prove, as an element of its burden of establishing the guilt

of the defendant, that it has made an adequate and full investi-

gation of the deposits to defendant’s bank accounts emanates

from the decision of this Honorable Court in Holland v. United

States, 348 U. S. 121, 99 L. Ed. 150, 75 S. Ct. 127 (1954).

Although Holland was prosecuted under the net worth theory, the

bank deposits theory is fraught with similar dangers for the

accused. As Mr. Justice Clark recognized in 348 U. S. at 127-

128:

There is great danger that the jury may assume that once

the Government has established the figures in its net worth

computations, the crime of tax evasion automatically

follows.

In a bank deposits case there exists the similar danger that the

jury might erroneously assume that once the government estab-

lishes a discrepancy between defendant’s total bank deposits

and reported income, the crime of tax evasion has been proved.

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13

To alleviate this peril several of the circuits have defined the

proof which the government must adduce in a criminal case

prosecuted exclusively under the bank deposits theory.

The requirements for proceeding under the bank deposits

theory were recently reviewed in United States v. Morse, 491

F 2d 149 (lst Cir. 1974), in which the Court stated at page

152:

In order to legitimately avail itself of this approach, the

government must initially introduce evidence to show (1)

that, during the tax years in question, the taxpayer was

engaged in an income producing business or calling; (2)

that he made regular deposits of funds into bank accounts;

and (3) that an adequate and full investigation of those

accounts was conducted in order to distinguish between

income and non-income deposits. (Emphasis added.)

The investigatory procedures italicized above have also been

mandated in other circuits. In United States v. Slutsky, 487

F. 2d 832 (2nd Cir. 1973). the Court stated at page 840:

The requirement of a full and adequate investigation in a

bank deposits case is based on the similar requirement in

a net worth case. Holland v. United States, supra. Such

investigation must establish a guarantee of essential ac-

curacy in the circumstantial proof at trial as an element of

the government's burden of proving guilt beyond reason-

able doubt.

The Court then proceeded to extensively examine the adequacy

of the government’s investigation and analysis of Slutsky’s

deposits. Because the analysis in Slutsky is in such sharp con-

trast with the absence of any analysis in the case at bar, the

bank deposits analysis in Slutsky merits detailed scrutiny. With

respect to each of Slutsky’s six bank accounts, hereinafter num-

bered 1 through 6, the Court stated in 487 F. 2d at 840-841:

1. With the exception of two unidentified items totalling

some $2,000, every item of the total $1,661,639.08

deposited in this account during the three taxable years

was analyzed. More than $1.5 million was identified as

non-income. The remainder was charged as income.

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ith Da ei ati

14

2. Of the total $1,710,083.34 deposited in this account,

more than $550,000 was identified as income. .. .

That figure comprised 788 individual items of which

678 were items under $1,000. The IRS’ investigation

of this account entailed an analysis of every item over

$1,000 (with the exception of approximately $11,000).

and a random analysis of items under $1,000. Only

$13,456.78 of the total deposits was identified and

eliminated as non-income.

3. In this, the major business account, more than $13 mil-

lion was deposited during the three years in question. Of

the items over $1,000, the IRS analyzed all but $4,000.

In addition, of the items under $1,000 (all of which had

a number encircled on the back of the checks), some

769 were randomly analyzed. The result was the

elimination of almost $3.8 million as non-income, the

identification of over $800,000 as income, and the

further charging as income of almost $7.5 million in

unidentified items under $1,000. Some $1 million in

currency deposited in this account was also charged

as income.

4. Of the total $996,297.82 deposited in this account,

every item was identified. $19,500 was eliminated as

non-income. The remainder was charged as income.

5. Of the total $326,687.75 deposited in this account,

every item was identified. More than $230,000 was

eliminated as non-income. The remainder was charged

as income.

6. Of the total $360,929.44 deposited in this account,

every item was identified. More than $170,000 was

eliminated as non-income. The remainder was charged

as income.

