Brief for the United States — Gendelman v. United States

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INDEX.

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CITATIONS.

CASES:

Barcott v. United States, 169 F. 2d 929, certiorari denied, 336

eS ee Tree eer ree re sre ae 11, 12

Bryan v. United States, 175 F. 2d 223, affirmed, 338 U. S.

eS eee eae Ce Te eee ERE REO Re ee 12,

Buttermore v. United States, 180 F. 2d 853........... 2.2.2 ee eee

Capone v. United States. 51 F. 2d 609, certiorari denied, 284

fe Nl SM eee Te ret eee RE ee ee er ee

Chadick v. United States, 77 F. 2d 961.............cccecceceee

Gariepy Vv. United States, 189 F. 2d 459 ......... cece cece cence

Gleckman v. United States, 80 F. 2d 394, certiorari denied, 297

Oe Se Are Cee STE LER ERT RIE REET ee

Guzik v. United States, 54 F. 2d 618, certiorari denied, 285

OS er ere he ee ea a eee Eee ee ee Ee

Hanson v. United States, 186 F. 2d 61 ............... ce eeeees 11, 12

seme: ¥. United States, 170 F. 34 BOS... esrsccesscecvevevace

| Kirsch v. United States, 174 F. 2d 895...............ce cee eee

| Leeby v. United States, decided Nevember 13, 1951............

Malone v. United States, 94 F. “a 281, certiorari denied, 304

i, BAUS tol ee at RGR See eee ESE re ere Ee

Oliver v. Unite? States, St ©. 2d 48, certiorari denied, 285

ON PE eC Greet CL eee PEP OE TORS TRE 11

Orzechowski v. United States, 37 F. 2d 713.........0.ccccceees 11

Paschen V. United States, 70 F. 2d 491 1.0... cece ccc cee ence 11

Schuermann v. United States, 174 F. 2d 397, certiorari denied,

Re en a eS AGES Vad env Oia weeded CeataVenee sue Oe

Singer v. United States, 58 F. 2d 74 2.0... 2. ccc cnc c cree cccees 11

pees V. United States, 317 U. B. 402 oo. i cece ccescceess 9

Stinnett v. United States, 173 F. 2d, 129, certiorari denied, 337

(REE, EE Oe ee ee a ee ee ee RE ee ee a 11

United States v. Chapman, 168 F. 2d 997, certiorari denied, 335

IE coe SA REEK NAR WNG AWA SS EEA SSO NE ESB OUTST OOS 12

United States ¥. Fenwick, 177 F.2d 488 2... cc cscs ccvcccccce 13

ii Index Continued.

Page

United States v. Johnson, 319 U. 8S. 503, rehearing denied, 320

Ele He OOO ye & CNG Ae eO es Ee MUARCEU CS HEN SRNR EE RoE N Eee 12

United States v. Miro, 60 F. 2d 58....... cc cece cecccsvecevecs 11

United States v. Skidmore, 123 F. 2d 604, certiorari denied,

PG eee eee ee eee eee ee ores he ec 11

United States v. Venuto, 182 F. 2d 519.......cccceccccecccccee Il

United States v. Zimmerman, 108 F. 2d 370 .............-200ee 11

STATUTES:

Internal Revenue Code:

Sec. 145 (26 U. 8. C. 1946 ed., Sec. 145)............---- 00 2

a ste Sides

JInthe Supreme Gourt of the Wnited States

OctToBeR TERM, 1951

No. 434

JuLIvUs GENDELMAN, Petitioner

Ve

UNITED STATES OF AMERICA

On Petition for a Writ of Certiorari to the United States Court

of Appeals for the Ninth Circuit

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINION BELOW

The Distrit Court rendered no opinion. The

opinion of the Court of Appeals (R. 706-712) is

unreported.

JURISDICTION

The judgment of the Court of Appeals was en-

tered on October 19, 1951. (R. 713.) The petition

for a writ of certiorari was filed on November 19,

1951. The jurisdiction of this Court is invoked un-

der 28 U.S.C., Section 1254(1). See also Rules

37(b) (2) and 45(a) of the Federal Rules of Crim-

inal Procedure.

