Before GOODRICH, KALODNER and HASTIE, Circuit Judges.
A jury has found the appellant, Harold Adonis, guilty of criminal income tax evasion in violation of Section 145(b) of the Internal Revenue Code, 26 U.S.C. 145(b). The specific charge of the indictment is that for the calendar year 1948 Adonis filed a false and fraudulent income tax return for himself and his wife. The defense offered no evidence but stood on its contention that the government's proof was inadequate in law and in fact.
The most difficult matter on this appeal is one of the problems characteristic of tax evasion cases in which the net worth-expenditure method of proof is employed. To make the present issue clear, we will first state those elements of the government's case which were quite adequately proved and then inquire what more, if anything, had to be evidenced to complete a showing sufficient for jury consideration.
First, it was shown, consistent with appellant's 1948 tax return, that he was a salaried employee of the State of New Jersey and that he received small additional compensation from two other sources. His total 1948 income as reported for tax purposes was $7304.77. It is conceded that no additional income was derived from the reported sources.
Second, there was a showing of the appellant's expenditures in 1948. About $4000 of routine living expense was proved. In addition it was shown that appellant bought a parcel of land in March, 1948 and, during the ensuing months, built and furnished a home on the site, paying for this enterprise during the taxable year amounts aggregating $44,627.61. The evidence of the payment of this much money in 1948 for land, building and furnishings was clear, precise and uncontroverted.
Third, the government put in evidence the details of an elaborate investigation by its agents into the life and financial history of the appellant through December 31, 1947 for the purpose of determining what assets were available to him at the beginning of the taxable year. This investigation resulted in a calculation of the appellant's net worth on December 31, 1947 as $3,342.85. This conclusion was consistent with a history of small salaried jobs, very modest living, very small bank accounts and such exigency that as recently as 1946 appellant's wife found it expedient to leave her baby in the custody of an aunt while she accepted employment at a salary of $30 per week.
Fourth, the government proved a diligent search for loans, inheritances, gifts and any other potential sources of nontaxable receipts in 1948 which might have supplied the large sums expended by appellant on his home building project. In this connection, although appellant elected to stay away from the investigators who sought to interrogate him about his 1948 income, the investigation covered all appellant had said or was reported to have said from time to time to other people in explanation of his ability to finance a very expensive 1948 project, so out of line with his apparent circumstances. This line of evidence was such as to warrant a conclusion by a jury that all reasonable inquiry had been made without discovery of any credible evidence of substantial non-taxable receipts during 1948.
This brings us to the area of controversy. What more than the case already outlined had to be shown as a matter of law, and what more was shown in fact, to justify submitting to the jury the question whether the large excess of appellant's 1948 expenditure over the aggregate of his year-beginning net worth and reported 1948 income represented unreported 1948 taxable income?
In the first three paragraphs of the opinion of this court in U.S. v. Caserta, 1952, 199 F.2d 905, 906, Judge Goodrich discussed cases relevant to this question and concluded that, absent countervailing evidence, nothing more than such proof as has been outlined above need be shown to make it a jury question whether proven expenditures substantially greater than disclosed income and financial resources included unreported current income. However, we cannot rest there because, in a series of cases decided December 6, 1954, the Supreme Court has given us new authoritative guidance which has significance for this problem. Holland v. United States, 348 U.S. 121, 75 S. Ct. 127; Friedberg v. United States, 348 U.S. 142, 75 S. Ct. 138; Smith v. United States, 348 U.S. 147, 75 S. Ct. 194; United States v. Calderon, 348 U.S. 160, 75 S. Ct. 186. The appellant properly urges that for present purposes the most important pronouncement in these very recent decisions is the following language of the Holland case:
"Increases in net worth, standing alone, cannot be assumed to be attributable to currently taxable income. But proof of a likely source, from which the jury could reasonably find that the net worth increases sprang, is sufficient * * *; here the disclosed business of the petitioners was proven to be capable of producing much more income than was reported and in a quantity sufficient to account for the net worth increases." 348 U.S. at page 138, 75 S. Ct. at page 136.
The Court seems to be saying that such proof as we already have described in the present case, standing alone, is not enough. It is deemed unfair to draw a decisive inference against the taxpayer solely from the fruitlessness of the government's search for a source of the large sum of money actually spent, even though on the evidence it seems clear that the taxpayer must have obtained new funds from somewhere during the taxable year. It may not be assumed merely from the government's inability to find any source of non-taxable receipts that the funds acquired during the taxable year are taxable income. However, under the doctrine of the Holland case, "proof of a likely source", without evidence of how much that source yielded, is sufficient additional evidence to justify the inference the government seeks to create.
But the Court does not say that such proof of a likely source is the only additional evidence which will suffice to establish the government's case in a situation of this kind. And we do not believe that the Court intended such an implication. For, in logic, other items of proof may have equal or greater probative value as circumstantial indication that the newly available funds were taxable income.
We believe the additional evidence in this case had such probative value. The government undertook to convince the jury, first, that the appellant had made considered statements identifying particular sources from which he claimed to have obtained specific large non-taxable sums during 1948 and, second, that he clearly had not received any such sums from those sources. It is argued that if the jurors were convinced that the taxpayer had thus wilfully fabricated an account of current non-taxable receipts to explain his 1948 affluence they might reasonably infer that such conduct was an effort to conceal the fact and real sources of taxable gain in that year. It is this logical inference from the taxpayer's own wilful misrepresentation upon which the government relies here to supply the evidentiary requirement which in other situations is filled by an inference from an affirmative showing of some ...