In response to Slutsky’s complaint that the government did not

analyze every deposit item under $1,000, the Court concluded

in 487 F. 2d at 842:

[T]he investigation included a detailed check of every item

in an amount greater than $1,000, with very few specified

exceptions. In addition, a random check of 1447 items in

amounts less than $1,000 was made; and the analyzed

items were found to constitute income in virtually every

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15

instance. Moreover, a further examination of the business

accounts disclosed that almost every item in an amount

under $1,000 was reflected by a check with a room number

encircled on the back; according to the record, this specif-

ically identified these items as guest receipts and therefore

income. To hoid the government to a stricter duty of in-

vestigation than it performed here would be to ignore both

the “reasonableness” and “fairness” strictures that have

been imposed; it would also result in an exercise in dimin-

ishing returns in terms both of the provision of relevant

information to the fact-finder and of the protection of the

rights of taxpayers.

In Beard v. United States, 222 F. 2d 84 (4th Cir. 1955), the

government’s extensive analysis of defendant’s bank deposits was

described at page 91:

The evidence was offered in the following manner: Micro-

film copies of the checks made by the Bank by the

Recordak process in the usual course of business. . . . They

comprised 950 reels of microfilm, each containing repro-

ductions in miniature of approximately 1500 checks. From

the microfilm the Government made enlarged photographs

of 854 checks cashed or deposited in 1944... by Beard or

his wife, and bearing the signature of one or the other as

last endorser. These items were listed on a 19 page docu-

ment which contained as to each check the date, the bank

on which it was drawn, the drawer, the payee and the

amount; and it also contained figures by which it could be

identified as one of the items in the microfilm. It was pre-

pared by ten revenue agents. . .

In obvious recognition of the legal requirement that an

adequate and full investigation of the deposits must be made in

order for the government to prosecute under the bank deposits

theory, the Handbook for Special Agents, Intelligence Division,

Internal Revenue Manual, Chapter 9900, published by the In-

ternal Revenue Service, promulgates the investigative requisites

for a bank deposits case in section 326.4(2):

The Government must establish that the deposits reflect

income which is current. This may be accomplished by

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16

showing that the taxpayer was engaged in an income-

producing business, that he made periodic deposits to his

bank account, that the deposits have been analyzed to

eliminate nonincome items such as loans or gifts, and in-

come items which may be duplicaticns of amounts actually

accounted for and reported or, amounts which have been

earned in prior years. (Emphasis added.)

Section 326.6(4) is even more cogent:

The analysis of deposits is the vital part of a bank deposits

case and too much importance cannot be placed upon its

accuracy. Exhibit 300-6 is illustrative of a schedule which

may be used to show the results of this analysis. (Emphasis

added. )

Exhibit 300-6, hereinafter reproduced, conclusively demon-

strates that a deposits case contemplates a day-by-day analysis

of every deposit in order to exclude non-income items and

attempt to identify the source of the deposit items.

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18

In the instant case, United States v. Esser, 520 F. 2d 213

(1975), the Seventh Circuit indicated its reliance upon United

States v. Morse, 491 F. 2d i49 (1st Cir. 1974), and United

States v. Slutsky, 487 F. 2d 832 (2nd Cir. 1973) (Appendix,

page AS), but utterly disregarded or eliminated the third founda-

tion requirement delineated by the First Circuit in Morse and

followed by the Second Circuit in Slutsky:

that an adequate and full investigation of those accounts

was conducted in order to distinguish between income and

non-income deposits. 491 F. 2d at 152.

Instead of requiring the government to fully investigate and

analyze petitioner’s bank deposits in order to distinguish between

income and non-income deposits, the Seventh Circuit allowed

the jury, which had never received any instruction from the Dis-

trict Court on this matter, to determine whether the government

was or was not capable of retrieving and analyzing defendant’s

deposits. The Court stated in 520 F. 2d at 216-217 (Appendix,

page AS):

The government introduced the bank statements and pass-

books as the most reliable evidence available. Though ap-

pellant attempted on cross-examination to establish that

the slips and items were capable of retrieval, the ques-

tion was left as one of fact for the jury.

