that as to this item defendant was guilty under the standards of proof governing criminal prosecutions. Adjustments made on accounting records of a company have often been the subject of civil litigation between the Commissioner of Internal Revenue and taxpayers, creating questions of tax liability which challenge the ingenuity of accountants and attorneys skilled in tax techniques. It would be extremely unfair to a defendant to permit him to be found guilty based solely on a capital accounting adjustment made on the books of a company. Particularly is this true where the Government offers no evidence to prove that that adjustment was made as the result of an actual expenditure of funds by the defendant in the prosecution year, or that the adjustment was made with specific intent to defraud.
Since the trial of this case the Court has had the benefit of the views of the Supreme Court of the United States on the net worth theory of prosecutions in income tax evasion cases. Certain rules governing net worth prosecutions have been laid down in the opinions of Mr. Justice Clark in four cases decided December 6, 1954, to wit: Holland v. United States, supra; Friedberg v. United States, 348 U.S. 142, 75 S. Ct. 138; Smith v. United States, 348 U.S. 147, 75 S. Ct. 194, and United States v. Calderon, 348 U.S. 160, 75 S. Ct. 186. The principles there enunciated together with the decision of Circuit Judge Hastie of the United States Court of Appeals for the Third Circuit in the case of United States v. Harold John Adonis, cited above, are dispositive of this motion.
In the Holland case, Mr. Justice Clark held that in net worth prosecutions the Government has the burden of showing a likely source of unreported taxable income but only with reasonable certainty. His language in that regard is very specific and states (348 U.S. 121, 75 S. Ct. 136):
'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. * * *'
As to likely source of income, the Holland case posed no difficulty. The defendant there operated a hotel and bar during the prosecution year. The Government alleged that only part of the income was registered in the books and it was shown that the total had produced, before the defendant became owner, profits substantially in excess of those reported. There was also evidence in that case, to disprove claimed accumulations of cash by the defendant over a period of twenty years, that the defendant had been pressed by creditors in 1928 and 1929, lost his restaurant on a foreclosure in 1933, that his wholly owned corporation became insolvent, leaving over $ 35,000 in debts, that the defendant had left his family and worked for six years as a Chef in another city at $ 175.00 a month, during which time his wife had been forced to work to help support the family. These factors establish beyond peradventure of doubt the hotel as the likely source. The evidence in the instant case is directly contrary. The Government admits in this case that it has no evidence whatsoever to show that defendant John J. O'Malley had a likely source of income other than from the sources reported in his income tax return filed for the prosecution year. The Government further conceded that the information in the tax return as to amounts reported from these revealed sources had been verified by the Government's own investigation and that there was no inaccuracy in the amounts reported.
In the Adonis case, supra, the Government did not prove a likely source of taxable income, but it was held that deliberate falsification as to alleged nontaxable sources of receipts to explain large expenditures or accumulations was a legally acceptable circumstantial showing that the funds were derived from current income. In that case the Government proved that Adonis during the prosecution year increased his assets some $ 45,000 over and above his income and previous net worth. There was no explanation of the apparent increase in net worth in that year. When the investigation of income tax liability started Adonis elected not to talk with the investigators who sought to interrogate him but the investigation did disclose that in his own circle of friends and acquaintances he had made a detailed and complete explanation of his ability to acquire these assets in an amount which was completely out of line with his apparent circumstances which were extremely modest. After proving the explanations of the defendant as made to friends and acquaintances who testified at the time of trial, the Government by clear and convincing evidence established the complete falsity of the defendant's explanation of alleged sources of the money necessary to acquire the assets. For example, it proved that Adonis's mother from whom he was supposed to have received a substantial amount of money was in fact indigent and the object of charity of her family; that an amount of money ostensibly a loan evidenced by a mortgage had in fact never been made; and finally, a statement that he had received a very substantial sum of money from a woman acquaintance, a clerk earning only a small salary and of modest circumstances, was entirely without foundation. Circuit Judge Hastie in the Adonis opinion held that the defendant's itemizing of supposed sources of nontaxable receipts was a calculated misrepresentation designed to conceal current income.
The facts of the instant case do not bring it within the ruling in the Adonis case. Defendant here, either directly or through his accountants, furnished the investigators with essential information to substantiate his claim of receipt of funds from nontaxable sources. I have discussed previously the facts involved as shown by the evidence in the case. In the Adonis case the Government directly proved calculated misrepresentation of source. In the instant case the nearest approach to the facts of the Adonis case rests in the evidence relating to the Perry loan. In that matter (the Perry loan) the Government has proved inconsistent statements but it has not proved which statement is false. In the Adonis case direct proof of falsity was offered. To permit a jury in this case on the evidence presented to find as a fact that the loan actually was not made would be an unwarranted and undesirable extension of the principle enunciated by Circuit Judge Hastie. A ruling in favor of the Government's contention would result in a lowering of the standards of proof required and the weakening of the safeguards prescribed by the Supreme Court in the Holland decision and by the Court of Appeals of this Circuit in the Adonis case.
The defendant may well have over a period of years substantially increased his net worth and on a basis which may have involved understatement of taxable income. However, in a criminal prosecution for income tax evasion in a particular calendar year, the Government it not permitted to allocate summarily such unaccounted-for accretions to a particular year without meeting the requirements laid down in the Holland and the Adonis decisions. The Government has, in the opinion of the Court, failed to meet such requirements in the instant prosecution. My conclusion, therefore, is that the proof adduced is insufficient to permit a jury to find beyond a reasonable doubt that defendant John J. O'Malley for the year 1946 willfully evaded income taxes due the United States.
An order for judgment of acquittal will be entered in accordance with the foregoing opinion.
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