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February 6, 1957


The opinion of the court was delivered by: MARSH

The defendant was found guilty by a jury under Section 145(b) of the Internal Revenue Code of 1939, 26 U.S.C.A. ยง 145(b) for willfully and knowingly attempting to evade and defeat a part of his income tax due the United States for the year 1949.

At the close of all the evidence, the defendant made a motion for a judgment of acquittal upon which motion judgment was reserved. Subsequently, a motion for a new trial was filed. Both motions will be denied.

 The defendant, doing business as a sole proprietor under the fictitious name of Pittsburgh Engineering and Supply Company, owned and operated a steel fabricating plant from 1946 to March 31, 1949. His books and records were kept upon the accrual basis of accounting. On April 1, 1949 he incorporated the business and became the controlling shareholder *fn1" and principal officer. In his income tax return for 1949, he correctly reported his salary from the corporation. At the trial, the important issue was whether he willfully attempted to evade or defeat his income tax by intentionally understating his income on his 1949 tax return for the period from January 1, 1949 to March 31, 1949. For this period he reported on his return $ 1675 as 'wages', which was $ 50 less than the amount of money he actually withdrew. The government contends that his net income from his business for this period was at least $ 12,024.42 (T., p. 146). This figure represents actual sales income less actual expenditures as shown by defendant's books for the period (T., p. 47; Ex. D-3), but does not take into consideration any inventory adjustment or allowance for depreciation.

 The defendant contends that the government did not meet its burden of proof in that it failed to prove the correct inventory value as of March 31, 1949. He claims this ending inventory was not valued at cost but was improperly valued at a market value which was higher than cost.

 From the evidence it appears that as of December 31, 1948, the defendant's records disclosed an inventory of $ 17,048.75 (Exhibit B). As of March 31, 1949, the end of the period, he caused a raw material inventory to be prepared which totalled $ 33,036.61 or an increase of $ 15,987.86 (Exhibit C). He certified to the latter inventory (Exhibit G). Based on these figures and an undisputed depreciation allowance of $ 1,696.94 and other minor adjustments, the records of the defendant showed a net income of $ 31,119.67 for the three-month period ending March 31, 1949.

 The government in proving defendant's profit for the three-month period disclaimed reliance on any inventory increase and contented itself with maintaining that the proofs demonstrated conclusively that defendant had at least the same amount of inventory on hand at the end of the period as he had at the beginning of the period, and therefore the $ 12,024.42 excess of total sales receipts over total expenditures was the minimum amount of net income defendant could have had for the period.

 There was testimony that a substantial portion of the ending inventory was valued at a 'market price' of $ 5.10 per hundred pounds of steel (T., pp. 44-47); the defendant testified that he had paid $ 3.05 to $ 3.80 per hundred pounds for this steel (T., p. 197). On the other hand, as of March 31, 1949, defendant certified that the ending inventory was 'priced at cost or market whichever was lower' (Exhibit G), *fn2" and there was testimony that certain assets and steel were valued at cost (T., pp. 28, 45, 59, 140-144). Thus, the jury could have found that the ending inventory of $ 33,036.11 had been valued at a market price which was higher than the cost prices which defendant said he had paid for the steel, or it could have found, as the government urged, that this inventory was valued substantially at cost.

 But even if the ending inventory were adjusted according to defendant's testimony, it was not demonstrated with any certainty that the resulting figure as of March 31, 1949 was of less value than the opening inventory. Hence we assume, as we must, that the jury found that there was no decrease in the inventory value for the period. This brings us to the defendant's attack upon the government's contention that the difference between $ 12,024.42, the excess of sales over expenditures, and $ 1,675, the income he reported in his return as 'wages', was taxable income fraudulently unreported. This attack was summarized in a recapitulation which appears in defendant's brief: "Alleged gain as of March 31, 1949 $ 12,024.42 Less: Customary depreciation items 2,145.52 accruals 9,878.90 "Less: Fuller (sic) and Owens (sic) profit 4,500.00 5,378.90 "Less: Amount reported by Steele on tax return 1,675.00 3,703.90 "Less: Any inventory depreciation ?"


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