The Seventh Circuit then ruled that a prosecution under the bank

deposits theory does not require an analysis of the bank deposit

items. The Court stated in 520 F. 2d at 217 (Appendix, page

AS):

[T]he bank deposits theory requires the government to prove

that the defendant was engaged in an income producing

business and that regular deposits of funds having the ap-

pearance of income were in fact made to bank accounts

during the course of business. United States v. Lacob, 416

F. 2d 756 (7th Cir. 1969); United States v. Stein, 437

F.2d 775 (7th Cir. 1971); United States v. Morse, 491

F.2d 149 (lst Cir. 1974). The total deposits figure serves

as the starting point for further analysis of the taxpayer's

accounts.

* * * * *

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19

After the government proves that deposits having the ap-

pearance of income were made the defendant has the burden

to explain as far as possible the deposits. With this done

the jury is entitled to infer that the difference between the

balance of deposited items and reported income constitutes

unreported income.

It is clear from the Esser opinion that the jury was free to

rely upon the unanalyzed monthiy bank statements and savings

passbooks as proof of deposits of income, so long as the peti-

tioner was engaged in an income producing business and that

regular deposits, having the appearance of income, were made

to his bank accounts. The Seventh Circuit then shifts the burden

to petitioner to explain his deposits by attempting to distinguish

income from non-income deposits from literally hundreds of un-

analyzed entries in the deposits column on his monthly bank

statements and savings passbooks which, at the time of trial, are

five, six and seven years old. The petitioner thus had the burden

of attempting to prove his innocence by doing exactly what the

government claimed it could not, and therefore did not, do:

conduct an investigation and analysis of his bank deposits, in-

cluding his deposit tickets and clearing checks which exist only

on the microfilm records at his banks, in order to distinguish be-

tween income and non-income deposits. If the petitioner fails

to meet this burden, the Seventh Circuit indulges the inference

that the discrepancy between the total deposits shown on the

bank statements and the income reported on his tax returns is

unreported income.

Petitioner respectfully suggests that the Seventh Circuit seri-

ously misinterpreted the law and effectively deprived him of due

process, first, by disregarding or eliminating the legal require-

ment that in a bank deposits case the government must prove,

as an element of its burden of establishing the guilt of the de-

fendant, that it has made an adequate and full investigation of

the deposits to defendant’s bank accounts; second, by shifting

the burden of proof from the government to the defendant; and

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20

third, by indulging the legal inference that if the defendant fails

to explain the discrepancy between the total deposits shown on

his monthly bank statements and his reported income, the dif-

ference is unreported income. While these errors of law are in-

dividually significant, their cumulative effect demonstrates an

extraordinary deprivation of the fundamental fairness guaranteed

a defendant in a criminal case.

It is elemental that the law never imposes a higher burden

on a defendant in a criminal case than the burden of proof

imposed upon the government. The burden of proof in a crim-

inal case never shifts. Lilienthal’s Tobacco v. United States, 97

U. S. 237, 24 L. Ed 901 (1877); Leland v. State of Oregon,

343 U. S. 790, 72 S. Ct. 1002 (1952); United States v. Fen-

wick, 177 F. 2d 488, 492 (7th Cir. 1949); and United States

v. Indian Trailer Corporation, 226 F. 2d 595, 598 (7th Cir.

1955). Accordingly, the conclusion seems inescapable that

when the government proceeds exclusively under the bank de-

posits theory but does not analyze defendant’s bank deposits,

the law cannot constitutionally impose upon defendant the bur-

den of explaining his deposits or, failing to do so, suffer the

inference that the difference between the total of the items in

the deposits column on his monthly bank statements and his re-

ported income is unreported income. The bare fact that

a man has deposited sums of money in a bank does not

prove that he owed income tax on those amounts. Kirsch v.