2

QUESTIONS PRESENTED

1. Was the evidence sufficient to sustain the

verdict ?

2. Was it error to admit evidence of petitioner’s

net worth ?

STATUTE INVOLVED

Internal Revenue Code:

Src. 145, PENALTIES.

* * * * * * * *

(b) Failure to Collect and Pay Over Tax, or

Attempt to Defeat or Evade Taxr—Any per-

son required under this chapter to collect, ac-

count for, and pay over any tax imposed by

this chapter, who willfully fails to collect or

truthfully account for and pay over such tax,

and any person who willfully attempts in any

manner to evade or defeat any tax imposed by

this chapter or the payment thereof, shall, in

addition to other penalties provided by law, be

guilty of a felony and, upon conviction thereof,

he fined not more than $10,000, or imprisoned

for not more than five vears, or both, together

with the costs of proseeution.

% % * x * % % *

(26 U.S.C. 1946 ed., See. 145.)

STATEMENT

Petitioner was indicted on March 8, 1950, in the

United States District Court for the Southern Dis-

12a Ue aDetih nae MSI

3

trict of California on two counts. (R. 3-5.) Count

one charged that petitioner wilfully attempted to

defeat and evade his individual income and victory

taxes for 1943 by filing a false and fraudulent re-

turn wherein he stated that his net income, com-

puted on the community property basis, was

$2,593.38, and that the income and victory tax

thereon was $401.25; whereas his income for the

year 1943, computed on the community property

basis, was $10,839.90 and the tax due was $2,913.85.

(R. 3-4.)

Count two charged that petitioner wilfully at-

tempted to evade and defeat a large part of the in-

come and victory taxes of his wife, Edythe Gendel-

man, for the vear 1943 by causing to be filed on her

behalf a false and fraudulent return in which it

was stated that her net income for the year, com-

puted on the community property basis, was

2,993.37, and the tax due thereon was $398.87 ;

Whereas, her net income for the year, computed on

a community property basis, was $10,839.90, and

the tax due was $2,913.85. (R. 4-5.)

A motion for aequittal was made at the eonelu-

sion of the Government’s case (R. 652, 660) and

was denied (R. 654, 661). The motion was renewed

at the close of the defense and again denied. (R.

673.) After denying the motion for acquittal and

for a new trial (R. 14-15) the court sentenced the

petitioner to imprisonment for a term of. ten

months on each count, to run concurrently (R.

15-17).

4

Petitioner was engaged in the manufacture and

sale of furniture during the year 1943, the two

principal businesses operated by him during the

year being the Modern Furniture and Upholster-

ing Company, Ine., a corporation, and Super-Built

Furniture Manufacturing Company, a sole pro-

priectorship, which succeeded the former company

on June 30, 1943. (R. 340-341, 388.) Both con-

cers were engaged in manufacturing furniture,

and in order to provide sales outlets for their prod-

ucts, petitioner purchased or opened retail stores

which he operated for various periods of time. (R.

410-411.)

Petitioner and his wife were the actual owners

of the entire interest in the Modern Furniture and

Upholstering Company, Inc., during the period of

its existence. (R. 336-340, 362-365, 403-404, 408:

Ex. 34, 46B, 47.) This company was consolidated

with Super-Built Furniture Manufacturing Com-

pany on June 30, 1943 (R. 340-341, 388), the legal

title being placed in the name of Esther Chochem

(R. 390), although petitioner was actually the

owner (R. 404, Ex. 34). The net income of the

company of $9,286.75 was reflected on the income

tax return of Esther Chochem for 1943. In an-

Swer to a request by the Government for informa-

tion as to the true ownership of his enterprises in

the name of Esther Chochem, petitioner made the

following signed statement: ‘Esther Chochem was

the owner of the legal title to the property of the

4a-

business operated under the name of Super-Builtt

Furniture Mfg. Co., but the income therefrom wass

received by Julius Gendelman, to whom it really,

belonged’, (R. 709, Ex. 44.) The income from,

Super-Built was not reported on petitioner’s 19433

return.

