Reply Brief Petitioner — McFee v. United States

In Tue

Supreme Court of the United States

Ocroser Term, 1955 |

No. 104

Austin F. McF zs, Petitioner,

V.

Untrep States or America, Respondent.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

PETITIONER’S REPLY BRIEF

Exvpen Mo Faxlaxp

618 Southern Building

Washington 5, D. C.

Attorney for the Petitioner

Printed by Law Bieporter Printing Co., 518 5th St., Washington, D. C.

PRELIMINARY STATEMENT

I. As to the “likely source”

es ta no evldense Whatever to n Bapentuats

tention that Petitioner’s business was capable of producing

much more income than was reported. The evidence is to

the contrary 2

Page

1

2

con-

Il. The Opening Net Worth Computation. 6

portion of the $114,000 item known to exist in 1943... 6

(b) Respondent does not deny Petitioner’s contention that

there was no substantial independent evidence corrobo-

rating Petitioner’s alleged statement that the $114,000

item represented a turnover. Q

III. There was no evidence supporting an inference of wilfulness.

The admittedly erroneous instructions as to intent were highly

prejudicial. They were not in accordance with the rule recog-

nized by this Court in Holland v. United States. 10

CONCLUSION 1¹

Holland v. United States, 348 U.S. 121, 75 S. Ct. 127, 99 L. Ed.

127 1. 2, 8, 4, 8, 6, 8, 10, 11

Opper v. Smith, 348 U.S. 84, 75 S. Ct. 158, 99 L. Ed. 104. = — 9

Smith v. United States, 348 U.S. 147, 75 S. Ct. 194, 99 L. Ed. 143... 9

In Tue

Supreme Cnurt of the United States

Octoser Term, 1955

No. 104

Austin F. McF sr, Petitioner,

v.

Untrep Srates or America, Respondent.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

PETITIONER'S REPLY BRIEF

Preliminary Statement

The safeguards announced by this Court in Holland v.

United States, 348 U. S. 121, 75 S. Ct. 127, 99 L. Ed. 127,

were intended to minimize the danger of conviction of an

innocent person by the use of the net worth method. The

present case demonstrates the reasonableness of and the

necessity for those safeguards. Petitioner was convicted

because the trial court failed to observe and apply them.

His innocence can be demonstrated by the record before this

Court.

Respondent’s Brief in Opposition completely fails to

answer the specific points involving the use of the net worth

method which are set forth in the Petition as reasons for

granting the writ and with respect to which the Govern-

ment’s proofs fail to meet the standards announced by this

Court in the Holland case, supra.

I

As to the “Likely Source“

There is no evidence whatever to support Respondent's con-

tention that Petitioner’s business was capable of pro-

ducing much more income than was reported. The

evidence is to the contrary.

Increases in net worth standing alone cannot be assumed

to be attributable to currently taxable income. Holland v.

United States, supra, 75 S. Ct. at p. 136. It was necessary,

therefore, for the Government to produce evidence tending

to show that the apparent net worth increase represented

taxable income. Proof of a likely source of taxable in-

come from which the jury could reasonably find that the

net worth increases sprang is sufficient to supply this nee-

essary element of proof. Holland v. United States, supra,

p. 136.

There is no such evidence ia this case. Petition pp. 11-14.

Respondent has pointed to none.

Respondent’s sole statement of fact in support of its con-

tention that Petitioner’s coin machine business was the

likely source of the alleged net worth increase, is that the

gross receipts from this source ‘‘ranged from $140,000 to

$246,000 for the years 1942 to 1946 inclusive.“ (Br. p. 3.)

Therefore, Respondent contends, this business was the likely

source.

MF ESSERE en

3

Petitioner’s gross receipts from this source were as fol-

lows (R. 384):

1942 $199,494

1943 212,133

1944 195,167

1945 239,310

1946 296,679

There is not the slightest evidence from which it reason-

ably could be inferred that Petitioner’s gross receipts from

that source for the years 1945 and 1946 in issue were greater

than the amounts set forth above. There was no evidence

from which a jury could reasonably find that this business

was capable of producing more gross income than was re-

ported during the years 1945 and 1946. There is no evi-

dence with respect to the size or capacity of the business to

produce income except the above figures. There is no evi-

dence of receipt of any unreported income from this busi-

ness, or of opportunity to receive unreported income. There

is no evidence of attempted concealment of assets, or of

incorrect books of account, or of any other act or device

usually employed by an evader of taxes.