United States, 174 F. 2d 595, 601 (8th Cir. 1949); and Gleck-

man Vv. United States, 80 F. 2d 394, 399 (8th Cir. 1935).

The Esser rationale represents a significant transgression from

Mr. Justice Clark’s reasoning in Holland v. United States, supra,

in 348 U. S. at 126:

One basic assumption in establishing guilt by this method

is that most assets derive from a taxable source, and that

when this is not true the taxpayer is in a position to ex-

plain the discrepancy. The application of such an assump-

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21

tion raises serious legal problems in the administration of

the criminal law. Unlike civil actions . . . the prosecution

must always prove the criminal charge beyond a reason-

able doubt.

And in 348 U. S. at 128:

Although it may sound fair to say that the taxpayer can

explain the “bulge” in his net worth, he may be entirely

honest and yet unable to recount his financial history. In

addition, such a rule would tend to shift the burden of

proof. Were the taxpayer compelled to come forward with

evidence, he might risk lending support to the Government's

case by showing loose business methods or losing the jury

through his apparent evasiveness. Of course, in other

criminal prosecutions juries may disbelieve and convict the

innocent. But the courts must minimize this danger. (Em-

phasis added. )

The Seventh Circuit’s reasoning in the instant case is also

inconsonant with Kirsch v. United States, 174 F. 2d 595 (8th

Cir. 1949). Although in Kirsch the government introduced into

evidence the bank’s record of defendant's business checking ac-

count and deposit slips showing all deposits made to that

account, the Court reversed the conviction after finding that

the government had not sufficiently analyzed defendant’s bank

deposits. The Eight Circuit held in 174 F. 2d at 601:

It is one thing for a party to say . . . that he had exercised

all of the means he reasonably could to determine how

much of a bank account was income, had eliminated all

that he could determine was not income, and was there-

fore assuming for the purpose of calculating taxes due that

the remainder was income, and quite another and different

thing to say . . . as was done in this case—My evidence

shows that all of these deposits were not income, but I

do not know how much was not, I have made no effort to

find out. So I am assuming that all are income and am

casting the burden on the defendant to show, if he can,

how much is not, or suffer the consequences. The latter

procedure cannot be approved.

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22

The Seventh Circuit's decision in the case at bar represents

the first bank deposits prosecution in which an appellate court

has approved the fundamental failure of the government to con-

duct any investigation and analysis of the deposits. It also ap-

pears to be the first time that the government was permitted to

. prove defendant's deposits by merely utilizing the figures shown

on defendant’s monthly bank statements and savings passbooks.

Although the government identified and eliminated several

obvious non-income items from the face of the passbooks, it is

impossible to determine how many non-income items could have

been eliminated from defendant's deposits had the government

conducted the type of bank deposits investigation prescribed

in the Internal Revenue Manual and performed in United States

v. Slutsky, 487 F. 2d 832 (2nd Cir. 1973) and in Beard v.

United States, 222 F. 2d 84 (4th Cir. 1955). As the First

Circuit said in Morse, supra, 491 F. 2d at 154:

The significance of the agent’s allowing a non-income

deduction is not the concession, but the corresponding im-

plication that it should not be larger.

The record in the instant case contains numerous examples of

loan repayments which were not credited to defendant as non-

income items, and there is considerable testimony concerning

the defendant’s practice of cashing clients’ checks, travelers’

checks and employee payroll checks, all of which were deposited

to petitioner's bank account. Since the government did not

analyze the deposits, all of these items were considered taxable

deposits of income.

The instant case is not only in conflict with the decisions of

other circuits, it is actually a departure from the doctrine here-

tofore followed in the Seventh Circuit. In United States v. Doyle,

234 F. 2d 788 (7th Cir. 1956), the Court approved the use

of the bank deposits method “if a thorough investigating

analvsis of the deposits is made as . . . is generally required.”

234 F. 2d at 793. Now the Seventh Circuit, apparently by rely-

ing upon United States v. Lacob, 416 F. 2d 756 (7th Cir.

