The opinion of the court was delivered by: WOOD
This is a criminal prosecution for income tax evasion. The Government charges that the defendant willfully attempted tempted to avade payment of his income tax by reporting sums as capital gains which the Government contends were ordinary income. These sums arose out of a series of transactions which will be discussed at length later in this opinion.
The jurisdiction of this Court was invoked under Title 26 U.S.C.A. § 7201, which provides in part as follows:
'Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title * * * shall * * * be guilty of a felony * * *.'
The defendant was tried and convicted by a jury on Counts II and III of the Indictment, but failed to agree on Count I.
The defendant has filed motions for acquittal and a new trial which we will consider separately.
The Indictment charges Milton H. L. Schwartz, hereinafter called Schwartz, with willfully and knowingly attempting to defeat a large part of the income tax due and owing by him and his wife for 1954, 1955, and 1956. As to the sums allegedly owed by the defendant, the Indictment states that Schwartz and his wife returned as income for the year 1954, $ 3,686.94 and the amount of tax due and owing thereon was $ 809.38. The Government contends that the defendant knew their taxable income was the sum of $ 15,395.19 upon which income there was owing to the United States $ 3,738.56. n1 For 1955, the defendant returned $ 1,905.75 as his income with a tax liability of $ 381.15. The Government claims his income for 1955 was $ 23,143.72 with a tax liability of $ 6,474.61. In the year 1956, Schwartz reported his income as $ 2,402.33 with a tax liability of $ 597.97, whereas the Government alleges his income was $ 12,050.96, and there was $ 2,861.29 owing to the United States.
The series of transactions which brought about these charges occurred during the years 1952 through 1956. The defendant suffered a large carry forward capital loss of $ 174,000.00 during the year 1953. Because of this loss, he was allowed, as is any taxpayer, to take credit against it for five years of any capital gains which he received during the succeeding five years. The defendant in his returns for these years 1954, 1955, and 1956 reported as capital gain transactions various sums which the Government charges were income from services.
Schwartz is an attorney and a member of the Bar of Philadelphia. His own words best describe his practice as being devoted to financial matters, 'and to help resurrect companies, individuals, matters that are complicated in some instances * * *' (NT 452). Schwartz was conversant in tax law and he represented clients with tax problems occasionally. His practice was international in scope, taking him to various foreign countries.
In considering these motions for acquittal and new trial, this Court is required to take the view of the evidence which is most favorable to the Government and to give the Government the benefit of all inferences which reasonably may be drawn in its favor. United States v. Frank, D.C., 151 F.Supp. 866, affd. 245 F.2d 284 (3 Cir. 1957), cert. denied 355 U.S. 819, 78 S. Ct. 25, 2 L. Ed. 2d 35 (1957). The defendant advances the proposition that the Government is bound by the testimony of its own witnesses. This is not the law of this Circuit in criminal cases. United States v. Frank, supra; United States v. Woll, 157 F.Supp. 704 (E.D.Pa.1957); United States v. Cindrich, D.C., 140 F.Supp. 356, aff'd. 241 F.2d 54 (3 Cir. 1957). This Circuit follows the rule as stated in United States v. Gordon, 242 F.2d 122, 126 (3 Cir. 1957), cert. denied 354 U.S. 921, 77 S. Ct. 1378, 1 L. Ed. 2d 1436 (1957).
'* * * In prosecutions of federal criminal cases, the government is not bound by the testimony of its witnesses, and the jury may believe part of what a witness says and disbelieve the remainder. * * *'
It seems that some of the witnesses called by the Government testified, as interpreted by the defendant, that these transactions involving Schwartz were partnership and ownership ventures rather than income from Schwartz's law practice. This Court is not of the same opinion, and there was enough testimony elicited from the Government's witnesses, singled out by the defendant, to find that these transactions were ordinary income matters. There were a number of disputed transactions which involved the defendant, and the first one concerned General Public Warehouse. In 1953, the defendant reported the sale of a capital asset which he terms 'Gen'l. Public Ware'. The return indicates that this alleged capital asset was purchased for $ 10,000.00 and sold for $ 44,000.00 in 1953.
The Government argued that the defendant never had a capital interest in General Public Warehouse and consequently never sold any such interest. The Government further contends that the payments made to the defendant by General Public Warehouse were payments made for legal services which the defendant performed, hence such were reportable as ordinary income.
It seems there were two agreements, one dated April of 1952, in which the defendant was to be a party to a joint venture. The agreement required contribution of a specific sum by each signer. The defendant never contributed. Subsequently, a new agreement was entered into, dated October 7, 1952. (NT 55-60). This new agreement provided that the April agreement is 'null and void ab initio'. (NT 57 at par. 1). Paragraph 3 of this agreement further stated that Schwartz rendered services (NT 58). Paragraph 4 of this agreement, and subsequent paragraphs, describe how the defendant was to be paid. Schwartz signed this agreement. The witness, Laupheimer, who is president of General Public Warehouse, stated that he employed the defendant as a lawyer. This was supported by a Power of Attorney, running in favor of the defendant. (Ex. G10).
Also, clearly showing that the defendant performed services and was being paid for services is the affidavit which Schwartz himself executed for submission to the Department of the Navy. (NT 39). This document indicates and details those services.
In direct response as to whether the defendant invested in General Public Warehouse, Laupheimer answered in the negative. (NT 93).
The next transaction was The Fretz Building. The Fretz Building, located at 10th and Diamond Streets in Philadelphia, was sold in December 1955. The buyer was a company controlled by Shorenstein. The seller was a company controlled by Garfinkle. The sale was executed by the defendant and a Mr. Wolf. For their commission, they jointly received $ 15,000.00. The defendant's share was one-half of this amount. This was established by the testimony of Garfinkle, the seller (NT 239); and the testimony of the buyer, Shorenstein (NT 252); and the testimony of the real estate agent, Mr. Wolf, with whom Schwartz split the fee. Wolf specifically identified this $ 15,000.00 as being paid for commissions (NT 313, 314). Wolf also testified that he and Schwartz were to contribute this payment toward the purchase price of the building pursuant to their own private ...