Petitioner also owned Modern Furniture Com. .

pany, a retail store, until April, 1943 (R. 397-399) )

when it was sold to Standard Furniture Company. -,

Its operations were reflected on the books of Mod- -

ern Furniture and Upholstering Company, Inc., a

and when this retail outlet was sold, a part of the e

consideration was made payable to Llovds Furni-. -

ture Company. (R. 901-504.)

Manufacturers Furniture Outlet, a retail store, »

was owned and operated by petitioner until March h

2, 1943 CR. 408, 415, 438, Ex. 34) when it was sold d

to Louis Mandell (R. 107-110).

L.. A. Mode Furniture Manufacturing Company, -

a furniture manufacturing company, was in exist- =

ence from February 22, 1943 to June 30, 1943, 3,

when it was sold to Super-Built Furniture Manu- 1-

facturing Company. (R. 408, 388-389, Ex. 34.) )

Title to this business was in the name of Mrs. sg,

Gendelman (R. 389), and a loss of #1,281.22 shown n

on the company records was claimed by petitioner +r

and his wife on their income tax returns (Ex. 2,3). ),

Llovds Furniture Company, a retail outlet, was is

operated from on or about January 22, to May 26, 6

1943, (R. 408, 436, 438, Ex. 34.) Title to the busi- i-

6

ness was in the name of Esther Chochem, both in

the purchase and sale of the business, but the peti-

tioner was the owner. (R. 408, 493.)

J and S Sales Company, a wholesale outlet, was

operated in August and September, 1943, as a

partnership between petitioner and Joseph J.

Sherline. (R. 198-199, 396.) The petitioner fur-

nished materials for assembly of living room

suites, and Sherline sold the merchandise. (R.

199-200.)

Allied Furniture Company, a retail store, was

owned and operated by petitioner until December,

1943. (R. 78, 397.)

During 1943 petitioner had no personal bank ac-

counts in his own name. (R. 621-622.) He utilized

three commercial and two savings bank accounts

of Edythe Gendelman, his wife, in three separate

banks. (R. 46-48, 58-62, Ex. 9-14, 20-22.) He held

a power of attorney over a commercial account in

the name of his aunt, Esther Chochem (R. 64, 66,

68, Ex. 23), and he also used another commercial

account and two savings accounts in the name of

Esther Chochem (R. 49, 51, 436, 443-447, Ex. 16-

17). He held a power of attorney ona commercial

account in the name of Corrine Chochem, daughter

of Esther Chochem. (R. 52, 436, Ex. 18.) In ad-

dition, he held a power of attorney over a commer-

cial account in the name of Lloyds Furniture Com-

pany, title to which business was in the name of

Esther Chochem. (R. 70-71, 487-438, Ex. 24.)

Bank deposits made to the various Chochem ac-

counts were traced as emanating from the sales of

eer et RDS, Ct Ta

oF . : gene ead INSEL EMPIRE AS

merchandise by the manufacturing and retail con-

cerns owned by petitioner, and from the sales of

the retail stores themselves. These deposits were

identified as (1) sale of merchandise amounting to

$1,844.00 (R. 545-546) paid by State Investment

Company checks (Ex. 5); (2) sale of Manufac-

tures Furniture Outlet retail store to Louis Mandel

for $7,600 (R. 541-542, Ex. 29); (3) sale of $1,080

merchandise to Orn’s Furniture Company (R. 113-

114, 121, 415-417; Ex. 30) ; (4) sale of merchandise

to J & S Sales Company of $3,981.64 (Ex. 32A-

32H); (5) sale of merchandise by J & S Sales

Company of $1,704 (R. 128-129, 449). Deposits of

$1,080 and $3,121.45 to Llovds Furniture Company

account were identified as a sale of merchandise to

Orn’s Furniture Company (R. 115-124), and sale

of the retail store, Modern Furniture Company

| (R. 32, 36, 504, Ex. 1). These deposits were listed

in petitioner’s books as loans payable, and were

| later transferred from the loans payable to the

| capital account. (R. 393, 549, 552, 561.)

In addition to the bank deposits, the petitioner

i had available undeposited funds which were used

to pav off loans of $4,424.45 and $744 (R. 463-464) ;

to invest in automobiles and trucks in the amount

| of $3,485 (R. 465, 510, 511) and to pay into vari-

ous escrow accounts (R. 466, 467, 525-527). None

of the foregoing amounts were reflected on his

books or income tax returns, and when his account-

ant made out income tax returns for 1943 the peti-

wens

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ean

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tioner stated that he did not have any other in-

come. (R. 160-161.)