Mere volume, standing alone, does not support the in-

ference of unreported income. For example in Holland v.

United States, supra, the Government showed that although

the business of the Hollands apparently increased during

the years in question, the reported income ‘‘fell to approxi-

mately one-quarter of the amount declared by the previous

management in a comparable period.“ Idem, p. 136. Thus

the evidence in that case indicated that the business was

capable of producing more income than was reported.

But in the present case there was no such showing. Pe-

titioner’s reported income from the suspected source in-

creased substantially during the two prosecution period

years. From $195,167 in 1944 it increased to $239,312 in

1945 and to $296,679 in 1946 (R. 384), an increase of 22.7%

4

and 52% rsepectively. This does not support any infer-

ence that the business was a potential source of unreported

income, for there was no collateral showing of capacity for

income greater than that reported.

Furthermore, in the Holland case, supra (at p. 136), it

was shown that the Holland’s had access to the cash reg-

ister and actually withdrew at least $12,500 therefrom which

was not recorded or reported as income. In the present

case, the Petitioner did not have access to the cash registers

or to any other source of collections, all receipts were col-

lected and recorded by employees, and there was no evi-

dence showing or tending to show that Petitioner received,

or had the opportunity to receive any unrecorded or unre-

ported income from this source or from any other known

source. All of the evidence, save the net worth statements

alone, is consistent with Petitioner’s claim that the alleged

net worth increases arose not from current income but

from errors in the Government’s net worth computation.

Respondent does not point to any evidence which is in

conflict with the foregoing statements. It merely ignores

them and states that the jury could properly have con-

cluded that many items of income had disappeared before

they reached the recording stage because (br. p. 6) :

(1) petitioner was the sole owner of a prosperous busi-

ness,

(2) that the business was capable of producing much

more income than reported,

(3) that petitioner’s contention of a prior accumulation

was refuted by the evidence,

(4) that petitioner failed to produce or turn over to the

revenue agents the temporary collection book records.

Respondent’s contention is untenable.

(a) That Petitioner was the sole owner of a prosperous

business is a completely neutral element. Respondent

omitted the important part of the evidence, namely that all

N

VV

5

collections and recordations were made entirely by em-

ployees with no access thereto by Petitioner prior to due

recordation. There was no evidence whatever to the con-

trary.

(b) There is absolutely no evidence that the business

was capable of producing more income than reported. If

there had been, Respondent would have pointed it out, as it

did in the Holland case, supra.

(e) Petitioner’s claim of a prior accumulation relates

primarily to the accuracy of the Government’s opening net

worth statement. If he had the accumulation (which the

record before this Court shows that he had) or any part

thereof the opening net worth statement was erroneous. If

he had no cash accumulation whatsoever, the omission of

cash from the opening net worth computation was correct.

But as pointed out by this Court in Holland v. United States,

supra, therein lies one of the vulnerable features of the use

of the net worth method. Mere proof of net worth in-

crease does not establish that the apparent increase was cur-

rently taxable income. There must be additional evidence,

such as proof of a likely source potentially capable of pro-

ducing currently unreported income.

Therefore, whether Petitioner did or did not have a

prior cash accumulation, does not in and of itself tend to

establish his coin machine business as a potential or prob-

able source of unreported income, particularly in view of

the uncontroverted evidence that all collections were made

and recorded by employees. This important element must

be established by the Government by tangible evidence—not

mere suspicion. There was no such evidence in this case.

(d) The collection books were merely corroborative evi-

dence of facts fully covered by Petitioner’s witnesses. These

collection books were temporary records made by em-

ployees, similar to department store sales books, not gen-

erally preserved for years long after recordation in the

— FP 000CCCT ae ae ee RL

Wp ee Seed Se N ~

6

permanent books of account. There is no evidence that

Petitioner himself was ever requested to produce these col-

lection books (ef. R. 399). There is no evidence thut he

ever received any of such books except after due and truth-

ful recordation thereof in the books of account (R. 399).

There is no evidence that these books were in existence at

the time of trial. There is no presumption that temporary

records are preserved indefinitely. Common custom is to

the contrary.