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23

1969), has improperly adopted the “appearance of income”

concept as a substitute for the requirement of an analysis of the

deposits. Lacob, however, envisioned no such substitution. After

defendant’s bank deposits were analyzed in Lacob, the govern-

ment identified over $55,000 as income and an additional

$39,000 as having the appearance of income. The Court in

Lacob found that “almost two-thirds of the income charged to

defendant was, in fact, proved by the specific-item method.” 416

F. 2d at 760. A thorough investigative analysis of the bank

deposits thus remained a prerequisite to proof or receipts having

the appearance of income.

Legal issues of exceptional importance have been raised in

the instant petition and extraordinary circumstances exist which

require an authoritative consideration and decision by this

Honorable Court. In Holland v. United States, 348 U. S. 121,

99 L. Ed. 150, 75 S. Ct. 127 (1954), Mr. Justice Clark in

348 U. S. at 129 wrote:

[P]itfalls inherent in the net worth method . . . require

the exercise of great care and restraint. The complexity

of the problem is such that it cannot be met merely by

the application of general rules. Cf. Universal Camera

Corp. v. N.L.R.B. 340 U.S. 474, 489, 95 L.Ed 456,

468, 71 S.Ct. 456. Trial courts should approach these

cases in the full realization that the taxpayer may be en-

snared in a system which, though difficult for the prosecu-

tion to utilize, is equally hard for the defendant to refute.

* * s * *

Appellate courts should review the cases, bearing con-

stantly in mind the difficulties that arise when circumstantial

evidence as to guilt is the chief weapon of a method that is

itself only an approximation.

Petitioner respectfully suggests that in the case at bar the

United States Court of Appeals for the Seventh Circuit did not

exercise that “great care and restraint” that has been mandated

by this Honorable Court. By abandoning the requirement for an

adequate and full investigation and analysis of a defendant's

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Be RA AR ADR BD EM halite aL diaionheih Ss SRM

De

LE: ME in PS

24

bank deposits in a case prosecuted exclusively under the bank

deposits method, the Seventh Circuit rescinded the guarantee of

essential accuracy in the circumstantial proof and transgressed

from the rationale and the rules promulgated in Holland.

The rules of law enunciated by the Seventh Circuit which:

1. permit the jury, without instructions, to determine

whether defendant’s deposits were capable of retrieval

and analysis by the government,

2. permit the jury, without intructions, to rely upon de-

fendant’s unanalyzed monthly bank statements and

savings passbooks as proof of deposits of income,

3. shift the burden of proof to defendant by requiring him

to explain any discrepancy between the total deposits

shown on his bank statements and the income reported

on his tax return or suffer the legal inference that such

discrepancy is unreported income, and

4. adopt the “appearance of income” rationale,

also violate Holland and, moreover, fail to comport with due

process, fundamental fairness, or a sense of justice. These issues

cogently warrant resolution by this Honorable Court.

All of the foregoing issues, particularly the departure from

the requirement that the government must prove, as an element

of its burden of establishing the guilt of the accused, that it

has conducted an adequate and full investigation and analysis

of defendant’s bank deposits, places the Seventh Circuit in con-

flict with recent decisions from two other circuits: United States

v. Morse, 491 F. 2d 149, 152 (list Cir. 1974), and United

States v. Slutsky, 487 F. 2d 832 (2nd Cir. 1973). This conflict

in the circuits, being directed at the fundamental due process

requirements for proceeding under the bank deposits method,

merits resolution by this Honorable Court. It is time for the

principles of Holland v. United States, supra, to be reaffirmed.

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25

CONCLUSION.

For the reasons stated herein, petitioner respectfully urges

this Honorable Court to grant this Petition for a Writ of

Certiorari to the United States Court of Appeals for the Seventh

Circuit.

Respectfully submitted,

JOEL Murray,

ROBERT J. BUTLER,

69 West Washington Street,

Chicago, Illinois 60602,

312/332-0838,

Attorneys for Petitioner.

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