Before KALODNER and HASTIE, Circuit Judges, and LAYTON, District Judge.
What is the proper standard to be applied in determining "willful" failure to pay income taxes "at the time or times required by law" under Section 145(a) of the Internal Revenue Code of 1939*fn1 and Section 7203 of the Internal Revenue Code of 1954?*fn2
That is the primary issue presented by this appeal from the District Court's judgment of conviction entered on its verdict of guilty (the trial was to the District Court) following its denial of defendant's motion for a judgment of acquittal or for a new trial.*fn3
The issue is one of first impression in an appellate court. The conviction is the first in a prosecution by the Government for failure to make timely payment of federal income tax where the taxpayer had filed his return at the time fixed by the revenue laws. It may be noted, parenthetically, that prior to the trial which took place in mid-1957, defendant had made full payment of taxes for the years involved, 1953 and 1954, plus interest, penalties and costs.
Collateral to the primary issue of proper standard involved in determining "willful" failure is the question whether the evidence complied with such standard.
Frank Palermo ("defendant") was charged in a two-count information with failing to pay income tax for the calendar years 1953 and 1954 at the time required by law in violation of Section 145 (a) of the Internal Revenue Code of 1939 (for 1953) and Section 7203 of the Internal Revenue Code of 1954 (for 1954). Defendant was found guilty and sentenced to pay a fine of $100.00 on each count. He prosecuted this appeal on these grounds: (1) Congress did not intend to make late payment of income tax, as distinguished from failure to pay, a criminal offense; (2) the District Court applied an improper standard in finding the requisite "willfulness"; and (3) that was insufficient evidence of "willfulness" to sustain the conviction.
Section 145(a) and Section 7203 provide, in part, in substantially identical language, that
"Any person required under this chapter to pay any * * * [income] tax * * * who willfully fails to pay such * * * tax * * * at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor * * *."
Defendant's first contention ignores the plain language of the above provision. The statutes specifically state that the criminal penalties provided thereunder are "in addition to other penalties provided by law". Congress obviously intended to make failure to make timely payment of income tax a misdemeanor regardless of the civil remedies available to insure prompt collection and the other penalties applicable in cases of late payment.
The information charged in the first count that defendant filed an income tax return for 1953 on or about March 12, 1954, reporting net taxable income of $9,882.86, and that he willfully and knowingly failed to pay the tax due on such income, $2,672.17, during the period January 1, 1954 to March 15, 1954, as prescribed by law.
The second count charged that he filed an income tax return for 1954 on or about April 14, 1955, reporting net taxable income of $13,455.19 and that he willfully and knowingly failed to pay the tax due on such income, $4,025.73, during the period January 1, 1955, to April 15, 1955,*fn4 as prescribed by law.
The Government introduced considerable evidence covering the period 1947-1957 as probative of defendant's willfulness in failing to make timely payment of taxes for 1953 and 1954. So too, defendant, in an effort to show the absence of any willful conduct, introduced evidence for years other than the tax years in question. Because, as already noted, this is the first time an appellate court has been called upon to review a conviction for failure to make timely payment of income tax,*fn5 we are constrained to review this evidence with particular emphasis on the question of relevancy.
The evidence may be summarized as follows:
Defendant filed timely returns for 1953 and 1954, the tax years in issue, showing a tax liability of $2,672.17*fn6 and $4,025.73, respectively, as stated in the information.No payments accompanied the returns as required by law and no quarterly payments of estimated tax were made during these calendar years.*fn7 The taxes due for 1953 and 1954, together with interest and penalties, were not paid until September 25, 1956, after defendant had been informed by the Internal Revenue Service that criminal prosecution was being contemplated. Efforts were made by a collection officer of the Internal Revenue Service to contact defendant during the period July 12, 1954, to November 17, 1955, regarding his tax liability but to no avail.
For the calendar years 1947 through 1952 defendant filed timely returns but was always delinquent in the payment of the tax shown to be due. The same was true of 1955 when an extension of time for payment to July 15, 1956, was granted.*fn8 Defendant's tax paying record, set out in detail in the Opinion of the District Court, discloses, in summary, substantial payments of back taxes, overdue at the time of payment, in the years 1948 through 1953, 1956 and 1957. Only one small payment - $746.03 on taxes owing for 1951 - was made in 1954. No payments were made in 1955. Small payments of estimated tax were made during 1947, 1956 and 1957. There is no record of estimated returns filed during the period 1948-1955 with the exception of 1954 when an estimate was filed without the required payment.On September 25, 1956, defendant paid in full the balance of taxes, interest and penalties for the period 1949-1952.The overdue tax for 1955 was paid in 1956 and 1957.
On the theory that expenditures for what it termed "luxury items" constituted probative evidence of "willful" failure to pay taxes when due, the Government adduced this testimony:
In 1949 defendant bought a $25,000 home in Atlantic City, New Jersey (he was a resident of Philadelphia), making a down payment of $5,000 that year and a final payment of $10,836 on April 28, 1950 (there was a $10,000 mortgage). At the time of the $10,836 payment, defendant owed the Government $6,669 in taxes for 1948 and 1949.
On May 19, 1954 defendant purchased a 1954 Cadillac automobile making a down payment of $1,520. At the time he owed $2,672 in taxes for 1953, as well as $4,466 tax for 1952.
On February 16, 1955, defendant purchased a 1955 Cadillac making a down payment of $1,549. The purchase was made at a time when defendant knew, or should have known, that on April 15, 1955, he would be required to pay $4,025 tax liability for 1954.
On January 7, 1956, defendant staged a $6,860 wedding party for his daughter. He paid on account, $6,000, in installments between October, 1955 and January, 1956. At the time of the wedding defendant owed his 1953 and 1954 taxes totalling almost $6,700 and he knew, or should have known, he would be required, on April 15, 1956, to pay an approximate $6,300 tax liability for 1955.
Testimony was adduced to establish that in July, 1953, defendant paid the Government approximately $9,500 on account of his delinquent 1950 and 1951 tax liability. Of the amount so paid $8,500 was derived from the sale of a property which defendant owned in Philadelphia, against which tax liens had been filed.
It was brought out in evidence that defendant had vainly attempted over a long period to sell property which he owned in Atlantic City in order to pay his taxes, and that he had, in 1956, offered to the Government this property and another he owned in Philadelphia as security for his accumulated delinquent taxes.
Defendant also adduced testimony that he was heavily indebted at various times to individuals during the period of his tax delinquency.
In its Opinion denying the defendant's motion for judgment of acquittal and/or for a new trial the District Court made special findings of fact at defendant's request in compliance with Rule 23(c) of the Federal Rules of Criminal Procedure, 18 U.S.C.
These special findings of fact were as follows (157 F.Supp. at page 581):
"The defendant's failure to pay year after year was without justifiable excuse since he was able to spend large sums for luxuries when taxes were owing."
"Defendant was stubborn, obstinate, and perverse in that he persisted in his failure to pay on time for a period of nine years."
"His failure to pay on time was without ground for believing that it was lawful."
"The fact that he executed and filed proper returns on time shows clearly that he knew that tax was due and when it was due and that the law required returns to be filed and tax to be paid in conformity with the returns."
"Perhaps he believed that he was not committing a criminal offense by not paying on time, but this does not mean that he did not know ...