Surely the failure to produce old temporary records

which, the evidence affirmatively established, had been

truthfuily recorded in the permanent books, of account, doe

not give rise to an inference that the collections, made and

recorded solely by Petitioner’s employees, were a likely

source of the alleged net worth increase.

Moreover, the burden of proof was on the Government

to establish a likely source. It was not incumbent upon the

petitioner to establish to a mathematical certainty by cor-

roborating evidence that the suspected source could not

possibly be a likely source.

There is absolutely no evidence in the record to support

Respondent’s statement that Petitioner’s business was a

likely source of unreported income. In this respect, there-

fore, the judgment below is not supported by this necessary

element of proof and, therefore, is not in accordance with

the decision of this Court in Holland v. United States, supra.

II.

The Opening Nat Worth Computation

(a) The Government failed to track down the lead“ fur

nished by Petitioner as to the existence of a substantial

portion of the $114,000 item known to exist in 1943.

(1) Respondent does not deny in its Brief in Opposition,

that the Government agents failed to track down the lead“

P SIE LILI EE SILL BET ER SIGE LE

7

furnished by Petitioner, as to the existence of a substantial

amount of cash on hand at the beginning of the prosecution

period, as set forth at p. 17 of the Petition. Respondent

does not deny that the Foresters Club books of account as

pointed out by Petitioner to the agents, would have disclosed

at least $71,172 of cash available to Petitioner from that

source alone but not included in the opening net worth com-

putation. Respondent does not deny that the revenue

agents ignored this lead and failed to examine these books

of account which were available to them. This substantial

cash amount was derived from the $114,000 item referred

to by the Government agent (R. 263, 485).

Respondent does not deny that the Government agents

failed to investigate the $114,000 item known by them to

exist in 1943, and does not deny that this item was easily

susceptible of confirmation from the sources available to

them as set forth at page 18 of Petition.

Respondent does not deny that this item if investigated

would have completely exonerated petitioner for the year

1945 and would have thoroughly discredited the Govern-

ment’s case for 1946.

Respondent’s refuge on this point consists merely in

quoting from the Court of Appeals opinion on the original

appeal. The Court of Appeals said that the only affirmative

evidence concerning the $114,000 transaction was the testi-

mony of R. E. McDonnell, a witness called by Petitioner (br.

p. 6).

Thus it appears, not only from the record but also from

the Court of Appeals opinion, that the record is devoid of

any showing that the Government agents adequately in-

vestigated and tracked down this important lead, which as

pointed out on page 17 and 18 of the Petition herein was

easily susceptible of being checked.

The Court of Appeals took the view in its original opinion

that it was incumbent upon the petitioner to establish the

existence of this available cash fund, and since MeDonnell’s

CCC IES PAYS n

8

testimony was viewed as being highly questiouable,“ it re-

solved the issue against the Petitioner. On reconsideration

the court, in a per curiam opinion, merely reaffirmed its

former opinion in toto.

But this Court held in the Holland case that the burden

of proof is on the Government, not the accused, and that it

was incumbent upon the Government to make a fair and

reasonable investigation from available sources, of impor-

tant leads bearing upon the existence of assets includible

in the opening net worth computation.

In this respect, therefore, the judgment of the court be-

low is not supported by this necessary element of proof

and therefore is not in accordance with the decision of this

Court in Holland v. United States, supra.

(2) There is no question but that this $114,000 item

existed. The Government agents knew about it (R. 263).

A photostat of the entire account of this item is on file with

this Court and is part of the record certified to this Court

by the Court of Appeals (R. 484).

Respondent takes the position that this evidence cannot

be relied upon at this stage of the proceeding (br. p. 4,

note 2).

Petitioner takes the position that the Government’s case

was defective in that the Government agents failed to take

reasonable steps to track down this important lead, which

was readily susceptible of investigation and which would

have thoroughly discredited the Government’s net worth

computations.

The burden was on the Government to establish that it

had taken this reasonable precaution. Cf. Holland v. United

States, supra, 75 S. Ct. at p. 135. The Government’s failure

to take this precaution is not cured by petitioner’s failure

*The photostat of the account of the $114,000 item on file with this

Court (R. 484) shows that McDonnell’s testimony was substantially

correct.