From analysis of the bank accounts utilized by

petitioner and undeposited funds available to him

which were not reflected on his books or income tax

returns, the revenue agent computed additional un-

reported net community income of $22,506.16. (R.

475.) To corroborate the results of the bank de-

posit analysis, the revenue agent made a net worth

analysis which showed that, based on the evidence

and records, petitioner’s net worth on January 1,

1943 was $15,031.67 and at the end of 1943 it was

#£48,130.94, or an increase in net assets of

$33,099.27. (R. 604-607.)

ARGUMENT

Petitioner contends that the evidence was in-

sufficient to support the verdict and that the trial

court erred in not granting his motion for a judg-

ment of acquittal.

A summary review of the evidence shows that

none of petitioner’s numerous business enterprises

were carried on in his own name, and that none of

the numerous bank accounts over which he exer-

cised control were in his own name. In a signed

statement he admitted that Super-Built Furniture

Manufacturing Company belonged to him, vet the

income from this source was not reported by him.

Bank deposits which were listed in his books as

loans payable were aetually proved to have been

income from the sale of merchandise, and were

chown to have been later transferred from the

sae gibi 5 DANA IE RIT ABT AS ES LLL IIT LEP NN

9

loans payable account to the drawing account.

Based on these bank deposits, the unreported in-

come was computed at $22,506.16 as compared with

$9,186.75 total reported by both petitioner and his

wife.

In corroboration of the computation of income

by the analysis of bank deposits, the Government

introduced a net worth summary which compared

petitioner’s financial position as of January 1,

1943, with his position as of December 31, 1943.

The minimum amount of unreported income thus

determined was $19,627.64.

There was evidence not only that there was an

understatement of income but that petitioner’s con-

duct was wilful, as shown by the concealment of

his assets in placing them in the names of others,

in making false entries on his books, and in han-

dling his affairs in such manner that usual records

were not made. Spies v. United States, 317 U.S.

492, 499.

The only defense offered was introduced through

cross examination of Government witnesses, that

certain items were not properly included in the

estimate of petitioner’s income; that certain ques-

tionable accounting entries resulted from mistakes

of employees; and that admissions made in his

signed statement were not in fact true. Disputed

issues of fact were thus presented, and as pointed

out by the court below (R. 710-711), neither the

petitioner’s admissions nor the bank deposits stood

10

alone as the sole proof of tax due and deliberately

omitted from his return. As the court said. (R.

711):

The evidence of the assets held by appellant in

others’ names, the large amount of funds at

his disposal and without explanation as to

source, the questionable bookkeeping entries,

the increase in his net worth during the year,

all considered in light of the taxpayer’s

own admissions, was in our opinion sufficient

evidence to justify submission of the case to

the jury. United States v. Johnson, supra,

[319 U.S. 503] at page 518.

Because the petitioner kept no records for some

of his business activities, or if he kept them, failed

to make all of his records available (R. 370-372 )

and because other books were incomplete or erro-

neous (R. 327-329, 418, 465-468) the revenue agent

was compelled to compute petitioner’s income by

analysis of bank accounts. Petitioner contends

that this was insufficient to take the case to a jury.

(Pet. 12.)

The rule in such eases, as stated in Gleckman Vv.

United States, 80 F. 2d 394 (C.A. 8th), certiorari

denied, 297 U.S. 709, is that the Government’s

proof must establish the existence of a business of

a lucrative nature, periodic deposits in bank ac-

counts over which the taxpayer exercises dominion

and control, and that the income was current. The

ae

11

proof in this case clearly satisfies these tests. The

use of bank deposits to compute income has been

approved in a long line of cases, including: Stinnett

v. United States, 173 F. 2d 129 (C.A. 4th), cer-

tiorari denied, 337 U.S. 957; United States y.

