Appeal from the United States District Court for the Middle District of Pennsylvania (D.C. Crim. No. 14831).
Aldisert, Gibbons and Weis, Circuit Judges.
The appellants Eugene F. House and Evelyn M. House, his wife, appeal from a judgment of sentence*fn1 on three counts of wilfully and knowingly attempting to evade payment of their federal income tax for the years 1964, 1965 and 1966 in violation of § 7201 of the Internal Revenue Code of 1954, 26 U.S.C. § 7201. They contend that the district court should have granted their motion for a judgment of acquittal on each count because there was insufficient evidence of wilfulness with respect to any year and because there was no evidence sufficient to establish a deficiency in two years. They also contend that their convictions must in any event be set aside because they are based upon evidence illegally obtained by agents of the Internal Revenue Service. With respect to the counts covering the years 1964 and 1965, we reverse because we agree that the government did not prove a deficiency in taxes. The appellants do not suggest on this appeal that there was insufficient evidence of a deficiency in 1966, but argue (1) that evidence produced at trial was derived from evidence illegally obtained and that there is no legally obtained evidence of a deficiency, and (2) that the jury's determination of wilfulness with respect to 1966 does not enjoy any untainted evidentiary support. We conclude that the evidence of a deficiency for 1966 was not the fruit of illegally obtained evidence, and that the evidence does not support the jury's finding of wilfulness with respect to Eugene House. We believe, however, that there is evidence sufficient to support the jury's finding of wilfulness with respect to Evelyn House, but that on this record a new trial on the 1966 count is appropriate.
I. COUNTS I AND II (1964 AND 1965)
The taxpayers have since 1948, as proprietors, operated a wood pallet manufacturing business. They maintained only one checking account for their business and private affairs. Mrs. House, a high school graduate, kept the records for the business in a simple but customary manner.*fn2 Mr. House, who has a ninth grade education, was primarily responsible for the manufacturing end of the business. The taxpayers reported their income for federal income tax purposes on a calendar year cash basis. For the year 1964 and for about ten years prior thereto they had their federal income tax returns prepared by Orville Mase, a banker and public accountant. For the years 1965 and 1966 they had the returns prepared by Charles Spuler, a certified public accountant. The government has made no contention that the returns as filed reflect any overstatement of expenses or other deductions. Its sole contention is that in each of the years in question the gross receipts reported on the return were understated because the taxpayers withheld for deposit in later years, or for negotiation other than through a bank, checks received from customers. As cash basis taxpayers they should properly have included in cash receipts for the tax year all checks actually received from customers in time for deposit in the year covered by the return.*fn3 E.g., United States v. Coblentz, 453 F.2d 503 (2d Cir.), cert. denied, 406 U.S. 917, 32 L. Ed. 2d 116, 92 S. Ct. 1766 (1972).
The elements of a § 7201 offense are (1) wilfulness, (2) the existence of a tax deficiency, and (3) an affirmative act constituting an evasion or attempted evasion of the tax. Sansone v. United States, supra, 380 U.S. at 351; United States v. Petti, 448 F.2d 1257 (3d Cir. 1971). The government has the burden of proving each element beyond a reasonable doubt, including the element of tax deficiency. The evidence discloses that Mrs. House kept a record of payments received from customers by marking "paid" on the retained copy of the invoice to customers when payment was received. She also kept in a spiral notebook a record of bank deposits. When it came time to prepare a tax return she made a tabulation of the "paid" invoices and furnished this tabulation to Mase and Spuler to assist them in preparing the tax returns. The accountants reported the total from this tabulation as total sales (gross receipts for a cash basis taxpayer) on Schedule C of the Houses' Form 1040.
In December of 1967 Revenue Agent Viard commenced a routine audit of the Houses' 1965 return. He was able to reconcile the gross receipts reported on the return with the record kept by Evelyn House (118a-20a). However, he found that bank deposits in 1965 exceeded reported gross receipts. Since he was leaving for military service Viard turned over the results of his partially completed field audit to Revenue Agent Klenkosky. He informed Klenkosky that Eugene House had said he would send his records to Mr. Spuler to have Spuler try to reconcile the differences between the 1965 reported gross receipts and the 1965 deposits. Klenkosky examined the taxpayers' records at Spuler's office and was unable to reconcile the differences between the 1965 total invoices, the 1965 total deposits, and the 1965 reported gross receipts. He concluded that an examination of the 1964 and 1966 records and tax returns would be required for such a reconciliation. He copied from the invoices and the spiral notebook a list of House customers and obtained from these customers copies of all checks which they had sent in payment of House invoices during the three years.
In response to a bill of particulars the government contended that it could prove an understatement, and hence a deficiency, by totaling the customer checks dated in a given year, and contrasting that total with the gross receipts shown in Schedule C. This contention may be summarized:
dated in a House understate-
given year Schedule C ment
1964 $295,510.84 $246,720.40 ...