9

to demonstrate his innocence. The account of this transac-

tion clearly confirms what this Court said in the Holland

case, namely that a failure to track down an important lead

readily susceptible of investigation may result in ‘‘serious

injustice, and such failure may raise a doubt as to the

accuracy of the net worth computation sufficient to warrant

a judgment of acquittal. (Idem 75 S. Ct. at p. 135).

(b) Respondent does not deny Petitioner’s contention that

there was no substantial independent evidence corrob-

orating Petitioner's alleged statement that the $114,000

item represented a turnover.

The Government agents testified that they included none

of the $114,000 item on hand in 1943 as an asset in the open-

ing net worth computation because Petitioner told them it

was a sum total of a ‘‘turnover”’ (Petition, pp. 18-20). This

was an important element of proof for if it was not a turn-

over, the proceeds of the entire $114,000 item were erro-

neously excluded.

There was no independent corroboration of this alleged

statement (Petition, pp. 18-21). The statement probably

was never made at all because it was not true.

Respondent’s Brief in Opposition makes no claim or con-

tention that there was any corroboration whatever of this

important alleged statement. It does not point to any cor-

roborative evidence, for there was none.

In this respect therefore the judgment of the Court or

Appeals is not supported by this necessary element of proof

and therefore is not in accordance with the decisions of this

Court in Opper v. United States, 348 U. S. 84, 75 S. Ct. 158,

164, 99 L. Ed. 104 and Smith v. United States, 348 U. S. 147,

75 S. Ct. 194, 199, 99 L. Ed. 143.

. . . EO SSP PARNELL PQA AERTS eee P

—— PPP — -

i oat 8

10

III.

There was no evidence supporting an inference of wilfulness

The admittedly erroneous instructions as to intent were

highly prejudicial. They were not in accordance with

the rule recognized by this Court in Holland v. United

States.

Respondent admits that the trial court’s instructions on

presumptive intent were erroneous but contends that the

error was harmless because cured by other instructions (br.

p. 8).

The erroneous instructions (Petition p. 24) were particu-

larly onerous because there was no evidence of wilfulness

and any inference of wrongful intent necessarily was itself

based on inference thrice removed from fact.

(1) The jury was required to infer that because the Gov-

ernment agents said they did not know the source of certain

expenditures that such source represented a current in-

crease in net worth.

(2) Then the jury was required to infer that the inferred

current increase in net worth represented currently taxable

income.

(3) Then the jury was required to infer that because Pa-

titioner did not report the inferred income in his returns,

that his omission was wilful.

(4) Then the Court told the jury that Petitioner’s wilful

failure to report the inferred income in his returns gave rise

to a presumption that Petitioner intended to defeat the tax.

In the Holland case this Court recognized the rule that

wilfulness cannot be inferred from the mere understate-

ment of income but stated that a consistent pattern of

under-reporting large amounts of income and of failure

on Petitioner’s part to include all of their income in their

books and records was sufficient to support an inference of

wilfulness, 75 S. Ct. at p. 137.

—

11

But in the present case there was no evidence of a con-

sistent pattern of understatement of income and there was

no evidence of a failure to include all of Petitioner’s income

in his books and records. The inference of wilfulness was

premised solely upon the series of inference on inference

set forth above.

Petitioner submits not only that the erroneous instruction

was particularly harmful but that on the face of the entire

record that was no evidence from which the jury could

reasonably infer an intent to defeat the tax. In this respect

the judgment of the Court of Appeals was not in accordance

with the decision of this Court in the Holland case.

CONCLUSION

Holland v. United States, supra, sets forth certain pre-

cepts calculated to standardize throughout the several

Cirenits the use of the net worth method of proof in crimi-

nal prosecutions. Such standardization is not achieved if

one Circuit may arbitrarily disregard such precepts by gen-

eralizations giving lip service thereto not supported by the

record. The line of demarcation between a conviction based

on proofs conforming to those standards and one not con-

forming thereto has not been concretely drawn by this

Court. This case provides a vehicle for such an authorita-

tive declaration. Petitioner submits that the issues are

broad enough and of sufficient general application to war-

rant the granting of the writ.

Expen MoFaRLAx D

618 Southern Building

Washington 5, D. C.

Attorney for the Petitioner