Venuto, 182 F. 24 519 (C.A. 3d) ; Jelaza v. United

States, 179 F. 2d 202 (C.A. 4th) ; Barcott v. United

States, 169 F.2d 929 (C.A. 9th), certiorari denied,

336 U.S. 912; Buttermore v. U nited States, 180 F.

2d 853 (C.A. 6th); Capone v. United States, 51 F.

2d 609 (C.A. 7th), certiorari denied, 284 U.S, 669 ;

Chadick v. United States, 77 F. 2d 961 (C.A. 3d);

Guzik v. United States, 54 F. 2d 618 (C.A. 7th),

certiorari denied, 285 U.S. 045; Malone vy. United

States, 94 F. 2d 281 (C.A. 7th), certiorari denied,

304 U.S. 562; Oliver v. United States, 54 F. 2d 48

(C.A. 7th), certiorari denied, 285 U.S. 543 ;

Paschen vy, United States, 70 F. 2d 491 (C.A. 7th) ;

Orzechowski v. United States, 37 F. 2d 713 (C.A.

3d); Singer v. United States, 58 F. 2d 74 (C.A.

3d) ; United States vy. Miro, 60 F. 2d 58 (C.A. 2d);

United States v. Zim merman, 108 F. 2d 370 (CLA.

7th) ; Manson v. United States, 186 F. 2d 61 (C.A.

8th).

The case of Kirsch y. United States, 174 F. 24

995 (C.A. 8th), upon which petitioner relies, is

clearly distinguishable because the Government’s

own testimony in that case showed that the deposits

could not be identified as income, whereas in the

instant case numerous deposits were traced direct] y

Tienes

12

from sales made by petitioner. (R. 106-121, 415-

417, 541-549, Ex. 1, 5, 29, 30, 31, 32.) The other

cases cited by petitioner did not involve the use of

current bank deposits as a means of determining

income. (See infra pp. 12-13.)

Petitioner also contends that it was an error to

permit the revenue agent to testify as to his net

worth increase during the year 1943. The wit-

ness was qualified as an expert witness (R. 325-

326); and his analysis of the petitioner’s increase

in net worth was based upon the evidence and tes-

timony previously introduced (R. 602). The use

of the increase in net worth method to compute in-

come in the absence of adequate records has been

approved in numerous Cases, including United

States v. Johnson, 319 U.S. 503, rehearing denied,

290 U.S. 808; United States V. Skidmore, 123 F. 2d

604 (C.A. 7th), certiorari denied, 315 U.S. 800;

United States v. Chapman, 168 F. 2d 997 (C.A.

7th), certiorari denied, 335 U.S. 853; Barcott v.

United States, 169 F. 2d 929 (C.A. 9th), certiorari

denied, 336 U. 8. 912; Schuermann v. United

States, 174 F. 2d 397 (C.A. 8th), certiorari denied,

998 U.S. 831. The use of net worth analysis to cor-

roborate other evidence of increased income has

also been approved in Leeby V. United States (C.A.

8th), decided November 13, 1951 (1951 C.C.H., par.

9497); Gariepy v. United States, 189 F. 2d 459

(C.A. 6th) ; Hanson v. United States, 186 F. 2d 61

(C.A. 8th).

The eases of Bryan v. United States, 175 F. 2d

993 (C.A. 5th), affirmed, 338 U.S. 552, and United

ad SEEPS OAL IE LONE NILE

13

States v. Fenwick, 177 F. 2d 488 (C.A. 7th) are

clearly distinguishable. In neither case was there

direct proof of unreported income, as was estab-

lished here. Both cases relied exclusively upon the

agents’ computations of net worth, whereas in the

instant case it was merely corroborative of evi-

dence established by other means. Finally, in the

Bryan case, the revenue agent frankly admitted

that he did not know whether his computations

contained all the assets of the defendant or not.

CONCLUSION

The decision of the court below is plainly correct

and presents no conflicts. The petition for a writ

of certiorari should be denied.

Respectfully submitted,

Puiuie B. PERLMAN,

Solicitor General.

Euis N. SLACK,

Acting Assistant Attorney General.

Meyer RoTHWACKS,

JOHN LOCKLEY,

Special Assistants to the Attorney

General,

DECEMBER, 1951.

VY U.S. GOVERNMENT PRINTING OFFICE 1951—979821/PO 537